Nate Reineke (00:13)
Hello physician moms and dads. I'm Nate Renneke, certified financial planner and primary advisor.
Chelsea Jones (00:19)
And I'm Chelsea Jones, also a certified financial planner and primary advisor here at Physician Family Financial Advisors.
Nate Reineke (00:26)
Chelsea, we have a lot of questions coming in lately. β I think we're going to record two episodes back to back. Everyone just gets to know the insider information here and a lot of housing questions. So it seems like things are heating up a bit β with the housing market or at least people's desire to move. So we'll jump right in today and do our best.
Chelsea Jones (00:31)
Mm-hmm.
All right, let's do it. So the first question is from a doctor, that's for sure, but I don't know where they are. They said, we're ready to buy our forever home, but all the houses in the area that meet our standards are 1.2 million. We can build and buy property for 1.3. Why wouldn't we just do that?
Nate Reineke (00:57)
Mm.
I really liked this question, so I got this one directly. β And because I got to sort of see β the whole process, because this is kind of a confusing scenario, I see it all the time, and it's easy for me to forget why this is true, but I know this to be true. Okay, so and then I'm gonna flesh it out. β The reason this is hard to do,
is because you need a ton of cash. I always know that to be true. β But the reason why you need a ton of cash is sort of hard for people to wrap their brain around. β Because most people don't go out and see what it looks like to get a construction loan or see what it looks like to actually build a house. so β essentially the way that it works is you
Chelsea Jones (01:45)
Mm-hmm.
Nate Reineke (02:10)
generally need to pay for the property in cash. Okay, so in this scenario with this family, their property is going to be $250,000. It's $250,000 in cash. And then it seems fine because you take that cash and once you get your construction loan, the cash you put toward the property is used as a down payment for your conventional mortgage. But the question you have to ask yourself is where are you going to get that cash?
Chelsea Jones (02:21)
Mm-hmm.
Nate Reineke (02:39)
because you're building a house and it usually takes a year, year and a half, sometimes two years to build the house. Right? So, much longer. And, you know, this isn't the kind of thing you want to be rushed building your forever home. So, it's going to take a while. And so, you need to live somewhere while they're building.
Chelsea Jones (02:47)
Yeah, longer than you would think. That's what I learned.
Yeah.
Nate Reineke (03:06)
And the way the construction loan works is as the money gets dispersed to build the house, you start paying on the interest. So you pay interest only, which seems like a pretty good benefit. OK, I don't have to start making these big payments right away. But the reality is that toward the end, let's say a year or a year and a half in, you're paying interest only on the full amount. So a one point three million dollar house, let's say the property
let's say the property was 300,000. So you're paying a million bucks, you're going to have a million dollar mortgage, and you're paying interest only on it. Well, the reality is that on a 30 year mortgage, you don't pay much principal anyways when you actually get the mortgage. So it's going to feel a whole lot like floating two mortgages, maybe a little bit cheaper on the interest only loan.
Chelsea Jones (03:53)
Mm-hmm.
Nate Reineke (04:04)
but it's going to feel like two mortgages. So you have drained your cash because you bought the property, then you're living in a house and forget about it if you want to sell your house and rent for two years because rent's expensive too, right? β And most of your cash is tied up in your current home usually. So there's some ways around that. You can get like a home equity loan, but there's no way around you're paying
twice, two mortgages, and you need cash. β On top of that, I have never once, never seen a custom build come in at budget. I did not say under budget, I mean at budget, never once, and I'm sure it's happened, but.
Chelsea Jones (04:35)
Yeah.
Yeah.
I was gonna ask
how confident are they in that 1.3?
Nate Reineke (04:59)
Everyone tries, everyone knows this. Okay, everyone I talked to is like, okay, the builder said this, so I'm adding 10 % and they do their best. Most people go into a home build with some, they're some nerves. they don't, they're like, what am I missing? Nobody just has pie in the sky thinking about this. They all know it's gonna be hard. They just can't β articulate why or just like, they don't know how much more. Like is it gonna be 50,000 more or?
Chelsea Jones (05:08)
Yeah.
Yeah.
Nate Reineke (05:29)
500,000 more they have no idea and neither do I Because what ends up happening is you go build your house you have the builders right in front of you, right? And they say okay. These are the standard β You know the standard bill cost build cost is this much and then you think well if we upgrade some things and in your mind you're thinking upgrade countertops upgrade cabinets β Like you're thinking these big things that you will have a lot of control over
Chelsea Jones (05:31)
Mm-hmm. Yeah.
