More House or More Investing?

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Dynasty90
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More House or More Investing?

Post by Dynasty90 »

Please excuse the dumb question...

I am in a position where I will be getting married and moving from a condo to a home in the next 1-3 years. Currently, I am 26 and she is 24. When we are married, our household income will be about 105k gross. I am not sure what the wiser long term financial decision would be in our situation.

Let’s say we have an “extra” $500 - $1,000 each month. Do we take that “extra” money and invest in 401k/IRAs and live in a smaller, modest home or do we use the money on a larger mortgage monthly payment for a larger home we envision myself living in for 20+ years?

Currently she and I are not maxing out our 401k and IRA retirement accounts.

I realize there is risk in both situations. No one can predict what the markets will look like in 20+ years. Furthermore, no one knows what a 250k home in my area now will be worth in 20+ years.

So, do we omit maxing out and growing our 401k/IRA for a larger home?

I would love to get your opinion. What would you do in my situation?
Tamalak
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Re: More House or More Investing?

Post by Tamalak »

I'm in the same general boat as you (looking for a house and trying to decide how much to get vs. how much to invest).

The strong impression this process has left me with is that housing is a *terrible* investment from a pure value-appreciation standpoint. It's expected to gain like %1 or %2 per year going forward on average, and a house is a badly diversified asset so it's a high risk %1-%2 .. even worse!

That means, buying less house will almost definitely end you up with more money, if you invest the savings. Whether that "investment" is increasing your 401k or just buying index stocks and bonds on your own.

Of course nobody sane buys a house just to speculate on its price. You live in it. So only buy as much house as you will actually use and enjoy and not one square foot more. If it will bring you real happiness (even minus the maintenance) then consider it, but no more.

(before considering everything else, definitely max out the "matched" part of your 401k. That is free money)
bubbadog
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Re: More House or More Investing?

Post by bubbadog »

Easy, More investing! At your ages the benefits long term will be tremendous.
BW1985
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Re: More House or More Investing?

Post by BW1985 »

To me a home is a consumption so I would not purchase a more expensive house just because you can afford to.

Buy what you need, save the rest.
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bertie wooster
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Re: More House or More Investing?

Post by bertie wooster »

Max out your retirement accounts (assuming you have an emergency fund - if you don't than fund that first) and then start working on your downpayment.

You are in your mid 20's - give yourselves time to enjoy the beginning of your marriage and then figure if/when/how many kids you want. Once you have an idea of that in a few years (and have been maxing retirement savings and funding house downpayment) start looking at what kind of house you want to settle in.

Good Luck!
runner23
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Re: More House or More Investing?

Post by runner23 »

I have had this dilemma for quite some time as well. Me and my wife are 26. Grossing $200k a year. Currently renting @ 1400 a month in Atlanta. We are maxing out 401k and IRAs each. We could have forgone that over the last 2 years and basically bought a house with 20% down this year. We decided long term investing is better at the moment as we can not get those tax deferred and ira eligible dollars back in the future. We will buy a home in a couple years.
A440
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Re: More House or More Investing?

Post by A440 »

Go for the investing route using low-cost index funds. Start the investing snowball rolling now, and it will be huge when you are ready to retire before all the others that can't. :D A bigger house comes with a bigger tax bill, more yard to mow, more rooms to heat/cool/vacuum/decorate, etc. Just get what you need and avoid the headaches of a bigger home.
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whodidntante
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Re: More House or More Investing?

Post by whodidntante »

A random house in the United States rates to be a terrible investment. Though it's possible you will get very lucky and buy in a town that will boom.
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MikeWillRetire
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Re: More House or More Investing?

Post by MikeWillRetire »

If you and your spouse are both working, then you will be spending very little time in your house, especially if you have kids and a dual income. And the little time you do spend there, you will be sleeping or maintaining it. That's my experience.
Teague
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Re: More House or More Investing?

Post by Teague »

I vote for the smaller, more modest home. These usually come attached to more modest neighborhoods, and more modest (but not necessarily smaller) neighbors. Not only will you be able to invest the difference, but there will be less pressure to "keep up with the Joneses" next door. So even more savings available to you. And if you avoid lifestyle creep, you can retire earlier.
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TroutMD
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Re: More House or More Investing?

