Author Topic: Spitballing funding a home purchase  (Read 852 times)

chadat23

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Spitballing funding a home purchase
« on: March 19, 2018, 03:29:01 PM »
How would you save/invest for a house/down payment for a primary residence while also saving to FIRE given that FIREing has an infinite time horizon but a down payment is one large lump sum with a fairly specific time horizon? Also, what percent down would you shoot for (if I'm doing the math right, after accounting for the decreased monthly expense, paying cash looks to make the most sense but that's challenging my preconceptions)?

We would like to FIRE in about 8ish years and then potentially buy a house in another year or two after that. The tricky part is that we live and work in a national park so once we quit we'll have to move and we don't know where we want to go so housing costs are still very much up in the air. On the plus side, we presently only spend about $25-30k annually so I think we'll have some room to play in our budget.

If it matters, my wife and I presently have about $550k with about a 60/40 split between taxed and tax-advantaged accounts with about a 90/10 total stock/total bond market split and can save about $30-40k per year, 20ish being in tax-advantaged accounts.

So any big-picture thoughts on things like allocations for the portion of our assets slated for a home purchase or how much to hope to put down given that we don't know what the housing or stock markets will be like or where interest rates will be? I kind of feel like I'm putting the cart before the horse but I'm pretty sure that's the name of the game in the world of FIREing.

And after writing all that I'm wondering if we should skip having a separate "house" bucket, stick with the current asset allocation, but acknowledge that we can't pick a FIRE account balance until housing costs are much better nailed down, then upon FIREing, put some percent of the down payment (or the entire anticipated house purchase price) into CDs or something like that so that we don't get messed up if the market crashes after we FIRE but before we buy. And if the market tanks the year before we expect to FIRE, maybe we just have to ride things out a bit longer than hoped.

Thanks,
Chad

ChpBstrd

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Re: Spitballing funding a home purchase
« Reply #1 on: March 19, 2018, 09:00:17 PM »
I don't know if it does you much good to allocate a separate FIRE fund and a separate down payment fund.

First, a lot can change in 8 years. The market you're looking at, where it makes more financial sense to buy instead of rent, could flip and become a place where it's more economical to rent. Or you might change and wish to live in different places over time rather than being tied to home ownership. You might realize you're not sure about what you want out of your housing in your to-be-determined post-FIRE lifestyle and decide it's more prudent to try a few different lifestyles over the first 5 years or so.

Second, you have a taxable account that will catch 10k a year of your savings for the next 8 years as long as you stay on your current plan. You can expect that taxable account to become a low six-figure sum in 8 years. Because it can be withdrawn penalty-free, this is your down payment, your Roth backdoor conversion pipeline, or whatever you want. Call it your flexibility money. A house down payment is just one of your options.

Third, you can still estimate a lifestyle cost without locking in a choice on rent vs. buy. One option is to estimate it both ways. Be sure to account for constantly-rising property taxes, maintenance, and insurance on the buying side. Another option is to only estimate the economically sensible housing decision. In many markets, the cost of owning vs. renting are at parity. That is, the amount you spend on housing as an owner comes out to roughly what the rent would have been. These landlords plan to retire when their mortgages are paid off, but have day jobs and barely break even. In other markets, housing prices are prohibitively high, but there are plenty of landlords leveraging real estate - with negative cashflows - just to speculate on further increases. In still other markets, housing prices are so low, there's no point in renting if you plan to stay just a few years. Figure out what your market is and estimate accordingly.

Yes, if you decide you are definitely buying, it makes sense to shift from equity to fixed income investments for a few months.

yachi

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Re: Spitballing funding a home purchase
« Reply #2 on: March 20, 2018, 09:33:54 AM »
I don't see a good reason to keep it separate either.  How flexible are you with your plans?  Is having a house in exactly 8 years success even if it comes without FIRE?  Then set that money aside.  Is having FIRE in 8 years a success even if it comes without a house?
Keeping everything in one bucket until you make an offer on a house means that if the market tanks, you can adjust your FIRE budget to include a lower cost house, and if the market takes off you can adjust for a higher cost house.

