Investing Plan for Housing

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Topic Author
DrShade
Posts: 12
Joined: Thu Jan 07, 2021 9:42 pm

Investing Plan for Housing

Post by DrShade »

Emergency funds: 6 months of expenses
Debt: none
house: currently renting
Tax Filing Status: Single
Tax Rate: 22% Federal, 4.17% State
State of Residence: AZ
Age:25
Desired Asset allocation: TBD
Desired International allocation: TBD
Condo Interest Rate: 2.433% on average for 15 year, 2.729% on average for 30 year


First time posting but I've been learning for a few weeks. I make 62k a year and I'm wondering what the best way to go about saving a down payment on a condo. I currently am renting and have no immediate need for it, so I was thinking of the best way of saving for a down payment. I would liek a condo since I'm still single and don't need the extra space in a house, I don't even use the space in my 750 sqft apartment :happy

I just started maxing out my Roth IRA through Schwab with the 2060 Target Date Index Fund (.08 ER) and contribute 275/month to my Roth 401k (best option there was the Vanguard 2060 target date fund with .15 ER). The options I'm looking for saving for a house are:

A. Keep investing 15% of my income (500/month into roth ira and 275 into work 401k) as well as maxing HSA at 300 a month. Use all extra money to save for a 20% down payment on a condo within 4 years, then use all excess money to aggressively pay it off within 8-9 years, being done around 37-38. Then fully max out HSA/Roth IRA/401k.

B. Pausing all Investments to save for a 20% down payment on a 200k condo in Phoenix within 2 years, then start contributing to roth ira/401k again and use all remaining money to pay off the condo within 7, have zero debt by 34 at the worst and then fully max roth ira/401k and hsa.

C. My friend suggested that I keep doing 15% into retirement and then invest all excess cash into a total market fund (swtsx at Schwab) for 8-10 years and then use the funds to outright buy the condo and never be in debt.

D. Same plan as option A but instead take a 30 year mortgage, pay only the minimum required and use the extra money towards maxing HSA/401k/Roth IRA and then put extra into a taxable account.

E. Rent forever, never buy a home and invest all leftover money into retirement and then a taxable account.

I know I'm probably overthinking this but I will be glad to clarify any points and look forward to your advice.
megabad
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Re: Investing Plan for Housing

Post by megabad »

Ok, I hesitate to say this, but I would start by stating pretty adamantly that I think a condo purchase for 25 year old is usually not the best decision. Basically this is partially your Option E, but I wouldn't say "never buy a home". More of a wait a while or buy an SFH instead.

If we ignore this first glaring concern, than my next question would be: do you want to pay off the condo quickly? If you just have an aversion to debt, than I would go with the 15 year and pay it off quickly to satiate this desire. Financially though, if you plan to hold the condo for say 20-30 years, I would probably just get the 30 year mortgage, pay it off on schedule and invest the remainder in low cost equity index fund. I guess your Option D.
Topic Author
DrShade
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Re: Investing Plan for Housing

Post by DrShade »

Why wouldn't you recommend a condo purchase for a young single person?

And I like your thoughts, I got into dave ramsey a few years ago which Is why I'm leaning towards either option A or B, then I did some research and seeing solid reasoning to choose option D. I don't think it's smart to pause all retirement savings while amassing a 20% down payment.

What if I do a hybrid of options A and D: save for retirement, use extra money to get a 20% down payment within a few years and then pay the minimum on that and use extra funds towards maxing out retirement funds with a taxable brokerage for leftover money? That way I pay it off in 15 years and contribute more to retirement.
tashnewbie
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Re: Investing Plan for Housing

Post by tashnewbie »

Welcome to the forum.

I wouldn't be in a rush to buy a house in your 20s, but you have to make your own decision. Why are you so motivated to buy a house?

