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-   -   Save for a house downpayment or keep dumping into the market? (https://www.early-retirement.org/forums/f30/save-for-a-house-downpayment-or-keep-dumping-into-the-market-103860.html)

Speed Racer 05-15-2020 09:26 AM

Save for a house downpayment or keep dumping into the market?
 
Being early on my journey to FIRE, (24 years old), one of the things I've thought about that could possibly greatly affect my net worth down the road is whether or not I should be saving for a house. I had saved up close to $10k before I lost my job last year and unemployment allowed me to maintain that and even increase it a little. I decided, you know what, if I'm buying a house, it won't be until next year and even then I don't know if I'll want to buy. So I put that into a brokerage and added a little bit to my position. Very risky, but even today my account is a few percentage points higher than when I put the money in.

I figure by this time next year I can have around $40,000 saved and that is obviously a pretty huge amount for my time horizon. It has me thinking I should maybe keep putting that in the market and rent while I more slowly save up to buy a house in 4-5 years. Buying a house has gotten really expensive the past couple years as well even though I live in a relatively LCOL area.

I suppose I could put down less than 20%, but PMI is just throwing money into the fire imo. Then again you could make that argument for renting, too.

What do you guys think?

OldShooter 05-15-2020 10:51 AM

A house is not generally an optimum financial decision. Sure, you could get lucky and be in an area where values take off, but generally speaking, nationally house prices are constrained to the overall rise in personal incomes. That said, a reasonable question is "So what if it's not an optimum investment?" There are other benefits and pleasures to owning. So, the tradeoff you are proposing is not a straightforward one.

OTOH, at your young age you have huge "personal capital" on the asset side of your balance sheet -- your future earning power. Also, we have 100+ years of historical data that says that, over the long term investments in stocks show a steady and reliable rise in value that far exceeds inflation. The sooner you get on that train, the more money you are likely to have for retirement or, hopefully, ER.

It sounds from your post that you are inciined to make the investment decision and IMO that is going to be very beneficial to you over the long term. Be sure, though, to put that stash into a tax-sheltered account. Almost certainly a Roth is best for you because you are currently (probably) in a lower tax bracket than you will be when you start withdrawing.

The hardest thing and the most important thing going forward is to leave that retirement stash alone. No borrowing, no panic selling, no withdrawals of any kind. I tell the students in my Adult-Ed class ("Investing For The Long Term") to buy themselves a tin of cat food and keep it handy. If they become tempted to tap their retirement stash, to take that can out and contemplate the kind of retirement cuisine they would like to have. If that doesn't deter, and they actually get the blank forms to tap the stash, take out the can, open it, and try a couple of cat food sandwiches. Then decide.

W2R 05-15-2020 11:04 AM

Save for a house downpayment or keep dumping into the market?
 
I think that as long as you do one or the other, you'll be 1000% ahead of most people in your age category.

Personally after a rough divorce that left me broke at age 50 I needed to be on the fast track to retirement. I started by saving the down payment for a modest house near work, and then paying it off completely in four years. This while "living like a student" and maxing out my 401K and Roth IRA. Then after the house was paid off I started funneling the money that I had been putting into the house, into taxable investment accounts instead while still continuing to max out my tax sheltered retirement accounts. This strategy may or may not have given me the absolutely most maximum bucks, but it worked out very nicely for me anyway.

After I had been retired for six years and knew my plans were working, I sold that house in cash and bought a nicer one in cash. The market boom helped me with that.

RobbieB 05-15-2020 11:08 AM

I would consider a house if you think your job and industry and location will be stable for at least 5-10 years.

Animorph 05-15-2020 11:31 AM

I advised my kids to save 15% of their gross income, invest it, and use it for retirement and buying their first house. I don't like having an artificial division between saving for a house and for retirement. For the same amount of savings each month, it probably makes little difference in the long run if you save it all for a house down payment before saving anything for retirement or reserve 50% of it for retirement and 50% for a house. And if you're investing your savings either way, the only difference is when you buy the house.

