Author Topic: Would you cash in 200K of index funds to buy a house in cash?  (Read 3216 times)

fizzgig

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Would you cash in 200K of index funds to buy a house in cash?
« on: October 14, 2017, 10:25:53 PM »
What would you guys do? I don't make much money, a little under 60K in northern NJ. I have about 180K in index funds and 20K in available savings. I was considering the idea of offering cash for houses for sale around here that were for sale at around 220K and offering 200K in cash. Girlfriend says she would pay the yearly taxes (about 5K) and utilities, leaving me with virtually no bills, and I would just resume saving as usual after buying the house. I'm currently splitting a 1800 a month rental and putting as much as savings I can in an index fund. I'm 40, never owned a house. i usually am able to save around 20K a year. I'd be able to save around 30K a year if I bought a house. Is it better to buy a house or just keep adding to the index funds? Not interested in any emotional benefits to owning, just in making the best financial decision.

MrThatsDifferent

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #1 on: October 14, 2017, 11:48:40 PM »
Read this first: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Personally, Iíd leave the money. When youíre 60,that $200k should be around $800k invested. You wonít get that type of return from the house in 20years. You will also go from liquid to illiquid. Youíll be able to add another $400k minimum. At that point you might have a better idea where you want to spend your life, maybe NJ, maybe not.

Not to mention, cash that all out and youíll be hit with a big CGT. You donít need to own, itís a money sucking myth.

Dicey

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #2 on: October 15, 2017, 01:17:31 AM »
Please Google "Compound Interest". Once you really understand how CI works, you'll have your answer.

From US News, with slight modifications, to whet your interest:

"Obviously, if you just put $1,000 in an account yielding 2 percent and let it sit for years, your money wouldn't grow very fast. The key is to continue adding money to your savings[/investment] account regularly so that you have more money to earn interest. The magic of compound interest is that the more you put in, the faster your money grows. Compound interest is also more beneficial the longer you have your money in a savings [/investment] account, so the earlier you start saving, the better off you are. You can use a compound interest calculator to help you make projections.

If you are 25, and you start with $5,000 in a savings [/investment] account, and you put in $200 a month for 40 years, your money can grow to $158,904.25 by the time you are 65. If you can up your contribution to $500 a month, you can end up with $380,700.34. If you start five years later, at 30, you only end up with $315,965.65. You miss out on tens of thousands of dollars, just by getting a late start."

This one should really blow your hair back:
http://www.businessinsider.com/amazing-power-of-compound-interest-2014-7

frugaliknowit

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #3 on: October 15, 2017, 05:41:22 AM »
Assuming the 180K is ALL you have invested (not that it's a small amount for a 40 year old) and taking emotion out of the mix, NO, I would not buy the house at all.  Splitting $1800 sounds like a decent deal.  If I were in your shoes and I were going to buy a house, I would look for something between 120K (2X income) and 150K and mortgage it.  All of this assumes you have no debt.


Laura33

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #4 on: October 15, 2017, 08:08:39 AM »
See the bolded part of Dicey's post and play around with a compound interest calculator.

$180k invested for 20 years at 7% is $700k by itself with no other money added.  That's a lot of money to catch up through increased future contributions.

I wouldn't do it.  If you really want to own a home, you're lucky:  interest rates are still very close to their all-time lows.  Take a mortgage, buy a house you can afford, and keep investing the difference.

Car Jack

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #5 on: October 15, 2017, 08:22:31 AM »
From a financial perspective, you really have to assume that the girl friend exits just as the house closes.  Now it's all on you. 

tralfamadorian

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #6 on: October 15, 2017, 04:47:04 PM »
Is it better to buy a house or just keep adding to the index funds? Not interested in any emotional benefits to owning, just in making the best financial decision.

I do not think it is the best financial decision to sell as a taxable event your diversified zero maintenance assets with an average long term growth rate of 7% for a non-diversified, high maintenance asset with an average speculative appreciation rate of 3% and a high standard deviation. 

Real estate becomes a preferred investment through some combination of 1) strong imbalance of rent vs mortgage, 2) leverage, 3) income production through some form of house hacking, and 4) forced appreciation through purchasing for below market value and/or prudent renovation.  From what you outlined in your initial post, it does not appear that any of these are present.

CanadianMustache

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #7 on: October 30, 2017, 09:07:45 PM »
Read this first: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Personally, Iíd leave the money. When youíre 60,that $200k should be around $800k invested. You wonít get that type of return from the house in 20years. You will also go from liquid to illiquid. Youíll be able to add another $400k minimum. At that point you might have a better idea where you want to spend your life, maybe NJ, maybe not.

Not to mention, cash that all out and youíll be hit with a big CGT. You donít need to own, itís a money sucking myth.
This.

JLee

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #8 on: October 31, 2017, 02:33:38 AM »
I wouldn't buy a house at all in northern NJ (or NJ at all, for that matter).  Housing costs here are insane, and even if you don't have a mortgage your taxes will eat you alive.

My plan is to GTFO once my resume is adequately built up -- staying here long term without a correspondingly high income is a poor financial decision, IMO.

boarder42

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #9 on: October 31, 2017, 06:12:04 AM »
so if we assume buying is better and from your perspective it looks to be much better just based on your rent compared to a 200k house.  (guess what you can get a house listed at 220k for 200k whether you pay cash or not) so now lets just do the math on buying a 200k house with a 4% mortgage vs paying cash -

200k house with 4% mortgage say you take out 20k to get to 20% down so you have 180k left over invested.  over the next 30 years your 180k grows to 1.3MM dollars. 

Now lets assume you are investing your PI payment each month on the house that you paid for in cash.  on a 180k mortgage at 4% your PI monthly is 955 or 11460 per year. So if we invest that for 30 year we end up with - 1.17MM

so not even counting the tax event into the picture it makes more sense to carry the mortgage than it does to sell it all and buy the house.  I'd go ahead and look at buying a place for that price though - i think you're giving your roommate a crazy good deal but how you manage that is up to you, i'd offer her a 700 a month plus utilities.  she sees a 200 a month cost savings and you offset almost your entire mortgage.

ShoulderThingThatGoesUp

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #10 on: October 31, 2017, 09:10:26 AM »
I've done this. I missed out on a lot of gains.

robartsd

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Re: Would you cash in 200K of index funds to buy a house in cash?
« Reply #11 on: October 31, 2017, 10:01:19 AM »
Generally no. Put enough down to avoid PMI, finance the rest. I might consider it if I was well beyond FI and just didnt want to get a bank involved in the transaction for some reason (but I can't think of what that reason would be).