Investing vs Buying A Home?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
rattlenap
Posts: 324
Joined: Wed May 25, 2016 6:22 pm

Investing vs Buying A Home?

Post by rattlenap » Sat Nov 26, 2016 11:46 pm

I am 41 now and want to buy a house by the time I am 50. Yet I am kind of facing a dilemma here. Just a little backstory. I am a late a starter to investing (started at 40). So I am investing 30% of my yearly income into both my 401k and IRA via three-fund portfolios. I have the investing thing all figured out and am on track to having a nice portfolio and will be able to retire comfortably when I am 65. Now comes the tough part. I want to buy a house, but I simply cannot afford it especially if I am investing 30% of my income because I will not be able to come up with a down payment. I realized at 40 that either I can my finance retirement or buy a house, not both. Of course I chose to finance my retirement instead. Yet the desire to be a homeowner is still there. So in about 5 years I will be moving to either New Mexico or someplace in the southwest where homes are ridiculously cheap. However, I still won't be to afford the downpayment for a home. In fact, I probably won't be able to buy one until I am 60.

So what are my options? How can I get the best of both worlds? Investing 30% of my income while being able to afford a home? Any feedback will be great. Thanks

Just so you know, I would be a first time home owner.

DSInvestor
Posts: 10905
Joined: Sat Oct 04, 2008 11:42 am

Re: Investing vs Buying A Home?

Post by DSInvestor » Sun Nov 27, 2016 12:17 am

How much are you contributing a year to 401k/403b/457b, IRA, taxable accounts? Are your 401k contributions to Roth 401k or Traditional 401k? Traditional 401k contributions would give you more take home pay than Roth 401k contributions.

Do you have any student loans, credit card debt, car loans?
What are your current expenses and can anything be trimmed to help you get closer to funding retirement and house downpayment?
Last edited by DSInvestor on Sun Nov 27, 2016 12:23 am, edited 1 time in total.
Wiki

AlohaJoe
Posts: 3929
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Investing vs Buying A Home?

Post by AlohaJoe » Sun Nov 27, 2016 12:21 am

Some options:

Don't ever retire.

Earn a bigger income.

Don't ever buy a house.

But a home and hope you can use a reverse mortgage to finance retirement.

Wakefield1
Posts: 870
Joined: Mon Nov 14, 2016 10:10 pm

Re: Investing vs Buying A Home?

Post by Wakefield1 » Sun Nov 27, 2016 12:30 am

It is desirable to have a house to retire to. I would suggest diverting some of the money available for investment,instead of investing it,channel it into a credit union or some other bank into a savings or "money market" account or possibly into CDs. If more adventurous than I you could try to use an online bank. Some here probably would suggest a short term bond fund but I would (do) use the credit union.
I am not sure as to the penalty for breaking a CD early,I don't know whether you would be worse off breaking a CD (withdrawing it before maturity) than having had your money in a lower interest savings account. If using CDs you could have different ones maturing at different times instead of one big one. Say 5 CDs with $10,000 each instead of one CD with 50,000.

rattlenap
Posts: 324
Joined: Wed May 25, 2016 6:22 pm

Re: Investing vs Buying A Home?

Post by rattlenap » Sun Nov 27, 2016 12:54 am

Wakefield1 wrote:It is desirable to have a house to retire to. I would suggest diverting some of the money available for investment,instead of investing it,channel it into a credit union or some other bank into a savings or "money market" account or possibly into CDs. If more adventurous than I you could try to use an online bank. Some here probably would suggest a short term bond fund but I would (do) use the credit union.
I am not sure as to the penalty for breaking a CD early,I don't know whether you would be worse off breaking a CD (withdrawing it before maturity) than having had your money in a lower interest savings account. If using CDs you could have different ones maturing at different times instead of one big one. Say 5 CDs with $10,000 each instead of one CD with 50,000.
Wouldn't iBonds be a better choice since one can get the inflation rate? CD's rates are paying just below inflation.

rattlenap
Posts: 324
Joined: Wed May 25, 2016 6:22 pm

Re: Investing vs Buying A Home?

Post by rattlenap » Sun Nov 27, 2016 12:55 am

DSInvestor wrote:How much are you contributing a year to 401k/403b/457b, IRA, taxable accounts? Are your 401k contributions to Roth 401k or Traditional 401k? Traditional 401k contributions would give you more take home pay than Roth 401k contributions.

Do you have any student loans, credit card debt, car loans?
What are your current expenses and can anything be trimmed to help you get closer to funding retirement and house downpayment?
No debt of any kind. I am doing a Roth IRA and Pre-Tax 401k. Though I do have a traditional IRA, which I don't contribute to since I am doing my 401k and concentrating on my Roth IRA as well.

msk
Posts: 949
Joined: Mon Aug 15, 2016 10:40 am

Re: Investing vs Buying A Home?

