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What’s your age and asset allocation?
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Pro
What’s your age and asset allocation?
SPG app updated for me but not combination
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Sounds like a pretty simple math problem you can figure out in excel. Biggest assumptions are appreciation of house and stock market gains.
I will say I’ve made hundreds of thousands in homes in a very short amount of time. Stocks can’t do that but most people also won’t have they result.
Pro
Agreed, but folks should look at the cash on cash return and take risk into account. If you look at the annualized returns by asset class for example, US equities beats REITs generally, so any specific luck is generally due to leverage.
https://www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/return-map
I would look broader - it really depends on your life goals and the quality of life you want. My brother went big on a home, and it’s been a stretch for them - but he wanted a big, new home in a nice gated neighborhood. He doesn’t want a second home and he and his family don’t vacation. He also underestimated cost of maintenance, upkeep, and furnishing. They’ll grow into it (both surgeons) but he acknowledges it’s been a bigger “investment” than anticipated.
On the other hand, my husband and I love to travel and are saving for a second home - we purchased less house than we could afford for this reason. Maybe someday we’ll upgrade (no kids yet), but we could easily fit kids here and really like having the extra income each month to choose where we put it. ($775k home on $400k+ annual income).
Correct; that was more than we were comfortable spending, largely because we have other goals for our money and didn’t want to be house poor. Just three years ago, our HHI was half of what it is now. We have other goals and needs for our money: savings, retirement, childcare soon, perhaps a country club, second home… we didn’t want all of our income to be tied up in a mortgage payment, even if we can “afford” it.
Rising Star
There’s no right answer. There is at least one wrong answer - being house poor. Meaning, you bought such an expensive house that servicing the debt, insurance and taxes leaves you with no money to fund your other goals.
Anything under that is some degree of fine, depending on your goals. Our first house together was supposed to be a starter, just for 5-7 years or so, at which point we’d upgrade to something bigger and nicer. That was 18 years ago. We are a little cramped but in net, we would rather be a little tight for another year until a kid moves out of our paid-off house than take on ~$humungous debt at this relatively late stage in our life.
I guess the moral is that if I had any idea that I might stay longer, I would err on the side of going bigger. But it’s hard to know what the future will bring.
Very interesting to see it the other way around, because a lot of times I see people buying a way bigger and more expensive house than they need. But that's great that you made the best of it and have a home now that's paid off! Congrats!
Short answer almost always no to buying expensive home.
All expenses go up with expensive homes, they don’t appreciate as much as most other assets, especially expensive homes. And there’s no dividends and the rental income is much lower ratio to the price compared to cheaper homes.
Unless you love the home, don’t buy it for an investment
That's super helpful! Thanks! :)
Pro
An appreciating home means nothing to your pocket until you sell it.
A cheap home with manageable payments means money in your pocket every month to invest.
Also worth noting that when you get a mortgage (assuming a standard mortgage and not an ARM), the monthly payment amount is locked in. Rent tends to rise annually, and those increases are usually going to the pocket of whoever owns the house or apartment complex.
There are arguments that renting is better than buying in overvalued markets (most Major DMA’s) if you invest what your down payment would be in fast growing assets, but that’s also a riskier play.
Living below your means and investing your extra income will always come out ahead. Houses are expensive, and I’m not just talking about the mortgage payment. Buy what you feel comfortable in, but I would take a smaller house in a nicer neighborhood over a larger house in a different neighborhood just because of all of the other costs associated with owning a home, all else being equal.
Thanks so much! That really helps!!
Overall your strategy should consider a large number of drivers - returns, diversification, liquidity, risk, lifestyle/budget, minimizing taxes, future potential, etc. when you do this you should come up with a decent range of house you can afford. For me, I focus on 20% down for Primary residency or 25% for inv. Prop. using cash, 401k loan that i can pay back in under a year (try and keep equity in tact). Then I look at monthly payment and cash flow and want a budget where I still have left over money to invest monthly (note - for 6 months to a year this portion of budget will overpay 401k loan) triangulating with what rent would be. At the same time, when buying ask yourself what is the thesis for why your house will appreciate…from a macro perspective - inflation,
Housing increases (largely out of your control but your forecast matters and your timeline impacts this), locally is is an improving neighborhood, limited supply (waterfront or specific neighborhood), personally can you put in work/improve it…sweat equity/light remodeling/repairs add value, large contractor led projects, new appliances, roofs, etc do not…).
This is great!! Thanks so much for sharing :)
This is a really odd question to me. On one hand you have your home which is not a liquid asset and on the other you have stocks. Also you are treating your home that you live in as an investment, which is not a good idea because you would have to sell it to access the equity or get a HELOC.
I would recommend if you want to diversify into real estate wait until you can afford rental properties. Then every year you can make the rent or sell decision based on the investment ROI and equity appreciation.
Definitely a great investment to build equity! Just want to make sure you see it as something that would be hard to sell/gain access to.
The budget decision for a house to me was less on the investment/appreciation piece and more on personal finances. As in, how much I would be saving on rent versus the mortgage payments (adjusting for equity).
I am not sure what your goals are for the house, but we purchased our first home with the intent to rent, so we made sure we were in a rentable neighborhood (near public transit, near military base/colleges, etc.). This is a great way to get out of paying rent and also starting your real estate empire!
Pro
The latter is usually your better bet - except in unusual circumstances, the stock market beats home appreciation/equity built. When you add in principle, interest, taxes, HOA fees, HOI, and maintenance over time, a home is not a good investment.
Great, thanks so much!! That definitely helps! :)
If you ignore the recent property price hike, the property prices increase at rate of inflation. I.e close to 2% in US
I have come up with a simple thumb rule for real estate investment: “2+2+2 rule”.
- total cash out for a property is approximately 5-6% when 80% is financed. Assume 6%
- 2% is principal payment and therefore paying yourself
- 2% is price appreciation
- the remaining 2% is your net monthly cost.
2 other factors to consider:
- real estate transaction cost 10% (commission, staging etc.) so minimum investment horizon is 5year+
- keep in mind that you can not split the property. So one property of 400k is not same as 2 properties @200k/piece.
This is great - thanks so much for this insight! Definitely helps me understand better :)