Put cash into a home or stock market.

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Nlu822
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Put cash into a home or stock market.

Post by Nlu822 »

Im 29 and have about 95 k saved outside my 401k. My grandmother will be selling me her house for a bargain $135,000. The homes value is estimated at 165 to 175k. My question is, should I put 90 k in as a down payment? It seems as though I will make money immediately on equity of about 20 to 25k. Or should I put 3.5 to 20% down and the rest in the stock market? I still have 21k in student loans at 2% interest and 3.5K on a car payment. Any thoughts or recommendations on how to spend the 95,000?
b42
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Re: Put cash into a home or stock market.

Post by b42 »

Since the car payment is only $3.5k I would pay that off first.

I would determine the minimum amount to put down on the house to avoid Private Mortgage Insurance (PMI). When you buy, even if you only put down 20% of the $135k house price, you will already have the additional equity of the true value of the home.

I would keep the extra funds in their current accounts so that you still have some liquidity or if there are any cash flow problems in the future.
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climber2020
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Re: Put cash into a home or stock market.

Post by climber2020 »

More important question: at age 29, do you really want a house and everything that comes along with it?
ThriftyPhD
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Re: Put cash into a home or stock market.

Post by ThriftyPhD »

Is the 95k in addition to an emergency fund, or is that included in the amount? Owning a house comes with a lot of surprise expenses that you may not be aware of if you've only rented till now. New roof, water leaks, water heater breaks, fridge breaks, etc. General recommendation is to budget 1-2% of home value per year for maintenance, but this can be 'bursty'. Some years there will be none, others you need $10k for a roof. You could put down 20%, own the home for a year to see how your finances shake out, and then decide if you want to pay it off early or not. This would leave you with ~$70k in your bank, some of which you could use to pay off the car. You could also use some to open a Roth IRA this year and next, if you haven't done so already.

The extra equity in the home, while nice, will not help you until you sell it.
avalpert
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Re: Put cash into a home or stock market.

Post by avalpert »

What mortgage rate can you get at different down payment levels?

My guess is you'd be better off with an 80% mortgage at this point and to maintain your liquidity. You also might consider an alternative arrangement to a below market purchase - you could buy at market rate and your grandmother can give you annual gifts up to the gift tax limit to cover the discount. This keeps the IRS from scrutinizing the purchase and keeps the comps up if you want to sell again soon.

You also should ask yourself if you really want to be a homeowner and if so do you really want to own this home.
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Re: Put cash into a home or stock market.

Post by sschoe2 »

First off I'm sure you are going to want to do some updates/remodeling and possibly repairs on grandma's house so hold some money back for that.

Second are you sure you need a house? When you add up insurance, maintenance, property taxes (especially in states like IL/NJ/NY) that will eat away at your investment even more so than expenses at high cost brokerages and funds like Edward Jones.

Finally, are you sure you are going to live in the area long term?
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Nlu822
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Re: Put cash into a home or stock market.

Post by Nlu822 »

climber2020 wrote: Wed Nov 01, 2017 8:39 am More important question: at age 29, do you really want a house and everything that comes along with it?
Trying to take advantage of lower interest rates
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ruralavalon
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Re: Put cash into a home or stock market.

Post by ruralavalon »

Nlu822 wrote: Wed Nov 01, 2017 7:48 am Im 29 and have about 95 k saved outside my 401k. My grandmother will be selling me her house for a bargain $135,000. The homes value is estimated at 165 to 175k. My question is, should I put 90 k in as a down payment? It seems as though I will make money immediately on equity of about 20 to 25k. Or should I put 3.5 to 20% down and the rest in the stock market? I still have 21k in student loans at 2% interest and 3.5K on a car payment. Any thoughts or recommendations on how to spend the 95,000?
Are you sure that you want to buy a home at this stage of life? Even at a bargain price and with low mortgage rates, it's still a matter of whether you really want homeowner headaches or need a house at this stage of life. This is more than a financial decision.