Post by msk » Sun Nov 27, 2016 2:01 am

You always have to have shelter, second priority after food. So you have a choice of either renting or buying. Buying is more attractive for a feeling of security but it restricts mobility. As you get to retirement you no longer need job mobility. Personally I would approach buying a home as just another investment. It requires due diligence, a careful assessment of the market and the marketability of the property (no eccentric houses, remoteness), tax implications, etc. I would then rank it against my existing investments, and cash some that look less attractive. Real estate, well located, is still a fairly liquid investment and is not lost money, like buying a car or similar consumables. Longer term, housing in attractive, growing communities will always at least keep up with inflation, at the very least to keep up with the rising labor cost needed for new construction. I made my first 7 figures in real estate, using 90% mortgages with high interest rates in the late 1970s early 1980s. With ample luck, housing can be, but is not guaranteed to be, an excellent investment. As one gets older there is less time for the market to recognize the value that you see, so I now consider myself too old for the hassle and waiting required of real estate investing. But buying a home is always nice :sharebeer

KlangFool
Posts: 10687
Joined: Sat Oct 11, 2008 12:35 pm

Re: Investing vs Buying A Home?

Post by KlangFool » Sun Nov 27, 2016 5:02 am

OP,

Come on. Are you kidding me? You know the answer.

Unless you save a lot more, you cannot afford to buy a house.

You could only retire if you are fully employed from now until 65 years old. That is a very optimistic projection to begin. But, you want to increase your risk of not making it by "renting" a house from the bank. You may be able to buy a house but you are not paying it off and retiring at the same time. Hence, you are "renting" the house from the bank.

What is the difference between normal renting versus "renting" the house from the bank?

KlangFool

WolfgangPauli
Posts: 263
Joined: Sun Aug 23, 2015 8:28 am

Re: Investing vs Buying A Home?

Post by WolfgangPauli » Sun Nov 27, 2016 5:21 am

My Humble Opinion:

Buying a house has a lot of utility when bringing up a family and loses its utility dramatically after the family is out and you are approaching retirement. The ease of mobility when not tied to a house far outweighs, in my opinion, the benefits of a home. Further, you should never go into retirement with a mortgage - kiss of death. So, if by saying "buy a home" you really mean "borrow huge sums of money from the bank so I have a place to live", I would vote NO. A couple of other points:

1. You can't "eat" a home - you can use investments to eat.
2. Virtually all price appreciation in a home is in the land not the house. So, unless you are buying in a location where land is in high demand and very low supply (read: Waterfront, big city like San Fran) then don't think for a minute it is an investment. If the demand gets high enough, the developers, in most areas, will just mow down another farmer's field and build more houses.

Why do I think you actually may be blessed and not cursed by not owning a home at this stage (and not buying one):

1. Transaction costs in real estate are ridiculous. Most ignore this because they "role it into a loan" but the costs of getting in, and more importantly, getting out are tremendous.

2. No mortgage going into retirement - did I mention that was a good thing?

3. Freedom to move - if you rent an apt or home, you just have to wait until the lease is up.

4. No repair bills!! Imagine being 80 and you now have to fix the HVAC or put a new roof on? With leasing, that is just a phone call to the landlord.

5. You can adjust your cost of living with your financial situation. So, let's say you are renting for $2,500 and you realize you need to take that down to $1,500 - wait for the lease to expire and move (see 3 above). Did I mention the ridiculous transaction costs in selling real estate if you own it? (See 1 above).

I could go on but try to satisfy your itch to spend money in another, less dangerous way. At this age, forget the house.
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com

User avatar
jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Investing vs Buying A Home?

Post by jimb_fromATL » Sun Nov 27, 2016 6:18 am

How much are you paying in rent?
How much would you have to pay for a comparable home?

A good rule of thumb --and typical requirement for qualifying for a mortgage-- is that a home should cost no more than about 25% to 30% of your income, and that all of your monthly debt and payment obligations be no more than around 36% of your income. That --and home ownership-- may not be possible for some folks with relatively low income in very high cost-of-housing areas, but will work for lots of folks with average income in most parts of the country.

Do you expect to live in the same area from now on... or at least for several years? In general it may not be a good idea to buy a home if you're not going to live there at least 5 years or so, since the closing costs for a mortgage and the commissions and costs of selling it may eat up any equity and appreciation you accrue in the first few years. Even worse if the home as dropped in value during a lull in the housing market at a time that you MUST move to another job, and might be forced to sell at a loss.

It would help to make some guesses if we knew more about your budget, your income and top tax brackets, how much you expect to receive from social security, whether you will have a pension, how much you already have saved for retirement, how much you're contributing to retirement now, and how much you have in liquid assets that could be used for a down payment on a home.

While the market does fluctuate, over a long period of time you will end up paying about as much in rent as it costs to buy, finance, maintain, and repair a similar dwelling, plus a little profit for the landlord. Otherwise, there wouldn't be much incentive for landlords to be in the rental business.

Rent also goes up fairly regularly with inflation, but your mortgage payment stays the same ... assuming a fixed rate mortgage. So eventually your total mortgage payment including taxes and insurance and maintenance and repairs can be considerably less than it would cost to rent the same place. Then when the mortgage is paid off you'll be paying only taxes, insurance, maintenance and repairs, which will be a small fraction of the rent for a comparable place to live.

Another way to look at buying a home is that any extra cost above renting a comparable place IS an investment for the future. You're building net worth in the form of reduced debt on the mortgage, plus getting a leveraged gain on the increase in the full value of the home, because you have less than the full value tied up in it.