Nate Reineke (05:58)
But what really happens is yes, the countertops, yes, the cabinets, but then they'll say, well, here's the flooring. What do you think about this flooring? The flooring here, this one, it costs an extra dollar a foot. You're like, I really like that new flooring. I actually think that's worth it. And then they come to you the next day and they say, hey, I know we told you the standard build comes with like three outlets in a room, but we could put six here.
Chelsea Jones (06:16)
Mm-hmm.
Nate Reineke (06:25)
And you're thinking back to all the old houses you've lived in where there's like one outlet in the corner and everything's like plugged into one outlet. You're like, that would be great. And it's not that much more. I mean, the guy said it's only a couple hundred dollars more. And they do that a hundred times. And all of sudden, before you know it, it's hundreds of thousands of dollars more.
Chelsea Jones (06:31)
Yeah.
Yeah.
death by a thousand cuts.
Nate Reineke (06:49)
Yes,
yes. And so, β you know, at the end of the road, you get a great result. You get to live on the property you want. You get to live in the neighborhood you want. You get to have a custom house as your forever home. But the reason you wouldn't do this isn't necessarily the reason you shouldn't do this. It's because most people can't. They can't float two mortgages. They don't have the cash to buy the property.
Chelsea Jones (06:59)
Mm-hmm.
Mm-hmm.
Nate Reineke (07:18)
and they want to somehow figure out a way to β get the equity from their current home and put it toward the house. And it's usually just not enough. Even if you have a few hundred thousand dollars of equity, it goes really fast. β And then on top of all that, you get this beautiful home that you just built. You don't want to put your old furniture in it. Gosh, we've been sitting on this couch for.
Chelsea Jones (07:31)
Yeah.
You
Nate Reineke (07:43)
six years and now we just built this beautiful home and now it doesn't match and it doesn't fit. so I've seen people spend six figures. Six figures. think this was seven or eight years ago. I saw a family put six figures of furniture into their house. So, you know, do the math on that inflation. So it's not that you shouldn't. I do believe that you could build a house for one point three million and houses do cost one point two in the neighborhood they're looking at.
Chelsea Jones (07:58)
Cheers.
Yeah.
Nate Reineke (08:13)
It's simply that most people can't. So if this is a big dream of yours, it takes a ton of preparation. You don't just get to decide one day sitting on the couch so you don't like any of the houses on Zillow. And so we're just going to build. You have to prepare. And the family that asked me this question, they had been preparing for a long time. And here's my big PSA. If you have a retirement plan,
Chelsea Jones (08:38)
Mm-hmm.
Nate Reineke (08:42)
and you do not have the need, let's say you have a big defined benefit plan or you have a ton of just benefits at work and you don't need to invest money in a brokerage account, your plan just doesn't call for it, but you have extra money, you should invest that money because that's what this family did for about four years. have hundreds of thousands because of the great growth in the market, hundreds of thousands in that account.
Chelsea Jones (09:00)
Mm-hmm.
Nate Reineke (09:10)
And I said, look, I know you worked really hard to save this money and invest this money. You don't need it. Remember, we talked about this. You don't need it. Why don't you put this toward this big goal? And so they had cash. had maybe 100,000. They were planning on saving another 100,000. They had 250,000 in a taxable account or a brokerage account.
Chelsea Jones (09:23)
Yeah.
Nate Reineke (09:36)
and they had a few hundred thousand dollars of equity that ultimately they will sell their home. This is another thing about construction loans. They end up selling their home and then they take that equity from their home and apply it to the end result, the mortgage that they get at the end of the road. So they're going to put 40 % down on this house and it's going to work out. But most people don't have all that set up because they just want to build kind of right out of the gate.
Chelsea Jones (09:52)
Mm-hmm.
Yeah.
Yeah. It's taken me back to the boat question. When can I buy a boat? And the family had prepared, prepared, talked about it for years and the time has finally come. I feel like that's. Yeah. Yeah.
Nate Reineke (10:06)
So.
Yeah.
Yeah, yeah, and it's a great feeling because they prepared.