I fall on the 100% equities during accumulation side. So I let the value of my investments determine when I bought a house and when I retired. Given the market is down right now, it's not a bad time to jump in and let it ride for a while. When the time comes when you can and want to buy a house, then I'd consider shifting the down payment into cash to eliminate market risk before committing to a large expense. I'm counting on time to reduce market risk, rather than a non-equity allocation. That time uncertainty may not fit everyone's risk tolerance.

One other thing to consider is to contribute some of your savings to a Roth IRA. The dollar amount of your contributions can be withdrawn at any time. This would allow some flexibility between house and retirement savings, or an emergency fund while cash is low while purchasing a house.

MichaelB 05-15-2020 02:54 PM

Quote:

Originally Posted by W2R (Post 2429829)
I think that as long as you do one or the other, you'll be 1000% ahead of most people in your age category.

+1 An important message, doing either one is already a step ahead in life. :)

38Chevy454 05-15-2020 08:20 PM

Quote:

Originally Posted by RobbieB (Post 2429830)
I would consider a house if you think your job and industry and location will be stable for at least 5-10 years.

X2, the timeframe is a big factor. House is a harder to sell asset. As mentioned by oldshooter the power of compounding early retirement savings is significant.
I will say that I bought my first house at 24, and have been moving up (and criss crossing the country) over the years. Fortunately many moves and house sales were assisted by corporate move. For me having a house is basically a requirement. I am just not at all a apartment or condo living person at all.
I agree that you can't really go wrong either way.

SnowballCamper 05-15-2020 10:02 PM

I say rent a small cheap place and dump the money into index funds.

I'm guessing you aren't married yet, and the addition of a spouse and/or kids probably impacts the house you want/need. Also, being able to relocate quickly can be an advantage for most careers (and for the right spouse).


Bottom line is you have to pay to live somewhere. Rent is straightforward (you pay a set ammount per month to occupy), but mortgaging a house means you assume the market risk (among a lot of other things) when you have to move for some reason.

EDIT: oh and here is my longer take on how to retire early https://www.early-retirement.org/for...rly-99570.html

Markola 05-16-2020 04:50 AM

Save for a house downpayment or keep dumping into the market?
 
Quote:

Originally Posted by Speed Racer (Post 2429784)
It has me thinking I should maybe keep putting that in the market and rent while I more slowly save up to buy a house in 4-5 years. Buying a house has gotten really expensive the past couple years as well even though I live in a relatively LCOL area.



What do you guys think?


Congrats on having the ability to save and invest from the beginning of your career. That makes you very different from probably most everyone you know.

I am 54 and was the same at 24, including the desire to buy a house as soon as possible, so I did by age 27. I thought it was the thing to do and thought I was well ahead of the pack of my peers. No one told me that a house is an illiquid wooden box of unpredictable expenses that dilutes oneís ability to save for stocks. Had I just rented for 10 more years or more and maxed my savings in a stock index fund, I would have probably retired in my 30s or 40s.

Renting is not throwing money away if renting subsidizes a higher value opportunity to save in growth assets rather than throwing money away on endless home expenses.

Youíre a saver in a consumer driven society, which already makes you cut from a different cloth. Why not explore doubling down on the weird, maxing your savings for 10 more years and, instead of focusing on a standard issue, pedestrian goal of owning a wooden box of expenses, raise your sights to becoming a millionaire as soon as possible? You could then buy a house for cash or choose to be like this couple in their early 30s who didnít buy a house but instead travel the world full time: Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required
https://www.amazon.com/dp/0525538690..._Ks8VEbP52CB3A

DrRoy 05-16-2020 06:54 AM

Quote:

I would consider a house if you think your job and industry and location will be stable for at least 5-10 years.
I agree with that, but the current times show that our ability to determine the level of stability is not high.

