Buying a House vs. Investing the Money. In need of advice or opinions.

[SettledownOrInvest]

Hey Mustachians! I've been reading and absorbing information on saving for the past few days. Doing so may have changed my mind a little bit on what my priorities are and what may be best for my future.

I'm in my early twenties and I run 2 single person businesses, trying to keep living expenses as low as I can. Right now, I only pay for food and sometimes rent/utilities (sometimes I do, sometimes I don't as I live with my parents to keep costs down).

When I first started turning a profit, I thought to myself that a house is very important and that will be the easiest way to settle myself down and not have much else to worry about. I came to the conclusion that I'd need around $25,000 a year to live off of (property taxes, insurance, bills, etc).

• Pre-tax Yearly Income: ~$282,000 (volatile job, so not sure how long it would last)
• Current Emergency Fund: $30,000
• Current Balance in Bank: $200,000
• Roth IRA: Maxed/year
• Debt: 0

Since my business is relatively volatile, I figured that I'd need to make a very large down payment on a house to offset the risk. I would also offset the mortgage by renting out one or two of the rooms in the short to mid term. I wouldn't go bigger than 3 bedrooms (this is mainly based on wanting to stay in the area for 10+ years if I were to make that commitment, and may want to start a family).

Saving up my money to afford a house may be tying me down and not be as beneficial to me as I once thought. A lot of people point out the upkeep of a house, and the potential costs it could be to keep tenants in a house you own.

I got to thinking that investing my money might be a better option for me, renting modestly for the next 5-10 years so I can easily invest more and continue living how I do (relatively frugally). But, I'm not 100% clear on investments and the tax deferrance they may or may not have.

Sorry this post got a little bit long winded. I am just at a bit of a crossroad on what I should do. I'd really appreciate any advice and/or opinions you have as many of you have much more experience with finances than I do.

[Emg03063]

Buying a house as an investment is a very undiversified way to invest in real estate, but from a trading perspective, you are covering your own short, so there's that.  Does your $25k budget include mortgage, or does that assume paid off house?  Financially, it can go either way, depending on how much house you buy vs. the cost of renting and what happens in the real estate market, but if you can live at home to minimize expenses, that's obviously financially ideal.  Given all of the financial uncertainty, I would base the decision on where I wanted to live currently for my own personal happiness.

[SettledownOrInvest]

Buying a house as an investment is a very undiversified way to invest in real estate, but from a trading perspective, you are covering your own short, so there's that.  Does your $25k budget include mortgage, or does that assume paid off house?  Financially, it can go either way, depending on how much house you buy vs. the cost of renting and what happens in the real estate market, but if you can live at home to minimize expenses, that's obviously financially ideal.  Given all of the financial uncertainty, I would base the decision on where I wanted to live currently for my own personal happiness.

Thanks for replying! The 25k budget would be once the house is completely paid off and mortgage free. I'd most likely settle in a state with low or no state income tax, so I've been looking at Washington a lot in some of the more up and coming neighborhoods. One of the places I liked was listed on some of the more rapidly growing cities/rated best places to live on livability if that counts for anything. I want to pick something in close range to a larger city like Seattle so I could rent out the rooms to prospectively less shady people (not dealing with small claims court or eviction would be best, obviously). It would most likely cost in the range of 400-450k based on what I researched, which I could save for another year and afford a big chunk of the down payment.

Buying a house for me doesn't equal happiness. I had the idea in my head for so long that it was what I was focused on. Now that I'm close to it and started reading more on investments it can go either way. I'd rather hit FI rather than struggle to own a home, but given the uncertainty of running the same business in 2-3 years also gives me a bit of worry on investing for 5-10 before I see a steady income coming from it. My business is based online so if something like that does happen, I do have plans to be able to start up again (it just may take some time, which is what my emergency fund is for).

Mainly I wanted to ask: If you were in my shoes, at my age, what would you do?

[ShoulderThingThatGoesUp]

Your single-person businesses are totally legit and you send quarterly love notes to the IRS, right? If no, stop posting financial details on the Internet. Assuming yes, you should be sheltering as much of your huge income as possible in tax-advantaged accounts like an individual 401(k) plan.

After that, if you want to buy a house that is a good investment (i.e. rentable at a profit) and rent to roommates to make your housing nearly free, I think that's defensible.

[SettledownOrInvest]

Your single-person businesses are totally legit and you send quarterly love notes to the IRS, right? If no, stop posting financial details on the Internet. Assuming yes, you should be sheltering as much of your huge income as possible in tax-advantaged accounts like an individual 401(k) plan.

After that, if you want to buy a house that is a good investment (i.e. rentable at a profit) and rent to roommates to make your housing nearly free, I think that's defensible.

I don't do quarterly notes, rather I do the full year at the same time as my income tax since it's a single member LLC/schedule C and I'm dealing with digital goods. Is it beneficial to put money into a 401k since I don't believe I get the same benefit as a company matched/exceeded 401k? I'll have to double check next when I meet with my accountant.

As far as a house goes, it definitely is something that I'd want to rent and would have to dig more research up there being demand to do so as well. I wouldn't purchase a house if there was no demand to rent as it's part of my plan to leverage for the mortgage essentially being free (even under an aggressive timeframe).

Thank you for taking the time to reply.

[FrugalFan]

You are in great shape financially, and arguments could be made either way depending on the situation. The NY times has a good rent vs own calculator, and I think Jcollins does as well. Buying usually only starts to make sense financially when you are fairly certain you will stay put for several years. Buying kind of ties you down a bit more. Since you are in what seems an early/transitional stage, I would consider actually living somewhere you are interested in buying but rent there at first to make sure you like it and can see yourself being there for a long time. If you do decide to buy, there is no need to pay off the entire house. I would prefer to have some money invested (and therefore accessible) and a mortgage than all of my money tied into my house.

[SettledownOrInvest]

You are in great shape financially, and arguments could be made either way depending on the situation. The NY times has a good rent vs own calculator, and I think Jcollins does as well. Buying usually only starts to make sense financially when you are fairly certain you will stay put for several years. Buying kind of ties you down a bit more. Since you are in what seems an early/transitional stage, I would consider actually living somewhere you are interested in buying but rent there at first to make sure you like it and can see yourself being there for a long time. If you do decide to buy, there is no need to pay off the entire house. I would prefer to have some money invested (and therefore accessible) and a mortgage than all of my money tied into my house.

Thank you! According to the calculators, renting makes slightly more sense by around $100-200, but it doesn't account if I would have tenants or rent out rooms of the house.

I will have to look into taking out a longer mortgage than I originally planned - and investing some of the rest. I'm just a bit worried that if I go belly up I won't have enough cash on hand to be able to continue paying the mortgage if something goes wrong (i.e. no tenants, going to take me a while to get a job, etc.). That's why I had originally planned to take out a rather aggressive paying strategy which is definitely a pretty big opportunity cost, too.

[FrugalFan]

But if you go belly up, you can use your investments to pay for all your expenses (food, roof over your head, etc). If all you have is a paid off house, you are not in great shape. Spending investments is not wise, but I think you are talking about a dire emergency here. I would rather have the money over a rather illiquid asset. And obviously you have other safety measures, like an emergency fund, an ability to live frugally, tenants, and maybe even the opportunity to move in with your parents if things go really bad. Give yourself more credit :)