Best place to save for investment property down payment

[Dreaming of Freedom]

I am trying to figure out the best place to save money that will be used for a down payment for an investment property and/or for general retirement funds. I do not have or make enough money to max out my 457, Roth IRA, HSA, and put 6% into my pension plan. As a result, I am thinking of just going ahead and saving the "special" money in a Roth IRA account. I can withdraw and use my Roth IRA contributions towards a down payment since I can take out the contributions penalty free, and won't have to worry about paying taxes on the capital gains & dividends like a taxable account. Does this sound like a good plan? What should I invest in to try and protect my contributions yet make more in interest/dividends than inflation? My retirement plan asset allocation is 90 to 95% equities via low cost mutual funds & ETF's, but I don't think I want to be that risky with this special pot of money. I may want to withdraw some of the funds in about 11-13 months for a down payment. Finally, I am not very knowledgeable about bond funds or other halfway safe investments so any tips would be wonderful!

 

[nun]

Make sure you put enough into your pension plan yo get the max employer contribution. If you have access to a 457 you must work for a state or local government so maybe the 6% is mandatory.

Anyway if you are saving for down payment in about a year do just that.....save don't invest. Put the money into a saving account.

Ironically you might have answered your question about bonds yourself "tips" might be what you want. By that I means Treasury Inflation Protected Securities. It's probably the worst time possible to buy a bond fund because rates are so low and they can only go up and bring down bond fund prices.

 

[Dreaming of Freedom]

Will all the different types of bond fund prices go down if interest rates go up?

I may use the money for a down payment, or it could just end up being part of my reitrement fund stash if I decide not to buy a rental property. I

I think I might hate the idea of losing money due to inflation being higher than interest rates more than I hate losing money in the market. I guess maybe because I know my money will lose value sitting in a 0.15% interest bank account. I am not retired yet though, so my risk tolerance is pretty high. I still get excited when the stock market drops & everything goes on sale. Don't worry, I do wear my seat belt in the car

I guess some other options might be to go ahead and invest the "special" savings in ETF's right now and hope the market comes back some within 12 months, or open a "high" account with Ally bank, or say screw saving the extra money for now and pay off the rest of my student loans as fast as possible so I will be able to save even more money in a few months when the loans would be paid off. Hmm, too many choices! My head is spinning.

Racing for the FIRE finish line, but I don't know where it is.

 

[hnzw_rui]

I was faced with a similar situation a couple years back (first time home buyer) although we ended up not buying property as even the cheapest ones in our preferred location would have stretched the budget too much.

My combined federal and marginal income tax rate at the time was 33% (25% + 8%) so instead of paying more in taxes and losing tax-advantaged space, what I did was contribute to the 457 but directed contributions towards the stable value fund. Our plan allowed taking loans up to 50% of the account balance or up to $50,000 whichever is lower and the loan can be paid over 15 years if used for a home purchase.

If I were in your shoes, I'd contribute to the 457 and maybe keep a 50/50 allocation between the stable value fund and stocks (at least until stable value reaches $50K, then all new contributions can go to stocks).

Max out the Roth IRA. My choice of funds for the down payment pot would be Vanguard LifeStrategy Income, Conservative Growth or Target Retirement Income. Alternately, maybe a barbell strategy with 70-80% in IRA CDs/savings and the remaining 20% in VTI or VBR.

 

[pb4uski]

For down payment money that you plan to access in a year or so the prudent course would be an online savings account... FDIC insured and no market or interest rate risk but only a return of 0.9% or 1%. However, with that alternative there is a some risk that inflation will outpace your return... but no market risk.

If you ultimately decide not to buy a property you can then put that money in your tax-deferred retirement savings by goosing up your contributions and using the online savings money to live on.

 

[hnzw_rui]

For down payment money that you plan to access in a year or so the prudent course would be an online savings account... FDIC insured and no market or interest rate risk but only a return of 0.9% or 1%. However, with that alternative there is a some risk that inflation will outpace your return... but no market risk.

If you ultimately decide not to buy a property you can then put that money in your tax-deferred retirement savings by goosing up your contributions and using the online savings money to live on.

Not so much inflation but property appreciation. Back in 2011-12 when real estate was down, we could afford $50K cash for down+closing but in order to avoid mortgage insurance, we needed $80-100K. Now, we can afford $100K but we need $150K.

 

[pb4uski]

You would have been better off to pay the PMI ...after a few years you would have had enough equity to refinance and get rid of the PMI.

 

[hnzw_rui]

You would have been better off to pay the PMI ...after a few years you would have had enough equity to refinance and get rid of the PMI.

In retrospect and if I had known I will be getting a promotion and a sizable pay increase 5 years the line, yeah sure. At the time, knowing PITI would have been ~40% of gross income, fearing one of us being laid off and actually getting a 10% pay cut right after we stopped looking for a house, I still think we made the right call.

 

[pb4uski]

I guess part of my point was that PMI isn't forever and is well worth it to get into the game in markets that are appreciating.

 

[Mulligan]

You would have been better off to pay the PMI ...after a few years you would have had enough equity to refinance and get rid of the PMI.

That just amazes me about PMI. I could have sworn back in the day once you had 20% equity you could just get it dropped. Now you have to refinance and pay all that again. I have a friend nearby who couldn't save a nickel if you gave him a dime to do it so he put down 3% borrowed from his Dad. We compared mortgages and I was floored... His PMI payment is higher than the amount of principal he is knocking off each month on his 30 year long. Houses don't appreciate much here, but I would rent before I would pay the PMI amount he is.


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[hnzw_rui]

I guess part of my point was that PMI isn't forever and is well worth it to get into the game in markets that are appreciating.

