Author Topic: More on property or in index fund?  (Read 1670 times)

Radioherd88

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More on property or in index fund?
« on: July 14, 2017, 05:25:48 PM »
Hello MMM community! First time caller, long time listener....

I am 34 and my wife is 30 - we have just finished paying off her 250k student loan bill (she is a veterinarian), so now that she has a job that pays we are finally able to allocate they money that has been going to that for the past 7 years to work for us. We were lucky to receive some stock from a family friend worth around 13k so plan with that is to sell and reinvest in 2 x roth IRA's (so 11k and then the tax due will make up the other 2k or so). Currently we are renting at $1550 a month due to uncertainty over where we wanted to settle down but now we are there and are looking to buy a house within the next 12 months. My current plan looking something like this:

Monthly till end of 2017:
$1550 Rent (maximum of 12 months)
$2933 Maxing out 401k contribution for rest of 2017 (with 5% employer match)
$416 Employee Stock Purchase Plan (15% discount on stock price)
$1000 Save to put towards down payment on house
$1000 Invest in Vanguard Total stock market/S&P 500 index fund
$383 leftover savings for emergencies (including health)

= $5349 total monthly investment in retirement (including down payment on house) 53.49% of take home pay


We are looking between 300-400k for a home which would translate to something like this:

300k home
Monthly from Jan 2018
$2350 Mortgage payment (15 year loan)
$1500 Maxing out 401k contribution for rest of 2018 (with 5% employer match)
$416 Employee Stock Purchase Plan (15% discount on stock price)
$916 2 x Roth IRA's until maxed out
$1500 Invest in Vanguard Total stock market/S&P 500 index fund
$300 health savings account
$300 leftover savings for emergencies

= $6432 total monthly investment in retirement (including mortgage payments) 62.31% of take home pay
= $4632 total monthly investment in retirement (not including mp) 44.8% of take home pay

350k home
Monthly from Jan 2018
$2750 Mortgage payment (15 year loan)
$1500 Maxing out 401k contribution for rest of 2018 (with 5% employer match)
$416 Employee Stock Purchase Plan (15% discount on stock price)
$916 2 x Roth IRA's until maxed out
$1100 Invest in Vanguard Total stock market/S&P 500 index fund
$300 health savings account
$300 leftover savings for emergencies

= $6432 total monthly investment in retirement (including mortgage payments) 62.31% of take home pay
= $4232 total monthly investment in retirement (not including mp) 40.9% of take home pay

400k home
Monthly from Jan 2018
$3200 Mortgage payment (15 year loan)
$1500 Maxing out 401k contribution for rest of 2018 (with 5% employer match)
$416 Employee Stock Purchase Plan (15% discount on stock price)
$916 2 x Roth IRA's until maxed out
$650 Invest in Vanguard Total stock market/S&P 500 index fund
$300 health savings account
$300 leftover savings for emergencies

= $6432 total monthly investment in retirement (including mortgage payments) 62.31% of take home pay
= $3782 total monthly investment in retirement (not including mp) 36.6% of take home pay

Questions I have are:

1. For the monthly till end of 2017 plan, do you think there is value in saving the 1k per month to put towards the down payment on a house, or would this be better adding to the index fund instead? For example, i believe we could take 10k out of a 401K to put towards a down payment on a first time home, so technically doing this instead and investing the 1k would be better right?

2. 15 year loan vs 30 year loan on mortgage - I've always assumed that the 15 year option is better as you are paying about half the interest amount, however, is there anyway that doing a 30 year and investing the money you are not putting toward the mortgage each month into an index fund instead would earn more than this extra interest? (assuming just the average returns)

3. Is there any benefit in spending extra on a house with the theory being over 15 years, the value of a more expensive house will increase by a larger margin than a less expensive house? - e.g 300k vs 400k?

4. Our basic plan is to retire in 15 years (once mortgage is paid off), which would reduce our annual living costs from around 66k to 36k,  but one variable not accounted for is kids (we are likely to start a family in the next couple years), does anyone have any advice on how to budget/plan/optimize for this? I've never come across any of MMM's articles on how he was able to raise kids after retirement and still live on 25k a year!