You could also look at buying a home as sort of like investing in an annuity that will eventually give you the equivalent of a monthly payout which is the difference between what you'd be paying in rent for a comparable place and what you're paying in T&I and maintenance for your paid-for home. Plus if the history of the housing market is any indicator at all, and if you have chosen a location that is not likely to go downhill, you will usually have some capital gain from the appreciation in value of the home when you finally do sell it.

jimb

orca91
Posts: 1223
Joined: Thu Mar 03, 2016 7:17 pm

Re: Investing vs Buying A Home?

Post by orca91 » Sun Nov 27, 2016 7:28 am

rattlenap wrote:I realized at 40 that either I can my finance retirement or buy a house, not both. Of course I chose to finance my retirement instead. Yet the desire to be a homeowner is still there. So in about 5 years I will be moving to either New Mexico or someplace in the southwest where homes are ridiculously cheap. However, I still won't be to afford the downpayment for a home. In fact, I probably won't be able to buy one until I am 60.

So what are my options? How can I get the best of both worlds? Investing 30% of my income while being able to afford a home? Any feedback will be great. Thanks
I'm not sure what there is to figure out here...

- You realize you can't do both currently
- You want to save for retirement
- You want to buy a home
- You can't buy a home where you currently live
- You would have to move to make this even possible
- You still wouldn't have a down payment if you moved
- Even after moving, you can't afford a home until you're 60

.... You can't afford to buy a home with things the way they are.

Are you able to save anything extra right now for a down payment, or after saving 30% does it all go to rent, food, and lifestyle?

I'd say save up for a down payment for 5 years and see where things are then for you and the housing market in different areas. But, it sounds like you have no extra money to save.

How to get the best of both worlds... find a better paying job... Are you single? Find a significant other... dual incomes... Basically, it sounds like you need more money to make this all happen.

2Birds1Stone
Posts: 453
Joined: Wed Nov 19, 2014 10:33 pm
Location: New York

Re: Investing vs Buying A Home?

Post by 2Birds1Stone » Sun Nov 27, 2016 8:05 am

I can't believe that everyone here took the OP's post at face value.

OP, you state that you invest 30% of your current income for retirement.

Have you analyzed your spending? How much fat is in there that could be trimmed if you were to optimize a bit?

Are you paying $200+/month for cable/internet?
Do you have a $500+ smartphone that costs you an additional $100/month for service?
Are you purchasing more car than you need?
Are you shopping around for the best possible insurance rates?
Do you spend an excessive amount on eating out/alcohol?
Is your spending truly aligned with your values?

What does your income prospect look like over the next 24 years? Are you expecting to barely keep up with inflation? Or is there room for vertical promotions in your field?

At 41, are you currently supporting dependants that will no longer be there as time passes?

You earn a decent income, are you factoring in at least some SS into your retirement planning?

All of these are important things to ask yourself. :sharebeer

orca91
Posts: 1223
Joined: Thu Mar 03, 2016 7:17 pm

Re: Investing vs Buying A Home?

Post by orca91 » Sun Nov 27, 2016 8:10 am

2Birds1Stone wrote:I can't believe that everyone here took the OP's post at face value.
You realize many of us brought up the same points you did, right? :confused

cherijoh
Posts: 4989
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Investing vs Buying A Home?

Post by cherijoh » Sun Nov 27, 2016 8:30 am

rattlenap wrote:I am 41 now and want to buy a house by the time I am 50. Yet I am kind of facing a dilemma here. Just a little backstory. I am a late a starter to investing (started at 40). So I am investing 30% of my yearly income into both my 401k and IRA via three-fund portfolios. I have the investing thing all figured out and am on track to having a nice portfolio and will be able to retire comfortably when I am 65. Now comes the tough part. I want to buy a house, but I simply cannot afford it especially if I am investing 30% of my income because I will not be able to come up with a down payment. I realized at 40 that either I can my finance retirement or buy a house, not both. Of course I chose to finance my retirement instead. Yet the desire to be a homeowner is still there. So in about 5 years I will be moving to either New Mexico or someplace in the southwest where homes are ridiculously cheap. However, I still won't be to afford the downpayment for a home. In fact, I probably won't be able to buy one until I am 60.

So what are my options? How can I get the best of both worlds? Investing 30% of my income while being able to afford a home? Any feedback will be great. Thanks

Just so you know, I would be a first time home owner.
If you currently can't afford to save for a down payment on a house, then there is no way you would be able to handle a 15-yr mortgage. So even if you were able to purchase a house at 50, that would mean that you would be making mortgage payments until you are 80. Since you just started saving for retirement, it sounds unlikely that you will be able to handle a house payment plus taxes and insurance in retirement.

There is no magic formula to make this work. Unfortunately, you have squandered the one thing that makes a home AND a comfortable retirement possible for many people - which is TIME. If you had started saving 15+ years ago, you would either be in your house and ramping up your investments or you would have a solid retirement nest egg that would allow you to throttle back on your investments to get into the house.

