Author Topic: Should I cash in all 300K of my index funds to buy a house in cash in NJ?  (Read 1285 times)

fizzgig

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In 5 years, I've gradually put 200K in an index fund and basically "earned" 100K from it. I'm a little worried there's probably a crash coming and just entertained the idea of buying a house while the fund is still doing well and then just start all over again and put any future savings into an index fund. Ideally, I'd like to be able to retire in 10 years using 3% of my index funds to supplement any retirement income, that was my initial reason for opening an index fund. I currently split rent in an apartment, my half being 1000/month.

terran

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You've got a couple of different questions going on here:

1) Should I time the market? No.
2) Should I buy a house in cash or should I get a mortgage at historically low interest rates and invest (keep invested) the cash? Mortgage and invest.
3) Should I buy a $300k house or should I continue to rent for $1000/month? Rent unless more information is provided. Would you rent out some of the house to offset costs? If not, it sounds like you're asking about increasing your lifestyle spending, so what would it cost to rent a comparable home that you wouldn't share with a roommate? That's the true comparison you should make, not against the current situation.

StashingAway

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I'm a little worried there's probably a crash coming

There is a crash coming. The question is, will the market double, triple or more before it crashes? Will you lose out on 200K in gains before it tanks 150K of them? If you knew how much it will crash, when, and what the recovery will look like, then go for it. Otherwise, stay in, keep your blinders on, and check once a year.

If you don't think you can emotionally handle a crash, move part of your portfolio into bonds.

MrThatsDifferent

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Seems like a financially bad decision to me. Id rent and invest, or, if youre freaking, take out the deposit and get a mortgage. But first read Go Curry Cracker: never rent again.

Villanelle

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How much would the house cost?  Would you rent it out (in which case what rent could you get?)?  If you would give up your current living situation, would you have a roommate in the new house?  If so, what rent could you get from that? 

Also, while the market might crash, so too might the housing market. 

JLee

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If your living situation is acceptable, keep renting.  Property taxes alone on your house will be frighteningly close to your half of rent today, plus when you buy a house here it'll likely be old and need a lot of work.  I bought a house in June that was in pretty great shape but ~$10k in insulation/air sealing, $10k for a boiler/on-demand water heater to replace the old boiler it had (and avoid needing a $3000 chimney repair)....it adds up fast.

If you do buy a house, get the chimney professionally inspected (on top of your normal home inspection).  I didn't and mine needs $5k in re-lining, so I'm just not using it anymore.

DK

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300k using the 4% rule is 12,000/yr, or 1k/month. congrats, you can pay your rent "forever" with your investments. now just work on building up to pay your other expenses.

Rosy

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You've received some stellar answers already ... I echo all of them.

Here are a few more nuggets to think about:
1. Never spend your principle (and then of all things invest it into something that costs money to own and most of all maintain-there is always sumptin':)

However, I happen to be one of many who prefer homeownership, period. No math examples in the world will ever convince me that owning your own home and garden isn't the most awesome thing in the universe and oh so worth it:).
So if you are really freaking and genuinely prefer a home of your own, you might consider taking out enough for a 20% deposit.

You know - your lifestyle and how demanding your job is should be a consideration as well. If you know that you can expect a transfer in a year or two across the country - then think twice, absentee landlording is the devil incarnate.
Why would you spend big bucks on something that you have no time to enjoy yourself and worse will only vex you when you need to spend $10K plus for a new AC system or whatever.
Even if you only rent a room to help pay the mortgage there can be trouble with the person who rents from you while you are in the middle of an important project at work that will define your career.

If you are thinking of Real Estate ownership and not really a home - you might want to consider a duplex or a home that you can rent out at least partially in effect letting someone else pay your mortgage for you.
Think of it this way, if you sunk all your money into a property and then find that new higher property taxation and needed improvements keep you from saving as much as you really want/need to in order to reach your stash goals ...
Until you've actually made time and took the effort of looking into the real estate market - you may be surprised what's out there or not, the desirability of the neighborhood, safety, school district - actual availability in your price range - is it suitable for renting, is there restrictive zoning and so on.
There is a lot to consider, family, suitability for future kids so you aren't forced into an expensive move down the road.