Whether you buy the house or not, I suggest the first priorities for your $95k savings outside your 401k could be:
1) keep an emergency fund sufficient to cover 3 months of basic living expenses;
2) just pay off the $3.5k car loan; and
3) just pay off the $21k student debt.

How much would it take to cover 3 months of your basic living expenses?

How much are you contributing annually to your 401k?

What is your tax bracket, both federal and state?

What rates and terms are you seeing for a possible mortgages?

You can simply add new information t your original post using the edit button.
Last edited by ruralavalon on Wed Nov 01, 2017 10:11 am, edited 2 times in total.
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Topic Author
Nlu822
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Re: Put cash into a home or stock market.

Post by Nlu822 »

sschoe2 wrote: Wed Nov 01, 2017 8:45 am First off I'm sure you are going to want to do some updates/remodeling and possibly repairs on grandma's house so hold some money back for that.

Second are you sure you need a house? When you add up insurance, maintenance, property taxes (especially in states like IL/NJ/NY) that will eat away at your investment even more so than expenses at high cost brokerages and funds like Edward Jones.

Finally, are you sure you are going to live in the area long term?
I plan on living there maybe 5 years. I cant really get any interest in a savings account. Stocks are currently extremely high. I would like to continue to dump money in this house and pay it off completely within 5 years. Then maybe sell
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climber2020
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Re: Put cash into a home or stock market.

Post by climber2020 »

Nlu822 wrote: Wed Nov 01, 2017 9:43 am
climber2020 wrote: Wed Nov 01, 2017 8:39 am More important question: at age 29, do you really want a house and everything that comes along with it?
Trying to take advantage of lower interest rates
You didn't answer the question. Whether or not it's a good deal is irrelevant if buying this thing will limit your options as a young person.
fouroheight68
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Re: Put cash into a home or stock market.

Post by fouroheight68 »

Put 20% down on the house <$27,000>
Pay off student debt <$21,000>
Pay off Car loan <$3,500>
Put 6 months expenses savings
Remainder (if any) invest in taxable account.

Alot of BHer's advise against purchasing real estate. You always need a roof over your head, and owning that roof is a great vessel to increasing your net worth. Yes, historically Real Estate has trailed the stock market in year over year gains, but there are many additional benefits including tax advantages (your mortgage interest is deductible from your income), and the huge fact that every dollar you pay towards principle is going directly back into your net worth. When you are renting you are literally giving every cent to someone else. You will hear people argue against mobility, but I have never seen that as an issue. Example - I bought my first home in 2010 at age 25. I was laid off shortly after, and the market continued to decline. Bad news right? Not really, I just moved in with my girlfriend, rented the property out for my payment, and a few years later I sold for a substantial profit when the market regained. If you don't mind being a landlord (it is really pretty simple if you have good tenants), then mobility is always available.
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quantAndHold
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Re: Put cash into a home or stock market.

Post by quantAndHold »

Nlu822 wrote: Wed Nov 01, 2017 9:52 am
sschoe2 wrote: Wed Nov 01, 2017 8:45 am First off I'm sure you are going to want to do some updates/remodeling and possibly repairs on grandma's house so hold some money back for that.

Second are you sure you need a house? When you add up insurance, maintenance, property taxes (especially in states like IL/NJ/NY) that will eat away at your investment even more so than expenses at high cost brokerages and funds like Edward Jones.

Finally, are you sure you are going to live in the area long term?
I plan on living there maybe 5 years. I cant really get any interest in a savings account. Stocks are currently extremely high. I would like to continue to dump money in this house and pay it off completely within 5 years. Then maybe sell
Why would you pay off the house if you’re planning on selling it right away? You get the same sales price whether it’s paid off or not, and if you don’t pay it off, the money you’d use to pay it off is available for other things.

Back to the original question...is the home really worth more than $135k? Who says? I assume at $135k, this is not one of the country’s hot real estate markets. Are there actually enough comparable sales to get a real valuation on the property? When you go to sell in the future, will there be a buyer out there, or is this in a town that’s struggling to hold onto its population?