It boils down to whether you can increase your income or reduce your expenses. Could you reduce your current housing expenses by either moving to a cheaper place or getting a roommate to share expenses?

2Birds1Stone
Posts: 453
Joined: Wed Nov 19, 2014 10:33 pm
Location: New York

Re: Investing vs Buying A Home?

Post by 2Birds1Stone » Sun Nov 27, 2016 8:45 am

orca91 wrote:
2Birds1Stone wrote:I can't believe that everyone here took the OP's post at face value.
You realize many of us brought up the same points you did, right? :confused
I think you were the only other one to bring up these points =D First few posters didn't seem to question most of these things.

I digress, I didn't read over the entire thread with a fine tooth comb. :sharebeer

Dandy
Posts: 5473
Joined: Sun Apr 25, 2010 7:42 pm

Re: Investing vs Buying A Home?

Post by Dandy » Sun Nov 27, 2016 9:44 am

Home ownership desires run strong and deep.
Some think it is because it is a great investment but only on occasion. Home prices tend to track inflation over the long term with some wild exceptions.
Some like the peace of mind of having your own land with no noisy people upstairs that stomp around or play the TV too loud. Try having an annoying neighbor or two and find it is very expensive and disruptive to move out.
Some think it is cheaper over the long run. Maybe but there are a lot of hidden/subtle costs. Repairs, landscaping, furnishing, heating/cooling, appliances, equipment (lawnmowers, shovels, rakes, barbeques, ladders, etc.) and/r pay retail for services like gutter cleaning, mowing, etc. insurance, etc. If you aren't handy and/or don't have tools you will be needing plumbers, painters, appliance repair, roofers, driveway sealing etc.
Hey, it is not impossible lots of people do it and lots of people get tired of doing the home upkeep thing especially as they near or are in retirement. I'm a happy home owner but at age 68+ it is getting to be a bit much keeping things up to snuff and I don't like to outsource a lot of services - they do a so-so job. For me, I'm looking to rent or buy a condo so I can stop raking the darn leaves. :happy

My daughter bought a house a few years ago and has had to replace the bathroom because of a bad pipes that leaked into the kitchen, had to have trees removed because they are dying ($4,400) and since they both work feel that the house takes up a lot of their time off when they should be enjoying life more. Their driveway, garage and landscaping all need serious attention. Sometimes you can afford the down payment on a house but are buying at the low end or fixer upper which bleeds money for years.

So, home ownership can be great but may not be utopia for everyone. Having a well funded retirement is usually a better deal. Maybe a compromise-- rent a house?

Wakefield1
Posts: 870
Joined: Mon Nov 14, 2016 10:10 pm

Re: Investing vs Buying A Home?

Post by Wakefield1 » Sun Nov 27, 2016 10:04 am

orca91 wrote:
2Birds1Stone wrote:I can't believe that everyone here took the OP's post at face value.
You realize many of us brought up the same points you did, right? :confused
This thread has brought out some interesting if disparate points of view -- did O.P. intend the question to be rhetorical? --
Work for 3 more years than previously planned,save up a BIG downpayment and buy using a small mortgage?
I think a decent small-moderate size house in Las Cruces NM or Huntington WV can be found for $170K
_____I think "rhetorical" can refer to a question meant to provoke thought or questioning as well as one unanswerable________
Last edited by Wakefield1 on Sun Nov 27, 2016 10:22 am, edited 1 time in total.

orca91
Posts: 1223
Joined: Thu Mar 03, 2016 7:17 pm

Re: Investing vs Buying A Home?

Post by orca91 » Sun Nov 27, 2016 10:15 am

I don't doubt the OP could do this somehow... there's always a way.

There are plenty of unknowns about the OP's situation and plans. Are they in a HCOL area now and saving and investing for a retirement in that area? Would a retirement in a LCOL area have a much different number needed for retirement... especially with a paid off home? Would the OP be leaving family and friends and a love of the area they're in now just to be a homeowner somewhere... and maybe or maybe not like the new area? If OP is not tied down to the current area and willing to move anywhere, why not move now? And, so on....

danaht
Posts: 541
Joined: Sun Oct 18, 2015 11:28 am

Re: Investing vs Buying A Home?

Post by danaht » Sun Nov 27, 2016 10:23 am

I think buying a house can be a better decision than renting as long as you buy the smallest, cheapest house you can afford, and are comfortable in. If you buy too big of a house - you end up paying a lot more in insurance, taxes, utilities, and maintenance than you may want. Buying is better because you also get the tax deductions from real estate taxes + any interest payments from loans. However - in a couple years there may no longer be tax deductions if some projected tax changes occur - in which case renting will become a better option.

reisner
Posts: 410
Joined: Fri Jun 20, 2008 12:34 pm

Re: Investing vs Buying A Home?

Post by reisner » Sun Nov 27, 2016 12:08 pm

So many issues to consider:

How much do you like or hate doing home maintenance?

How big a home do you want? The answer will factor into investment costs.

Married or single? Usually the nesting and owning impulses are stronger with a partner than alone. How fussy are you about your surroundings being just so?

How healthy do you see yourself in your post-retirement years? And will you want more flexibility or more stability?

