The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: capoevename on January 18, 2017, 12:43:39 PM
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Hello all,
could you help me realize if this strategy makes sense? Are there better alternatives?
We are 2 with a ~360K stash and currently renting. We don't own any real estate property and have most of our stash in the stock market.
We are thinking of buying a property to mitigate the scenario that the market goes down and we have financial hardships (layoffs, etc). At this point it seems worth it to sacrifice some optimizations to reduce those risks (not that this will happen, probably not).
Using the NY Times rent vs buy calculator (linked below) and putting 5% for investment return rate (is this too low for the stock market?) and other variables (we prefer to buy cash to avoid debt since that would not mitigate the risk mentioned above), we basically break even after 2-3 years depending on what specific property we go for (120-160K). 2-3 years seems like a reasonable amount of time we would stay here if everything goes well. We would probably move to a slightly bigger property and different area after that when we plan to start a family. The reason we are not buying the "dream" home right now is to keep the % of the stash that goes into the property lower.
We are thinking of moving forward with it. What do you think? Any red flags?
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html)
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I would just say that the usual recommendation is to be expecting/planning stay in a house for atleast 5 years, because if you're buying selling more than that you incur a lot of transaction costs. So 2-3 years sounds a little low. BUT, that 'traditional wisdom' usually applies to homes bought with a mortgage I think. Also, I could see the time coming, and going, when you want to 'upgrade', and maybe you'll convince yourselves to stick it out with the first baby in that small 120k house (which would be pretty dope from a mustachian perspective.)
...in a way though you must recognize this is market timing. You're talking about taking 120k of your money out of the market (or keeping it out) to try and avoid a downturn.
I'm doing the same thing, but with just 17.5k, and I'm questioning it everyday, because no one has a crystal ball
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Surrounded by red flags, with red flags on top!
If you're a cash buyer, the time to buy is when the market goes down and there are layoffs all around, assuming you still want to own in that area, even when it's down.
How will you feel if the market does what you think it will, and you're left with a house worth far less than what you paid and a big chunk of your net worth now illiquid, possibly never to recover?
Seems like you have money that's burning a hole in your pocket. In fact, you have time to think up a better plan, which is what I'd heartily recommend.
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Why would you have any financial hardship with a 360K stash?
The possible scenario's
-no market crash, both working: great, stay the course!!
-no market crash, somebody gets fired: meh, you have a 360k stash, you can take your time and find new employment.
-market crash, both working: nice, more stock at a cheaper price, keep saving, keep investing
-market crash + unemployment: even a very bad crash would leave you with a stash of around 180k. That is still plenty to find employment + since you are renting you have the flexibility to move to where employment prospects are better
If you really want to own a house: find a fixer upper that is good value (look long and hard), put 10% down, take a mortgage for the rest (rates are still pretty low) on 20 years and make the regular monthly payments. Build up some sweat equity in the house. You will be adding value to the house on the cheap since you do most of the work yourself. This way, even in in a crash environment you will still break even (might lose the sweat equity, but hey it's sweat equity!). And you also acquire skills that can help find a job if you lose current work.
On the plus side, you will be so busy with the renovation you won't have time to ponder what might or might not go wrong....
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Thanks for your thoughts guys. After looking more into it I think it's better to keep renting and investing the way we are.