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When to Prioritize Saving for a Down Payment?

Started by OMRTD, December 30, 2019, 07:11:46 PM

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OMRTD

Hey Everyone,

Long time lurker/FS reader, first time contributor in any form. I've finally figured out a rather solid financial footing since graduating from college earlier this year. I found a full time job near my home town, so I managed to knock out all $15k of my student loans while living at home. Now, I'm trying to prepare myself for the coming year and set priorities that make sense given my situation.

I live in a HCOL area, where it'll likely take me 2-5 years to save for a serious down payment on a home (around 20%, to avoid PMI). I really think that I want to be invested in real estate sooner rather than later, but I'm quite disheartened by the reality of how long it will take to save and how high that payment will be when I do manage to get a loan.

For 2020, my plan is currently to fully fund my 401k and Roth IRA per many of Sam's post and a lot of advice across the internet. However, even living at home, this would only really allow me to save about $10k/yr while still living at home. towards the downpayment (which is far below the $80-100k I've been projecting given current market prices).

Am I wrong for prioritizing my retirement accounts in this situation? Should I just move out and adopt an ascetic lifestyle for half of a decade and hope for the best as far as salary increases/bonuses to get me to my target?

I could really use some feedback, it's got me a bit bummed out despite the fact that I was excited to land a job with a salary just below the median income for my city. Perhaps I just need to reframe the problem in my head, maybe I should reallocate my priorities, or maybe I just need to hustle and make more income?

It's not evil to rent for a bit, is it? I feel sick throwing all that money away when my parents live so nearby, but I've paid my debt from school, I don't like continuing to mooch off of them either.

Thanks all!

couchfi

Buying isn't always the best option, put the numbers in a rent vs buy calculator and see if it makes sense for you https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

It depends on your local market and tax rates, although the trump tax changes in 2018 eliminates a lot of the tax advantages if you're in a high tax state so that calculator might not be accurate (set tax rate to 0 in that case).

As for buying when you're young and (assuming) without a family? Have you heard of "house hacking"? It's the buzzword for owning and then renting out to room mates. Also depends on market but it can change the financial picture drastically, maybe to the point where even getting mortgage insurance is worth it.

WengerTodd

Quote from: OMRTD on December 30, 2019, 07:11:46 PM
Hey Everyone,

Long time lurker/FS reader, first time contributor in any form. I've finally figured out a rather solid financial footing since graduating from college earlier this year. I found a full time job near my home town, so I managed to knock out all $15k of my student loans while living at home. Now, I'm trying to prepare myself for the coming year and set priorities that make sense given my situation.

I live in a HCOL area, where it'll likely take me 2-5 years to save for a serious down payment on a home (around 20%, to avoid PMI). I really think that I want to be invested in real estate sooner rather than later, but I'm quite disheartened by the reality of how long it will take to save and how high that payment will be when I do manage to get a loan.

It's not evil to rent for a bit, is it? I feel sick throwing all that money away when my parents live so nearby, but I've paid my debt from school, I don't like continuing to mooch off of them either.

Thanks all!


As with anything in life, there's no right way to do something, even on Government forms. So there's a lot of different ways you can do this, you have to pick the one that's the best for you:

1 - Get a better job or work harder and make more money (not meaning that as an insult, but that's one option).

2 - Live an austere lifestyle for a set period of time so you can maximize your savings potential

3 - Sell everything you have that you don't really *need* and invest that money in hopes of doubling / tripling it.

You can also try all three...


And, on the flip side, there's the aspect of actually purchasing the home when you feel that you're ready. You can...

1 - Try to get a good deal on new construction (where available)
2 - Buy a house that's trashed and needs total renovation
3 - Continue to wait around for a home that you like, and get in early and make a deal



Personally, what I try to do a little bit of some of these. When I really need to buckle down and save more, I start going through my house looking for things I can sell. I'm not selling my soul or anything, but our interests change, and maybe hobbies that I once enjoyed... I don't care so much about anymore. So I'll sell stuff. I'll also live austere so I don't incur any additional costs, I'll make my lunches, and make sure we don't eat out very often. These are all good things to do anyway. And then, the last two homes I've purchased have been total wrecks... basically all-original homes from the early to mid-80s. Not horribly old, but clearly old enough that they need total renovations at this point, but structurally are otherwise "solid." I always buy in a nice area, and the motto is to buy the cheapest house with the most potential in the nicest neighborhood I can find.

So now, I've got more money than I planned for, and I'm spending less money on the home that I'm going to be purchasing.

Home renovations are not hard... they aren't. I hate to be blunt, but if people with no education whatsoever can come across our border and do it, then so can you. There are plenty of YouTube videos that explain how to install kitchen cabinets, sweat pipes, replace an electric receptacle, or lay tile... it's all easy stuff you can do. The only things I won't do myself are things that I know it's cheaper for me to pay than it is for my time/cost value, and anything that endangers my life (roofing, and 240+ volt electrical work).

What's better, when you renovate the home yourself, you can do it at your own pace, and your own budget. You generally save 75% since you're doing all the labor yourself, and THAT is the most expensive cost. Even better, every dollar you spend essentially goes directly into equity. In a hot real estate market, it's sometimes double or triple. I'm a computer programmer and a cybersecurity engineer. If I can lay tile, put up a wall, frame a door, whatever... then so can everyone else.


You also want to consider a few other factors:
1 - How much you're spending by renting, versus what you would spend if you were paying a mortgage? Would you go bigger, or stay the same. That question answers how much less (or more) you would be spending.
2 - What is the potential gain in home value versus the potential additional earnings in the stock market you'd see? (Gain would be determined both by equity growth, and principle payment)