What condition is the house in? Does it need a new roof? Foundation? Wiring or plumbing? Windows? Are the kitchen and bath still the old kitchen and bath from granny’s day? All of those things are super expensive. How much will you need to spend to maintain the property? How much to make it look nice to you? How much to appeal to a buyer when you go to sell?

Is this in a location where you could find a buyer, or at least a tenant, if you needed to move for a job opportunity?

Just like a used car, a house that would be worth $165k in perfect condition could easily be worth much less if it’s been lived in for 30 or 40 years and needs maintenance or improvements.

Don’t get me wrong, this might actually be a good deal, especially if you really want to live where the house is. But it also might not be. Housing prices don’t always go up. They tend to swing around. And if they drop, five years might not be enough time for them to come back. And if you’re in a town that’s losing population, the price might not ever come back.

My first place...bought for $103k, and within the first month, it was worth $120k. Yay! Six years later when I wanted to move in with my girlfriend, we both owned houses that were underwater. I moved in with her and rented out my place for 3 years, for less than my mortgage payments were, until I could sell it for enough to barely pay off the mortgage. I took a bath on that place. I’ve done well with real estate since then, mostly because the mistakes I made with the first place taught me to be very careful with valuation.
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ruralavalon
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Re: Put cash into a home or stock market.

Post by ruralavalon »

How much would it take to cover 3 months of your basic living expenses?

How much are you contributing annually to your 401k?

What is your tax bracket, both federal and state?

What rates and terms are you seeing for possible mortgages?

You can simply add new information t your original post using the edit button.
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DrGoogle2017
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Re: Put cash into a home or stock market.

Post by DrGoogle2017 »

I would pay off your student loan and $3.5k loan first before I do anything else.
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Re: Put cash into a home or stock market.

Post by Sandtrap »

Nlu822 wrote: Wed Nov 01, 2017 9:52 am
sschoe2 wrote: Wed Nov 01, 2017 8:45 am First off I'm sure you are going to want to do some updates/remodeling and possibly repairs on grandma's house so hold some money back for that.

Second are you sure you need a house? When you add up insurance, maintenance, property taxes (especially in states like IL/NJ/NY) that will eat away at your investment even more so than expenses at high cost brokerages and funds like Edward Jones.

Finally, are you sure you are going to live in the area long term?
I plan on living there maybe 5 years. I cant really get any interest in a savings account. Stocks are currently extremely high. I would like to continue to dump money in this house and pay it off completely within 5 years. Then maybe sell
There seem to be an assumption that the house will appreciate in value over the next 5 years to make it worth the investment. And, as a seller, normally, you will be paying realtor commissions, and closing costs, depending on your area. And, over the next 5 years the house will not need upgrades and repairs prior to sale. And, that the overhead to owning the home, besides, the mortgage payment, such as property insurance, property tax, etc, will be covered by yourself and also made back in the long run, if the sales price of the house is substantially above what you paid for it. This R/E purchase for a short time frame is a "flipper". You do not plan to rent it out so there's that alternative income stream that is off the table. Can you make it work?
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Nlu822
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Re: Put cash into a home or stock market.

Post by Nlu822 »

quantAndHold wrote: Wed Nov 01, 2017 11:14 am
Nlu822 wrote: Wed Nov 01, 2017 9:52 am
sschoe2 wrote: Wed Nov 01, 2017 8:45 am First off I'm sure you are going to want to do some updates/remodeling and possibly repairs on grandma's house so hold some money back for that.

Second are you sure you need a house? When you add up insurance, maintenance, property taxes (especially in states like IL/NJ/NY) that will eat away at your investment even more so than expenses at high cost brokerages and funds like Edward Jones.

Finally, are you sure you are going to live in the area long term?
I plan on living there maybe 5 years. I cant really get any interest in a savings account. Stocks are currently extremely high. I would like to continue to dump money in this house and pay it off completely within 5 years. Then maybe sell
Why would you pay off the house if you’re planning on selling it right away? You get the same sales price whether it’s paid off or not, and if you don’t pay it off, the money you’d use to pay it off is available for other things.