5. Any other thoughts/suggestions/opinions welcomed!


MMbergmann

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Re: More on property or in index fund?
« Reply #1 on: July 14, 2017, 07:54:24 PM »
Hello MMM community! First time caller, long time listener....

I am 34 and my wife is 30 - we have just finished paying off her 250k student loan bill (she is a veterinarian), so now that she has a job that pays we are finally able to allocate they money that has been going to that for the past 7 years to work for us. We were lucky to receive some stock from a family friend worth around 13k so plan with that is to sell and reinvest in 2 x roth IRA's (so 11k and then the tax due will make up the other 2k or so). Currently we are renting at $1550 a month due to uncertainty over where we wanted to settle down but now we are there and are looking to buy a house within the next 12 months. My current plan looking something like this:

Monthly till end of 2017:
$1550 Rent (maximum of 12 months)
$2933 Maxing out 401k contribution for rest of 2017 (with 5% employer match)
$416 Employee Stock Purchase Plan (15% discount on stock price)
$1000 Save to put towards down payment on house
$1000 Invest in Vanguard Total stock market/S&P 500 index fund
$383 leftover savings for emergencies (including health)

= $5349 total monthly investment in retirement (including down payment on house) 53.49% of take home pay


We are looking between 300-400k for a home which would translate to something like this:

300k home
Monthly from Jan 2018
$2350 Mortgage payment (15 year loan)
$1500 Maxing out 401k contribution for rest of 2018 (with 5% employer match)
$416 Employee Stock Purchase Plan (15% discount on stock price)
$916 2 x Roth IRA's until maxed out
$1500 Invest in Vanguard Total stock market/S&P 500 index fund
$300 health savings account
$300 leftover savings for emergencies

= $6432 total monthly investment in retirement (including mortgage payments) 62.31% of take home pay
= $4632 total monthly investment in retirement (not including mp) 44.8% of take home pay

350k home
Monthly from Jan 2018
$2750 Mortgage payment (15 year loan)
$1500 Maxing out 401k contribution for rest of 2018 (with 5% employer match)
$416 Employee Stock Purchase Plan (15% discount on stock price)
$916 2 x Roth IRA's until maxed out
$1100 Invest in Vanguard Total stock market/S&P 500 index fund
$300 health savings account
$300 leftover savings for emergencies

= $6432 total monthly investment in retirement (including mortgage payments) 62.31% of take home pay
= $4232 total monthly investment in retirement (not including mp) 40.9% of take home pay

400k home
Monthly from Jan 2018
$3200 Mortgage payment (15 year loan)
$1500 Maxing out 401k contribution for rest of 2018 (with 5% employer match)
$416 Employee Stock Purchase Plan (15% discount on stock price)
$916 2 x Roth IRA's until maxed out
$650 Invest in Vanguard Total stock market/S&P 500 index fund
$300 health savings account
$300 leftover savings for emergencies

= $6432 total monthly investment in retirement (including mortgage payments) 62.31% of take home pay
= $3782 total monthly investment in retirement (not including mp) 36.6% of take home pay

Questions I have are:

1. For the monthly till end of 2017 plan, do you think there is value in saving the 1k per month to put towards the down payment on a house, or would this be better adding to the index fund instead? For example, i believe we could take 10k out of a 401K to put towards a down payment on a first time home, so technically doing this instead and investing the 1k would be better right?
You would still have to pay tax on the withdrawal. The first time home exception is an exception for the 10% early withdrawal penalty. If it is a short term (in your case you are saying a year) then I would just find a good savings account. You don't want to risk a down payment on a house to a bad market.

2. 15 year loan vs 30 year loan on mortgage - I've always assumed that the 15 year option is better as you are paying about half the interest amount, however, is there anyway that doing a 30 year and investing the money you are not putting toward the mortgage each month into an index fund instead would earn more than this extra interest? (assuming just the average returns) Yes, for the reason you mentioned 30 year can be better.

