Author Topic: More House or More Investing?  (Read 8365 times)

Dynasty90

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More House or More Investing?
« on: May 06, 2016, 11:54:42 AM »
New member here,

Please excuse the dumb question...

I am in a position where I will be getting married and moving from a condo to a home in the next 1-3 years. Currently, I am 26 and she is 24. When we are married, our household income will be about 105k gross. I am not sure what the wiser long term financial decision would be in our situation.

Let’s say we have an “extra” $500 - $1,000 each month. Do we take that “extra” money and invest in 401k/IRAs and live in a smaller, modest home or do we use the money on a larger mortgage monthly payment for a larger home we envision myself living in for 20+ years?

Currently, she and I are not maxing out our 401k and IRA retirement accounts.

I realize there is risk in both situations. No one can predict what the markets will look like in 20+ years. Furthermore, no one knows what a 250k home in my area now will be worth in 20+ years.

So, do we omit maxing out and growing our 401k/IRA for a larger home?

I would love to get your opinion. What would you do in my situation?

bobechs

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Re: More House or More Investing?
« Reply #1 on: May 06, 2016, 11:59:22 AM »
What you ought to do and what you are going to do are two entirely different things.

You already know what you ought to do; now go and do what you are going to do.

serpentstooth

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Re: More House or More Investing?
« Reply #2 on: May 06, 2016, 12:07:08 PM »
It might help to get a little more information here. Why are you moving to the condo? What is your idea of a more modest home vs. a larger home? What are you hoping to gain by buying the bigger house? Are you buying for space for children you may have down the road?

nereo

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Re: More House or More Investing?
« Reply #3 on: May 06, 2016, 12:18:25 PM »

Let’s say we have an “extra” $500 - $1,000 each month. Do we take that “extra” money and invest in 401k/IRAs and live in a smaller, modest home or do we use the money on a larger mortgage monthly payment for a larger home we envision myself living in for 20+ years?

Currently, she and I are not maxing out our 401k and IRA retirement accounts.
So, do we omit maxing out and growing our 401k/IRA for a larger home?


Do you omit maxing out your 401(k)/IRA for the sake of owning a larger home:  Absolutely not.

Historically which has been a better investment over 20+ year time periods:  Putting money into the market, hands down.

Is buying a larger home then we need a good path towards becoming wealthy:  Almost certainly NO.

some reading for you...http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/



Dynasty90

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Re: More House or More Investing?
« Reply #4 on: May 06, 2016, 12:35:28 PM »
It might help to get a little more information here. Why are you moving to the condo? What is your idea of a more modest home vs. a larger home? What are you hoping to gain by buying the bigger house? Are you buying for space for children you may have down the road?

Thanks for the reply.

Reasons to move out of condo:

- Monthly HOA fee has increased about 8%-10% per year
- Snow removal and lawn care service performance is mediocre
- Storage is limited and living conditions are getting tight
- Single car garage is a negative
- Lack of basement is a negative
- Having neighbors always around is starting to become irritating
- Near rail road tracks which the trains blow horns at all hours (not good for future babies, but children won't be for a minimum of 5 years)
- I bought when the prices were low (90k range) and now they are rising (105k range)...I anticipate to sell for 10k higher than I bought and have around 50k in equity at the end of the deal

My idea of a modest home is 150k-175k and below. A larger, more expensive home would be around 250k-275k. The main reason to purchase the more expensive home is that it would check off more of the boxes....more livable sq footage, front and back yard, our own driveway, larger garage, much larger storage options, no HOA fee, more space between neighbors, plan to be more in the country so less noise and more peace, and yes more room for future children. We both also do not enjoy moving, so a one time move in 20+ years sure beats two or three.

serpentstooth

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Re: More House or More Investing?
« Reply #5 on: May 06, 2016, 01:19:43 PM »
Okay, so here's the thing. We're in a 1000 square foot 2 bedroom apartment. No garage, no yard. We both have moderately space intensive interests that require equipment. I cook a lot, and my husband has a piano and assorted equipment related to that. We have a 1 year old. About 200 square feet of our apartment is the living room, which basically serves to house the pull out couch my parents sleep on, park the strollers and little else.

