Got a windfall. Should I buy a home in my expensive city?
April 29, 2017 4:50 AM   Subscribe

Recently came into some money, trying to figure out how to invest it. I have tried talking to the usual people (financial advisor, accountant) but the answers have been pretty noncommittal and inconsistent. Could use some help, snowflake details inside.

This is the situation:
- I have $250k (net) from a recent windfall.
- My overall financial health is not amazing, but I've done ok. I have a good job, about $20k in savings, and a small retirement account (maybe $50k). Very little debt aside from student loans.
- I am married with children.
- Currently renting, have never owned a home.

I live and work in a very expensive US city. We are in it for the long haul — we expect to live here for a long time if not forever.

My question is: should I buy a home, considering that almost the entire sum would go to the down payment? Around here starter homes/condos with at 2-3 bedrooms are in the $800-900k range.

Part of me is like "fuck yeah, stop throwing rent down the drain!" and the other part is like "wait, it would be really nice to put a chunk of money into the stock market and build a diversified portfolio instead of literally putting all this money into one place"

Am I missing something? Is the answer "obviously you buy a house" or is it more complicated than that?
posted by anonymous to Work & Money (12 answers total) 3 users marked this as a favorite
 
A few thoughts:

1. Have you put the numbers for your particular situation into the New York Times Rent vs Buy calculator? That might help you get some more concrete numbers about whether it would make sense financially to put your windfall into a home of your own, or to continue to rent in your specific environment.

2. There's no reason you can't do a bit of both, with the numbers you describe. 20% down on a $900K place is $180K. That would leave about $70K left over which would more than double your nest egg. Or, use some of that to get rid of student loans--also a win.

3. What does your gut say about being rooted? How about your spouse? For me, this is a really big deal. After having been a homeowner for a decade, my family went back to renting for a few years following a cross-country move to a totally new area. I absolutely hated it. I'm back in my own place again and so much happier. Other people just detest the responsibility of ownership, or for that matter the interdependence of condo associations. Figuring out what matters here for you and yours is a big part of making the happiest choice.
posted by Sublimity at 5:02 AM on April 29, 2017 [10 favorites]


Put together a 6 month emergency fund, pay off your debts, then throw the rest into a house.
posted by blue_beetle at 5:29 AM on April 29, 2017 [10 favorites]


Check out /r/personalfinance over on reddit, they may have strong feelings about your investment options - but for an opinion: I live in an area with comparable values, and I'd 100% buy a home (especially if I had kids).

I don't think it's great to treat your actual residence as an investment property per se (because everyone's got to live somewhere [and pay for it], and renting v buying might just be a wash over 30 years, as far as that goes). Other than level of comfort with ownership, the big thing, imo, is having the chance to build equity to use when it's time to retire, and you're looking at $5k/month for a non-abusive retirement home.

Even if there's a bit of a bubble, it's very unlikely it's going to lose value over the long term, in a market like that, barring some kind of (probably global) catastrophe. There are only yay many homes to go around, and tons of people wanting them, that isn't likely to stop. So it's more or less a rock solid place to put money. (Although if you're on a fault line or wobbly coast or something, that's possibly another story.)

It's not particularly "liquid" (or whatever) though, so perhaps not ideal (as an investment) if you foresee needing to shuffle money around in the short term. (Then again, if you hit some sort of personal emergency, you could always get a line of credit, with that as an asset in your favour). But given your situation (family with kids, not going anywhere), I don't think you could go far wrong buying a home.

One thing to think about would be job security/your ability to make payments, and what kind of mortgage would work for you. But even if for some reason you all of a sudden couldn't make the payments, you could probably sell in a heartbeat. And, odds are a monthly mortgage would be slightly cheaper than renting, or it often works out that way here.