3. Is there any benefit in spending extra on a house with the theory being over 15 years, the value of a more expensive house will increase by a larger margin than a less expensive house? - e.g 300k vs 400k? Going to leave this to a realtor. It would depend more on the area and what homebuyers want. Complete speculation unless you're an expert on those things. Money you pay for a house could/could not have any correlation on what it could be worth later. You could have a tornado or a hurricane in that time for all anyone knows (depending on what part of the country you live in). If I were you I wouldn't view a home as an investment that could gain or lose value. The value you get out of a home is intrinsic, i.e. if you actually like the area and see yourself staying there long term, so as not to be bit by moving costs and realtor fees

4. Our basic plan is to retire in 15 years (once mortgage is paid off), which would reduce our annual living costs from around 66k to 36k,  but one variable not accounted for is kids (we are likely to start a family in the next couple years), does anyone have any advice on how to budget/plan/optimize for this? I've never come across any of MMM's articles on how he was able to raise kids after retirement and still live on 25k a year! All I know is that kids cost a lot of money. Good luck.

5. Any other thoughts/suggestions/opinions welcomed!



Radioherd88

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Re: More on property or in index fund?
« Reply #2 on: July 17, 2017, 04:17:48 PM »
Questions I have are:

1. For the monthly till end of 2017 plan, do you think there is value in saving the 1k per month to put towards the down payment on a house, or would this be better adding to the index fund instead? For example, i believe we could take 10k out of a 401K to put towards a down payment on a first time home, so technically doing this instead and investing the 1k would be better right?
You would still have to pay tax on the withdrawal. The first time home exception is an exception for the 10% early withdrawal penalty. If it is a short term (in your case you are saying a year) then I would just find a good savings account. You don't want to risk a down payment on a house to a bad market.

Yes I see your point - my thinking was basically use the 1k per month that i was saving for a down payment to add to an index fund and just have the (around 10k) that we would save in the next 10 months doing something in an index fund during that time - it should be a lot more than a savings account can do and we could then take the 10k from the 401k (that we have saved taxed on) and pay tax on it anyway - but at least the index fund 10 k will have made something more than the savings account (but never a guarantee)

2. 15 year loan vs 30 year loan on mortgage - I've always assumed that the 15 year option is better as you are paying about half the interest amount, however, is there anyway that doing a 30 year and investing the money you are not putting toward the mortgage each month into an index fund instead would earn more than this extra interest? (assuming just the average returns) Yes, for the reason you mentioned 30 year can be better.

Indeed - anyone care to share their case studies on this - do we have a straw poll in this forum somewhere on what % of MMM's are 15 vs 30?

3. Is there any benefit in spending extra on a house with the theory being over 15 years, the value of a more expensive house will increase by a larger margin than a less expensive house? - e.g 300k vs 400k? Going to leave this to a realtor. It would depend more on the area and what homebuyers want. Complete speculation unless you're an expert on those things. Money you pay for a house could/could not have any correlation on what it could be worth later. You could have a tornado or a hurricane in that time for all anyone knows (depending on what part of the country you live in). If I were you I wouldn't view a home as an investment that could gain or lose value. The value you get out of a home is intrinsic, i.e. if you actually like the area and see yourself staying there long term, so as not to be bit by moving costs and realtor fees

Agree - just wanted to see if anyone thought differently

4. Our basic plan is to retire in 15 years (once mortgage is paid off), which would reduce our annual living costs from around 66k to 36k,  but one variable not accounted for is kids (we are likely to start a family in the next couple years), does anyone have any advice on how to budget/plan/optimize for this? I've never come across any of MMM's articles on how he was able to raise kids after retirement and still live on 25k a year! All I know is that kids cost a lot of money. Good luck.

Indeed - thanks!

5. Any other thoughts/suggestions/opinions welcomed!
« Last Edit: July 17, 2017, 04:20:40 PM by Radioherd88 »

dandarc

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Re: More on property or in index fund?
« Reply #3 on: July 17, 2017, 04:51:13 PM »
If you really will invest the difference, then 30-year mortgage and don't pay a cent early is the mathematically correct approach.  There isn't a guarantee, but it is highly likely that you'll have much more at the end of the 30 years if you invest wisely (meaning low-cost index funds, don't panic and sell when the market is down).  So long as rates are favorable, you should periodically cash-out refinance and invest the lump sum as well.  Says the guy who just made the last payment on his house last month, 3 years after purchase . . . I personally was having a hard time getting my wife on board with the "cash-out refinance to a 30 year and invest", and frankly just don't have the energy to continue that battle.  Probably would have been an easier sell at the time of purchase, but what can you do?  Luckily, we live in a LCOL area, and a paid off house may be sub-optimal, but is not a "bad" use of money.

