Author Topic: Investing/saving vs buying first home  (Read 4339 times)

poorboyrichman

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Investing/saving vs buying first home
« on: November 03, 2014, 06:41:43 AM »
I am a late convert to mustachianism, hitting 27 next week. I have a track record of stupid consumer spending following 3 years of living like an eternal student after university. I ended up spending everything I earned plus a little extra, but have reigned this in and am finally saving for the future.

After breaking up with an ex-girlfriend (a not so great influence on the spending front) I was offered an opportunity to move back to my parents but in a separate dwelling on their land. I couldnít refuse as I was broke! Shortly after going it alone at home with my parents I met the girl of my dreams (also a mustachian in all but name) and a year on she has moved in to my place. We now have a combined income of £60,000 (~$96,000 USD) and we are looking to buy a house within the next 2-3 years (plus marriage in about as much time).

While I am extremely grateful of the support my parents are giving us by letting us stay in their property for free, ideally I don't want to be their freeloading neighbour forever, living in such close proximity isn't the greatest for my sanity or relationship either!

We are therefore in a hurry to put together enough money to buy our own home. Given the housing market here it would take far too long to buy a house without a mortgage, but we are looking to put down at least 30% on the house and take no longer than a 15 year mortgage with the expectation that we pay it off as soon as possible! We are looking to spend about $240,000 on our first home).

We both currently have a small amount of debt (mine = stupid spending, expensive holiday hangover, hers = further education and driving lessons now totaling ~$3600) which we are both working our assess off at clearing (this was ~$10,000 6 months ago). We each have a car but as we are living together should be able to move to using just one. I will be leaving my lease as soon as possible and already cycle commute every day, (the extortionate contract cancellations fees become more palatable in January which is why I haven't made a move sooner!). I should be in a position of being able to save 75-80% of my income or more once the car is gone. So here is my question, should I still be putting money aside for retirement if I do not yet own a home?

As soon as the debt is gone Iím planning on kicking my early retirement plan into gear but my partner is telling me I'm stupid I'm being a bit daft thinking about investing while we are saving up for a deposit and believes it is equally silly to be continuing investing for retirement prior to having paid off the mortgage. I know the secret to having a good investment fund is to start early and utilise the power of compounding interest etc, but how should I balance the goal of home ownership with investments for the future?

Yes, home ownership could be considered an investment in its own right assuming the housing market bubble doesnít pop, but I just feel uneasy about piling it all in a house while not saving substantially for retirement. Where is the balance for a mustachian? Note: 7.1% of my gross income goes straight to my work's retirement scheme so I will always be paying this as a minimum but any saving in excess of that will need to be done by me privately.

I need to have the talk with my partner about early retirement, she is very career driven and not sure sheís quite there yet so Iím not sure she sees this entirely from my angle. A little advice would be great.
« Last Edit: November 03, 2014, 01:18:31 PM by poorboyrichman »

ioseftavi

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Re: Investing/saving vs buying first home
« Reply #1 on: November 03, 2014, 09:40:22 AM »
...We are therefore in a hurry to put together enough money to buy our own home. Given the housing market here it would take far too long to buy a house without a mortgage, but we are looking to put down at least 30% on the house and take no longer than a 15 year mortgage with the expectation that we pay it off as soon as possible! We are looking to spend about $240,000 on our first home).

I would suggest first that you read Why your home is not a good investment, on JLCollinsNH's blog (note he is a US investor, so mortgage interest is deductible in his article - in the UK it's not).  I say this as someone who is planning on being a homeowner someday: buying a primary residence is not a good investment.  It will give you shelter.  It will give you pride.  It will give you the warm and fuzzies when you look at it and think of it.  But it is not a good investment, generally.

So here is my question, should I still be putting money aside for retirement if I do not yet own a home?

See my above, and doubly so for retirement savings.  In most countries, UK included, retirement accounts offer certain tax benefits.  When you compare the benefits of owning stocks in a tax-free or tax advantaged account, versus owning a piece of real estate which you pay for and maintain with only after tax money, pay taxes on when you sell it, and factor in massive transaction costs - the money you put into your workplace pension or personal pension will almost certainly grow far, far faster than the equity in your primary residence.

...but my partner is telling me I'm stupid for thinking of investing while we are saving up for a deposit and believes it is equally silly to be continuing investing for retirement prior to having paid off the mortgage.

First up - the girl of your dreams shouldn't be saying to you (through words or actions) that you're stupid.  Find a way to talk about money factually and unemotionally.  You both want what's best for each other and for your nest egg. 

Secondly, your partner is almost certainly wrong.  Housing prices generally track inflation, meaning that in the developed countries, you can expect your home to appreciate at a rate of somewhere between 1-3% per year.  Yes, sometimes this figure will be higher if you purchase at a low point and sell at a high point - but generally, you'll earn the rate of inflation.  Perhaps a percent or two more, but not "lots and lots more".

Conversely, your investment accounts (workplace pension scheme or personal pension) will likely earn around 7-10%, depending on the time period you're invested. 

So, simplifying your choice down to a one-or-the-other:
Should we buy a house which has massive transaction costs, zero tax benefit (the UK has no mortgage interest deduction), and is likely to appreciate at 1-3% per year?
OR
Should we pay into our retirement funds which have near-zero transaction costs, high tax benefits, and are likely to appreciate at 7-10% per year?

