Author Topic: Best place to stash my *potential* down payment money for a year and a half?  (Read 5750 times)

DodgerStache

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Hi all!


I really had to resist throwing in the stache play on words, but was able to do it. Short time MMM reader and new to the forums, but love the feedback I have been seeing so I thought I'd give it a try. Here's my situation:

Me: 28 years old with a very secure consulting job. Might be able to relocate to certain big cities pending firm approval. Clients are all over the city, so cannot necessarily live in a central location.
Wife: 30 years old with a very secure job in Santa Monica. Would need to find a new job if we chose to move.
Married, but no kids yet - that's about 18 months off
Dual income - saving approximately $5k per month (aside from retirement funds)
Debt-free
401k/403B maxed out each month through both our employers

So we are currently living in Los Angeles due to favorable job offers and we are not sure if we want to stick around long-term. Housing seems ridiculously overpriced and we cannot find anything affordable that's also close to work (Santa Monica). We have two border collies, so a yard is a must. Currently renting a great place on the Westside at a good discount from the market rate, but the owners will be moving back in about a year and a half to reclaim their home. At that point in time, we will either find a new place to rent in LA, buy in LA, or move to a different city and make the same decision.

Bottom line is this - we have no intentions to buy for at least 18 months, but we have about $160K sitting in Capital One 360 @ 0.75%. We just hit the $160K, but we plan on buffering it to $180K in the next four months. Is there something better we can do with the money that poses a very little risk and would let us pull money out in 18 months if we did decide to buy? Any thoughts on how to handle the money if this 18 months turns into a longer period of time?

Thanks in advance for all your ideas!

GizmoTX

  • Handlebar Stache
  • *****
  • Posts: 1347
Bankrate lists GE Credit's 18 month CD @ 1.15%. It & Synchrony are paying about 1% in their savings accounts, which are accessible any time.
If you go CD, I'd ladder it.

Dimitri

  • Guest
I used to bank with CapitalOne360 but then realized that there are a lot of better alternatives out there.

http://www.bankrate.com/funnel/savings/savings-results.aspx

A 12 month CD will pay you even more since you have time on your side with this money:

http://www.bankrate.com/funnel/cd-investments/cd-investment-results.aspx?ic_id=CDI_compare_rates_module:www.bankrate.com:1_Yr_CD&local=false&prods=15

If you want a higher return it will come with more risk. 


health teacher

  • 5 O'Clock Shadow
  • *
  • Posts: 10
I bonds. Inflation protected and no withdrawal penalty after 1 year.

DodgerStache

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Thanks for the savings/CD rates!

Is there any value in putting some of the money towards an REIT (maybe VNQ?) to mirror property values since I know this money will eventually go towards a house? Seems like a decent amount of risk, but all the risk it tied to the eventual investment I'll make with the money.

Dimitri

  • Guest
I bonds. Inflation protected and no withdrawal penalty after 1 year.

According to TreasuryDirect - Series I Savings Bonds have a three month interest penalty in the first five years of ownership.

https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

DodgerStache

  • 5 O'Clock Shadow
  • *
  • Posts: 10
I bonds. Inflation protected and no withdrawal penalty after 1 year.

According to TreasuryDirect - Series I Savings Bonds have a three month interest penalty in the first five years of ownership.

https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

It sounds like you can only buy $10k worth in a calendar year... am I reading that correctly?

health teacher

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Yeah, my mistake. I was thinking ability to cash it.

I bonds. Inflation protected and no withdrawal penalty after 1 year.

According to TreasuryDirect - Series I Savings Bonds have a three month interest penalty in the first five years of ownership.

https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

health teacher

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Just realized you have a hefty downpayment.

Don't take my advice, I don't have experience with that kind of cash!!
« Last Edit: January 19, 2015, 02:57:34 PM by health teacher »

DodgerStache

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Just realized you have a hefty downpayment.

Don't take my advice, I don't have experience with that kind of cash!!

Haha no way! I bonds are fantastic - I just wish I could buy more of it. LA is so out of control that a down like this probably isn't even enough to get a decent place near her work...

BigRed

  • Stubble
  • **
  • Posts: 200
  • Age: 43
  • Location: NJ
We have the same issue, Westside of LA, lots of cash (although not as much as yours), a timeline that's at least 18 months out to buy, but no certainty we'll buy in LA or even at all at that point.  We have the kids already, though.  I also believe Westside housing prices are insane and they must come down at some point. 

I'm considering the following plan, though: $60k is enough of a downpayment to use if we move.  Prices in West LA are nuts and must come down.  Therefore, if we stay, we'll rent until our savings and reasonable house prices line up.  Therefore, we should invest anything above $60k and wait for the market to help us and house prices to fall.  Essentially more risk, the downside is if prices fall and the market falls simultaneously and we miss our chance, but it's also possible that inflation-adjusted prices fall because inflation rises, and then keeping cash, we'd risk missing that opportunity anyway because our cash will lose value due to inflation.  We haven't shown the inclination to take that kind of additional risk so far in life, but I'm floating this plan to see what people think.  For you, that would probably involve investing the $100k you already have in excess of $60k (or pick you own lower COL area downpayment level.)

What do people think of this idea?

oldmannickels

  • Stubble
  • **
  • Posts: 194
I'm in a similar situation to you, but on the opposite coast. Here's an idea I've been playing with. Why not take your savings rate x 18 and sock that away in investments, with some buffer.

Put $50k or so in an investment account and just build the cash buffer back up with your normal monthly savings while you're getting closer to the actual time you need to make a decision.

The other ideas of CD ladders and high yield savings are also good.