I would continue to rent, especially if the cost of rent was cheaper or basically equivalent to buying. Renting would allow you to continue funding tax-advantaged accounts (401k and Roth IRA) and possibly max them, and it would give flexibility to pursue whatever path your career took (e.g., if you wanted/needed to move to take a new job opportunity).

What's your current rent?

What would the mortgage be on a $200k condo (with 20% down, that's $160k mortgage), along with HOA, taxes, and insurance?

So, I guess I'd take Option E modified (rent for now, buy later if you want), or if you decide you really want to buy, then go with Option D.
Topic Author
DrShade
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Re: Investing Plan for Housing

Post by DrShade »

I wanted to buy a condo so I can eventually pay it off and reduce my monthly expenses by a significant amount. I don't want to wait too long to do this as rent continually increases (my rent actually didn't increase this year due to covid but that is the outlier, not the norm.)

My current rent is ~1200 a month after taxes and everything. Total mortgage with Hoa/insurance,taxes, etc on a 160k condo with 20% down is about 1050 for 30 years at 2.7% and about 1400 for 15 years at 2.433%.

Like I said I don't mind renting, I just didn't want to keep paying 1200 a month any longer than I have to and figured that getting a condo sooner rather than later would work out better for me financially in the future. I did consider moving in with a friend or two to save on costs, but I don't know how long we would do that for as we would be 26 at that time and people start getting married, etc so I didn't want to rely on that plan.
Nate7out
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Re: Investing Plan for Housing

Post by Nate7out »

DrShade wrote: Fri Jan 08, 2021 1:13 pm I wanted to buy a condo so I can eventually pay it off and reduce my monthly expenses by a significant amount. I don't want to wait too long to do this as rent continually increases (my rent actually didn't increase this year due to covid but that is the outlier, not the norm.)

My current rent is ~1200 a month after taxes and everything. Total mortgage with Hoa/insurance,taxes, etc on a 160k condo with 20% down is about 1050 for 30 years at 2.7% and about 1400 for 15 years at 2.433%.

Like I said I don't mind renting, I just didn't want to keep paying 1200 a month any longer than I have to and figured that getting a condo sooner rather than later would work out better for me financially in the future. I did consider moving in with a friend or two to save on costs, but I don't know how long we would do that for as we would be 26 at that time and people start getting married, etc so I didn't want to rely on that plan.
If you are willing to have a roommate, then house hack. Buy the condo and rent space to a roommate.

Also, save up using your hybrid A/D approach 2 posts above so you don't miss out on too much compounding or tax deferral.

One downside of buying is the timing. As you note, the time is coming for marriage, etc. If you bought and then your circumstances change (marital status or career) you may end up selling after only a few years. Then transaction costs eat into the sale proceeds and you might not see much benefit to owning.
nsherman2006
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Re: Investing Plan for Housing

Post by nsherman2006 »

Nate7out wrote: Fri Jan 08, 2021 1:23 pm
DrShade wrote: Fri Jan 08, 2021 1:13 pm I wanted to buy a condo so I can eventually pay it off and reduce my monthly expenses by a significant amount. I don't want to wait too long to do this as rent continually increases (my rent actually didn't increase this year due to covid but that is the outlier, not the norm.)

My current rent is ~1200 a month after taxes and everything. Total mortgage with Hoa/insurance,taxes, etc on a 160k condo with 20% down is about 1050 for 30 years at 2.7% and about 1400 for 15 years at 2.433%.

Like I said I don't mind renting, I just didn't want to keep paying 1200 a month any longer than I have to and figured that getting a condo sooner rather than later would work out better for me financially in the future. I did consider moving in with a friend or two to save on costs, but I don't know how long we would do that for as we would be 26 at that time and people start getting married, etc so I didn't want to rely on that plan.
If you are willing to have a roommate, then house hack. Buy the condo and rent space to a roommate.

Also, save up using your hybrid A/D approach 2 posts above so you don't miss out on too much compounding or tax deferral.