I would not look at a house as an investment. In general you cannot spend it's value, although you can borrow against it or downsize. If you want to live in your own house instead of rent, then work towards that. I would not keep your down payment money in the stock market. Look how quickly that can devalue.

atmsmshr 05-16-2020 07:22 AM

Suggestion - save for retirement first and reap tax benefits, whether they be Roth accounts for someone starting out or 401k for incomes greater than $65k.

First time homebuyers with good credit can get a no down FHA loan. However, you will lock in mortgage insurance payments.

Real estate for homes will become a buyers market soon - possibly in a few months. Financing rates are already at historical lows.

You can have your cake and eat it too in this scenario.

StephieJean 05-16-2020 08:17 AM

Quote:

Originally Posted by Speed Racer (Post 2429784)
Being early on my journey to FIRE, (24 years old), one of the things I've thought about that could possibly greatly affect my net worth down the road is whether or not I should be saving for a house. I had saved up close to $10k before I lost my job last year and unemployment allowed me to maintain that and even increase it a little. I decided, you know what, if I'm buying a house, it won't be until next year and even then I don't know if I'll want to buy. So I put that into a brokerage and added a little bit to my position. Very risky, but even today my account is a few percentage points higher than when I put the money in.

I figure by this time next year I can have around $40,000 saved and that is obviously a pretty huge amount for my time horizon. It has me thinking I should maybe keep putting that in the market and rent while I more slowly save up to buy a house in 4-5 years. Buying a house has gotten really expensive the past couple years as well even though I live in a relatively LCOL area.

I suppose I could put down less than 20%, but PMI is just throwing money into the fire imo. Then again you could make that argument for renting, too.

What do you guys think?

HI there, 24 years old and asking great financial questions. As a Veteran of the U.S. Army, I would say keep saving your dollars and join the Armed Forces. Once a Veteran, you can purchase your first home for $1 down, I mean it. so cool! The Service was an awesome experience and I gained life knowledge and personal experience I couldn't otherwise have received. Ok, enough of the recruitment. I would find a home loan that affords little to NO Down and save that money for your house (repairs, remodels, payments) once you are in it. Putting a lot of cash down on a home does not lower your payment much, and only helps the loan company or banks get richer, while you are out that dough. IMO. Good luck.

CRLLS 05-16-2020 09:42 AM

You have some great options. If you are not already investing in an IRA, and are thinking 1-5 years out for the house, I would put the max of whatever you qualify for, into a Roth IRA 1st. The contributions can be withdrawn at any time for any purpose. If you have had the Roth for 5 years, then up to $10k of the earnings can also be withdrawn for your 1st house, penalty and tax free. If you withdraw earnings before the 5 year period, you only pay the tax on those gains. Once in the Roth, you can always invest in whatever you feel comfortable with just like an non-retirement investment account. I would suggest a more safe investment for this money if you are looking at needing it in 1-5 years. It is hard to beat that outside of a Roth. Even if you buy before the 5 year requirement, you can withdraw the contributions, leave the earnings in the Roth, and have a head start on your retirement bucket(s).

I won't argue the rent vs buy debate. IMO, renting mostly works to your benefit if you rent a "lesser" place than you would otherwise buy. That is, unless you find the rare landlord that wants to rent at a loss or under market rates. Granted, the down payment of a house purchase is an upfront cost that would be higher than 1-2 months deposit for a rental.

Speed Racer 05-18-2020 12:36 PM

Thanks for all of the responses, everyone. I need to give it some more thought, but I think I have a general idea of what I want to do. It'll probably be best to build up a smaller emergency fund again and invest the rest. If I were in the market today, I wouldn't really feel comfortable buying at today's prices unless it was a fixer upper type of situation, which I absolutely don't mind. If the stock market happens to go down again, I just won't buy. I've always wanted to live downtown anyway and maybe doing that for 1-3 years would satisfy me while I save up even more cash.

RobbieB 05-23-2020 07:48 PM

Real estate is going down too. Interest rates are low.

