Keep investing or save in HISA for a house? (Advice please)

[MrThatsDifferent]

To date my investment strategy has been to rent only, invest in my retirement account and post-tax index funds, after I pay my expenses. I’ve kept a very low EF. I live in a very HCOL city. Because of COVID I think that my path to FIRE will be extended by 2 years (7 years away now instead of 5), and perhaps it’s better to have a property that I own and live in as a permanent base?  It’s clear that where I live the property market (already insanely high with pricing—currently $850k for a 2 bed, 2 bath, 1 car space apartment within a 30 min commute to the CBD) will drop by 10-20% in the next year, with lots of stock available. Next year would be an optimal time to buy, however I have virtually no cash right now. If I make it my goal, I could have the full 20% deposit in cash by July 2021. (Where I live you can also put 10% down and keep the remaking 10% in an offset account that reduces the interest respectively, and lets you access the cash if you need it, my preferred option). Also, I would be looking to buy something that ticks all my boxes between July 2021-Jan 2022.

My question: is it better to stop sending my after tax money to the index funds and put that money in a HISA (currently getting 1.67%) or keep investing all my cash and take the money out next year for the purchase? (Assuming I follow through, I’ve been steadfastly against home ownership but doing the math, my high rent i now is more than the mortgage on that $850k property, and if I’m here at least 7 more years, it doesn’t make sense to keep paying the rent). The only other thing I’ve been thinking is whether it’s good to keep more cash in the HISA as a buffer? My job seems pretty secure for the time being, but these are nervous times.

I guess I’m concerned about losing money if I invest in the next year, as well as the hassle and tax implications of withdrawing a huge amount if I need it next year? On the other hand I think how much could my money grow between now and then that I might miss out on?

Thoughts?

[Radagast]

Hey mrthatsdifferent, I'll try and chime in. That is a situation we find ourselves in as well, although it is even more complicated here because we are a 2 person household whose opinions on what house to buy and when can change several times per day which is frustrating for investment planning. Right now we are probably going to buy a nice mustachian style house with an "in-law-suite" attached which we can rent out, which will break even with renting in 15 months and result in a net profit if we sell after about 3+ years.

Since you are somewhat ambivalent, I actually think you might be best continuing your current course. Eventually there will be a time when stocks rebound. If you are not picky on the exact timing, then eventually you will find yourself with a large pile of money and can get the house then. If it happens like in 2008, then stocks will rebound much faster than real estate. If you bought in from 2008-2011 you would have done very well in the market, and then real estate prices bottomed out early 2012.

Another tip: recently "small cap value" (and also their international counter parts) stocks have been very cheap, even selling for well below book value (maybe not now, that could have been a month ago thing). It has been my experience that broad market segments selling for much less than book value have the strongest near term rebound potential. But I don't want to give confident advice that may later be wrong so... up to you.

[MrThatsDifferent]

Thank you Radagast for sharing your thoughts on this. That’s part of my dilemma, knowing that this is a cheap time to buy stocks, but also wanting to be prepared for a real estate opportunity. I don’t think I can do both. Fortunately my retirement account is automatically buying every 2 weeks, so I’m not missing out entirely.

[Heckler]

if I need it next year?

If you need it next year, don't invest it.  HISA, no doubt.

[cchrissyy]

I wouldn't change a lifelong strategy of renting based on the two predictions you've made here. the revised time to fire thing or the falling housing prices thing.  either one of those might not materialize and in that case you would not buy a house and any cash set aside prematurely would have missed time in the market.

[magnet18]

FWIW, I'm currently saving in a HYSA for a down payment on a rental.  I don't expect we'll be seeing a 30% year like we did last year, and all metrics indicate were more likely to see a -30% year, so if you have a short term need for the money just keep it cash, IMO.

Other than that, depends on how much you want to be a homeowner

If you house hack and rent out you can significantly accelerate your path to FI, but there is a significant and real cost in the time and stress involved with landlordism

If you're a regular homeowner, expect a never-ending stream of maintenance projects that need done.  Windows, water heaters, furnaces, ac, mowing the yard, fixing the lawnmower, etc ...

If that doesn't bother you, go for it, but if your lifelong rent philosophy includes not worrying about those things, tread carefully.

Personally, i could never imagine being happy as a lifelong renter, it was only ever a stopgap to purchasing something.  But I can see both sides.  As cchrissyy pointed out, your reasons are kinda thin.  Buying just because you'll be in a city for an extra 600 days and you might get a 10% discount seems like it might be overkill.

[MrThatsDifferent]

Thanks for that Magnet. I agree, I’m a bit all over the place with it and trying to sort it out. My plan was to house hack, rent out one room, while I stay in the other. My thinking was that it would free up more of my money and give me company. That might be the living alone during lockdown that’s talking. Life can be lonely. I’ve also started to question my move to Europe for retirement strategy, is it wise now? So, my current thinking is if I found a place I like, live there, get a roommate. If I move overseas for a bit, I can either rent out my room or keep it empty for me to come back whenever I want. Then, down the road, I can return and have a paid off asset as my base. Or sell and move somewhere else. In the meantime, I’ll save the cash and see how things are a year from now and where my head is at. I’ll have the money to purchase if I want, or put it back in the market if I decide otherwise.