What to do with a down payment nest egg?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
ben_galaxy
Posts: 5
Joined: Mon Feb 29, 2016 10:23 pm

What to do with a down payment nest egg?

Post by ben_galaxy » Tue Oct 10, 2017 10:01 pm

I live in a very high housing-cost area of the US and recently came into a moderately-sized windfall that would be enough to put 40-50% down to purchase an average single-family home here. Why so much down? Well, I don't want a jumbo loan and I do want a mortgage payment that is not ridiculous.

Currently this money is wasting away in a 1.25% money market while I decide what to do with it, and I would love some Boglehead advice.

Quick financial snapshot:
- Early 40s, 2 kids under 10
- 25% tax bracket, married filing jointly
- 3-6 months Emergency fund in cash
- Debt free (besides mortgage and $5k balance on student loan)
- 25% equity in our current smaller home (ideally would like to keep this upon moving up; it makes a perfect rental unit)
- Fully contributing to self and spouse's IRAs each year (good old Boglehead 3-fund portfolio allocation)
- Passive income streams coming in along with regular income
- Goal: Utilize the money in 1-2 years for the down payment

Our financial situation is pretty stable, so although a market downturn would not be ideal of course, this money could afford to weather one. I'm much more comfortable taking that risk than I am of knowing with certainty that our principle is "safe"(ly being ground down by inflation) in the money market acct. Even in a bear market we could have the money collecting and reinvesting dividends at a lower cost basis. So the advice I'm looking to hear is where you would suggest investing it. I've got a few thoughts:

1. Simply put the whole shebang into VTSAX,
2. Go for slightly better downside protection by putting it in VYM/VHDYX (High Dividend Yield),
3. 50/50 in one of the above, plus a tax-exempt bond fund,
4. Dabble in Utilities (VPU) for more yield

Of those, I'm leaning towards #1-3. I'm not sure I feel good putting all this money into a single sector (e.g. utilities), even if it is relatively stable and higher-yield. What do smarter financial minds think?

Thanks for taking the time to read.

Grt2bOutdoors
Posts: 17251
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: What to do with a down payment nest egg?

Post by Grt2bOutdoors » Tue Oct 10, 2017 10:49 pm

Put the money in an FDIC insured account wasting away at 1.25%.
1) You are fooling yourself it you believe for a second that a high yield dividend equity fund will save you in the event of a market downturn. Don't believe me? go look at what happened to the bluest of the blue chip dividend paying equities in 2008-2009 - no equity is immune to the forces of "sell, sell, sell".
2) More money has been lost reaching for yield than at the point of a gun. Don't be greedy! Return of capital is more important than return on capital.
3) Monies needed in 5 years or less do not belong in the stock market or in a bond fund whose duration exceeds the time you are planning to access those funds.

You've got to ask yourself one question: Do I feel lucky? Well, do ya? - Clint Eastwood (1971) :twisted:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

mega317
Posts: 1248
Joined: Tue Apr 19, 2016 10:55 am

Re: What to do with a down payment nest egg?

Post by mega317 » Wed Oct 11, 2017 1:15 am

Wow your post took an unexpected turn. Usually people who can't bear to leave their down payment in a savings account are asking about CDs or short-term bonds and such. I absolutely agree with above.

It wouldn't be crazy to put it in bonds, especially because a "major" loss won't cost you the house; you just put less money down. You just need to understand that there is real risk.

And to me the payoff probably isn't worth it. 1.25% vs. let's say total bond at 2.4%. So we're talking just over 1% of what, a few hundred thousand? So for the risk you will be rewarded with likely a few thousand (before taxes). But you could lose multiples of that.

Dottie57
Posts: 2379
Joined: Thu May 19, 2016 5:43 pm

Re: What to do with a down payment nest egg?

Post by Dottie57 » Wed Oct 11, 2017 5:52 am

Put your money into CDs. Short term money does not belong in equities. Bad, bad idea.

