The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: joe travers on August 12, 2014, 03:28:31 PM
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Hi all,
I have a question for you regarding saving to buy a home. First some background:
- We live in high COL area and currently rent a 2br town home. Lease is through Apr. 2015.
- We recently relocated from another high COL area to be closer to family.
- We want to have a baby in the next year.
- This is the kicker: we are really unsure how long we plan to stay in our current area. The thought of paying over $500k for a very modest house makes us cringe. Since our current lease is through April of next year, we definitely wouldn't buy anything until then.
Question: we have approx $72k chilling in our savings account (at 0.20% APR) for the house down payment. We contribute to this every time we get a paycheck. Given that we don't know when we're going to buy a home, should we put all of this in some kind of investment account, a CD, or something else?
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How far are you willing to push back your purchase date? Looking at rolling 10-year returns (http://www.crestmontresearch.com/docs/Stock-Rolling-Components.pdf) there are only 4/100 where it has lost money and all of the rest have beaten CD rates. Yet, if you're not willing to push off buying then I wouldn't.
You could also do a hybrid approach. Your 20% goes in a CD and the rest goes in investments.
(obviously, this implies that I generally think the US. market will go up in the long-term, etc.)
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Howdy new neighbor! I don't necessarily have any good advice but can offer myself as a semi-cautionary tale. We moved back here around 2004, and knowing how crazy the housing market always has been in this area, started shoveling as much into savings as possible for our down payment. 10 years later, still haven't bought a house, yet still have an absurd percentage of our money in cash, much of which we still are afraid to move since we finally started looking a little more seriously in the last couple years and might actually need the down payment at any time. Could be worse of course, it was all that shoveling that got us to establish a pretty high savings rate long before we ever heard of MMM. But when I do the math on what even half our cash would've earned us in the last year alone if we'd invested, (granted that's probably an outlier of a year but still) it definitely hurts!
I'll be interested in the advice you get on this too. My initial reaction would be if you don't know how long you want to stay here, you might want to skip buying altogether. Only reason we're considering it is because we're fairly confident we'll be here for quite some time, and even with that it doesn't necessarily make financial sense to buy, we just want to for all the other reasons.
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I'm sure you could find someone at your local REIA to give you at least 5% interest on a short term note. Just don't give them all your money and check them out well.
If you're good with stocks you can make a lot of cash that way. Most people in real estate seem to dislike stocks but a lot of money can be made there also but it takes a ton of research and time just like real estate.
If you're super conservative you could probably get a CD of at least 1% with that much cash. Low rate but still 5 times better.
Don't buy until you decide you really want to stay there. Think of the costs to sell that 500 k house. 6% realtor commission = $30 k. It would take quite some time to pay down that much principal.
I know you would rather buy and its probably better in the long run once you decide on an area but I honestly think renting can be not that bad if you have a good landlord who takes care of his properties well. Ofcourse your losing money and its cheaper to own but also keep in mind you have no maintenance, property tax or insurance. Too many people jump the gun and buy a house too soon. Most of your "lost rent" would also be lost on these expenses if you had a loan and ownership.
Try and build up your savings if you're going to buy a house that expensive. Sure $72 k is way more than most people have but if you put down 10% that's 50 k and will eat up most of your cash.
There are some more complicated things that you could try but you really need to look into these well. They are a bit complicated and can get you into trouble if you don't do them correctly. Skip this if you aren't willing to do a lot of research. If I were buying an expensive house - 500 k - I would try and buy subject to the seller's loan or with a loan from the seller. Just think of the points you will pay on a 500 k house. If the loan were 450 k and they wanted two points that's $9 k. If you could find a seller who was moving out of state and would let you take over his debt you could get some equity, probably a cheap interest rate since they probably refi-ed recently, and avoid huge closing costs. There are usually no points from a seller carry back and you can negotiate the rate. The seller would have the same issue now as you if they sold for cash they have 500 k at 0.20% interest. Cut out the middle man and get a cheap rate.
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Matt Murph, good luck, there is no real answer and it all depends on your goals, what you will do in the worst case, and your risk tolerance.