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1346
I'm curious why no one recommends a vanguard bond fund for this.

https://personal.vanguard.com/us/funds/etf/all?assetclass=bond&assetclass=bond

Dimitri

  • Guest
I'm curious why no one recommends a vanguard bond fund for this.

https://personal.vanguard.com/us/funds/etf/all?assetclass=bond&assetclass=bond

Probably because none of them are risk-free?

Hayden Frys Mustache

  • 5 O'Clock Shadow
  • *
  • Posts: 39
  • Age: 31
  • Location: Iowa
I'm in a similar situation to you, but on the opposite coast. Here's an idea I've been playing with. Why not take your savings rate x 18 and sock that away in investments, with some buffer.

Put $50k or so in an investment account and just build the cash buffer back up with your normal monthly savings while you're getting closer to the actual time you need to make a decision.

The other ideas of CD ladders and high yield savings are also good.

I was thinking along these lines too - How much of your stash do you need to put down on a house? Since your horizon is a little longer, consider keeping what you need to put down low-risk (bonds/CDs) and invest the rest in an index/REIT/name it.

DodgerStache

  • 5 O'Clock Shadow
  • *
  • Posts: 10
I'm in a similar situation to you, but on the opposite coast. Here's an idea I've been playing with. Why not take your savings rate x 18 and sock that away in investments, with some buffer.

Put $50k or so in an investment account and just build the cash buffer back up with your normal monthly savings while you're getting closer to the actual time you need to make a decision.

The other ideas of CD ladders and high yield savings are also good.

Never really thought about it like this, but I really like this idea... might try to throw about $50K into the new Charles Schwab Intelligent Portfolio aggressive investing and forget about it while we build our down payment again. Have there been any reviews of the new service or do we need to wait until after launch?

DodgerStache

  • 5 O'Clock Shadow
  • *
  • Posts: 10
We have the same issue, Westside of LA, lots of cash (although not as much as yours), a timeline that's at least 18 months out to buy, but no certainty we'll buy in LA or even at all at that point.  We have the kids already, though.  I also believe Westside housing prices are insane and they must come down at some point. 

I'm considering the following plan, though: $60k is enough of a downpayment to use if we move.  Prices in West LA are nuts and must come down.  Therefore, if we stay, we'll rent until our savings and reasonable house prices line up.  Therefore, we should invest anything above $60k and wait for the market to help us and house prices to fall.  Essentially more risk, the downside is if prices fall and the market falls simultaneously and we miss our chance, but it's also possible that inflation-adjusted prices fall because inflation rises, and then keeping cash, we'd risk missing that opportunity anyway because our cash will lose value due to inflation.  We haven't shown the inclination to take that kind of additional risk so far in life, but I'm floating this plan to see what people think.  For you, that would probably involve investing the $100k you already have in excess of $60k (or pick you own lower COL area downpayment level.)

What do people think of this idea?

I'm not against this, but I don't think we're going to get much less of a COL location unless we move out of state. Not sure the wife would go for it though.

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1346
I understand that bond price will drop with rising interest rates, but wouldn't monthly dividends remain constant?

BigRed

  • Stubble
  • **
  • Posts: 200
  • Age: 43
  • Location: NJ

I'm considering the following plan, though: $60k is enough of a downpayment to use if we move.  Prices in West LA are nuts and must come down.  Therefore, if we stay, we'll rent until our savings and reasonable house prices line up.  Therefore, we should invest anything above $60k and wait for the market to help us and house prices to fall.  ...  For you, that would probably involve investing the $100k you already have in excess of $60k (or pick you own lower COL area downpayment level.)

I'm not against this, but I don't think we're going to get much less of a COL location unless we move out of state. Not sure the wife would go for it though.

Well, almost anywhere is lower COL than the Westside, except for the Bay area.  Since you said you might consider other cities, I thought it was enough like ours to air my potential plan.  I'm of the opinion that it's crazy to pay current prices on the Westside, even if you can afford it.  Perhaps that's sour grapes though since we currently cannot afford it, and if people who can pay those prices do, we'll never be able to afford it.

dios.del.sol

  • Stubble
  • **
  • Posts: 150
  • Location: Los Angeles
To answer the OP, we're hanging on to our down payment money in a "high" interest savings account. This is due to the uncertainty on if or when we'd jump into the real estate game. Moving on, since there are several LA posts here, and since I don't want to hijack this thread, I started a new one: Griping on LA real estate. It would just be a way of trading stories and creative ideas surrounding the real estate market in LA. Any interest?

Rein1987

  • Stubble
  • **
  • Posts: 149
I think it depends on how much money down and how much you have. If you want put all your money down, a high yield saving account is the best choice. However, if you only plan to put 70% of your money down, for example, you might want to invest some of the money with some risk. VNQ can be a good choice here, because if VNQ keeps down, the housing price is likely to be lower too.

I was in a similar situation last year, considering what to do with my downpayment. I was not sure when I buy and how much I buy. Finally, I just bought the house a week ago. What we did was 40% saving account, 10% bond, 10% REIT and 40% stock. I know this is risky, but we do not plan to use all our savings to buy the new house. We end up using 65% of the money, so we sold the bond and some stock/REIT which made much more than the interest rate banks offer (the return was more than 10% for the bond+reit+stock).


CanuckExpat

  • Magnum Stache
  • ******
  • Posts: 2947
  • Age: 36
  • Location: Travelling
    • Freedom35
You'll find some discussion on this topic in this earlier thread (and probably other older threads): http://forum.mrmoneymustache.com/real-estate-and-landlording/saving-for-a-home-keep-cash-in-liquid-savings-acct-or-invest/

I think it comes down to how uncertain you are on the time-frame that you will need the money, and how big a deal it would be for you to have do deal with the market being down when you needed to tap the funds.