GGekkoNCo 06-16-2020 11:42 AM

Quote:

Originally Posted by OldShooter (Post 2429822)
A house is not generally an optimum financial decision. Sure, you could get lucky and be in an area where values take off, but generally speaking, nationally house prices are constrained to the overall rise in personal incomes. That said, a reasonable question is "So what if it's not an optimum investment?" There are other benefits and pleasures to owning. So, the tradeoff you are proposing is not a straightforward one.

OTOH, at your young age you have huge "personal capital" on the asset side of your balance sheet -- your future earning power. Also, we have 100+ years of historical data that says that, over the long term investments in stocks show a steady and reliable rise in value that far exceeds inflation. The sooner you get on that train, the more money you are likely to have for retirement or, hopefully, ER.

It sounds from your post that you are inciined to make the investment decision and IMO that is going to be very beneficial to you over the long term. Be sure, though, to put that stash into a tax-sheltered account. Almost certainly a Roth is best for you because you are currently (probably) in a lower tax bracket than you will be when you start withdrawing.

The hardest thing and the most important thing going forward is to leave that retirement stash alone. No borrowing, no panic selling, no withdrawals of any kind. I tell the students in my Adult-Ed class ("Investing For The Long Term") to buy themselves a tin of cat food and keep it handy. If they become tempted to tap their retirement stash, to take that can out and contemplate the kind of retirement cuisine they would like to have. If that doesn't deter, and they actually get the blank forms to tap the stash, take out the can, open it, and try a couple of cat food sandwiches. Then decide.


Agree about the house not being an optimal investment. It's a money pit. And yes PMI is literally take money and put it in a garbage bag and throw it away (for the buyer) ... I'd rent if i could do it all over again...lol

armor99 06-27-2020 09:37 PM

Quote:

Originally Posted by Speed Racer (Post 2429784)
Being early on my journey to FIRE, (24 years old), one of the things I've thought about that could possibly greatly affect my net worth down the road is whether or not I should be saving for a house. I had saved up close to $10k before I lost my job last year and unemployment allowed me to maintain that and even increase it a little. I decided, you know what, if I'm buying a house, it won't be until next year and even then I don't know if I'll want to buy. So I put that into a brokerage and added a little bit to my position. Very risky, but even today my account is a few percentage points higher than when I put the money in.



I figure by this time next year I can have around $40,000 saved and that is obviously a pretty huge amount for my time horizon. It has me thinking I should maybe keep putting that in the market and rent while I more slowly save up to buy a house in 4-5 years. Buying a house has gotten really expensive the past couple years as well even though I live in a relatively LCOL area.



I suppose I could put down less than 20%, but PMI is just throwing money into the fire imo. Then again you could make that argument for renting, too.



What do you guys think?



I donít think thereís anything wrong with renting. Provided you donít do it for very long periods of time in your life.
The advantage of renting is no long term commitments. If a job goes south, easy to pack up an go somewhere else.
On the other hand, do that too long, and you start wasting money. There is also the issue of allowing a landlord too much power and influence in your life. If you long term rent in an area you could easily wake up one morning a be priced out of where you currently live due to the area improving. Something your would welcome if you were a home owner.

RobbieB 06-28-2020 03:40 PM

I agree. I don't like either landlords or HOA's telling me what I can do with the property and I'm very glad I bought this 1400 sq-ft tract house when I did. A K&B "starter" home for sure but it was before the new "zero" lot lines and has wider streets than the new developments. They now sell for just under what new places twice as big in sq-ft go for.

I've been here 30 years now and no plans to move. The neighborhood is getting gentrified with the increased values and folks are improving their homes accordingly.

armor99 06-28-2020 04:08 PM

Quote:

Originally Posted by RobbieB (Post 2448619)
The neighborhood is getting gentrified with the increased values and folks are improving their homes accordingly.


I have always found it interesting that the term gentrification is only a dirty word amongst renters. People who own their own homes love this!


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