Chelsea Jones (10:22)
And two with the, um, being prepared, being able to put extra cash down because you've say you invested your extra cash rather than, I don't know, spending it. Um, I've seen not in this specific case, but in, um, some cases where like this, if you're more, if you're having to float two mortgages, you might, depending on your cash flow, you might be tempted to be like, maybe I should not contribute to my IRA this year.
Nate Reineke (10:30)
Yes.
Ahem.
Mm-hmm.
Chelsea Jones (10:52)
or maybe I should reduce my taxable savings a little bit so that way we can breathe a little bit more. β
Nate Reineke (10:59)
Yeah, the one I see
all the time is they want to cut college in half.
Chelsea Jones (11:03)
Yeah. Yeah. β
Nate Reineke (11:05)
You
know, all of sudden they're like, man, that's an expensive goal. I'm like, hey, you made the goal. Don't, don't. All of sudden they're rethinking all their goals. And then the thing you have to ask yourself is like, okay, now it's not just having, you know, you're not just giving up having a little bit more extra money every month, because that's what most people think. I buy a house, I won't have extra cash to like spend and go on vacation. Now you are literally deciding, is this house worth retiring two years later? Is this house worth?
Chelsea Jones (11:12)
Mm-hmm.
Right.
Mm-hmm.
Nate Reineke (11:34)
not paying for all of my children's college. I don't know, maybe it is for some. β But it's, yeah, it's important to ask yourself.
Chelsea Jones (11:37)
Mm-hmm.
Maybe it's a question you have to ask yourself though.
So, okay, ready to go to the next question?
Nate Reineke (11:48)
Yes, we also, β this one is from a dermatologist in North Carolina. So should I open an LLC for my 1099 locums work? β So this is like the, I get this question a lot and there's a lot of confusion around it. And I think it's because there isn't a solid β answer, meaning like there isn't a huge upside.
Chelsea Jones (11:55)
Okay.
Mm-hmm.
Nate Reineke (12:18)
And sometimes there isn't an enormous downside to either way. So people just kind of get away with not doing anything. β But I'll give you the pros and cons and you just have to make a decision for yourself. But generally, the pros of β opening up an LLC is kind of keeping your books in order. So you have a separate account for your business expenses versus your personal expenses. Then β there is
Everyone thinks or they are told they should do it for liability reasons. But an LLC for physicians doesn't generally protect you from a whole lot. β It's like lease obligations or vendor disputes. So that might be worth doing it for. But a lot of people will open LLCs for their real estate if they own real estate and they're renting it out. And that does provide protection. know, someone trips and falls at your real estate property, your rental.
and they can't sue you, the doctor. β But it doesn't protect against medical malpractice and things like that, that kind of the big worries for being self-employed. β With an LLC, you can make an S-corp election. So you can tax yourself differently, meaning you can pay yourself, I've talked about this before on the podcast, a reasonable wage, and then make distributions to yourself to... β
Chelsea Jones (13:26)
Mm-hmm.
Nate Reineke (13:43)
pay a little bit less in taxes. β that I think, admittedly, I think in the past on this podcast, I have overstated the benefit of that because most physicians make so much that β payroll taxes only go up to a certain income. So you don't save the full amount when you do this S-corp election, but you do save some. think it's, actually, I won't even say a rate because it's
Chelsea Jones (13:43)
Avoid some payroll taxes, yeah.
Mm-hmm.
Nate Reineke (14:11)
I can't be exactly precise, but it's worth doing. You can save thousands of dollars if you make a lot. And then if you are all 1099, you can set up an LLC to sponsor some retirement plans. But generally, a sole proprietor, sole proprietorship is basically you're just getting a 1099, you can do a lot of these things without an LLC.
Chelsea Jones (14:28)
Mm-hmm.
Nate Reineke (14:40)
You can set up a separate bank account for your business, even though it's just a sole proprietorship. β You can get malpractice insurance. You can't do the S-Corp and you can set up a solo β 401k. So there's some benefits to it. I don't see a huge reason not to, but the cons are just administrative burden, I guess, of setting it up at the same time. It's not all that bad.
Chelsea Jones (14:40)
Mm-hmm.
Mm-hmm.
Nate Reineke (15:09)
pay state filing fees, there's some reporting you have to do, you have to get an extra bank account, but it's all things you probably should do as a business. β And then S-corps come with some complexity. Generally, you're like, okay, now I need an accountant. Now I need to set these plans up. β Now I need someone to tell me what my reasonable salary is. So it's really not the end of the world to set one up. And it does come with some benefits.