One downside of buying is the timing. As you note, the time is coming for marriage, etc. If you bought and then your circumstances change (marital status or career) you may end up selling after only a few years. Then transaction costs eat into the sale proceeds and you might not see much benefit to owning.
I second the house hacking bit. If you aren't afraid to get your hands dirty with a little maintenance, and can find a duplex, that's a great way to reduce housing expenses. I wish I had known that when I was younger!
Topic Author
DrShade
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Re: Investing Plan for Housing

Post by DrShade »

I'll keep that in mind. Currently I am leaning towards option D but am still 25 and single, should I actually aim to buy a condo in 4 years? or should I keep renting (within my means) and put excess money toward retirement for now? I figured I'd buy when I'm 30 or something if needed but I don't see myself getting married/starting a family anytime soon.
tashnewbie
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Re: Investing Plan for Housing

Post by tashnewbie »

DrShade wrote: Fri Jan 08, 2021 3:51 pm I'll keep that in mind. Currently I am leaning towards option D but am still 25 and single, should I actually aim to buy a condo in 4 years? or should I keep renting (within my means) and put excess money toward retirement for now? I figured I'd buy when I'm 30 or something if needed but I don't see myself getting married/starting a family anytime soon.
I think continuing to rent is a very good choice. That gives you maximum flexibility for life changes (personal and business).
onourway
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Re: Investing Plan for Housing

Post by onourway »

Your current rent is relatively cheap and being single renting gives you a lot of flexibility. Your desire to buy isn't unusual, but unless you have a very strong personal preference towards ownership, for right now, renting appears to be a better value. The overall cost of owning a place at the rates you are looking at will be more expensive than owning. Perhaps you would get lucky with appreciation, but it could go the other way as well, or you could decide to sell shortly thereafter because of a life change - job transfer, marriage, etc. and lose out on the transaction costs.

If you do continue to rent though, make sure to actually invest the extra money you'd otherwise be spending on ownership rather than simply spend it here and there. If you do this religiously, you are likely to come out ahead, long-term, with the investments.
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geerhardusvos
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Re: Investing Plan for Housing

Post by geerhardusvos »

I highly recommend you do not pause any retirement savings/investing in order to save for a condo. These are crucial investing years, and you will be best served financially to continue renting. Phoenix is a good market to be a renter since house prices have continued to appreciate rapidly. With HOA costs and your current income, I would not recommend you purchase a condo, and if you do to keep it under $150,000.

When considering buying: Check this out for starters
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alex_686
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Re: Investing Plan for Housing

Post by alex_686 »

Step back and let us think about this in the bigger context.

First, does your 401k match? If so, that is free money. So always contribute up to your match.

Second, contribute to your IRA & Roth. You can withdraw some money from your IRA penalty free for a 1st time home purchase. Any contributions made to your Roth can always be withdrawn penalty free. You might as well take advantage of the tax free space.

Personally I would not be as aggressive about getting the condo paid off as fast as possible. You do have a balancing act. You have more than one goal. At the very least housing and retirement. You should not sacrifice one goal for the other.

As to how you should invest - I am getting mixed signals. Usually somebody who is interested in paying off a home mortgage as fast as possible is highly risk adverse. As such I find parking all of your housing money into a risky equity fund odd. Neither choice is wrong, it is just that one is a all out bet on risk aversion and the 2nd is all out bet on risk.

Lastly, I am skeptical of C. That implies 9k per year into retirement savings and 16k into equites a year, or 25k. That is a fairly high rate of savings.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
DrShade
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Re: Investing Plan for Housing

Post by DrShade »

Currently my 401k doesn't match so I'm maxing out my roth ira and then doing another 275 a month into the 401k to hit 15% of my income.

Ultimately I feel what I want is the plan that ends up with the most money. I figured paying off quickly a 15 year mortgage let me max out my retirement the most because of more years hitting the max. Then I thought about doing a 30 year mortgage and investing a steady, almost maxed or maxed amount every year for 30 years.

