Author Topic: Save for home or keep investing?  (Read 1931 times)

lowroller4111

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Save for home or keep investing?
« on: August 24, 2018, 11:45:08 PM »
Background - i'm 44 and live in Southern California, Orange County specifically.  Home prices here are absolutely bonkers, the median list price is around $850,000 and it costs somewhere in the area of $600,000 to get something minimal that would work for me - 1400 sqft, 2-3bd, garage is the minimum I would want if I bought.

I have no debts, doing pretty well in terms of investing/retirement/savings.  Not going to get into why I did not buy during the last downturn since it's a long story but I have around $50k cash right now.  My budget is around $400k for a home.  Right now that target home costs $650k or so.  I noticed that the Real Estate market is significantly slowing down here in OC and inventory is rising very sharply which i've been told is strange for the summer season and is raising some red flags.

My options are:

1. Wait for the 40% drop in prices, which is what I would need to do avoid over leveraging myself... even at $400k it's a bit too much but I would manage.  However, this drop may take 1, 2, 5, 7 years or never who knows?  Meanwhile my down payment money is just losing money to inflation.

2. Forget about home ownership and invest the $50k now

I am very particular about not ending up house poor so do not in any way want to exceed 3X annual gross income with 20% down for a home purchase even if that seems extremely unconventional these days.

Which of the above options would be advisable? The issue I have is that in 2011-2012 the buying opportunity was so brief before the frenzy started all over again i'm afraid that if I don't have money ready I may miss out again.


mstr d

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Re: Save for home or keep investing?
« Reply #1 on: August 25, 2018, 01:04:45 AM »
What are your plans for the future? Do you want to keep living at the same place for the rest of your life?

lefty

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Re: Save for home or keep investing?
« Reply #2 on: August 25, 2018, 10:01:28 AM »
Posting to follow. I'm in a similar situation.

lowroller4111

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Re: Save for home or keep investing?
« Reply #3 on: August 25, 2018, 08:13:08 PM »
What are your plans for the future? Do you want to keep living at the same place for the rest of your life?

I am renting currently.  I intend to stay put for at least the next couple of years since I have a secure job that I really like with a good income and don't want to unnecessarily disturb that.

I am not quite sure what to do at the moment, is it worth moving to a different state just to be able to buy? 

What I do know is that I plan to retire at 62 (18 years from now) and I most definitely will not be living in CA for my retirement, I plan to retire in a very low cost state with no or low income taxes and cost of living - FL, TX, GA, TN or NC are some choices I may consider.


Andy R

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Re: Save for home or keep investing?
« Reply #4 on: August 26, 2018, 12:10:17 AM »
I am not quite sure what to do at the moment, is it worth moving to a different state just to be able to buy?

Why is renting so terrible to you that you would consider moving to an entirely different state just to own a house? What is it about owning a house vs renting that is worth moving to another state for?

lowroller4111

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Re: Save for home or keep investing?
« Reply #5 on: August 26, 2018, 11:19:05 AM »
Why is renting so terrible to you that you would consider moving to an entirely different state just to own a house? What is it about owning a house vs renting that is worth moving to another state for?

Not quite sure, it's just a perception I think that one needs to own their own home to feel financially secure.  But then when I run the numbers it does not quite make sense.  As a single I can rent just as much space as I need saving a tremendous amount.  The extra saved over ownership I can invest and that compounds at a far greater rate in the markets than inflation in Real estate prices or rents.

Just did a quick calculation over the last 30 years, in 1988 the median home price in Orange County was $174,500.  30 years later it is $720,000 or a 4.75% appreciation rate which is pretty amazing since nationwide it's only 2.2% over the last 30 years. 

However, someone who had put $174,500 into VFINX (Vanguard S&P500) in Jan 1988 and not added another cent would have a current balance of $3.78 million.  I estimate that rental costs over the period 1988-2018 would've been at the very most $500,000 while property taxes and maintenance for the buyer would've been an additional $125,000 (property taxes here in CA are locked down due to Prop 13 but are still indexed yearly to the CPI).