The choice is obvious, but it's not the one most people are happy to hear, because home ownership is seen as a rite of passage.  So, if you are going to purchase a home, do it with your eyes open: Your home will likely be a very mediocre investment.  However, it'll probably bring you lots of non-financial happiness.

Hope that helps!
« Last Edit: November 03, 2014, 09:41:59 AM by ioseftavi »

DoubleDown

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Re: Investing/saving vs buying first home
« Reply #2 on: November 03, 2014, 09:49:55 AM »
Hi (or Cheers),

First off, you're definitely not a late convert. At 27, you have plenty of time ahead of you, so forget worrying about that.

I don't think of buying a house as a "vs." question in regards to investing. Do both, *if* buying a house makes sense where you live. To determine if buying makes sense, use a good Rent vs. Buy calculator. Also, buying is usually only a good idea if you really know you can stay put for a pretty long time, like at least 5-7 years. And even at that timeframe, you might only break even after paying transaction costs.

If you had to make a choice between investing outside of a house, and saving for a down payment, then I'd prioritize saving in traditional investments first. Since you're talking British Pounds, I presume you are in the UK, and I don't know what kinds of tax incentives (if any) there are for saving there. For example, in the US, we can shelter a good amount of income in 401k and IRA plans, and I'd definitely max those out before putting money aside for a house.

All that said, I'm bullish on real estate (at least in the U.S.), and buying my first home was a great stepping stone to building wealth over time. Besides, there's something to be said for owning your own place that you can decide on how it's used, when you want to leave it, etc. If you can buy and hold a few houses over long time periods, in the right places, you can gain substantial wealth.

poorboyrichman

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Re: Investing/saving vs buying first home
« Reply #3 on: November 04, 2014, 06:35:13 AM »
Thanks both some great tips here.

OK "stupid" was a bit strong, but it was said in jest really. We definitely don't agree on all financial matters however our financial principles are in line 90% of the time, and in many ways she can be more financially savvy then me. I can't blame her for doubting my plans, given my history with silly spending and financial decisions, but your right we need to sit down and talk about this in a logical way and unemotional way. I'm glad to hear I'm right about it being better to invest, but I too know I want my own place, I guess I will just invest what I can afford in the short term.

I have been reading and educating myself on investing so I'm prepared with the facts before things get serious. I had assumed that house prices were rising at a similar level to return on equity invests/stock and share returns, so glad to learn otherwise. Also I hadn't though about all the transaction fees etc. Guess I need to have a long hard think about where we want to be in 3-5 years time before buying. That said, it is an exciting opportunity and can't wait to make my first move!

Saving up for a deposit on top of living expenses, while saving 75% of my income for retirement is going to be next to impossible for me. I will have to sacrifice some investing potential in the short term, I guess I really wanted to hear how others had managed that?

rocksinmyhead

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Re: Investing/saving vs buying first home
« Reply #4 on: November 04, 2014, 07:33:10 AM »
obviously everyone's situation is different, but I can at least tell you what I'm doing right now (and many of the details of our situations are similar, although I live in the US... I'm 26, I rent a house with my boyfriend, and we are also planning on marrying and buying a house within 2-3 years). not sure what the deal is with retirement funds and taxes where you are (UK?), but here the max you can contribute per year to your 401K (pre-tax) is $17500. I max that out and then put the rest of my savings in a "high"-interest savings account (it's at Ally and I think it's only like 0.85% interest, but general wisdom seemed to suggest that if you want to spend the money within ~5 years, a savings account is the best choice). it may take you longer to save up for a house this way, but you will have more money in the long run.

that being said, I totally understand wanting to stop mooching off your parents/put a little distance between you sooner rather than later. is there a reason renting is off the table? is it just that it would cut down your savings rate? don't get me wrong, there are a lot of things I hate about renting, but it might be a third option.

DoubleDown

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Re: Investing/saving vs buying first home
« Reply #5 on: November 04, 2014, 12:08:23 PM »
I understand what you're saying about it being difficult to invest and save up for a home, but I wanted to follow on again with the suggestion to stop looking at it as an "either/or" or "vs." situation. You can do both, simultaneously. That is, you don't have to think about them as completely separate buckets.

For example, just to keep it simple, let's say you can save $25k* per year. You could invest that $25k in some mix of stocks and bonds, in a regular investment fund where you live. After 4 years of this, you'll have $100k plus whatever returns you have gained (or possibly $100k minus losses, but this is not so likely as long as you haven't had a wildly aggressive allocation).

Now you can decide what to do with your $100k (plus/minus returns): Keep it where it is, or use all or part of it as a down payment on a home. The only question then becomes how aggressive you want to be in your allocations over those 4 years: If you want to play it safe because you really, really want to have a down payment available, then choose a safer allocation. If buying a home is not as critical, then perhaps you might be more aggressive in your investing.

If you choose to put your $100k into a down payment on a home, you're just choosing to allocate your investment differently (into real estate instead of stocks/bonds). Meanwhile, you can continue your $25k/year savings/investing. Then you have both real estate and stocks/bonds in your portfolio.

*Forgive my use of $ instead of Pounds -- I don't know where that symbol is on my keyboard and I'm too lazy to look for it!