Anything about you and your pursuits that would put a landlord off? You keep coonhounds that bay at the moon, need a place on the property to butcher your deer every year, look funny?

How stable and how liquid is the real estate market where you are now? How stable in NM where you intend to wind up? Stocks and real estate in many parts of the country are overpriced right now. But stocks and bonds may well make you richer than real estate, or not. (Robert Shiller has some NYT articles about this. How cool are you under financial pressure? My investment savvy cousins have lost money on every house they've owned (and sold all their stock when the Dow was at 10,000 and going down.) A comparative naif, I have accidentally made out like a bandit four times in a row on the roller coaster of West Coast homes, and also not blinked on investments during to recession and recovery.

If you save up and buy a home and eventually own it outright, not only will you save on rent, but also on the tax you would have to pay.

How well do you know what you want? It's not so easy get rid of a home in some areas. Once I was surprised it took seven weeks in La Jolla. Another time it took seven months in Port Townsend, WA and we were lucky. It took others two years or more to sell.

I sympathize with the own or rent quandry because I have a dog in the race. My marriage is breaking up, I'm 71, and find that I don't know where I want to live and that the nesting impulse has faded a great deal now that I'm alone.

NYCguy
Posts: 265
Joined: Sun Nov 13, 2016 12:42 pm

Re: Investing vs Buying A Home?

Post by NYCguy » Sun Nov 27, 2016 12:32 pm

I concur with most of the prior posts. If you accept the original post assumptions that they are on track to retire at age 65 based upon their current investment rate, and assume that there is not more money in the budget to be squeezed out for homeownership and income will not rise to create more options, then the analysis breaks down as follows:

Is there a viable rentals in your area that provide you with housing to meet your needs? I assume the answer is yes as you're renting today, but will it work for the next 20 years? I would assume the answer is yes.
How much more or less would it cost to own a home versus what you are paying to rent today? In most locations it costs substantially more to own, when one factors taxes, maintenance and down payment, but that is not always the case and sometimes the difference is marginal.
How does where I live and how much home I own or rent affect other financial decisions? How long will my commute be? Will I need a second car or need to replace cars more frequently? Think of organizing your life in a manner that provides simplicity and long-term happiness. I have found that this has created financial efficiency which has allowed me to say 30 to 50% of my after-tax income for decades.

As other responses have noted, do not look at home ownership as an investment. Residential real estate values go up and down over long periods of time but generally will keep pace with inflation. Yes, homeownership is a form of forced savings, but I view that only as a value for someone who is undisciplined to invest otherwise.

Saving for a down payment can be problematic from an investment standpoint. For many people it will take several years to accumulate the down payment. During that time the money should be invested in something safe and hence earning little return. If however the same person decided to rent, the same money could be invested in accordance with an appropriate asset allocation for retirement because of the longer time horizon.

I tend to be much more analytical than most people about the rent versus own decision. I ascribe little value to the psychic benefits of ownership.

Personally, I chose to rent for 18, while pretty much everyone in my demographic chose own. When the math shifted in favor of ownership, I bought. On paper I have enjoyed a 60% gross return in the six years I have owned.

Notwithstanding that paper gain, I remain a huge fan of renting and would've been happy to rent my entire working life.
If your out-go is greater than your income, your upkeep will be your DOWNFALL.

forevernaive
Posts: 113
Joined: Tue May 20, 2014 3:46 pm

Re: Investing vs Buying A Home?

Post by forevernaive » Mon Nov 28, 2016 12:10 pm

OP, you should be aware that you can withdraw from many tax-favored retirement investments for your first home down payment with no penalty. You are saving for a possible house purchase already. Other than investigating the options and possibly adjusting some of your portfolio into cash (I wouldn't until your plans are far more imminent), no change of course is necessary.
KlangFool wrote:OP,

What is the difference between normal renting versus "renting" the house from the bank?

KlangFool
The main difference from a retirement perspective is that rents can (and almost certainly will) rise, while a fixed mortgage will be constant.

This is a considerable difference and may well matter a great deal to the OPs planning for housing expenses in retirement.

The other point of difference is that so long as one eventually pays off the mortgage, it then means the only housing expenses are taxes, insurance and maintenance, which should be significantly less than the cost of rent. Then there is the fact that buying a home is a significant income tax shelter if one's income is high enough; renting does not offer such advantages.

I think the OP needs to take a hard look at where he lives, wants to live permanently (eg new Mexico) and consider his retirement needs as a whole. If he knows he won't need to move again for his job, doesn't want to move in retirement, if the real estate costs are reasonable and he can afford to buy the smallest, least expensive home for cash or on a 15 year fixed mortgage that still manages to keep retirement on track, it might be a good bet.

I agree that home ownership is not always the best option, but without the specifics it is hard to tell.

User avatar
Meg77
Posts: 2420
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Investing vs Buying A Home?

Post by Meg77 » Mon Nov 28, 2016 12:28 pm

Many people in their 60s look to sell their homes and rent or downsize after decades of financing and maintaining a large fixed asset. The excitement of owning your own home wears off over time, believe me. I think you could probably afford to buy a home if you move to a cheaper area and cut your budget back a bit (after all, eventually it would be paid for and your monthly costs would be substantially lower), but I question whether that's necessary or desirable.