Back to the original question...is the home really worth more than $135k? Who says? I assume at $135k, this is not one of the country’s hot real estate markets. Are there actually enough comparable sales to get a real valuation on the property? When you go to sell in the future, will there be a buyer out there, or is this in a town that’s struggling to hold onto its population?

What condition is the house in? Does it need a new roof? Foundation? Wiring or plumbing? Windows? Are the kitchen and bath still the old kitchen and bath from granny’s day? All of those things are super expensive. How much will you need to spend to maintain the property? How much to make it look nice to you? How much to appeal to a buyer when you go to sell?

Is this in a location where you could find a buyer, or at least a tenant, if you needed to move for a job opportunity?

Just like a used car, a house that would be worth $165k in perfect condition could easily be worth much less if it’s been lived in for 30 or 40 years and needs maintenance or improvements.

Don’t get me wrong, this might actually be a good deal, especially if you really want to live where the house is. But it also might not be. Housing prices don’t always go up. They tend to swing around. And if they drop, five years might not be enough time for them to come back. And if you’re in a town that’s losing population, the price might not ever come back.

My first place...bought for $103k, and within the first month, it was worth $120k. Yay! Six years later when I wanted to move in with my girlfriend, we both owned houses that were underwater. I moved in with her and rented out my place for 3 years, for less than my mortgage payments were, until I could sell it for enough to barely pay off the mortgage. I took a bath on that place. I’ve done well with real estate since then, mostly because the mistakes I made with the first place taught me to be very careful with valuation.
Thanks for the heads up on your experiences.
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Nlu822
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Re: Put cash into a home or stock market.

Post by Nlu822 »

Seems to be the consensus is to put no more than 20 % on the home. I'm unsure if I want to live there my whole life. Is the 20% still worthwhile if I'm unsure if I want to always live there. Can you get rid of the private insurance with less than a 20 % down payment?
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Re: Put cash into a home or stock market.

Post by MrPotatoHead »

You may have one of the rare opportunists to get into a rental property with a positive cashflow. If you are going to be in the area for 10 years or so (I note you said sell after 5) you might have real winner here. I would check the rental rates and kick the tires on the items that need replacement with a contactor. Because of the steep discount to alleged market value you are getting you may be in very good shape and be able to have the luxury of discounting the rent in order to assure a quality tenant who will be with you fro the long term. Also renting this property with a purchase option to the right tenant might almost ensure you can get out on 5 years at a profit. I would take a look at the rental option strongly.

As far as home ownership at your age - I would be cautious. There is saying, did you enjoy the weekend or are you a home owner.
BogleBoogie
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Re: Put cash into a home or stock market.

Post by BogleBoogie »

climber2020 wrote: Wed Nov 01, 2017 8:39 am More important question: at age 29, do you really want a house and everything that comes along with it?
Why? Because he's getting it at a great price. If it were at market value, I would probably ask this question too. But at a below market price this is a no-brainer. Put the minimum down payment to avoid paying PMI. Save a chunk (6 months in mortgage payments) to be safe. Take the rest of the money and invest it in retirement account. Once you move in there may be some unanticipated costs for repairs, be ready for those. This sounds like a great opportunity.
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Nlu822
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Re: Put cash into a home or stock market.

Post by Nlu822 »

Thanks for the insights everyone. Opened me up to more possibilities
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Meg77
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Re: Put cash into a home or stock market.

Post by Meg77 »

You're in a great spot! Buying this home makes a ton of sense even if you don't want to be a homeowner forever due to the great gift your grandmother is effectively giving you by discounting the price so much. Here's what I would do:

1. $30,000 - Buy the home and put 20% down on the purchase and get a 30 year fixed mortgage (this will enable you to cash flow better if/when you move and decide to rent it out instead of sell it).