chadat23

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Re: Spitballing funding a home purchase
« Reply #3 on: March 20, 2018, 02:12:01 PM »
Overall, I agree that for the next while, one bucket makes the most sense. That said, given our living/employment arrangement, I don't see us buying until a year or two after we FIRE (assuming that we do buy). My resulting fear is that, after FIREing, and between figuring out where we want to live and actually buying a house, the market will shift such that we won't be able to buy there anymore. If a market shift leaves us with half as much purchasing power than some communities that could have been affordable, won't be. And to that, I'll add that while we don't need a fancy house, after having spent years living and working in national parks, the thought of retiring to some nondescript bit of suburbia isn't what I'm looking for :)

GOFU

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Re: Spitballing funding a home purchase
« Reply #4 on: March 20, 2018, 07:24:30 PM »
Save as hard as you can, invest as aggressively as you can according to your horizons and tolerances, and when you are a year or two or three out from wanting to buy the house separate out what you will need for that in cash or something similarly safe.

Here is a thread debating the advantages and disadvantages of carrying a mortgage.
https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
« Last Edit: March 20, 2018, 08:11:13 PM by GOFU »

chadat23

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Re: Spitballing funding a home purchase
« Reply #5 on: March 21, 2018, 12:56:19 PM »
I previously wrote a simplified version of cfiresim (I based it on cfiresim's source code so I get identical results for a given scenario) so that I could test some variable allocation ideas (none made meaningful gains over a fixed allocation). After doing some more reading on the topic I just modified it to account for a fixed mortgage payment over a finite number of years. I then tested two scenarios. I chose numbers that, for me, seem plausible, were easy to work with, and didn't result in any 100% success rates. I assumed that there's a portfolio value of $1.2M at the start of retirement, 90/10 stock/bond split, a home purchase price of $400k, $30k of annual spending excluding a potential mortgage, and a 40 year retirement. I'm dismissing the effects of being able to deduct the mortgage interest since I don't anticipate itemizing on my taxes to yield a large benefit over the standard deduction, if any.

If 20% is put down, resulting in a $1.12M starting account balance, with a 30 year, $1600 mortgage payment then I get the following results:

Success Rate 94.39252336448598
Mean ending balance 4242714.15397
Median ending balance 2907409.30794
Ending balance Std Dev 4127366.39536
Highest result 22406961.7968
Lowest result -1487877.71188

If the house is bought cash meaning that there's an $800k starting balance but no mortgage then I get these results:

Success Rate 94.39252336448598
Mean ending balance 3390789.38122
Median ending balance 2325883.56199
Ending balance Std Dev 3366251.7036
Highest result 18150703.6419
Lowest result -634955.668535

So, assuming I didn't make any coding errors in adding the mortgage stuff, while on average you're a bit better off with a mortgage, it doesn't affect your success rate, at least assuming today's mortgage rates. Additionally, I reran the scenarios with a $200k home purchase, still 20% down, and $800 mortgage payments and again got comparably similar results.

WalkaboutStache

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Re: Spitballing funding a home purchase
« Reply #6 on: May 10, 2018, 02:35:06 AM »
Do you see yourself living in the same area after you retire?  If so, you may be able to put a down-payment on a house and then rent it on AirBnB until you are ready to retire (check your municipality's rules for that).  I imagine that there are no major hotels nearby and that the availability of beds is somewhat tight. 

What I like about this is that you are likely to make more than your monthly payments with AirBnB (National Parks are hot markets for that), and get a bit of a best of both worlds experience where the house you will live in doubles as income property.  Remember that once you FIRE the availability of financing may dry up (even with good credit), so you may need a plan to buy before you pull the plug.

For a bit more context, I have a cabin near Hawaii Volcanoes NP.   It rents really well.
« Last Edit: May 10, 2018, 02:43:20 AM by WalkaboutStache »

Spitfire

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Re: Spitballing funding a home purchase
« Reply #7 on: May 10, 2018, 08:02:31 AM »
If you know you won't need your down payment for 8 years, I would front load the stock investments and switch to a savings account at the end. For example, if you need 60k for a down payment and save 20k a year in taxable accounts, I would do the first 5 years in stocks and the last 3 in savings account. The more time your stocks have to grow, the better. It also gives you time to adjust your plans if your desire to buy a house changes, without having a cash drag the whole time.