Nearly A Moose
Posts: 559
Joined: Fri Apr 22, 2016 5:28 pm

Re: What to do with a down payment nest egg?

Post by Nearly A Moose » Wed Oct 11, 2017 11:24 am

Effects of inflation won't be disastrous over a 2 year period. Use a high interest savings account, CDs, or a short-term bond fund. You'll need to do the math, but it's possible that at your marginal tax rate the tax savings from a muni bond fund will offset the slight underperformance compared to a taxable bond fund. But I think this is too short term for an equity fund, unless you're so wealthy that this is just a drop in the bucket, in which case just roll this into your overall asset allocation and be done with it. But I assume that's not the case from your post.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

bloom2708
Posts: 2926
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: What to do with a down payment nest egg?

Post by bloom2708 » Wed Oct 11, 2017 11:49 am

Options 1 thru 4 are all bad options for short term money.

1.25% is not wasting away.

Don't just do something. Stand there in this case. :wink:
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

itstoomuch
Posts: 4823
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: What to do with a down payment nest egg?

Post by itstoomuch » Wed Oct 11, 2017 12:16 pm

We kept inheritance in a passbook savings. Start looking now But don't be trigger happy. Our concern was not the return of or on the money but the loss of purchasing power in 12%+, appreciating housing market.

We started to look for rental properties immediately. Discovered a Seattle condo that owner had dropped price twice (2 years ago October 2015) and who was anxious to move back to his home state. This was an investment property for him and this property had a considerable cap gain in the short time of his ownership. In our two years ownership, rental would be cash flow positive even if we had a loan on it and has an 2 year unrealized cap gain of 30-50%.
Ymmv
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

aristotelian
Posts: 3158
Joined: Wed Jan 11, 2017 8:05 pm

Re: What to do with a down payment nest egg?

Post by aristotelian » Wed Oct 11, 2017 12:34 pm

#2 and #4 make zero sense. Not only are those high risk, they are not tax efficient. You would be better off holding those funds in tax deferred accounts and holding something more tax efficient in your taxable account.

With a 1-2 year timeframe, you are probably looking at either CD's or a short term bond fund such as VCSH. Possibly an intermediate muni fund if you are open to taking some risk. Any substantial amount in stocks is not a good idea unless you would be OK with incurring some serious losses and downsizing your house payment.

integrity
Posts: 372
Joined: Fri Mar 12, 2010 12:57 am

Re: What to do with a down payment nest egg?

Post by integrity » Wed Oct 11, 2017 12:47 pm

We have our house downpayment sitting in a state muni fund for our state of residence. If you are in one of the top tax brackets, the tax-avoidance benefits for both state and federal can substantially improve the net return. We have about a 3-4 year time horizon for buying a house, so we felt it was a reasonable balance of risk/reward.

I will admit guilt to some market timing within this account. We've had it open for 2 years and I've sold at a couple mini-peaks, held in money market for a couple of months, then bought back in at a lower basis. This has also increased the return for us, but there has been some luck involved. Of course there are capital gains taxes to be paid when you meddle like that.

User avatar
eye.surgeon
Posts: 109
Joined: Wed Apr 05, 2017 1:19 pm
Location: California

Re: What to do with a down payment nest egg?

Post by eye.surgeon » Wed Oct 11, 2017 1:18 pm

While I agree with what has been said, if you can tolerate some risk and afford to lose some of that down payment, it wouldn't be completely unreasonable to park it in Wellesley Admiral funds for 1-2 years, it's a 30/70 AA fund that will get you a decent return or at least not a horrible loss. This is only an option if you're prepared to risk some loss and have a higher risk tolerance. That's what I am doing with $50k awaiting a car purchase. If it goes down, whatever, if it goes up which it probably will, bonus.


Otherwise, Ally bank has a no-penalty 1.5% 11 month CD, park it there.
Last edited by eye.surgeon on Thu Oct 12, 2017 12:37 am, edited 1 time in total.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

itstoomuch
Posts: 4823
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: What to do with a down payment nest egg?