You are right - you need to think this through and know what your goals and expectations, plans for your future are.

2. TIME and the magic of compound interest have been in your favor, remember you can never ever make up for time.
You have a great start and a nice amount invested don't destroy it all - you can never buy back or save enough again in your fifties for what you did not do or take advantage of in your thirties.
Play with your $300K and see the difference in investing in your thirties - forties - fifties -
despite the ups and downs if you have time on your side you are golden.
Don't give up that ace in the hole. 

None of us know what the future of the stock market holds - it may all go to hell in a handbasket, the current virus in China could somehow get out of control and wreak untold havoc upon the world and we will all be in trouble for decades to come.
There is no timing the market.

Yet, diversification is a good thing too - so consider your options carefully.
So much depends on your situation and your area - our housing market is red hot, always a scary time to buy IMHO, but again what do I know? Those prices may be here to stay and become the new normal for several good reasons.
Personally, I like the idea of owning property and having a renter pay your mortgage - it gives you some diversification and you don't have to worry how you'll pay the rent/mtg when you lose your job.
There is risk and luck in everything you do.

Dave1442397

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Don't forget to take NJ property taxes into account. I don't know what part of NJ you're in, but look at the tax history of houses on Zillow.

I think my taxes are bad, and then I look at my neighbor's...this is for the house behind us, which is definitely for the high earners. You can only deduct $10k of this on your Federal taxes, which may be part of the reason that some of those houses have been either foreclosed on or sold for (in one case) 25% of the original asking price, and only then after years of price reductions.

« Last Edit: January 27, 2020, 03:37:48 PM by Dave1442397 »

tooqk4u22

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Houses in NJ offer no real appreciation due to high property and other taxes in the state combined with very low growth prospects (due to the aforementioned).   I am a homeowner bc of family and expectation of being in the house for a long time. 

Rentals in NJ almost always make no sense (4% return typically after factoring in a figure for vacancy and repairs) again due to high taxes and low demand growth so you can't raise rents as fast. 

I would stick with the $1,000/month rent as long as I could.  Like the previous comment said property taxes area high - for a $250k house will be generally $8k per year +/- depending on where you live. 

If you are that worried (whether it is right or not) take some chips off the table and move to a slightly more conservative AA to help you sleep at night.   BUt if you are young and have many years of work ahead of you then you can ride out all equities.   I can tell you that my equities that dropped by more than half during the financial crisis are worth more than pre-crash levels by a lot. 

JLee

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Re: Should I cash in all 300K of my index funds to buy a house in cash in NJ?
« Reply #10 on: January 28, 2020, 09:08:00 AM »
No math examples in the world will ever convince me that owning your own home and garden isn't the most awesome thing in the universe and oh so worth it:).

The property taxes for my 1900 sq ft house in NJ are $14k.

DeniseNJ

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Re: Should I cash in all 300K of my index funds to buy a house in cash in NJ?
« Reply #11 on: January 28, 2020, 10:32:27 AM »
No math examples in the world will ever convince me that owning your own home and garden isn't the most awesome thing in the universe and oh so worth it:).

The property taxes for my 1900 sq ft house in NJ are $14k.

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You can only deduct $10k of this on your Federal taxes, which may be part of the reason that some of those houses have been either foreclosed on or sold for (in one case) 25% of the original asking price, and only then after years of price reductions.

it's even worse even worse.  That 10K is not just for prop tax--that also includes state income tax!  NJ is the pits!

MrThatsDifferent

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Re: Should I cash in all 300K of my index funds to buy a house in cash in NJ?
« Reply #12 on: January 28, 2020, 12:22:28 PM »
300k using the 4% rule is 12,000/yr, or 1k/month. congrats, you can pay your rent "forever" with your investments. now just work on building up to pay your other expenses.

This is such a brilliant and simple analysis.