Then I saw that phoenix rent prices have been around 1000-1300 for 1 bed places for the past few years and figured I could keep renting until I want to start a family, but rents always increase so I guess I would have to keep searching for new places to stay if I did this plan.

I've been renting for over 2 years since I graduated college and I have no issue with it, it's a pretty simple lifestyle and I like it. I don't really have a compelling reason to buy right now because of this (outside of the potential financial gains that come with paid off property) and probably won't until I meet someone and get married/start a family. I want to maximize money and that's why I had multiple plans to analyze.

Sounds like options D and E are the best for maximum returns?
Topic Author
DrShade
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Re: Investing Plan for Housing

Post by DrShade »

Bumping message for more awareness.
dogagility
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Re: Investing Plan for Housing

Post by dogagility »

DrShade wrote: Fri Jan 08, 2021 1:13 pm Like I said I don't mind renting, I just didn't want to keep paying 1200 a month any longer than I have to and figured that getting a condo sooner rather than later would work out better for me financially in the future. I did consider moving in with a friend or two to save on costs, but I don't know how long we would do that for as we would be 26 at that time and people start getting married, etc so I didn't want to rely on that plan.
Buying a house isn't necessarily better financially than renting. I might suggest doing some financial comparisons using online calculators.

At the end of the day, most conclusions I've seen is people buy houses for emotional, intangible reasons rather than financial reasons. That's not necessarily a bad thing... my family much prefers living in a house.

I too agree with a poster upthread that mobility may be important for career advancement. If you need to sell your house within a few years of purchasing, this can be a large financial drag.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
chassis
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Re: Investing Plan for Housing

Post by chassis »

dogagility wrote: Sat Jan 09, 2021 8:37 am
DrShade wrote: Fri Jan 08, 2021 1:13 pm Like I said I don't mind renting, I just didn't want to keep paying 1200 a month any longer than I have to and figured that getting a condo sooner rather than later would work out better for me financially in the future. I did consider moving in with a friend or two to save on costs, but I don't know how long we would do that for as we would be 26 at that time and people start getting married, etc so I didn't want to rely on that plan.
Buying a house isn't necessarily better financially than renting. I might suggest doing some financial comparisons using online calculators.

At the end of the day, most conclusions I've seen is people buy houses for emotional, intangible reasons rather than financial reasons. That's not necessarily a bad thing... my family much prefers living in a house.

I too agree with a poster upthread that mobility may be important for career advancement. If you need to sell your house within a few years of purchasing, this can be a large financial drag.
Agree with buying a house is not necessarily a good financial decision. Non-financial factors are many times the deciding factors.

If one is brutally honest about all of the repair, maintenance and remodeling money that is spent, plus property taxes and interest (if any), buying a principal dwelling is not a great deal, financially. When doing the comparison, don’t forget to include the money spent on grass seed, fertilizer, a gallon of touch up paint, a can of drywall repair paste, new overhead light fixture, etc. It’s never ending.

Added to the money spent on interest and maintenance, is your time to do the work yourself or to manage (and pay) a contractor to do the work.

The quality of life from renting, because of more time available, is very valuable to me. My wife and I owned for 28 years and don’t regret it, but with just the two us now we evaluate this decision using different decision factor weights.

Net worth increase is a priority for us now, and renting helps toward this goal. Owning a home would not help toward the goal.
alex_686
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Re: Investing Plan for Housing

Post by alex_686 »

chassis wrote: Sat Jan 09, 2021 9:48 am Agree with buying a house is not necessarily a good financial decision. Non-financial factors are many times the deciding factors.

If one is brutally honest about all of the repair, maintenance and remodeling money that is spent, plus property taxes and interest (if any), buying a principal dwelling is not a great deal, financially. When doing the comparison, don’t forget to include the money spent on grass seed, fertilizer, a gallon of touch up paint, a can of drywall repair paste, new overhead light fixture, etc. It’s never ending.