If you want my opinion, I think you're jumping the gun. Your condo may not be the home you want when you have, say, a 6, 8 and 10 year old. If you delay having kids for 5 years, that scenario is, minimum, 15 YEARS away. Even once you have kids, for a lot of years, your kids are going to be small, and they are not going to require a lot of space. My daughter doesn't have her own room and, frankly, wouldn't take it if offered. We set up an adorable nursery in half our bedroom, and she doesn't require a lot of play space because, well, mostly she follows me around all day like an enthusiastic puppy.

You have a really inexpensive housing situation right now, and I think you'd serve yourself and your future family well by sticking it out for a few more years to save money. I'd make a thorough evaluation of your STUFF, and see what, if anything, you can purge. I am constantly pruning around here to keep our possessions down to something reasonable, and it helps a LOT. I also spent some money building out storage solutions that make sense for a small space. My dad and I IKEA hacked a nice pantry because the kitchen has bad storage, and I replaced all our end tables with tiny two-drawer dressers for added storage. It cost some money, but we have a good cheap housing situation, so it was worth the expense. Let me know if you want pictures of anything.

If I were you, I would suck it up in the condo for, say, 7 more years, and then move straight into the larger house.

Jim2001

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Re: More House or More Investing?
« Reply #6 on: May 06, 2016, 04:37:36 PM »

Do you omit maxing out your 401(k)/IRA for the sake of owning a larger home:  Absolutely not.

Historically which has been a better investment over 20+ year time periods:  Putting money into the market, hands down.

Is buying a larger home then we need a good path towards becoming wealthy:  Almost certainly NO.

+1 on maxing the retirement savings

Leverage contorts the returns on real estate (most times better, sometimes bankruptcy), but putting that aside.  Don't treat your primary residence as an investment when it comes to saving for retirement.  It's a place to live that has many costs associated with upkeep.  I've found that the larger the home, the more expensive the maintenance. 

Find a home that meets your needs, then plow the rest into emergency funds and investments.

monarda

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Re: More House or More Investing?
« Reply #7 on: May 07, 2016, 11:03:15 AM »
Sounds like you should move out of the condo, even though it might not be the optimal financial decision right now. Your happiness, getting the garage and yard and losing the HOA has value to you. 

What about getting out of the condo, investing your profit and renting for 5 years, or until you find the forever home? Buying with plans to only own a place short-term is almost never a good idea. You are young- invest a lot now. There's plenty of documentation for why that's the best strategy. 

sokoloff

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Re: More House or More Investing?
« Reply #8 on: May 07, 2016, 11:19:42 AM »
I'm going to go a little against the MMM grain here and offer some support to the larger house, IFF you are fairly sure you can live there 20 years AND that you couldn't live in the intermediate house for that long. I've never been a fan of condos and HOA nonsense (personal preference) and am also a fan of not moving.

When you couple moving with selling houses (and the associated expenses), you can give up ~8% of the house value everytime you move. That's giving up approx a whole year's worth of market gains (and on the full amount of the house, not just what you have in the downpayment/equity). If you're leveraged 5:1, you could be giving up 5 years' market gain on each house transaction, plus each of those moves is an opportunity (haha) to buy new furniture, TV/entertainment stuff, other appliances, do the inevitable first year repairs in a house, etc.

We bought in 2007 (not a bad time, but not the absolute best) and our house has gone up in value by high 6-figures. If you consider our downpayment was ~$250K (very HCOL area), the nominal return is around +240% (or a 14.5% CAGR) on the downpayment. That's by no means guaranteed, and it could easily go the other way if you buy in an area that experiences a real estate slump.

Total S&P 500 (with dividends reinvested) return over that time period is +65.5% or almost half a million less in this particular case.