Post by TroutMD »

Your trying to justify the house as a good investment. A house is not necessarily a bad investment, but it's absolutely terrible compared to a tax deferred account.

Even though you are sure your buying a house in a market that will be hot and appreciate 1000%, you probably have as equal chance of that being successful as picking the next Appel stock.
magicman
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Re: More House or More Investing?

Post by magicman »

Max out retirement first. You can always sell and purchase a different home later on. You cannot make up for lost tax advantage account time.
Impromptu
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Re: More House or More Investing?

Post by Impromptu »

I think the biggest flaw in the buy the bigger house scenario is that you think you will live in that house for 20+ years. At your stage in life this is unlikely to be a "forever" type house. Get the smaller house now, invest in all of your tax advantaged accounts, grow into your income slowly, let your upper middle class income accumulate, and buy a bigger home later. I think this will result in a significantly higher net worth in the future with many more options.
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czeckers
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Re: More House or More Investing?

Post by czeckers »

Smaller house. Your needs will change dramatically if children enter the picture: one of you may want to stay home, and you'll be more concerned about schools, proximity to day care< etc. In my experience, couples who buy a house before children almost invariably move to a different house. Might as well save up as much money as you can right now to maximize duration of compounding.
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Dynasty90
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Re: More House or More Investing?

Post by Dynasty90 »

MikeWillRetire wrote:If you and your spouse are both working, then you will be spending very little time in your house, especially if you have kids and a dual income. And the little time you do spend there, you will be sleeping or maintaining it. That's my experience.
Very good point. We both plan on working even when children are in the picture.

Great replies so far!
BW1985
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Re: More House or More Investing?

Post by BW1985 »

Dynasty90 wrote:
MikeWillRetire wrote:If you and your spouse are both working, then you will be spending very little time in your house, especially if you have kids and a dual income. And the little time you do spend there, you will be sleeping or maintaining it. That's my experience.
Very good point. We both plan on working even when children are in the picture.

Great replies so far!
I would buy based on your needs now or in the near future, example if planning a baby you may like a second bedroom for a nursery or a second bathroom for guests.

I would not buy a 4-5 bedroom 3000 sq ft house because you plan on having 3 kids, eventually. Things can change.

Hope that makes sense.
Chase the good life my whole life long, look back on my life and my life gone...where did I go wrong?
carofe
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Re: More House or More Investing?

Post by carofe »

I would formulate the question in a different way: How much house can I afford (so that I can still max out my investments towards the goal of being financially independent)? The rule of thumbs: a house that it is not more than 2x your salary, even if you had a good down payment.
Also, I think I read before that the average time a homeowner lives in his house before selling it is around 5 years. You may want to sell the house anyway eventually.
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Valuethinker
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Re: More House or More Investing?

Post by Valuethinker »

Dynasty90 wrote:Please excuse the dumb question...

I am in a position where I will be getting married and moving from a condo to a home in the next 1-3 years. Currently, I am 26 and she is 24. When we are married, our household income will be about 105k gross. I am not sure what the wiser long term financial decision would be in our situation.

Let’s say we have an “extra” $500 - $1,000 each month. Do we take that “extra” money and invest in 401k/IRAs and live in a smaller, modest home or do we use the money on a larger mortgage monthly payment for a larger home we envision myself living in for 20+ years?

Currently she and I are not maxing out our 401k and IRA retirement accounts.

I realize there is risk in both situations. No one can predict what the markets will look like in 20+ years. Furthermore, no one knows what a 250k home in my area now will be worth in 20+ years.

So, do we omit maxing out and growing our 401k/IRA for a larger home?

I would love to get your opinion. What would you do in my situation?
If you live in the high demand areas (SoCal, Bay Area, maybe Portland and Seattle, Boston, NYC, DC) there may be merit in buying. We cannot call prices, but these areas, due to limited land supply and zoning, have tended to go up faster than inflation for decades on end.

In most of the rest of the US, housing hasn't been a great long term investment. You "right size" when you have a genuine need (eg children on the way). In the meantime you favor investing.

So the general rule is to favor investing, but there may be exceptions in the aforementioned metropolitan areas.
10YearPlan
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Re: More House or More Investing?