Post by itstoomuch » Wed Oct 11, 2017 2:24 pm

For 2nd purchase:
I started to wind down Discretionary in Jan 2016. By May-June 2017, the Discretionary was ~70% cash. I continued to trade during this time. Found a place in August 2017 and used Discretionary cash for the DP. We paid 22% over asking.
Ymmv
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

ben_galaxy
Posts: 5
Joined: Mon Feb 29, 2016 10:23 pm

Re: What to do with a down payment nest egg?

Post by ben_galaxy » Fri Oct 13, 2017 2:10 am

I am comfortable taking some risk with this money, but I definitely take all the points about some of the stated options being too risky. Right now it's about finding the optimal balance between getting greedy chasing yield and sitting on the sidelines afraid to make a move. We all know what WB says about being greedy and being fearful. I'm equal parts both at the moment--fearful of losing purchasing power in a 6% appreciating housing market, causing "greed" to find a way and keep pace. That's a very bad place to make a decision from, so for now I think it's wisest to take the advice to put it in CDs for awhile and let things settle in my head. After a few months perhaps I will look into moving it into tax-free bonds or some of the other suggestions given.

Thanks for all the feedback. Much appreciated!

dbr
Posts: 24136
Joined: Sun Mar 04, 2007 9:50 am

Re: What to do with a down payment nest egg?

Post by dbr » Fri Oct 13, 2017 8:20 am

ben_galaxy wrote:
Fri Oct 13, 2017 2:10 am
I am comfortable taking some risk with this money, but I definitely take all the points about some of the stated options being too risky. Right now it's about finding the optimal balance between getting greedy chasing yield and sitting on the sidelines afraid to make a move. We all know what WB says about being greedy and being fearful. I'm equal parts both at the moment--fearful of losing purchasing power in a 6% appreciating housing market, causing "greed" to find a way and keep pace. That's a very bad place to make a decision from, so for now I think it's wisest to take the advice to put it in CDs for awhile and let things settle in my head. After a few months perhaps I will look into moving it into tax-free bonds or some of the other suggestions given.

Thanks for all the feedback. Much appreciated!
The bottom line is that your money is not an investment but short term savings for a specific purpose. What you might read about investing does not apply to this.

itstoomuch
Posts: 4823
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: What to do with a down payment nest egg?

Post by itstoomuch » Fri Oct 13, 2017 3:47 pm

JMO,
But your best option may be to do a purchase sooner than later. This is opposite to parking money theory in anticipation to a purchase :annoyed .
YMMV :oops:
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

itstoomuch
Posts: 4823
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: What to do with a down payment nest egg?

Post by itstoomuch » Fri Oct 13, 2017 5:25 pm

Zillow reports SFH, Redmond WA, had a 20% appreciation for 2017 over 2016. Expect 7% increase for 2018.
Zillow reports SFH, Seattle WA, had a 16% appreciation for 2017 over 2016. Expect 7% increase for 2018.
Zillow forecasted 10-12% increases in 2016 for 2017.
We closed on a condo in Redmond WA, Aug 2017, at 22% over asking. Ask was based on 2016 comp sales. 15 Bidders, 3 bids went to =>20% including one cash offer, which wasn't us.

Don't know where your HCOL area, but JMO, I think you may be looking at the wrong side of the equation :confused
Ymmv :annoyed :dollar
Last edited by itstoomuch on Sat Oct 14, 2017 1:23 pm, edited 1 time in total.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

ben_galaxy
Posts: 5
Joined: Mon Feb 29, 2016 10:23 pm

Re: What to do with a down payment nest egg?

Post by ben_galaxy » Fri Oct 13, 2017 5:46 pm

dbr wrote:
Fri Oct 13, 2017 8:20 am
The bottom line is that your money is not an investment but short term savings for a specific purpose. What you might read about investing does not apply to this.
Excellent point.

Post Reply