Author Topic: Saving for a house soon  (Read 2068 times)

Easy Does It FI

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Saving for a house soon
« on: June 23, 2015, 09:36:27 PM »
If I want to buy a house in ~2 yrs in cash, should i be saving in all MMDA, CD's and other cash? Should I also broaden to short-term bonds (when the avg maturity of vanguard's short-term bond is 3 years)?

... Or does it make sense to commingle it into my full portfolio and use the portfolio with SpecID sales to cash out and buy the house?

For an example, let's use easy numbers, let's say I have $1M in acct's, $125k in current equity, and want to buy a $250k house. Time horizon to save the remaining cash is within 2 years...

Thanks in advance!

Bearded Man

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Re: Saving for a house soon
« Reply #1 on: June 23, 2015, 10:18:46 PM »
One million in "acct's" and "125K in current equity". Does that mean you have one million in the stock market and 125K cash? Not sure what you meant, can you clarify?

Depending on where you live, it could be better for you to take out a mortgage. Let's say prices increase by 5% per year in your area. That same house will cost you 26K more in two years or 276K. Even if the 250K you want to invest is the future value of the house, you still could save yourself tens of thousands of dollars by buying at the current price of 226K.

Furthermore, you would stop paying rent, build probably 3K a year equity, save maybe 2K on your taxes a year on top of that and lock your monthly payment. You could still pay it off while living in the house.

Based on my SWAG, I would say you would save 35K over two years by buying now. That's what, a 14% return on your money?

But wait, there's more. The opportunity cost of having your money tied up in a paid off house. 250K at 10% average return is a cool 25K per YEAR that you would lose by having a paid off house instead of having the money in an index fund. The more I run the numbers in your scenario, the more it makes sense for you to take out a mortgage instead of paying cash.



« Last Edit: June 23, 2015, 10:24:57 PM by Bearded Man »

Easy Does It FI

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Re: Saving for a house soon
« Reply #2 on: June 24, 2015, 07:22:05 AM »
Good points, all. Let me add some detail to help.

The "$1M" is in accounts, IRA's, 401k's, taxable. It's a split of cash, bonds, stock.
I have another rental property with $125k equity.

The goal here is to setup something similar to MMM: make an addition to the family, downshift significantly (potentially no wage income for a number of years), and move to a house in another state where we can live in a cheaper market.

I'm not certain I want to buy a house today that I can't live in for 2 years (in another state, I'll still have to rent here, an even if I rent, I'll have to use a PM). I'm not sure how big a house I need (uncertainty of children). I'm not certain we'll be able to move when I say we can (health of kid(s)/wife and what that means for expenses and SWR).

My thought is to reduce these uncertainties so I don't have to pay multiple rounds of closing costs.

It's a fair point to make that a house price after expenses will generally keep up with inflation (which a money mkt won't).

In this case does it make more sense to earn 1% on cash or pay 2-3% on debt?

Bearded Man

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Re: Saving for a house soon
« Reply #3 on: June 24, 2015, 08:02:15 AM »


In this case does it make more sense to earn 1% on cash or pay 2-3% on debt?

That's a biased argument. That sentence doesn't take into account what I just said above, at all. You are phrasing the question as one of earning 1% on savings or paying 2-3% on debt, when in reality, it is not just paying 2-3% on debt, you are building equity, the house is appreciating and you get tax benefits. The calculations I posted above show you would be earning a very high return buying a house now.

Furthermore, if you are planning on relocating, then you can buy the house now and pay nothing on debt; you tenants pay it for you as you rent it out for 2 years before relocating. I think you have already decided in your mind and are looking for evidence to sway you that your decision is the right one. Again, you are not just paying 2-3% on debt, I just posted the calculations above.

Easy Does It FI

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Re: Saving for a house soon
« Reply #4 on: June 24, 2015, 10:54:51 AM »
Assuming it takes anywhere from 1 month to 2 years to find and purchase my house, how should the down payment be invested beforehand?