The bottom line, we're still seeing the investor coming out LIGHT YEARS ahead of the home buyer in terms of use of capital.  I do understand there are intangible aspects to why people buy homes but looking at it purely from a numbers view buying to me seems like a HUGELY EXPENSIVE LUXURY and NOT the best wealth building tool like the media and common wisdom puts it out to be.

Note - we are talking about cash vs cash scenarios here.  IF the buyer had financed he would've been MUCH WORSE.  Interest rates in 1988 were 10+% and stayed high all through the late 90s, even if they refinanced midway - add in refinancing costs too.  Also the argument can be made that interest rates now are at historic lows (although not anymore since they are almost touching 5% now!!), but that puts additional risks to home values if interest rates go much higher due to inflation pressures.

There are other severe drawbacks to home ownership as well, in order to liquidate the house the former guy has to pay 6%, liquidating the portfolio costs nothing additional in sales commissions.  You also can't liquidate parts of the house but you can withdraw only parts of the portfolio.  Rental costs over 30 years can be flexibly managed to an a la carte approach - rent only the size that you need, for a single a 1bd can be good enough, whereas buying a 1bd is hugely expensive and also has poor resale and since a renter can easily upgrade from a 1bd to 2bd if needs arise one can't upsize a purchased property without incurring huge costs.

I am all ears if anyone has legitimate counter arguments to this.

« Last Edit: August 26, 2018, 11:22:38 AM by lowroller4111 »

nihilism122

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Re: Save for home or keep investing?
« Reply #6 on: August 26, 2018, 01:13:07 PM »
When in doubt, keep investing.  That's my advice.  I am a 36 year old renter in a high cost of living city.  Over the years I have wondered whether I should buy a home, too, but I have never gotten around to it.  Frankly, every time I run the numbers I lose interest.  My monthly living costs would triple, even with a sizable down payment.  I just don't see the logic in it.  I save about 60-65% of my income.  I am happy. 

Andy R

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Re: Save for home or keep investing?
« Reply #7 on: August 26, 2018, 07:49:03 PM »
The thinking of "one needs to own their own home to feel financially secure" sounds like it is something you have subconsciously picked up from your surroundings as you grew up.
There is no difference between owning your house or owning and investment that pays out a return that can support rent indefinitely. You would just need to understand that you need more income if you rent because you now need enough to support you plus your rent, but that should be money invested that you otherwise would have put towards a house, so should not be an issue as long as you are aware of this and add it to your retirement amount goal.

As for your numbers comparing renting vs buying, yes I do have a point that you missed. Leverage.
If you put down 100k on a 500k property, then you are getting a growth of 5x what you would if you invested without leverage. 5 times the growth rate and compounded over decades.

catccc

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Re: Save for home or keep investing?
« Reply #8 on: August 29, 2018, 01:50:49 PM »
There is so much societal pressure for people to buy a home.  I am a life long renter, now 39, and it's worked out quite well for me thus far.

For a better part of my adulthood, I saved and saved for a house.  I figured the more we had to put down, the better.  We didn't really start looking for houses until 2009, and I had a tidy sum saved up by then.  And I kept saving.  Come early 2014, still no house; we'd kinda stopped looking, we were busy with small kids... the intention just got away from us.  At that point, I lump sum invested $80K, 2/3 of our $120K cash savings into Vanguard.  It was a rather conservative allocation, since I still thought we'd be buying a house at some point.  Looking back, my only mistake was not abandoning my cash position sooner, or not having a more aggressive allocation.

Here are some tidbits that make me feel like I'm making the right choice by continuing to rent:

"It's drilled into us from a very young age that a big house with a yard and a white picket fence is central to the American Dream, but did you really buy a house, or did you just get yourself a job as a handyman/gardener?"
https://www.inc.com/stephan-aarstol/escape-the-rat-race-how-to-stop-running-and-start-living.html

"...housing is so dangerous. It makes you think that you are winning. Well, in reality, everybody else is winning—the bank, the real estate agent, the contractor who you had to pay $10,000 to stage the place or whatever […] So, it’s true that housing does make people money—just not [the homeowner].
https://www.madfientist.com/millennial-revolution-interview/

" a relentlessly ongoing drain on the cash reserves of the owner." (and 17 other thoughts)
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