Most importantly, we bought a house that my wife and I love, that provides a nice stable place to raise our kids, with a fenced yard to play in, and that we can see ourselves staying another dozen years or more. That stability is comforting to me (and my family), but the finances were tight for a few uncomfortable years. Be aware that "house poor" is a real thing and it's easy to let the drain of maintenance on a larger, more expensive house put a crimp on your savings and happiness.

However, I can't support not putting at least the max-for-match into your 401K(s), and have always put the max into my retirement accounts myself. If I couldn't do that, I wouldn't have bought the house.

2Birds1Stone

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Re: More House or More Investing?
« Reply #9 on: May 07, 2016, 11:32:24 AM »
Get out of the condo into a reasonable SFH.

Max out those 401k's and Roth's asap.

$36k of tax deferred space is awesome + matching.
$11k of after tax, tax free future growth is amazing and spreads your tax risk.

If you were to just simply max those two out, and buy less house than you need. You will be in a VERY good spot in no time.

FINate

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Re: More House or More Investing?
« Reply #10 on: May 07, 2016, 11:52:13 AM »
It might help to get a little more information here. Why are you moving to the condo? What is your idea of a more modest home vs. a larger home? What are you hoping to gain by buying the bigger house? Are you buying for space for children you may have down the road?

Thanks for the reply.

Reasons to move out of condo:

- Monthly HOA fee has increased about 8%-10% per year
- Snow removal and lawn care service performance is mediocre
- Storage is limited and living conditions are getting tight
- Single car garage is a negative
- Lack of basement is a negative
- Having neighbors always around is starting to become irritating
- Near rail road tracks which the trains blow horns at all hours (not good for future babies, but children won't be for a minimum of 5 years)
- I bought when the prices were low (90k range) and now they are rising (105k range)...I anticipate to sell for 10k higher than I bought and have around 50k in equity at the end of the deal

My idea of a modest home is 150k-175k and below. A larger, more expensive home would be around 250k-275k. The main reason to purchase the more expensive home is that it would check off more of the boxes....more livable sq footage, front and back yard, our own driveway, larger garage, much larger storage options, no HOA fee, more space between neighbors, plan to be more in the country so less noise and more peace, and yes more room for future children. We both also do not enjoy moving, so a one time move in 20+ years sure beats two or three.

My advice: Stay in the condo at least until kid(s) are on the way, perhaps even longer.

Bigger house == higher taxes and utilities. Being tight on storage is a benefit, it will help keep your spending in check. If you buy a bigger house you will feel the need to furnish it and you will fill the available storage. The condo has an HOA, but that covers maintenance of the structure/grounds. Maintaining a home is more expensive than most people realize - water intrusion, new roof, foundation work, plumbing issues - these add up to serious money quickly!

I also encourage you to read MMM's classic post on Tiny Details Exaggeration Syndrome to gain some perspective. The reasons you list to move are all, in the big scheme of things, tiny details. So the landscaping is not up to your standard - so what! Be thankful that you don't have to spend your weekend doing yard work. Get to know your neighbors. You have a roof over your head and a garage! You have equity in your condo and, by the sound of it, and opportunity to spend the next 5+ years saving like mad. I cannot emphasis enough how much of a blessing this will be for your future self if you start aggressively saving and investing now rather than buying more house than you really need.

Dynasty90

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Re: More House or More Investing?
« Reply #11 on: May 09, 2016, 01:38:02 PM »
Excellent replies thus far!

I like hearing answers from different perspectives.

Dee18

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Re: More House or More Investing?
« Reply #12 on: May 09, 2016, 04:43:20 PM »
Stay in the condo for now.  Enjoy being newlyweds without all the extra work and expense of a house.  Read about minimalism if it feels crowded.

Kwill

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Re: More House or More Investing?
« Reply #13 on: May 09, 2016, 04:56:53 PM »
Are you engaged yet? If your decision to move or not move is completely connected to your idea of the future with your girlfriend, maybe you should get engaged and then make the decision together. It seems like there are good reasons to go with either your current condo or a single family home. How attached is she to her current living situation?

