Author Topic: Saving for Downpayment. Strategy?  (Read 7946 times)

windriver

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Saving for Downpayment. Strategy?
« on: November 01, 2014, 09:49:06 PM »
Hi all,

Probing for some educated opinions here and appreciate your input. Wife and I are in our late 20's. We earn around $100K per year, but that will decrease eventually when the when an eventual baby comes and the wife goes to part time. We live in a remote resort town, and the cheapest dilapidated single family homes go for $600K - $750K. We have no debt.

We are committed and have the capacity to save $2,500 per month ($30K per year), while also participating in our company's retirement matching. We plan to grow our family, so we will outgrow our favorable rental situation in 5-7 years. If we don't have a sizable downpayment by then, we will have to leave the community.

I'm looking for returns of 10-20% and acknowledge the risk associated. I have access (through my job) to various stock news letters and other industry tools. I am not an investing professional, but I do know the fundamentals. I am considering building a diversified portfolio of stocks using these tools for guidance. I realize that mutual funds and index funds have great track records, but I'm looking to take more risk for a chance at a better return.

Any thoughts or strategies I should look into? Alternatives? Any and all feedback is appreciated.

Thanks

Retired To Win

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Re: Saving for Downpayment. Strategy?
« Reply #1 on: November 01, 2014, 10:03:29 PM »
My best advice to you is to change your location.  I should think that doing that would knock off several hundred thousand dollars off your home purchase price.  Even if the move means a lower salary, analyze the pros (saving $200K to $400K on the cost of a house?) versus the cons (making $20K to $30K less a year?) carefully.

Hardwiring into your basic expenses the monthly payments on a $500K-plus mortgage -- especially on a $100,000 income -- is something I would absolutely counsel you not to do.

Good luck.

windriver

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Re: Saving for Downpayment. Strategy?
« Reply #2 on: November 02, 2014, 12:41:42 AM »
Retired To Win - Thanks for your response. I know it looks insane on paper to live in this town, but we've put a lot of thought into it and weighed pros and cons. There are so many quality of life factors that I can't put a number on. A massive mortgage payment is tough to swallow, but I am positive I could rent the house out for the mortgage amount if we ran into trouble.

Ultimately we could change our minds, but for now we're going for it. I'm focused on finding ways I can make this work, learning about the financial instruments that can give us a chance, and working/saving our butts off.

MilStachian

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Re: Saving for Downpayment. Strategy?
« Reply #3 on: November 02, 2014, 06:53:48 AM »
rweba: Thanks for linking to michaelbluejay.com.  I've never seen his articles before and they were a worthwhile read.

wtjbatman

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Re: Saving for Downpayment. Strategy?
« Reply #4 on: November 02, 2014, 11:21:26 AM »
You want to buy a $600k-750k house on $100k income... and that income is expected to decrease in the future?

I'm not an expert on buying a house. I'm still in the saving for the down payment stage. But unless you have a substantial down payment (>50%), it sounds like a mistake.

And FWIW, whatever ways there are to achieve a 10-20% return, I would never invest my savings that are earmarked for a house.

resy

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Re: Saving for Downpayment. Strategy?
« Reply #5 on: November 02, 2014, 11:51:47 AM »
Thank you rweba for that link, I am also enjoying it!
OP, couldnt agree more with rweba and wtjbatman. Also, not only will your income decrease as you start your family but your expenses will start to increase. No matter how frugal you are there are expenses that come with kida as they grow and the more you have of them -since you mentioned you want a big family- eithet your wife will have to stay home of you will need to pay for expensive daycare.
Just a thought.
I believe we are just worried you'll get into a barely manageable financial situation that will get worse over time when life happens.
Best of luck :)

waltworks

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Re: Saving for Downpayment. Strategy?
« Reply #6 on: November 02, 2014, 01:58:13 PM »
I don't understand why you can't just keep renting. Buying a house is probably a bad move, and trying to day-trade to get 20% returns on your savings is even dumber. Just rent! Kids can grow up just fine in a rented house.

-W

Left

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Re: Saving for Downpayment. Strategy?
« Reply #7 on: November 02, 2014, 02:19:16 PM »
I'm not even sure it would work out with your salary :S

if you can only put away $2500/month to save for a down payment, if you switched it all over to mortgage payment you can buy barely a $500,000 house at 4%
http://www.myamortizationchart.com/30-year/500000-dollars/4_00-percent/

You'd be hard pressed if anything came with house/car/life problems. And kids seem to get into "life/growing/learning" problems because they do dumb things

You mentioned saving 30k/year while in company retirement, do you mean you are maxing out the 401k? So you are saving 2x$17,500 + $2500/month? You might make it work if you cut out the retirement saving but this is MMM, retirement seems to come first here :S

NP

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Re: Saving for Downpayment. Strategy?
« Reply #8 on: November 03, 2014, 09:53:04 AM »
windriver, I wish you success but please realize that looking for returns in the range of 20% is what often destroys wealth. You can shoot that high only by taking extreme risks. Using stock newsletters as guidance is a really bad idea, it's more dangerous than selecting stocks randomly unless you're already a very experienced investor. Knowing the basics is not even close to the level of skill you'd need to successfully pick individual stocks. You'd run a very high risk of getting completely wiped out if you attempt anything like this.

I suggest you adjust your expectations and set realistic goals. As it's been pointed out above, often you're financially better off if you rent, especially in expensive neighborhoods. We live in a very expensive area, too, because we think the quality of life it provides makes it absolutely worth it for us considering our needs and personal preferences. However, we decided against buying a place even though our salaries are much higher relative to the property prices than in your case. We ran the numbers and they just didn't add up even when taking into account tax breaks etc.