Chelsea Jones (15:32)
Mm-hmm.
Nate Reineke (15:40)
So I can't see a huge reason not to unless you're just like allergic to paperwork and you have you don't make that much money. know as.
Chelsea Jones (15:45)
you
You don't have
someone to do the paperwork for you. Cause I think a lot of times your tax preparer would take care of a lot of this for you. but.
Nate Reineke (15:55)
That's right.
Yeah, so most likely I'd say in general, it's a good hygiene to do.
Chelsea Jones (16:04)
Okay. Good to know. Sorry. Our next question came from an infectious disease doc. They said on your most recent podcast, the last question was about putting post-tax money into a 401k. β The doc did not have access to converting it to a Roth. At my institution this year, they're making us put our catch-up contribution amount for age 50 plus post-tax into Roth.
I think this is different than the scenario you spoke about, but can you clarify if this is acceptable? So I can, I got this one. β so the short answer is yes. So, with the catch up contribution or the thing to remember with mega backdoor, β contributions to a 401k in general.
Nate Reineke (16:36)
Yeah.
Chelsea Jones (16:56)
Um, you want to maximize your pre-tax contributions first. Uh, which this doctor, sounds like they're doing that. He's speaking or they're speaking specifically about the age 50, uh, catch up, which it's a rule this year that has to go into the Roth. You don't have the option to put that into, you don't have the option to defer it pre-tax. So still put in your catch up, put it in the Roth. It grows tax free. Um,
Nate Reineke (17:05)
Mm-hmm.
Mm-hmm.
Chelsea Jones (17:26)
But that's kind of being forced into the Roth. You just, you can't put it in pre-tax. But the alternative is, well, if you don't want the money into the Roth, take it, maybe invest it into a taxable account. That's not a win because if you take the post-tax money, put it in the taxable account, the growth is going to be taxed at capital gains rates. So, fist between those two, tax-free growth in the Roth wins out over β capital gains taxes in the taxable account.
Nate Reineke (17:46)
Mm-hmm.
Chelsea Jones (17:56)
So.
Nate Reineke (17:56)
Right.
Yeah, it's one of those. These are entirely different situations just to be really clear to this listener. One is you're trying to get money into Roth. The question that I believe Kyle and I answered last week was, know, in one scenario you're trying to get the money into the Roth but there's no mechanism in the account to actually get it to Roth. It's just post-tax contributions. In this scenario it is
Chelsea Jones (18:04)
Yeah.
Mm.
Nate Reineke (18:25)
the money goes directly into the Roth. So it's actually great β getting more money in the Roth. I have kind of a funny thought about this. β We still get much, there's still much debate about whether or not you should do pre-tax or Roth contributions. β And a lot of it has to do with just kind of feeling helpless about how much your tax bill is going to be. And you're just like, I might as well just pay it. And because at least I know Roth contributions are good. β
And you know, I pay so much taxes anyways, it's like, I just, it doesn't matter. They sort of giving up on like getting any tax breaks. β But this to me answers the question of whether or not like Roth versus pre-tax, which one is better? Because the government is essentially saying, we want you to pay taxes on this money.
Chelsea Jones (19:04)
Mm-hmm.
right now.
Nate Reineke (19:23)
right now, give us our money. And they're saying if you're 50 plus and you make enough money to save this, save this ketchup, because the majority of America cannot fill up their 401k, let alone fill it up plus the ketchup contribution. Right, so for physicians, the people who can actually make these ketchup contributions, they're saying, no, we're not gonna let you do that pre-tax, it's too good for you. We want our money.
Chelsea Jones (19:26)
Mm-hmm.
Right.
Nate Reineke (19:52)
And that should signal something to you. It should signal that maybe those pre-tax contributions are pretty good β because they're forcing it to you now, forcing you to do it now. β It is interesting. I view the tax code as a β incentive system and they're incentivizing people to save money for retirement so that the country doesn't have to support them. And if you make enough money to do this,
Chelsea Jones (19:58)
Mm-hmm.
Nate Reineke (20:20)
they don't need to incentivize you anymore. They know you're gonna save the money, so therefore they took away that incentive, because you're gonna do it anyways.
Chelsea Jones (20:29)
Mm-hmm.
Yeah. And our government needs revenue right now. So.