Added to the money spent on interest and maintenance, is your time to do the work yourself or to manage (and pay) a contractor to do the work.

The quality of life from renting, because of more time available, is very valuable to me. My wife and I owned for 28 years and don’t regret it, but with just the two us now we evaluate this decision using different decision factor weights.

Net worth increase is a priority for us now, and renting helps toward this goal. Owning a home would not help toward the goal.

This analysis is a bit off. As a renter you do pay for repair and maintenance. Plus property taxes, often at a higher rate because you don't qualify for homesteading. The fact that these charges are indirect - you pay the landlord and the landlord pays the actual bills - does not matter. Plus he is buying a condo, so nothing spent on lawn care.

You do want to look at costs. Owning a home is often more expensive because you are consuming more housing. Homes tend to be in nicer neighbors, are larger, have higher end furnishings, etc.

Also, you point about interest is also a bit off. You need to think about the level of housing consumption you want, or "imputed rent". You want to think about the value of real estate in your portfolio. It has a fairly modest effect, but it is still there. However, you need to be careful on how you think about the mortgage and interest because that is something separate. Think about the opportunity cost. is it better to own a house outright or own a house, a mortgage (negative bond) and a large equity portfolio?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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willthrill81
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Re: Investing Plan for Housing

Post by willthrill81 »

I agree with several others that a single 25 year old who is really trying to move ahead financially, house hacking can be a great move. It seems to me that few couples are cut out for it, but it can really work for singles.

However, I'm not convinced that a condo is ideal for house hacking. Generally, house hacking is easier with a property with four or more bedrooms because it's easier to split the cost of the property three or more ways (i.e., among your roommates) than two, and most condos don't have four or more bedrooms. This doesn't preclude a condo for house hacking, but it just means that it's generally more difficult.
Last edited by willthrill81 on Sat Jan 09, 2021 11:38 am, edited 1 time in total.
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geerhardusvos
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Re: Investing Plan for Housing

Post by geerhardusvos »

willthrill81 wrote: Sat Jan 09, 2021 11:22 am I agree with several others that a single 25 year old who is really trying to move ahead financially, house hacking can be a great move. It seems to me that few couples are cut out for it, but it can really work for singles.

However, I'm not convinced that a condo is ideal for house hacking. Generally, it's house hacking is easier with a property with four or more bedrooms because it's easier to split the cost of the property three or more ways (i.e., among your roommates) than two, and most condos don't have four or more bedrooms. This doesn't preclude a condo for house hacking, but it just means that it's generally more difficult.
Totally agree. I have a good friend who purchased a house with five bedrooms and a three car garage when he was 23 years old. He barely qualified for the mortgage. We were all scratching our heads. Then he rented each of the bedrooms, except the master bedroom where he lived, to young professionals who were clean and well behaved. He kept it orderly, maintained the house well, had rules, and was particular about who he let in his house. He never paid for his mortgage once, and in fact he paid it down halfway with just his rent proceeds. Then when he met a nice girl, he kicked all of the roommates out at the end of their terms, then cleaned up and remodeled the house, and he got married and they live happily in a really nice house that’s almost paid off. This is hard to replicate if you are not disciplined and don’t have the network of people you would want to live with you, but it was one of the best house hacks I’ve ever seen. Now he is 29 years old, the house has appreciated by 60% and it’s almost paid off. Fantastic. Hard to replicate when you get married, but not impossible. We did a similar thing except for my brother and his wife lived with us for the first couple years of their marriage and it helped them pay off debt and they paid half of our mortgage each month.
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Topic Author
DrShade
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Re: Investing Plan for Housing

Post by DrShade »

I think I'll do option E, rent within my means and set up auto transfers so the money is invested monthly. I really don't want to deal with maintenance, remodeling etc if I don't have to.

If I meet someone/want to start a family, I'll do option D.

Thanks everyone for the thoughts!
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