Dynasty90

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Re: More House or More Investing?
« Reply #14 on: May 10, 2016, 06:45:01 AM »
Are you engaged yet? If your decision to move or not move is completely connected to your idea of the future with your girlfriend, maybe you should get engaged and then make the decision together. It seems like there are good reasons to go with either your current condo or a single family home. How attached is she to her current living situation?

We are not engaged at the moment. That will occur in 6-12 months. She is satisfied with our current living situation and likes the condo.

I guess the thing that sparked my interest in moving is that the condo values are the highest they have been in 3-4 years. My mind is playing tricks on me with "the condo's value is almost at its peak, get out while it's a hot market"

zephyr911

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Re: More House or More Investing?
« Reply #15 on: May 10, 2016, 07:51:30 AM »
Are you engaged yet? If your decision to move or not move is completely connected to your idea of the future with your girlfriend, maybe you should get engaged and then make the decision together. It seems like there are good reasons to go with either your current condo or a single family home. How attached is she to her current living situation?

We are not engaged at the moment. That will occur in 6-12 months. She is satisfied with our current living situation and likes the condo.

I guess the thing that sparked my interest in moving is that the condo values are the highest they have been in 3-4 years. My mind is playing tricks on me with "the condo's value is almost at its peak, get out while it's a hot market"
Don't sweat the timing. If the condo market tanks, the SFH market probably will too. Get rich first, THEN have nice things.
We gross 160k, NW 300k and climbing, and downsized by 40% in 2014 (180k/1900sf->120k/1144sf). It was one of the best decisions we've ever made. NW is climbing much faster, and the following year was the first time I maxed all retirement accounts.

serpentstooth

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Re: More House or More Investing?
« Reply #16 on: May 10, 2016, 10:46:14 AM »
Are you engaged yet? If your decision to move or not move is completely connected to your idea of the future with your girlfriend, maybe you should get engaged and then make the decision together. It seems like there are good reasons to go with either your current condo or a single family home. How attached is she to her current living situation?

We are not engaged at the moment. That will occur in 6-12 months. She is satisfied with our current living situation and likes the condo.

I guess the thing that sparked my interest in moving is that the condo values are the highest they have been in 3-4 years. My mind is playing tricks on me with "the condo's value is almost at its peak, get out while it's a hot market"
Don't sweat the timing. If the condo market tanks, the SFH market probably will too. Get rich first, THEN have nice things.
We gross 160k, NW 300k and climbing, and downsized by 40% in 2014 (180k/1900sf->120k/1144sf). It was one of the best decisions we've ever made. NW is climbing much faster, and the following year was the first time I maxed all retirement accounts.

The other thing is that as you save more, your home value is going to become a smaller and smaller share of your net worth and gains will become less important. I know that a $10,000 increase in property value sounds like a ton right now, but if you save well, soon you will have investments that lose or gain more than that in one day. If you have two incomes and work hard at increasing them and cutting expenses, then soon $10,000 will not be a lot of money. It might just be 1-4 months of savings, which puts that amount in a very different perspective.

Dicey

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Re: More House or More Investing?
« Reply #17 on: May 11, 2016, 03:25:52 PM »
Another random thought a day later. When I was in my early 20's, I was saving like mad to buy a house, so I did not do any other investment/retirement vehicle. I did buy a house, and I finally reached FIRE and I do have a BBoM (Haven't seen this thread in a while, so the translation is Big Ball o' Money). BUT: Here's the rule that should be engraved on all High School Diplomas (among others):

The sooner you start saving for retirement, the fewer actual dollars you will need to save.

So, my advice is to skip the intermediate property. Focus on your relationship and on saving as much as you possibly can for the next 5 years while you live in the condo. Get on the HOA Board and learn how things work. This way, there is a frugal voice when expenditures are being considered. It helps. Then, when your babies are toddlers, move into your forever home. For inspiration, check out the Frugal woods blog:

http://www.frugalwoods.com/

Bicycle_B

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Re: More House or More Investing?
« Reply #18 on: May 11, 2016, 03:45:45 PM »
I was a kid once.  I liked the sound of the trains.