As far as buying more house than you need - yes it could work out to more appreciation.  That is a possibility.  What is close to guaranteed if you do - higher mortgage payment, taxes.  Also quite likely are higher maintenance and utilities, although if you're spending more for "newer" and/or "better location" instead of "bigger", these might not follow as directly as the taxes and interest being higher.  So, I tend to look at the house I live in as a consumption item - try to minimize the expense within your parameters.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

czr

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Re: More on property or in index fund?
« Reply #4 on: July 18, 2017, 07:07:53 AM »
I took out $10k from an IRA and bought a house with it in 2010. The house went up 50% and the mutual funds went up 100% so YMMV. Who knows what the future will hold. We got a 30 yr mortgage and will have it paid of in 15 yrs. With the super long period of super low FED interest rates, inflation will ramp up and so will mortgage rates. 30 years is a long time to have a note though and paying it off is a risk-free return.

Buy the house in the best location (close to work, safe neighborhood, good upside potential, quality schools) that will fit your needs and plan to live there for at least 5 years. The second you buy a house you are down the 5-6% commission on realtor selling fees which comes into play if you have to sell whether it be 10 years from now or 1 year from now. Your property taxes will be higher than the previous owner because of the stepped up basis of your purchase price. A home is not an investment because you'll need somewhere to live and you want the choice to be able to stay in the house when you are FI and want to cash out.

I think the biggest expense of having kids is labor costs and childcare. The first year is the most expensive since short-term disability usually only replaces part of income and you have hospital bills, diapers, possibly formula, furniture, and baby gear, etc. For daycare, you can shop around and get estimates already in your area and for ours it's about $1k /mo per kid for the first 4 years then about $500 afterwards for after-school care and activities. Food, clothing, healthcare, entertainment, vacations, college savings are also considerations. You have to really be focused if you really want to retire in 15 years because there are many distractions and unforeseen events called life. I think you will find that you will want to spend most of your time with your kids when they are younger because, well, babies are so gosh darn cute.

Radioherd88

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Re: More on property or in index fund?
« Reply #5 on: July 23, 2017, 05:37:29 PM »
If you really will invest the difference, then 30-year mortgage and don't pay a cent early is the mathematically correct approach.  There isn't a guarantee, but it is highly likely that you'll have much more at the end of the 30 years if you invest wisely (meaning low-cost index funds, don't panic and sell when the market is down).  So long as rates are favorable, you should periodically cash-out refinance and invest the lump sum as well. 

I am start to think more and more that this is the best plan - it does also just give the flexibility with the extra cash available each month and continues to give the option to pay off earlier if things were to change. Tell me more about the refinance suggestion? How often? Why is it better?

Thanks for the feedback

Radioherd88

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Re: More on property or in index fund?
« Reply #6 on: July 23, 2017, 05:43:02 PM »
I think the biggest expense of having kids is labor costs and childcare. The first year is the most expensive since short-term disability usually only replaces part of income and you have hospital bills, diapers, possibly formula, furniture, and baby gear, etc. For daycare, you can shop around and get estimates already in your area and for ours it's about $1k /mo per kid for the first 4 years then about $500 afterwards for after-school care and activities. Food, clothing, healthcare, entertainment, vacations, college savings are also considerations. You have to really be focused if you really want to retire in 15 years because there are many distractions and unforeseen events called life. I think you will find that you will want to spend most of your time with your kids when they are younger because, well, babies are so gosh darn cute.

Yeah, it's hard to budget for - estimates are all over the place - 250 per kid for 18 years to 600k per kid for 18 years based on your income level and college fees - does anyone have a college fund? It's hard to know when to start adding to one as you are betting that A: you actually have a kid and B: they actually go to college - so you don't want to put too much in there as it can't be used for anything else - right?

dandarc

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Re: More on property or in index fund?
« Reply #7 on: July 24, 2017, 07:15:59 AM »
If you really will invest the difference, then 30-year mortgage and don't pay a cent early is the mathematically correct approach.  There isn't a guarantee, but it is highly likely that you'll have much more at the end of the 30 years if you invest wisely (meaning low-cost index funds, don't panic and sell when the market is down).  So long as rates are favorable, you should periodically cash-out refinance and invest the lump sum as well. 