1. The maintenance on a home can be a tremendous burden, both in terms of time and money - especially if you have to outsource all of it. As you age, doing much of it yourself may not be an option. And as a lifelong renter you'd probably face a steep learning curve when it comes to all sorts of things - home insurance policy options, lawn care, how often to repaint/restain/replace everything so the house doesn't rot around you, how to deal with a leaky roof/water heater/dishwasher/fridge/washing machine.

2. You may require help and need to enter an assisted living or nursing care facility at some point not too far into retirement. May want to save your money for that, or even buy into an all-inclusive retirement community instead at some point.

3. Renting allows you to remain flexible and move as you need or want to based on physical, financial or emotional reasons. Maybe you end up having a rare cancer and want to go rent close to a specific treatment facility in another area. Maybe you want to be closer to a particular family member who needs help (or is willing to help you when you need it) down the road. Maybe your retirement income is higher/lower than you expected and you want to upgrade/downgrade your living situation later.
"An investment in knowledge pays the best interest." - Benjamin Franklin

KlangFool
Posts: 10687
Joined: Sat Oct 11, 2008 12:35 pm

Re: Investing vs Buying A Home?

Post by KlangFool » Mon Nov 28, 2016 12:35 pm

forevernaive wrote:OP, you should be aware that you can withdraw from many tax-favored retirement investments for your first home down payment with no penalty. You are saving for a possible house purchase already. Other than investigating the options and possibly adjusting some of your portfolio into cash (I wouldn't until your plans are far more imminent), no change of course is necessary.
KlangFool wrote:OP,

What is the difference between normal renting versus "renting" the house from the bank?

KlangFool
The main difference from a retirement perspective is that rents can (and almost certainly will) rise, while a fixed mortgage will be constant.
forevernaive,

Who says so? The house price in my area is still below the 2004/2005 level.

KlangFool

katzmandu
Posts: 139
Joined: Tue Nov 26, 2013 8:39 am

Re: Investing vs Buying A Home?

Post by katzmandu » Mon Nov 28, 2016 12:46 pm

KlangFool wrote:OP,

Come on. Are you kidding me? You know the answer.

Unless you save a lot more, you cannot afford to buy a house.

You could only retire if you are fully employed from now until 65 years old. That is a very optimistic projection to begin. But, you want to increase your risk of not making it by "renting" a house from the bank. You may be able to buy a house but you are not paying it off and retiring at the same time. Hence, you are "renting" the house from the bank.

What is the difference between normal renting versus "renting" the house from the bank?

KlangFool
1 yr legal obligation to a landlord vs 15/30 legally bound to bank? I've already chosen the retire (if possible) with a large pile of money and figure out if I want to buy later rather than throwing all in now. In my area, it makes sense because a 2BR to purchase would likely cost me $1100 more monthly than the 1BR I currently rent with 2/yr leases that go up a pittance each cycle. I choose to invest the difference and see how it all turns out. Things can change, obviously, but this is the plan for now. I'm in agreement with you.

orca91
Posts: 1223
Joined: Thu Mar 03, 2016 7:17 pm

Re: Investing vs Buying A Home?

Post by orca91 » Mon Nov 28, 2016 1:04 pm

KlangFool wrote:
forevernaive wrote:OP, you should be aware that you can withdraw from many tax-favored retirement investments for your first home down payment with no penalty. You are saving for a possible house purchase already. Other than investigating the options and possibly adjusting some of your portfolio into cash (I wouldn't until your plans are far more imminent), no change of course is necessary.
KlangFool wrote:OP,

What is the difference between normal renting versus "renting" the house from the bank?

KlangFool
The main difference from a retirement perspective is that rents can (and almost certainly will) rise, while a fixed mortgage will be constant.
forevernaive,

Who says so? The house price in my area is still below the 2004/2005 level.

KlangFool
They said rent will rise.

Why did you bring up home prices? Have rents in the same area stayed the same or below 2004/2005 levels?

rbaldini
Posts: 905
Joined: Mon Mar 23, 2015 3:20 pm

Re: Investing vs Buying A Home?

Post by rbaldini » Mon Nov 28, 2016 1:17 pm

Would be nice to have more numbers. Let me see if I can get a ballpark idea.

You are investing 30% of your income into 401k and IRA. Since the 401k and IRA max contribution is 18000+5500, your annual income is no greater than (18000+5500)/.3 = $78,334, but could be less. (Or, if you're a dual income household, the dual income is no greater than $156,667.) The problem, then, is that you will not be able to accumulate enough cash for a down payment by the time you are 50 because so much of your paycheck is going into retirement accounts. Is that right?

A few strategies to consider:
(1) You can withdraw $10k from a traditional IRA for a first time home purchase, penalty free. But you'll have to pay tax at your marginal income rate. This largely negates the value of contributing to a traditional IRA in the first place, but it's an option.
(2) You can withdraw up to what you've contributed to a Roth IRA penalty and tax free. Obviously the downside here is that you can't replace that money, so you lose that tax-free advantage - again, negating the value of contributing to a Roth in the first place. You can also withdraw on earnings up to $10k without tax if you've held the fund for 5 years (I think).
(3) There's some way to take a loan from a 401(k). I don't know much about this. In a sense you are borrowing money from the 401(k), which you pay back at some fixed rate. The downside is that you're removing money from the market during that time.