Perhaps the most minor of arguments for the condo, I suppose.  But I couldn't resist!

Good luck whatever you do.

mountainjillian

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Re: More House or More Investing?
« Reply #19 on: May 15, 2016, 06:26:49 PM »
We are in almost this exact situation except we stand to make $150K on our property. We could buy a real fixer upper condo for about $240k, or we can get a "forever house" for probably around $400k. Either scenario would allow us to pay off all debt but the $400k house would not include a $265/mo HOA fee, but obviously our monthly fees would be quite a bit higher over the long term. Not sure what to do!

sokoloff

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Re: More House or More Investing?
« Reply #20 on: May 16, 2016, 12:43:22 AM »
Minimize moves is the strategy I'd use in your shoes.

Especially if the $265K condo is a "fixer upper" meaning it will need a lot of work. That work that you put in will rarely return at the time of sale and takes money (obviously) but also time and inconvenience over the years you live in the place. If you can swing the "forever house", do that.

hucktard

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Re: More House or More Investing?
« Reply #21 on: May 18, 2016, 09:27:55 AM »
If you know you are going to stay in the same spot for more than 7 years then buy a decent size house with a basement that can be rented out. That way somebody else pays for half your mortgage. That's what I did and it worked out well. You basically get your cake and eat it too. House hacking kicks ass. Also, disregard anybody who compares real estate appreciation to the stock market but does not account for leverage. I can't believe how many times I hear people say that the stock market beats real estate appreciation, but forget to account for the fact that people are only putting 5-20% down on real estate. Leverage magnifies your returns (and your losses). With that being said, obviously don't buy a huge house if you are going to have to make the entire mortgage payment (without renting a room or a basement), and if it prevents you from maxing your 401K.

hucktard

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Re: More House or More Investing?
« Reply #22 on: May 18, 2016, 09:37:05 AM »
Nereo,

It looks like you did not account for the fact that people generally use leverage when buying a house? The average appreciation of real estate per year does not equal the average return on investment. If you put 20% down on a house and it appreciates by 2.5% per year, your return on investment is 12.5%, which beats the stock market. Also is your graph of the stock market inflation adjusted? It doesn't look like it. So you just compared real estate appreciation without leverage and then adjusted that for inflation and then compared that to non-inflation adjusted stock returns? That's not a very fair comparison.



Let’s say we have an “extra” $500 - $1,000 each month. Do we take that “extra” money and invest in 401k/IRAs and live in a smaller, modest home or do we use the money on a larger mortgage monthly payment for a larger home we envision myself living in for 20+ years?

Currently, she and I are not maxing out our 401k and IRA retirement accounts.
So, do we omit maxing out and growing our 401k/IRA for a larger home?


Do you omit maxing out your 401(k)/IRA for the sake of owning a larger home:  Absolutely not.

Historically which has been a better investment over 20+ year time periods:  Putting money into the market, hands down.

Is buying a larger home then we need a good path towards becoming wealthy:  Almost certainly NO.

some reading for you...http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/




nereo

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Re: More House or More Investing?
« Reply #23 on: May 23, 2016, 07:37:49 AM »
Nereo,

It looks like you did not account for the fact that people generally use leverage when buying a house? The average appreciation of real estate per year does not equal the average return on investment. If you put 20% down on a house and it appreciates by 2.5% per year, your return on investment is 12.5%, which beats the stock market. Also is your graph of the stock market inflation adjusted? It doesn't look like it. So you just compared real estate appreciation without leverage and then adjusted that for inflation and then compared that to non-inflation adjusted stock returns? That's not a very fair comparison.


Hucktard - while it is true that most people purchase a home with leverage by having a mortgage, that in itself doesn't make the purchase better.  For starters, very broadly speaking home prices just barely beat out inflation, so your real annual return (again, very broadly speaking) is not 2.5% but less than a percent.  That's before factoring upkeep costs (maintenance). Also, as the mortgage gets paid down so does the effect of leveraging.  This is a common trick of real-estate agents who make statements like "even if your home only increases in value 2% per year you're really earning 10% returns, which is better than the stock market!"  Its fundamentally untrue.

