Save or invest money for future house purchase

[Redherring]

Topic moved

[alsoknownasDean]

Saving for a house... I'd keep it in cash.

That is unless you're prepared to delay a year or two in the event of a market downturn.

[vand]

It always just goes back to this: how OK would you be if your investments fell by the time you wanted to buy the house? Some people would be OK with it and say "yeah, I'm fine with just continuing to work for another year or two" and for some people it would be completely unacceptable.

You can be smart about it though. You don't have to lump sum it all into equities. You can pick a more predictable asset allocation, and you can cost average in over a period. Both these will greatly reduce your risk.

[Zamboni]

Holding completely in cash seems silly if you have a 5 year timeframe. People act like cash is zero risk, but that's not true: of course there is inflation risk in holding cash.

I would do something else. For example, a series I savings bond currently pays 7% interest. You and your other half can only put $20K per year ($10K each) in that type of bond, and you'd have to be sure you won't need it for at least one full year, but that would be quite a bit more in your stash than even going with a CD and it's still safe from a big market downturn.

https://forum.mrmoneymustache.com/welcome-to-the-forum/series-i-savings-bonds-for-emergency-fund-3-54-interest-rate/?topicseen

Even a 60 month CD at my local credit union is only paying 0.55% right now. You might be able to do slightly better on the rate, but you will be losing money to inflation if you stick to cash or low yield savings.

Personally I would keep a reasonable emergency fund in cash (especially because of the travel plans), but then invest the rest in stock index funds and bonds. If the market crashed, then I'd just hold my funds and rent a little longer, because the market has always recovered. YMMV.

[franklin4]

I suggest considering another path. You could buy in the near future with a mortgage and pay it off early. This approach would benefit you if house prices continue shooting up. The negative is that if you travel for long stretches you would need someone to keep an eye on the place, whether you rent it out or leave it empty.

[Arbitrage]

I would hold an appropriate asset allocation for the timeframe you're considering.  4-5 years, in my mind, means you're holding a combination of stocks and fixed income, probably anywhere from 15-50% stocks in your down payment fund, depending upon your risk tolerance (which means, in this case, your flexibility for shifting your purchase timeframe and house price). 

I wouldn't buy the house early unless you have a good plan for being a landlord while you travel.  Holding an empty house for years would be a huge waste of money. 

[seemsright]

Have a bigger reason to own a house than a roof over your head. Owning a house is expensive. Something goes wrong, or breaks you are on the hook.

I look forward to the days where the landlord fixes the problems...not me or my bank account.

[wageslave23]

We have already reached our FI number in terms of investable assets. Now, we are on the final strech to accumulate enough to buy a house in cash. Today we rent. We should be able to reach the final goal in mid-2023 and then we pull the trigger. However, we wish to slow travel for 2-3 years before settling down. So time horizon from today is 4-5 years before we’d need the money for a house

The budget for the house purchase is 25% of our final net worth target.

My question is how to handle the money earmarked for the house. Do we keep investing it, knowing that we risk to have a downturn ? If yes, could a mitigation strategy be to get a mortgage if investments are depressed at that time and then later pay out the loan once markets are back up?

I think I would start pulling out a percentage of the house purchase each year.  If 5 years until you buy, pull 20% of the expected purchase price out of the market each year and park it in cash or similar safe asset like CDs, etc.  That way you are utilizing a glidepath similar to what people do with bond allocation as they near retirement. 

[Ron Scott]

Since you’re planning on making the purchase in 4-5 years it’s best to avoid the risk associated with equities…and that includes index funds.

If you do decide to invest in equities to buy a home in the future, set yourself up to be somewhat flexible, maybe being willing to wait a couple more years.

Don’t put yourself into the position of having to sell equities during a down market.

[kite]

Invest. It's all the same retirement assets as your FI money, anyway.  And that is diversified already and proportionate between equity and fixed income assets commensurate with your age & goals, right?

This isn't like a 529 that you know with certainty you will pull out to pay tuition in a specific month within the next 3-5 years.
This is taking 25% of your net worth (whatever that is at that future date) to buy a home.  If your net worth is 1 Million and you are plunking down $250k for a house that's that.  If your net worth is 2 Million and you're targeting $500k homes, that's another thing.  Nobody** can predict where the global economy, the equities market and the housing markets are going to be 5 years from now. 
But how much of your assets do you want to have out of the market during that time?  Especially when you have so much flexibility as to when you purchase.  You really could just keep renting and wait out a down-turn in the Equities markets.  Or even get a mortgage that you turn around and pay off if you must buy when your portfolio is down.  But there is no "must buy now" date coming.  It's all fungible.

**Actually not nobody.  Everyone is predicting but nobody really knows.  What I think will happen is that the deaths of Baby Boomers take every model that any forecaster has developed for either housing or equities and blow it to shit. Invest. With your eyes open.

[highplainsdrifter]

I'm saving for my long-term home purchase. I estimate about 2-5 years of saving needed to reach my goal.

I chose to put the savings into TIPS (treasury inflation protected security) bonds. The return isn't amazing, but currently better than any bank account. I think I've got about 4% return on the TIPS mutual fund I'm in so far in 21'. With inflation as crazy as it is, I feel like TIPS are a solid choice to hedge inflation risk with minimal capital loss risk. I don't hear many people suggest TIPS, probably because they're kind of a boring suggestion.

Personally, I've also chosen to also put some of the savings in index funds too. I'm not too concerned about the market risk with a 5 year horizon. I'm like 80% TIPS and 20% total stock market and I'm comfortable with that. Initially I wasn't planning on doing any stock, but I decided to throw some money in the market April 20' when the market was bottoming out from the first wave of Covid. Too good of a timing opportunity to pass up and luckily that market timing has worked out so far. That stock/bond ratio will likely shrink since I'm putting all new savings into the TIPS.

Ultimately, choose whatever vehicle you're comfortable with. I might switch out of TIPS in the future if inflation becomes less of an issue. I'm not stuck to the investment idea.

[4tify]

I’m in a similar boat and I’m using a Betterment goal which starts at 30% stocks and winds down as it gets closer to the target date. There’s a .25% fee but I’m ok with that for the convenience. I also looked at VASIX which holds about 20% stocks. Because I’m FI I figured a little more risk was the way to go.

Where are you thinking of buying? All of my choices are getting mailed by the housing market.