Post by 10YearPlan »

BW1985 wrote:
Dynasty90 wrote:
MikeWillRetire wrote:If you and your spouse are both working, then you will be spending very little time in your house, especially if you have kids and a dual income. And the little time you do spend there, you will be sleeping or maintaining it. That's my experience.
Very good point. We both plan on working even when children are in the picture.

Great replies so far!
I would buy based on your needs now or in the near future, example if planning a baby you may like a second bedroom for a nursery or a second bathroom for guests.

I would not buy a 4-5 bedroom 3000 sq ft house because you plan on having 3 kids, eventually. Things can change.

Hope that makes sense.
Not to take away from the main point, which is, I think in your case, it makes sense to invest first, upgrade house later...but I think the housing decision is a deeply personal one, based on one's lifestyle. I am part of a dual career couple, with two kids (now 8 and 11). I feel like I am at home all the time. We entertain a lot (our choice, we love to do so), our kids have their friends over a lot, and we just generally hang out as a family here quite a bit. That may change as they get a bit older but for now, our house is truly our command center and it is important to me that I love it. All that said, I invested first and would recommend you do the same. There will always be an opportunity to upgrade later, if you decide to do so. I am also of the opinion that you should squeeze in as much travel as you can now, while you're young and before kids come along. I didn't do that, and now regret it.
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Tycoon
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Re: More House or More Investing?

Post by Tycoon »

Our experience was that more investing proved to be magnitudes better than more house.
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am
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Re: More House or More Investing?

Post by am »

You should get the cheapest house possible that meets your needs. As others have said, this is a consumption item and a money sink. The more house you have, the more money you spend on mortgage, taxes, upkeep, furnishing, etc. In most areas, the more expensive the house, the tougher it is to unload and the higher the transaction costs.
kdsunday
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Re: More House or More Investing?

Post by kdsunday »

I would suggest the least amount of house you are comfortable living in. In addition to what many others have said above (being able to increase how much you are investing), you are also in essence training yourselves to get by on less - which will help move the date of whenever you will be financially independent that much closer.
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Dulocracy
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Re: More House or More Investing?

Post by Dulocracy »

I decided I wanted to get my forever home in the beginning. It was more house than I should have purchased. I had no kids. Now that I have my 1st kid, school districts changed. If I do not want my child in the bottom 40% of schools, I have to move. Many things can change. Start small. Do not buy if you are not going to be there for 5 years. Buy a house that will last you 10. Keep costs low and savings high. If someone had convinced me to put more money into retirement accounts at that time, I would be much better off.

Start small and invest the rest.
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kd2008
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Re: More House or More Investing?

Post by kd2008 »

I concur with posters pointing out that bigger house when both of you are working means more maintenance and less enjoyment. Simply because we have finite time and money at our disposal.

Have a look at http://thefinancebuff.com/looking-at-th ... cture.html

http://thefinancebuff.com/lifestyle-des ... -live.html

Some of it may not be applicable to your case, but try to look at it as a deliberate choice. Both of you have great incomes at your age. Take advantage of it and maximize tax deferred savings.
auggiedoggies
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Re: More House or More Investing?

Post by auggiedoggies »

I'll go a bit against the grain here and say that it's a very personal choice, based on the needs and wants of you and your wife.

My wife and I wanted a bit bigger house with a larger yard. We are similar in age and income to you and your wife. We enjoy doing the yard work and landscaping, and the extra space and yard has been amazing. We spend a lot of time at home, and it's nice to enjoy coming home everyday. We also love our neighborhood. And I don't know if I buy that there's significantly more maintenance with a larger house. The large expenses (roof, siding, flooring, plumbing, etc) are not exponentially more expensive with a larger house, at least not in my experience. Windows could be if you have more windows in a larger house. We have found that we spend about $25 more a month on heating/cooling (went from 2k sq ft to 3.5k), but that's very manageable for us.
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BolderBoy
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Re: More House or More Investing?

Post by BolderBoy »

magicman wrote:Max out retirement first. You can always sell and purchase a different home later on. You cannot make up for lost tax advantage account time.
+1. This is the soundest advice if you can follow it.
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