Also consider how much space you really need. Having traveled extensively, it's plainly obvious that most Americans have a huge appetite for square feet in their homes compared to what's considered perfectly adequate for a happy life in many other developed and prosperous countries. Having lots of space is wonderful but I prefer to view it as a luxury of which I only allow myself as much as seems reasonable given that we're trying to be frugal and are working towards early retirement, and given that we, like you, are already paying a hefty price for another kind of luxury we wouldn't like to compromise on: living in an expensive area.

hodedofome

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Re: Saving for Downpayment. Strategy?
« Reply #9 on: November 03, 2014, 10:10:55 AM »
You could only reasonably get those kinds of returns if you were to make investing/trading your life. Which means your day job will suffer.

You and your spouse will have to work really hard and make as much money as possible (and obviously save as much as you can before kids). And after you have kids, she'll probably still have to work. I'm not saying you should leave, but just understand in order to afford an expense like that you'll have to live very simply in all other areas of life, and still make over $100k a year.

I would not look to the stock market as your savior in this scenario. And this is coming from someone who trades on the side and wants to make trading my full-time profession. Working really hard and saving as much as possible is the only way this could work out.

rmendpara

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Re: Saving for Downpayment. Strategy?
« Reply #10 on: November 03, 2014, 10:15:13 AM »
Most people suggest keeping savings for an expected purchase within 5 years in a savings account. Maybe CDs, short term bonds (that match duration of your expected outlay), or even equities for a portion of the amount (maybe 1/3 of the expected down payment?).

Then, there's what you are suggesting as an expected return of 10-20% for several years...

I'll just say that's not realistic. No one (read: few) on this forum will say that's a realistic expectation or a good plan with a high chance of success. Then there's the issue of buying a 600k house on a 100k income that's likely to decrease in the future.

I'd ask the first question: Why do you want to buy instead of continuing to rent? It doesn't appear you will come out ahead by buying. If you can make 10-20% in the markets as you suggest is reasonable, then you should NEVER buy a home as it will never come even close to that type of appreciation over the long term.

Spondulix

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Re: Saving for Downpayment. Strategy?
« Reply #11 on: November 03, 2014, 10:50:43 PM »
Have you considered PMI in you calculations here? If you're not putting down 20%, PMI on a 700k house at 0.5% (which may be conservative) is $3500 a year, or an extra $300 a month. So if you waited a couple years, put $60k down, got a killer rate (4%), you'd still be looking at a monthly payment of $3,850. $3055 mortgage + $300 PMI + $300 property taxes (conservative, calculated at 0.5%) + $200 home insurance... all which could be on the low side. As is, that's almost 40% of your salaries.

To avoid PMI, you'd have to have 20% down (140k), which at you savings rate, would be 5 years. That's not even taking into consideration the cost of homes going up in the area, and the cost of repairs to make it move in ready.

Some places it really does make more sense to rent than own. Are there no surrounding communities to move to that are cheaper?

Terrestrial

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Re: Saving for Downpayment. Strategy?
« Reply #12 on: November 04, 2014, 02:27:46 PM »
You could only reasonably get those kinds of returns if you were to make investing/trading your life. Which means your day job will suffer.

You can't even 'reasonably' make the high end of those returns if you DO make it your life.  10%, yes...but many of us are making about that from relatively passive stock market investment and not trading, and as others have noted I wouldn't be investing house down payment money you need soon anyway.  20% - pipe dream.  Plenty of dedicated pro money managers with analysts don't make that return year in and out.   I'm not saying it's impossible just that it's EXTREMELY unlikely.  You are far and away running a greater possibility of losing money, maybe a substantial ammount, than of ever making 20% annualized over any significant period.  Trying to do so even if you 'acknowledge the associate risk' will make your chances of realistically owning a home in that market go from slim to none.

Do yourself a favor and forget about buying a 600k house on a 100k income.  That's pure lunacy.  I spent around half that much on a house on 50% more income, and sometimes I still feel like we spent too much.   Keep renting if you are committed to the town, or move if you're not.

I find it optimal to spend ~25% (or less) of your take home pay on your mortgage/taxes/insurance if you want to be able to adequately save for retirement/FI and not be chained to your house and live a very comfortable secure life.  On 100k income (ignoring that it will go down when your wife goes to part time) someone's take home is probably about what...~6k/month after taxes/payroll/healthcare and a reasonable (not maxed) retirement contribution?   That's probably about a 200k mortgage on a 600k house to get your payment down to a reasonable level for that income....so you'd need 400k saved and not only that you'd have to be willing to pour it all into real estate, not ideal. 

EDIT:  I didn't notice your time horizon of 5-7 years before...in this situation I suppose with diligent saving of 30k/year and some REASONABLE investment return expectations (10%) you might be able to get to around 300k in 7 years and have a ~50% down on a 600k-ish house.  I would STILL advise you not to spend that much and dump all your cash into one house but I suppose you can maybe work out if that's your goal.  Of course by then a 600k house in a reasonably healthy high priced market may cost 700k+.  Also dont forget that in 5-7 years its much more likely that we will have returned to a normal interest rate environment (~6%?) and not the ~4% you can secure a 30 yr mortgage for these days.  It's a solid difference in buying power.  Lets say you were able to save the 300k and still find a 600k place.  A 300k mortgage PITI on a 600k prop at 4% is ~2k/month...higher than I would go but probably 'reasonable' on 100k income at about 25% of gross....I understand people in high COL areas have to stretch a bit.   At 6% it's a full 300/month more.
« Last Edit: November 04, 2014, 02:47:03 PM by Terrestrial »