2. $5500 - Max out a Roth IRA for 2017 if you haven't already - i.e. put $5500 into a Roth IRA (assuming you have earned $5500 this year you should qualify).

3. $25,000 - Pay off all your debts immediately.

4. $5,500 - In January max out a Roth IRA for 2018.

5. Leave the remaining $25K in cash for reserves, unexpected home expenses, continuing education, etc.

6. Increase your 401k contributions if necessary to make sure you're saving at least 15% of your income toward retirement between that and the Roth IRA.

7. Consider enrolling in a high deductible health care plan which would enable you to contribute to a Health Savings Account next year. Max that out even if it means dipping into savings a bit.

Repeat every year until you can afford to retire! Increase savings/investments if you want to get there sooner.
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AnalogKid22
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Re: Put cash into a home or stock market.

Post by AnalogKid22 »

Check out this excellent podcast on this very subject: Cult of Home Ownership
ddurrett896
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Re: Put cash into a home or stock market.

Post by ddurrett896 »

Nlu822 wrote: Wed Nov 01, 2017 7:48 am Or should I put 3.5 to 20% down and the rest in the stock market? I still have 21k in student loans at 2% interest and 3.5K on a car payment. Any thoughts or recommendations on how to spend the 95,000?
Pay off car - $3,500
Put down on house - $35,000

Do a 15 year mortgage and bank the $56,500.

Definitely max out Roth and big chunk of 401k each year.
H-Town
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Re: Put cash into a home or stock market.

Post by H-Town »

Nlu822 wrote: Wed Nov 01, 2017 7:48 am Im 29 and have about 95 k saved outside my 401k. My grandmother will be selling me her house for a bargain $135,000. The homes value is estimated at 165 to 175k. My question is, should I put 90 k in as a down payment? It seems as though I will make money immediately on equity of about 20 to 25k. Or should I put 3.5 to 20% down and the rest in the stock market? I still have 21k in student loans at 2% interest and 3.5K on a car payment. Any thoughts or recommendations on how to spend the 95,000?
1) Pay off 21k student loan.

2) Pay off car loan

3) Why are you buying your grandmother's house? Is it in your long-term plan or is it just a knee jerk decision? If it does not fit in your long-term plan, just help your grandmother to sell the house on the open market.

4) If the house fits your long-term needs, then find out why your grandmother needs $135k. Does she need it right away after closing? If not, work out a plan to pay her back monthly with your income. This way, you don't have to take on a mortgage, PMI, etc.
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Re: Put cash into a home or stock market.

Post by SkunkRiverBandit »

I don't think 5 years is long enough to warrant buying the house with the risk involved. As others noted, you could easily have 2 or 3 things break and put you underwater on the deal, and 5 years isn't enough to appreciate enough on the market or recover from it. And, the market value could go down in that time. I don't like the deal considering the lack of commitment to it. I don't recommend becoming a landlord and renting it out either. That's a fulltime job, the rental income is earned unless you're a slumlord. Going at it for low interest rates with a 5 year horizon doesn't make a lot of sense to me either. In general, I'd never buy property unless it was at least 10 years that I intended to stay there.

I do understand seeing value and wanting to take advantage of the opportunity, I would buy it and flip it immediately if it's really worth what you think it is. If that's not kosher with the family or grandma, then don't bring on that headache. I'm assuming the good price is because she wants you to have it, not flip it.

Better yet, agree to be her real estate agent, sell it on the open market at full value and ask for a 5% fee for the job. That's probably your best option, least hassle. Heck, ask her if you act as her real estate agent if you can have the difference between the price she offered to sell it to you and the final sale value. If she's ok with that, hands down the way to go, all the money none of the risk or comparatively, much hassle.
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ruralavalon
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Re: Put cash into a home or stock market.