I am start to think more and more that this is the best plan - it does also just give the flexibility with the extra cash available each month and continues to give the option to pay off earlier if things were to change. Tell me more about the refinance suggestion? How often? Why is it better?

Thanks for the feedback
Same reason getting the 30 year in the first place is good.  If you can borrow cheaply enough on a long-term, fixed rate deal, such as a US-style 30 year mortgage, then doing so and investing in assets (for example, stocks) that should appreciate at a higher rate than you're paying on the loan is the correct thing to do, if you have control over your investing behavior.  Over the long term, it is highly likely you'll come out ahead.

As far as when you hit the "Now it is time to refinance", that will be a function of rates, principal pay-downs and appreciation.  There is no set timetable - you could refinance every year, could be 10+ years before the numbers work, you just keep an eye on things and when the numbers make sense to you, pull the trigger.  As an example, if the refinance costs $3K, and you can cash out $60K and prevailing rates are still reasonable, you might do that to get the $60K into assets that should perform better over the long term.  If you can cash out $100K, it looks even better.  If you can only cash out $10K, maybe you wait.

All that being said - cash-flow is something you need to consider as well.  A larger loan still has to be serviced every month.  A larger payment could put you in a place you're not comfortable with, if your income situation changes, or your other expenses change.  Another reason to favor the 30-year over a 15-year - the payment will be quite a bit lower, so that mitigates this risk some.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

Radioherd88

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Re: More on property or in index fund?
« Reply #8 on: July 27, 2017, 04:20:55 PM »

As far as when you hit the "Now it is time to refinance", that will be a function of rates, principal pay-downs and appreciation.  There is no set timetable - you could refinance every year, could be 10+ years before the numbers work, you just keep an eye on things and when the numbers make sense to you, pull the trigger.  As an example, if the refinance costs $3K, and you can cash out $60K and prevailing rates are still reasonable, you might do that to get the $60K into assets that should perform better over the long term.  If you can cash out $100K, it looks even better.  If you can only cash out $10K, maybe you wait.
[/quote]

Got it - I'm fairly conservative so refinancing has always seemed like a bit of a gamble to me (not that I've really looked into it much). I generally like to know what I'm getting and play the high percentages, but yes there are scenarios where this can work and most of my investing i plan to have steady in index funds which isn't as much of a gamble. (i realize i said gamble 3 times here but i'm fine with that for extra emphasis lol)

gluskap

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Re: More on property or in index fund?
« Reply #9 on: August 09, 2017, 06:59:48 PM »
To me it made sense to have the house paid off around the same time as your retire.  We live in a HCOL area so if we still had to pay mortgage when we FIRE, we would need to have a bigger stache and our monthly expenses would also be higher.  So to do the 5 year Roth ladder rollover we would need to pull out more money to cover our expenses which would put us in a higher tax bracket.  Also by the time we FIRE, our DD would be going to college.  Most financial aid calculations just look at income and not house equity so by keeping our expenses low with no mortgage we would be more likely to have her qualify for financial aid.  The other thing is that for the 30 year to make sense you really have to invest the difference and stick to the plan for the extra 15 years.  What happens if there is a major stock market crash?  Are you confident you would still stick to the plan?  I think for all those reasons, a 15 year makes more sense if it coincides with when you will retire.

sokoloff

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Re: More on property or in index fund?
« Reply #10 on: August 13, 2017, 02:02:32 PM »
I took out $10k from an IRA and bought a house with it in 2010. The house went up 50% and the mutual funds went up 100% so YMMV.
Assuming you were leveraged 5:1 on the house (20% downpayment), you had a higher cash-on-cash return on the house than the mutual funds.

I don't think the decision to buy property for consumption (read: to live in) is an "investment", but rather should be evaluated based on you and your family's personal goals, desires, and financial ability. That property in desirable areas tends to go up is secondary and, as you noted, not at all guaranteed.