“People still view housing as a central component of happiness and a critical aspect of the American dream,” Dr. Dunn said. “But there is little research to support that.”
https://www.nytimes.com/2013/07/14/realestate/homeownership-the-key-to-happiness.html

Bottom line... I know it is hard to feel like an adult as a renter.  But I would recommend resisting the urge to buy if you are on the fence.  You can make the choice to own for your lifestyle if it is important to you, but it doesn't seem like it is.  Really, the numbers rarely pan out.  And for the owners that defend their choice, think of this, from the NYT article linked above: “It’s very hard to get people to admit they spent hundreds of thousands of dollars in a way not optimal for their happiness.”

domo

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Re: Save for home or keep investing?
« Reply #9 on: August 29, 2018, 02:28:54 PM »
Owning only makes sense if you can afford to buy the house. Otherwise, it does not. There is a lot of social pressure that makes people buy houses that they can't afford. It doesn't matter if you need a place to live in the area for the next 50 years, or if house prices are low and are expected to rise. If you can't comfortably make payments on the mortgage, it's a bad idea to get one.
Owning a home can be a good thing when it is time to FIRE, as you should no longer have a mortgage note then. It helps keep your monthly bills down, though you are on the hook for larger unplanned expenditures like plumbing, HVAC, and electrical failures.
There is always the question of whether or not you plan on staying in the area once you FIRE. If not, you are essentially attempting to time the housing market. You may find yourself stuck with an overpriced house in an area you no longer want to live in. Sure, you could luck out and FIRE at the right time and get yourself a nice fat bonus, but you might not. Do you want the housing market to dictate when you are able to FIRE?

harvestbook

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Re: Save for home or keep investing?
« Reply #10 on: August 30, 2018, 06:25:29 AM »
I find it immensely psychologically satisfying to own a paid-off house. It allows me to invest more aggressively, live the lifestyle I want--I don't have to ask permission to dig a garden, have chickens or goats, plant trees, do renovations, and serves as a low-cost base to make plans for the future. I would never dream of thinking of it as an "asset," it's just a place to keep my stuff out of the rain. But I intend to live here the rest of my life and I work at home, so I don't have to worry about getting fired, changing jobs, comparable housing or rent prices, etc.

Of course, paying off a house only means that the taxing county authority owns it rather than the bank. There's no one-size-fits-all situation, but I'd never buy a house anywhere I wasn't going to stay.

nihilism122

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Re: Save for home or keep investing?
« Reply #11 on: August 31, 2018, 06:12:22 PM »
The thing with buying a home is unless it is cheaper than renting, it will inevitably increase your monthly expenses and decrease the amount of money you have invested for passive income to pay your bills.  Retirement is all about generating enough passive income to be financially independent. 

This is what has always stopped me from buying.  It would drastically increase my housing costs and drastically reduce my passive income.  I view this as counter-productive to FIRE. 
« Last Edit: August 31, 2018, 06:14:31 PM by nihilism122 »

cchrissyy

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Re: Save for home or keep investing?
« Reply #12 on: August 31, 2018, 06:34:24 PM »
it sounds like you're happy renting and that investing the money is mathematically optimal. so the entire solution here could be in your head - learn to think differently about the societal pressure to own your housing situation.

Retire-Canada

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Re: Save for home or keep investing?
« Reply #13 on: September 12, 2018, 11:31:09 AM »
2. Forget about home ownership and invest the $50k now

Do this ^^. Stop thinking about real estate. If and when houses drop to a level that you find affordable you can rethink ownership. Otherwise get rich and keep renting.

simonsez

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Re: Save for home or keep investing?
« Reply #14 on: September 12, 2018, 12:24:11 PM »
OP, you don't really say what you're living in now and how much it costs.  Are you renting something that you would want to buy?  Or are you waiting to "reward" yourself and buy a house that is much more than what you are living in now?

I would do some rent/buy math.  It doesn't really matter if the cost of the house you want is 50k or 5 mil, it's relative to how much you spend per month now on rent (assuming what you live in now has amenities house would have, or make adjustment to compare apples to apples) and which would be better for long-term.

talltexan

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Re: Save for home or keep investing?
« Reply #15 on: September 13, 2018, 07:32:50 AM »
You didn't mention your relationship status: moving is harder when there are two careers/incomes to consider. A spouse also increases the need for space.