Post by ruralavalon »

Nlu822 wrote: Wed Nov 01, 2017 4:18 pm Seems to be the consensus is to put no more than 20 % on the home. I'm unsure if I want to live there my whole life. Is the 20% still worthwhile if I'm unsure if I want to always live there. Can you get rid of the private insurance with less than a 20 % down payment?
If you buy at least 20% down will be important.
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Sandtrap
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Re: Put cash into a home or stock market.

Post by Sandtrap »

Nlu822 wrote: Wed Nov 01, 2017 4:18 pm Seems to be the consensus is to put no more than 20 % on the home. I'm unsure if I want to live there my whole life. Is the 20% still worthwhile if I'm unsure if I want to always live there.
IMHO it matters not whether you are going to live in the house forever or not. Raise a family and grow old and play with grandkids.
Look at a home purchase as an investment. Take all the attachment or emotion out of it, all the "what if's". Look at the purchase as one would buy on the open market, not family. Nobody wants to lose money on a home purchase, or be "stuck with it", unable to sell or "bail out" of a bad situation.
So, consider the purchase price relative to area curb value. Potential annual appreciation rate. Improvement and maintenance costs. Other annual costs. If financing, consider those quantifiables. Sometimes the greater the leveraging the more the potential downside. Thus 20% as a baseline, but not always.
Consider if you can sell it in 5 years without losing money. Or 1 year without losing money. Consider if you can rent it out without losing money, or make money as an alternate income stream if life changes should happen.
Like the stock market, R/E can't be predicted with certainty. Thus, have all your bases covered going in and while owning it.

Tip: Sometimes the best way to save money on a bargain sale at the shopping mall is not to go there in the lst place.

Some actionable things to consider amongst many options you can take.
I hope this is helpful.
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jb1
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Re: Put cash into a home or stock market.

Post by jb1 »

Your grandma is selling you her house... to her grandson.. for only 30k off and you think its a discount... What?
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ruralavalon
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Re: Put cash into a home or stock market.

Post by ruralavalon »

jb1 wrote: Fri Nov 03, 2017 11:13 am Your grandma is selling you her house... to her grandson.. for only 30k off and you think its a discount... What?
That's 25% off.
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Jackson12
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Re: Put cash into a home or stock market.

Post by Jackson12 »

Nlu822 wrote: Wed Nov 01, 2017 7:48 am Im 29 and have about 95 k saved outside my 401k. My grandmother will be selling me her house for a bargain $135,000. The homes value is estimated at 165 to 175k. My question is, should I put 90 k in as a down payment? It seems as though I will make money immediately on equity of about 20 to 25k. Or should I put 3.5 to 20% down and the rest in the stock market? I still have 21k in student loans at 2% interest and 3.5K on a car payment. Any thoughts or recommendations on how to spend the 95,000?
Because she is your grandmother, is it fair to assume she will be open about looming maintenance issues? On a related note, Is the house well maintained? Can you afford the real estate taxes and extra costs for such things as sewer charges, lawn mowing, trash pick-up, etc?

If your budget will be tight, I'd question the expense. Home ownership may be your dream but not necessarily the best financial decision. If we'd rented for many years before buying a home , we'd have come out ahead.

But home prices appreciate very gradually in our city.
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Re: Put cash into a home or stock market.

Post by jb1 »

ruralavalon wrote: Fri Nov 03, 2017 3:50 pm
jb1 wrote: Fri Nov 03, 2017 11:13 am Your grandma is selling you her house... to her grandson.. for only 30k off and you think its a discount... What?
That's 25% off.
Idk just seems odd in terms of family values. My grandparents immigrated from italy, no english, little money, bought a duplex in NYC for cheap. As they got older and could no longer take care of it they passed it on to my father free of charge who then rented it out etc.. Wound up selling it for 1 million cash. Again, just the whole concept seems odd to me from OP who is has school debt, and then his own grandma wants to sell him something etc.. I assume the grandma is in her 80's.. Not quite sure what shed do with 135k lol.. Id go out of my way to buy another property OP.

To answer your question OP. Id put 20% down and rent it out which is legal. If you do a FHA loan you have to live in it as well if you choose to rent it.
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