Regarding the graph, yes it's nominal returns, but also note it's a semi-log plot.  It's also not my graph as the link shows. Since 1871 the real adjusted returns of the SP500 are just over 8% (div. reinvested). Since 1976 they have been 7.1%) If you'd like to compare nominal vs. real returns for any given time period here's a good data set:
http://dqydj.com/sp-500-return-calculator/

full disclosure:  I am a home owner and I'm not trying to dissuade people from buying a home.

FINate

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Re: More House or More Investing?
« Reply #24 on: May 23, 2016, 10:03:17 AM »
Since we are now comparing housing prices relative to other investment returns, let me add this: Your primary residence (as in the case presented by OP) should NOT be thought of as an investment. It's a place to live, and you have to live somewhere. Sure, you can sell for "profit" if prices go up, but you still need to live somewhere so you'll end up paying more to buy a new place unless you move to a lower cost of living area (which is life change more similar to downsizing than an investment decision). For the most part you should be unconcerned about the value of your primary residence unless you're underwater on the mortgage.

Investment properties are a different matter, but in these cases your primary concern should be on the investment income these will generate. I would not invest in property with the expectation of capital appreciation.

nereo

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Re: More House or More Investing?
« Reply #25 on: May 23, 2016, 10:08:04 AM »
Since we are now comparing housing prices relative to other investment returns, let me add this: Your primary residence (as in the case presented by OP) should NOT be thought of as an investment ...

I thought we were comparing housing prices relative to other investment returns from the start, were we not?  The title of the thread is "more house or more investing" and at the start the OP asked this:

Quote
I am not sure what the wiser long term financial decision would be in our situation.

Let’s say we have an “extra” $500 - $1,000 each month. Do we take that “extra” money and invest in 401k/IRAs and live in a smaller, modest home or do we use the money on a larger mortgage monthly payment for a larger home we envision myself living in for 20+ years?

FINate

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Re: More House or More Investing?
« Reply #26 on: May 23, 2016, 10:18:27 AM »
Since we are now comparing housing prices relative to other investment returns, let me add this: Your primary residence (as in the case presented by OP) should NOT be thought of as an investment ...

I thought we were comparing housing prices relative to other investment returns from the start, were we not?  The title of the thread is "more house or more investing" and at the start the OP asked this:

Quote
I am not sure what the wiser long term financial decision would be in our situation.

Let’s say we have an “extra” $500 - $1,000 each month. Do we take that “extra” money and invest in 401k/IRAs and live in a smaller, modest home or do we use the money on a larger mortgage monthly payment for a larger home we envision myself living in for 20+ years?

Which is why my advice was to stay in the small condo for now. But the mindset behind whether or not it makes sense to purchase a larger home now in anticipation of future family needs is somewhat different. At the point where people start comparing graphs of home prices (which is ridiculous because real estate is extremely local) then I feel compelled to draw that sharp distinction between a home and investments.

nereo

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Re: More House or More Investing?
« Reply #27 on: May 23, 2016, 10:29:48 AM »

Which is why my advice was to stay in the small condo for now. But the mindset behind whether or not it makes sense to purchase a larger home now in anticipation of future family needs is somewhat different. At the point where people start comparing graphs of home prices (which is ridiculous because real estate is extremely local) then I feel compelled to draw that sharp distinction between a home and investments.

makes sense, and making that sharp distinction is a good idea. 
I just wanted to make sure the OP understood that foregoing contributions to tax-advantaged accounts in favor of a larger place (and explicitily hoping that a larger place will yield better returns) is not historically a good bet. 
Seems we are both discussing similar things, just in different ways.

adamcollin

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Re: More House or More Investing?
« Reply #28 on: May 24, 2016, 06:26:43 AM »
I would advise you to invest in a smaller modest home since it will require lower monthly premium.