All of these strategies still boil down to prioritizing the house over the retirement accounts. The latter are generally considered superior investments for retirement, so most folks here would say it's a bad idea. BUT - one thing you have to consider is rent! If you're paying a lot in rent now, and you could buy a home that would cost substantially less in monthly payments, then the financial benefit of replacing the rent with a mortgage could exceed the cost of temporarily not investing in the retirement accounts. In that case, it would make sense to temporarily invest in the down payment rather than in the retirement accounts. But that strikes me as unlikely. And even if that were the case, an even better decision would be to move to a place with cheaper rent, so that you could continue loading up your retirement accounts.

KlangFool
Posts: 10687
Joined: Sat Oct 11, 2008 12:35 pm

Re: Investing vs Buying A Home?

Post by KlangFool » Mon Nov 28, 2016 1:26 pm

orca91 wrote:
They said rent will rise.

Why did you bring up home prices? Have rents in the same area stayed the same or below 2004/2005 levels?
orca91,

I do not have the rent information that goes back that far. For rent, it had stayed about the same for at least the last 3 years.

KlangFool

Gropes & Ray
Posts: 1067
Joined: Wed Jul 16, 2014 7:28 am

Re: Investing vs Buying A Home?

Post by Gropes & Ray » Mon Nov 28, 2016 1:45 pm

If you find a place in the Southwest where homes are ridiculously cheap, and it's not a 2 cow town (not that there's anything wrong with that), let me know. My city currently has 10%+ inflation in homes under $300k.

lazydavid
Posts: 1887
Joined: Wed Apr 06, 2016 1:37 pm

Re: Investing vs Buying A Home?

Post by lazydavid » Mon Nov 28, 2016 2:17 pm

KlangFool wrote:
orca91 wrote:
They said rent will rise.

Why did you bring up home prices? Have rents in the same area stayed the same or below 2004/2005 levels?
orca91,

I do not have the rent information that goes back that far. For rent, it had stayed about the same for at least the last 3 years.

KlangFool
It's a sample size of one (and likely not in your area), but the exact apartment model I rented from 2000-2002 for $1,050/mo (at the end I went month-to-month and they charged me $1300) is currently available for $1,491/mo for a 12-month lease, or $1,708 for a 6-month, which is as short as they'll go.

So that's a 42% increase over a 14-year period. Will it be $2,117/mo in 2030? Perhaps, perhaps not. But I'd certainly take the over on it being $1,491/mo. I definitely have a far higher degree of confidence that my mortgage payment (on a house 4x the size of that apartment) will be $1,218/mo in 2030. And $0 in 2031. :mrgreen:

orca91
Posts: 1223
Joined: Thu Mar 03, 2016 7:17 pm

Re: Investing vs Buying A Home?

Post by orca91 » Mon Nov 28, 2016 2:29 pm

KlangFool wrote:
orca91 wrote:
They said rent will rise.

Why did you bring up home prices? Have rents in the same area stayed the same or below 2004/2005 levels?
orca91,

I do not have the rent information that goes back that far. For rent, it had stayed about the same for at least the last 3 years.

KlangFool
So, the point of your other post about home prices was.....

KlangFool
Posts: 10687
Joined: Sat Oct 11, 2008 12:35 pm

Re: Investing vs Buying A Home?

Post by KlangFool » Mon Nov 28, 2016 2:49 pm

orca91 wrote:
KlangFool wrote:
orca91 wrote:
They said rent will rise.

Why did you bring up home prices? Have rents in the same area stayed the same or below 2004/2005 levels?
orca91,

I do not have the rent information that goes back that far. For rent, it had stayed about the same for at least the last 3 years.

KlangFool
So, the point of your other post about home prices was.....
orca91,

Normally, the house price tracks the rental closely. So, if the house price is lower than 2004/2005 level. The rental should be lower than the 2004/2005 level.

KlangFool

KlangFool
Posts: 10687
Joined: Sat Oct 11, 2008 12:35 pm

Re: Investing vs Buying A Home?

Post by KlangFool » Mon Nov 28, 2016 2:57 pm

lazydavid wrote:
It's a sample size of one (and likely not in your area), but the exact apartment model I rented from 2000-2002 for $1,050/mo (at the end I went month-to-month and they charged me $1300) is currently available for $1,491/mo for a 12-month lease, or $1,708 for a 6-month, which is as short as they'll go.

So that's a 42% increase over a 14-year period. Will it be $2,117/mo in 2030? Perhaps, perhaps not. But I'd certainly take the over on it being $1,491/mo. I definitely have a far higher degree of confidence that my mortgage payment (on a house 4x the size of that apartment) will be $1,218/mo in 2030. And $0 in 2031. :mrgreen:
lazydavid,

So, are you willing to pay 42% more in mortgage versus rental in order to break even in 14 years?