Nate Reineke (20:32)
That's true. could you could there's an argument to
be made that you know they chose wrong or something and they're they're cashing in their chips now they want that they want that revenue. β So I could be wrong but it was that's that's how I took this when I saw this new role that they rolled out.
Chelsea Jones (20:49)
Okay, so our next question comes from another dermatologist. They said, we're going to move in about, we're going to move in about one year, but have been saving some money to work on our current home. What work should we do in our house if we know we'll be moving?
Nate Reineke (21:09)
Okay. I really like this question. It's less, it's not stock market, but it's still an investment in your house in a way, β or feels like one when you go to sell. So this really turns from a sort of personal preference type question about like, what should we do to our home to make it the way we like it to a return on investment question. And I believe your home is actually not an investment β because
Chelsea Jones (21:33)
Mm-hmm.
Nate Reineke (21:38)
you end up selling it and just using all the money for your next house and then you're ultimately not going to get any return out of your home other than the cost savings of not having to rent your whole life. So any money you put into your house, it usually costs more to do that than you will get in return. In fact, it almost always costs more. β There are some things that are worth doing, mainly just because
Chelsea Jones (21:50)
Mm-hmm.
Nate Reineke (22:07)
β You'll get most of your money back. But β when you pay a contractor to do this work, which I would say all physicians do. I I've yet to meet a physician that's doing their own work on their house or a lot of it. If you're paying a contractor to do this, the next person is not going to pay full price. It's just there's studies written about this. I think the best thing you can do is work to the outside like curb appeal work, like a fence.
70 % of your money back. So the things to do would be things like regular maintenance, things that would come up, β really easy stuff to fix that you can eliminate from an inspection. HVAC, maybe small repairs to the roof or something like that. β The high return on investment stuff is things like painting or light fixtures. So yes.
Chelsea Jones (22:54)
Right.
The Landlord special. I'm kidding.
Nate Reineke (23:06)
β I remember when I sold my first house, I hadn't even thought of it because I didn't care too much, but the light outside of our house was old. It was just like a porch light and it was old. I fixed that. It was like the first thing I did. was like, that's like $20 at Home Depot and just fixed it real quick.
And sure enough, my real estate agent came and they took a nice little picture of that new light I put in and like posted it. But it's a marketability thing. It's not really like a return on investment and something that people should should realize. Like we're in a time now where it's really easy to sell your house, maybe not like this year, but the last 10 years it's been really easy to sell your house. You're always trying to make money on your house. 20 years ago, you just hoped to sell your house. Like you.
Chelsea Jones (23:55)
Mm-hmm.
Nate Reineke (23:57)
You were just hoping it didn't sit for six months. So this is about marketability, not about trying to get your money back, because you probably won't. And the beautiful thing, or not beautiful, the not so beautiful thing about this is you will never know how much you got back for redoing a fence or redoing your roof. You'll never know. Your buyer will never sit there and say,
I'm willing to pay you an extra $20,000 because you redid the roof. It's just a one price. They expect the roof to be fine. So one of the best pieces of advice I ever got from a real estate agent is don't worry so much about it. You're just going to give them a credit. You're just, when you sell the house, they're going to say, hey, there's a problem with the roof. And you say, okay, here's $10,000. Okay, so get over that. No one looks at the roof when they come look.
Chelsea Jones (24:27)
Right.
Mm-hmm.
Nate Reineke (24:51)
tour your home, but when the inspection time rolls around, just be prepared to write that check because giving them $10,000 for the roof is a lot better than paying a roofer to come over and put $10,000 into it, rip the top off and tell you all the sheathing needs to be redone and there's a leak in the attic. Okay, so you don't want to be the one to find those problems. You just be prepared to give them a credit and it's the same thing. It's the same cost except you don't have to deal with contractors.
Chelsea Jones (24:58)
Yeah.
You
Okay.
Nate Reineke (25:22)
Think that's it, right?
Chelsea Jones (25:24)
I think so.
Nate Reineke (25:25)
Okay, β thank you everyone for listening. If you like this show, please be sure to subscribe so you don't miss when we release new episodes. And you can also give us a rating wherever you're listening. If you'd like to work with us, you can visit physicianfamily.com to schedule an interview. And if you aren't ready for that, please send us a question. We answer two listener questions today. We promise to continue to do so. And if we don't read them on the podcast, we will respond to your email. Remember until next time, you're not just making a living, you're making a life.