To address the easy stuff first: Why are you only earning 0.2%? You should be able to earn at least 0.8% percent in an FDIC online savings account with no work, and maybe 1-3% on at least some of that money relatively safely if you are willing to jump through some hoops (rewards checking, short term CDs, credit union promos, etc). I'd do the first for sure, you can decide if the second is worth the trouble. The difference is only a few hundred to maybe a thousand a year, but every bit helps :)
To answer the second question, we were in a similar boat a few years ago and a good post on Bogleheads (which I unfortunately can't find right now) helped informed my thinking on the subject. I think our approach worked out well for us. It came down to thinking about how certain are you that you will buy the thing you are saving for, how certain are you about the timeframe that you will need to make the purchase, and what are the consequences and fall-back options if you don't have the required amount at the required time.
If for example, your doctor told you that you would absolutely need a new pacemaker in 2 years, you knew exactly how much it would cost, and that you were SOL if you didn't have the money in two years, then you know for sure you better save exactly that amount and have it ready in two years, you don't want to take market risk and you put in the safest vehicle possible.
On the other hand, you might be in a scenario where you possibly maybe want a house down-payment 1-5 years from now, or whenever the time is right, you don't know how much you want but know that more would be better, and that your comfortable with the back up plan that if something goes wrong you can either put off buying a house, or just make a smaller down payment, then you have a different scenario than the first example.
With that in mind, we decided we would all our money according to our desired asset allocation (60/40 in this case, we are conservative), across all accounts, taxable and tax deferred. In the the 40% fixed income category, we included all cash, savings accounts, CDs bond funds etc. Ultimately money doesn't care whether it is your "emergency fund", "new car fund", "down-payment" savings, etc. Your overall return is going to be driven by the combination of all your accounts, so why not treat it as one asset allocation.
When we did end up buying a house (somewhat quickly and unexpectedly), we just tapped the cash in our high-interest savings accounts, CD's etc, sold enough equities in our taxable account to make up downpayment we wanted, and re-balanced across all our accounts back to the desired allocation once the downpayment was withdrawn.
This worked great for us, partially because of timing and market returns over the last few years. But those are things you can't control or predict. If shit had hit the fan, we would have either just continued renting, made a smaller downpayment, liquidate a larger percentage of our equities, or packed up and lived in a van somewhere.. no big deal either way :)
That's just my two cents and experience. Hope it was helpful.
I couldn't find the original bogleheads thread I had read, but this describes something similar to what we did: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=131025#p1929021
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Although coming at it from the bright side, if you did buy a house in 2004 or a little after, you probably would've lost money. Off the top of my head, I can think of two folks I know who are underwater from their mid-2000s home buys.
My uncle, who lived in NorCal for more than thirty years (now in Central Coast), told me recently that home prices in the Bay Area have and will always go up. I guess that means over the long-term if you're going to stay, it might be ok to bite the bullet and buy.
Oh yes, I'm so very, very glad we knew we weren't ready to buy in the mid-2000s! The one offer we did put in on a place last year, was for a home that had been bought in 2005 and those people were desperately trying to get someone to offer enough to make up what they paid for the home and cover the renovations they put in, which even in the crazy market was just not going to happen for them.
And having grown up here I am also cautiously optimistic like your uncle, anyone in it for the very long haul will probably at least not LOSE money if they buy here. But it could certainly get rough in spots along the way for anyone unxepectedly needing to sell after a shorter timeframe. My parents remind me that when they bought back in the early 80s, the market trajectory looked very similar to what it is now (and that was with interest rates around 17%!). And it seemed unsustainably high to them then too. Their place would now likely sell for at least 12x the purchase price they paid, and they've been living there basically free for quite awhile now, having paid off their mortgage early.
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Rob over at the "dough roller podcast" recorded a show a few weeks ago discussing this topic. I haven't listened to this particular podcast, because i'm not saving for a house, but i regularly listen to his show and he has well rounded information and you might enjoy and learn something.
You can get the show on any podcast app, podcast #95, or in the following link.
Good luck!
http://www.doughroller.net/mortgages/5-places-to-stash-your-cash-when-purchasing-a-home/ (http://www.doughroller.net/mortgages/5-places-to-stash-your-cash-when-purchasing-a-home/)
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Hey all,
Thanks very much for the feedback! Very helpful and much appreciated. Definitely going to take some time to consider all this.