True, it's not forever. PMI is dropped off automatically at 78% LTV and you could get it dropped off if property appreciates enough so you have 20% equity by writing to the lender. FHA loan, you'd need to refi. Yes, I did all my research. That said, if you don't have 20% for down (and additional cash for closing costs and other related expenses), I think that's a sign you're buying too much house than you can afford and it was certainly true for us at the time. Not so much now with the promotions and pay raise but that was something I didn't know 5 years back. Besides, back then house prices were pretty stagnant (or even dropping slightly). It's not exactly easy to predict when the value will go up by 25% so I can get rid of mortgage insurance.

That just amazes me about PMI. I could have sworn back in the day once you had 20% equity you could just get it dropped. Now you have to refinance and pay all that again. I have a friend nearby who couldn't save a nickel if you gave him a dime to do it so he put down 3% borrowed from his Dad. We compared mortgages and I was floored... His PMI payment is higher than the amount of principal he is knocking off each month on his 30 year long. Houses don't appreciate much here, but I would rent before I would pay the PMI amount he is.

Maybe it's an FHA loan? I think mortgage insurance for FHA is 1.75% upfront and 1.35% per annum of loan amount.

 

[pb4uski]

....That said, if you don't have 20% for down (and additional cash for closing costs and other related expenses), I think that's a sign you're buying too much house than you can afford ....

I understand your point and it might have been true in your situation, but I think of affordability more as a function of PITI as a percentage of income and less on the amount down... but obviously the two are related because the lower the down payment the higher the mortgage payments and the higher % of income PITI is.

That said, 20% is a pretty high hurdle in this day and age. I think that the minimum should be 10% and the maximum PITI should be 30% of income.

 

[Dreaming of Freedom]

Can you still get an 80% mortgage with no PMI if you put down 5% and get a 15% HELOC loan? That is what I did way back in 2002. The reason I did it was to avoid PMI, because back then you could not deduct PMI payments on your tax return, but you could deduct the interest on the HELOC loan. For what it is worth, I only qualified for $1,000 more than what the final purchase price was. These kinds of loans may no longer be around since the mortgage/housing crash of 2008+. I turned out OK, and because the HELOC would balloon in 10 years and had a variable interest rate, I paid it off as soon as I could. Then I refinanced and got my interest rate down 2% more, and as a result of both actions, my house will be paid off in 20 years instead of 30 years. Yay!

On another note, I am still thinking of saving money for a down payment in a Roth IRA since I don't make enough to fund it and money for a down payment. I guess I will just keep the money in a conservative mixture of funds. Then again, I wonder if Ally or other similar back has a good paying Roth IRA money market account?

 

[hnzw_rui]

I understand your point and it might have been true in your situation, but I think of affordability more as a function of PITI as a percentage of income and less on the amount down... but obviously the two are related because the lower the down payment the higher the mortgage payments and the higher % of income PITI is.

That said, 20% is a pretty high hurdle in this day and age. I think that the minimum should be 10% and the maximum PITI should be 30% of income.

I guess it depends on median home price. In areas where you can buy a home for $100K, I think it's reasonable to require 20% down. For locations where the median home price is higher than $500K (seriously, that's half a million!), I think 10% is reasonable enough to drop the PMI requirement.

Mind, I did the math. On a $500K house with 10% down, 1% PMI alone increases the required annual income by $15,000. On a 3.875% APR 30-year fixed loan, the combined effect of a larger loan amount ($450K instead of $400K) and 1% PMI increases the required annual income by $24,400. By the way, this example goes against the recommendation of buying a house that costs 2-3x of annual salary. To meet both the 30% PITI and 2-3x rule, you'd need a 15-year mortgage.

Can you still get an 80% mortgage with no PMI if you put down 5% and get a 15% HELOC loan? That is what I did way back in 2002. The reason I did it was to avoid PMI, because back then you could not deduct PMI payments on your tax return, but you could deduct the interest on the HELOC loan. For what it is worth, I only qualified for $1,000 more than what the final purchase price was. These kinds of loans may no longer be around since the mortgage/housing crash of 2008+. I turned out OK, and because the HELOC would balloon in 10 years and had a variable interest rate, I paid it off as soon as I could. Then I refinanced and got my interest rate down 2% more, and as a result of both actions, my house will be paid off in 20 years instead of 30 years. Yay!

On another note, I am still thinking of saving money for a down payment in a Roth IRA since I don't make enough to fund it and money for a down payment. I guess I will just keep the money in a conservative mixture of funds. Then again, I wonder if Ally or other similar back has a good paying Roth IRA money market account?

Not sure about HELOC but you can get a 2nd mortgage. That's actually the route I'm inclined to take. But definitely yes on maxing out your Roth IRA space even if all you do is put the contributions in a CD that barely pays anything.

 

[Mulligan]

True, it's not forever. PMI is dropped off automatically at 78% LTV and you could get it dropped off if property appreciates enough so you have 20% equity by writing to the lender. FHA loan, you'd need to refi. Yes, I did all my research. That said, if you don't have 20% for down (and additional cash for closing costs and other related expenses), I think that's a sign you're buying too much house than you can afford and it was certainly true for us at the time. Not so much now with the promotions and pay raise but that was something I didn't know 5 years back. Besides, back then house prices were pretty stagnant (or even dropping slightly). It's not exactly easy to predict when the value will go up by 25% so I can get rid of mortgage insurance.


Maybe it's an FHA loan? I think mortgage insurance for FHA is 1.75% upfront and 1.35% per annum of loan amount.

I think it was an FHA loan. Those are some penal numbers. No wonder my friends payment is so much bigger than mine is. Probably doesn't matter though. If he wasn't spending it in fees it would be blown somewhere else.


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