Mississippi Mudstache

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Re: Save for home or keep investing?
« Reply #16 on: September 13, 2018, 11:16:41 AM »
I find it immensely psychologically satisfying to own a paid-off house. It allows me to invest more aggressively, live the lifestyle I want--I don't have to ask permission to dig a garden, have chickens or goats, plant trees, do renovations, and serves as a low-cost base to make plans for the future. I would never dream of thinking of it as an "asset," it's just a place to keep my stuff out of the rain.

Exactly how I feel. I've been a renter for a few random years in the decade since I left college, but I'm much happier owning my own home. There is little doubt that I'd be better off financially if I had rented the whole time, though, so if you're going to be a homeowner, you'd better be damn sure it's going to improve your quality of life.

lowroller4111

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Re: Save for home or keep investing?
« Reply #17 on: September 13, 2018, 06:46:28 PM »
found an interesting video opinion on the topic:

https://www.youtube.com/watch?v=ErjqwvXJAGg


Andy R

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Re: Save for home or keep investing?
« Reply #18 on: September 13, 2018, 07:38:23 PM »
found an interesting video opinion on the topic:

https://www.youtube.com/watch?v=ErjqwvXJAGg

Biased load of garbage.
Renting and buying are both good options provided you have reasons for your choice and why it applies to you and you can deal with the downsides of whichever one you choose, since along with both options having upsides, both options also have downsides.
Make an educated decision, not one based on what a motivational speaker convinces you to.

84Blazer909

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Re: Save for home or keep investing?
« Reply #19 on: September 14, 2018, 10:14:55 AM »
I can totally understand your plight - I live in SoCal as well, my daughter lives in Irvine with her mom. A while back I modified my career to be able to work from home and then decided to buy further east, I now live in Redlands.  For your price tag, you would basically have to go East to at least Corona and keep going from there.  There are nice areas out there, totally understand if you can't work remote and the commute is not doable. Consider - sacrificing now can lead to greater ability to live where you want in SoCal later.

As far as trying to compare these decisions, there are certainly quite a few additional items to factor in from the real estate side.  I feel building a spreadsheet is really needed to compare this properly. There are more but these are some big ones. Intuitively people know that successful real estate investment can get someone very rich.


1. ( Profit from inflation) , mortgage payment stays the same over 30 years, rent keeps going up. That mortgage payment in 30 years has a significantly lower impact on your monthly finances. (Insert "believed" monetary inflation number here - 3-7%)

2. (Equity) Gain in equity over time via principle paydown (Rent vs mortgage being equal, at some point your house is paid off and doesnt cost a dime). If you keep renting, you will have to rent until you're dead.

3. (Leverage) When property values go up, they go up as a percentage of the entire purchased value, not a percentage of your down payment, this is massive leverage that can work in your favor when selling and/or also the reasons below. 5% return on 50k a year is $2,500. 5% a year on 500k is $25,000. A few years of that, then sell and the stock market returns compared will never touch that. (yes, we are higher in real estate prices now, just want to comment on this in general)

4. (Tax deductions) Mortgage interest, property taxes are tax deductible. If selling and you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free. If you are married and file a joint return, the tax-free amount doubles to $500,000. (Lot's more deductions)

5.  (Options) Ability to buy, live in it, later move out, then rent it out.  A good rental can easily gain 13% cash on cash return with very low volatility w/ standard down payment.
(Depending on rent to value ration in your market, varies highly, you *can* still get those returns in certain parts of the country even now, not SoCal though unfortunately. Just bought one in Memphis and ended up w/ approx 12.5% cash on cash)

6. (Leverage/Options) When a property gains sufficient equity you can perform a cash-out ReFi and use low interest 30 yr funds for additional investment, real estate allows low risk leverage that is pretty unique... (opportunity cost)

7b. (Not a financial factor) Ability to control your surroundings, engage in home renovation projects (may not be a personal desire, certainly is for me, just a life enjoyment factor). It's hard to quantify this one, when I bought my first house I felt an amazing feeling of freedom and control of my own destiny. 

Some points to consider....
« Last Edit: September 14, 2018, 11:05:17 AM by 84Blazer909 »