<<It's a sample size of one (and likely not in your area), but the exact apartment model I rented from 2000-2002 for $1,050/mo (at the end I went month-to-month and they charged me $1300) is currently available for $1,491/mo for a 12-month lease, or $1,708 for a 6-month, which is as short as they'll go.>>

Your information is incomplete without your current mortgage payment and the size of your down payment.

Please note that I bought a townhouse in my current area. The PITI is 30% lower than renting the same house. I do not have to forecast or count on capital appreciation. And, I still save 30+% of my gross income. But, this is not the case for OP.

KlangFool

lazydavid
Posts: 1887
Joined: Wed Apr 06, 2016 1:37 pm

Re: Investing vs Buying A Home?

Post by lazydavid » Mon Nov 28, 2016 4:07 pm

KlangFool wrote:So, are you willing to pay 42% more in mortgage versus rental in order to break even in 14 years?
This makes no sense whatsoever. The rental in 2016 costs 42% more than the rental in 2002. Homes in my area are worth 23% more in 2016 than they were in 2002. When I bought in 2013, they were about the same price. My mortgage payment is LESS than the rent on the much-smaller apartment.
KlangFool wrote:Your information is incomplete without your current mortgage payment and the size of your down payment.
I provided my mortgage payment--$1,218/month. That's new, as I just refinanced down to 15 years. For the first three years, it was $888. Down payment was $200k, a bit less than half the purchase price. That was proceeds from the sale of our first home--which ironically enough had the same $1,050 mortgage payment as the rent on my previous apartment--and my father-in-law's home, who moved in with us.

Obviously a large down payment changes things somewhat. Ignoring PMI for the moment, if I had made no down payment at all, I'd currently be looking at an approximately $2,400 mortgage payment. Is this more than the $1500 current going rate of my 2br/2ba apartment? Absolutely. But my 5br/4ba house is also 4x the square footage, with a garage, backyard, patio, pool, wet bar, etc.

My first house wasn't nearly as lavish, but was 40% larger than the apartment, with an extra bedroom, garage, backyard, deck, etc. etc. And my last mortgage payment on it in 2013 was almost to the penny the same as my first rent payment in 2000. True, I don't know what the apartment was going for 3 years ago. But it was probably not too far off from the current 42% higher figure, while my mortgage definitely rose 0% over that period.

orca91
Posts: 1223
Joined: Thu Mar 03, 2016 7:17 pm

Re: Investing vs Buying A Home?

Post by orca91 » Mon Nov 28, 2016 11:02 pm

KlangFool wrote:
orca91 wrote:
KlangFool wrote:
orca91 wrote:
They said rent will rise.

Why did you bring up home prices? Have rents in the same area stayed the same or below 2004/2005 levels?
orca91,

I do not have the rent information that goes back that far. For rent, it had stayed about the same for at least the last 3 years.

KlangFool
So, the point of your other post about home prices was.....
orca91,

Normally, the house price tracks the rental closely. So, if the house price is lower than 2004/2005 level. The rental should be lower than the 2004/2005 level.

KlangFool
Closely??... So, there was a rent price crash around 2008 also? Rents may hold steady for a bit, but they don't crash and you know rentals in your area aren't the same or below 2004/2005 levels.

Your arguments in this one have no basis at all, Klang.

Ivygirl
Posts: 139
Joined: Sun Apr 06, 2014 1:36 pm

Re: Investing vs Buying A Home?

Post by Ivygirl » Tue Nov 29, 2016 9:55 am

rattlenap wrote:I am 41 now and want to buy a house by the time I am 50. Yet I am kind of facing a dilemma here. Just a little backstory. I am a late a starter to investing (started at 40). So I am investing 30% of my yearly income into both my 401k and IRA via three-fund portfolios. I have the investing thing all figured out and am on track to having a nice portfolio and will be able to retire comfortably when I am 65. Now comes the tough part. I want to buy a house, but I simply cannot afford it especially if I am investing 30% of my income because I will not be able to come up with a down payment. I realized at 40 that either I can my finance retirement or buy a house, not both. Of course I chose to finance my retirement instead. Yet the desire to be a homeowner is still there. So in about 5 years I will be moving to either New Mexico or someplace in the southwest where homes are ridiculously cheap. However, I still won't be to afford the downpayment for a home. In fact, I probably won't be able to buy one until I am 60.

So what are my options? How can I get the best of both worlds? Investing 30% of my income while being able to afford a home? Any feedback will be great. Thanks

Just so you know, I would be a first time home owner.
I'm in the same situation. I got a late start to investing (started at age 46), now save about 26% of my income into retirement accounts, and recognize it is not feasible to reach retirement with both a decent nest egg and a house. My savings now are the basis for the compounded returns of the future, I have to bulk up the retirement accounts NOW and can't save a down payment.

I have a minimum retirement goal. When I reach it, I may divert savings to a down payment, but if I buy it will be a duplex or duplex with a garage apartment for rental income. A stand-alone house would not be a good choice I feel in my circumstances.

If a house is bought, it also has to be furnished. I think I would really resent thousands of dollars spent on blinds, drapes, carpets, and furniture to fill rooms, all the while my retirement accounts were stalled.

Post Reply