(If you have the option to get an actual house or duplex and avoid condo maintenance fees, go for that.)
posted by cotton dress sock at 5:49 AM on April 29, 2017 [8 favorites]


Even if there's a bit of a bubble, it's very unlikely it's going to lose value over the long term, in a market like that, barring some kind of (probably global) catastrophe

I am admittedly in a midwestern city where cost of living is low, but nearly a million dollars for a 2-3 bedroom place seems insane. Regardless of what the price is, though, the important question is whether it's best to rent or buy in your area. The aforementioned NYT calculator can help with that, as can monthly mortgage payment calculators. Popping in the numbers you mention above (900k with a 200k downpayment on a 30yr mortgage), you're looking at between 3500 and 4000 dollars a month, depending on taxes, insurance, etc.

If that's substantially higher than what you're paying in rent, or more than you can reasonably afford, then it's unlikely to make sense to buy. Frankly, buying has it's pros and cons, and if you have a good landlord, not having to deal with maintenance and such can be really nice.

One more note - let's say you're 40 years old and want to retire at age 65. You drop that 250k into an index fund making 7% a year, and you've got over 1.3 million for retirement. (yeah, that's like 730k after inflation, but that still probably means that you've just gifted yourself a decade of retirement!)
posted by chrisamiller at 6:12 AM on April 29, 2017 [2 favorites]


Read this: Managing a windfall

Then search the bogleheads forums for windfall+ house.

It's hard to comment based on the info you provide. Can you afford payments, taxes, insurance, and the upkeep costs on a $900k place? What are your other liabilities? What is your current rent? How old are you, and what is your retirement horizon? All of these things could break it one way or the other.

But from what you have said, I'd guess no, you aren't in a position to service the debt while continuing to save for retirement and college. Use the money to pay down high-rate debt, fill up your tax-advantaged savings, and put the rest in low-cost index funds, corresponding to your risk tolerance.
posted by Dashy at 6:43 AM on April 29, 2017 [1 favorite]


Go to Bogleheads.org, start reading the wiki and forum, and post a question. Start with managing a windfall. The most important thing: don't make any decisions right away. Give yourself at least a year to think it over.
posted by medusa at 6:45 AM on April 29, 2017 [3 favorites]


Very little debt aside from student loans.
This seems like the first thing to pour your windfall into. Unless you're somehow paying even less interest than the ~4% return you'd be likely to make investing it in only-slightly-risky index funds in the long term, getting rid of debt before making down payments on new debt seems like a no-brainer.
posted by eotvos at 7:09 AM on April 29, 2017 [3 favorites]


I live in a crazy housing market (Silicon Valley) and we could have never afforded our second home if we hadn't bought our first home when we did - after ten years it double in price - which is not particularly remarkable but we were highly leveraged so we got the benefit of the appreciation on the banks share too. That extra equity allowed us to move into a much better school system when our kids were ready for high school.

That said, I would be very nervous with only $20k in savings. Houses come with crazy unpredictable expenses (new roof, broken sewer lines, heaters and AC that stop working) on top of taxes, insurance and regular upkeep. What if you get laid off for a couple months? What if the car breaks?

My advice is to figure out the real budget for home owning (including setting aside money for major repairs) in addition to your usual expenses plus savings for retirement, rainy day, kids and try to live on that, banking the extra house money for now. Then put your windfall in the bank, live according to your budget (using house money as needed for rent) and see how it feels. If it seems realistic, or even exciting, then go ahead and start shopping for house.
posted by metahawk at 10:54 AM on April 29, 2017 [2 favorites]


By the way, most mortgages are only help for several years (3-7 years seems to be typical numbers from a few years ago.) Since most money goes to interest rather than principal or the first few years, you can't really building much equity compared to the zero equity of paying rent.
posted by metahawk at 11:03 AM on April 29, 2017 [1 favorite]


Can't begin to answer this question without knowing your rough income and the amount you pay monthly on your student loan debt.
posted by praemunire at 11:57 AM on April 29, 2017


I'd first consider a few known expenses first and really think about your overall financial future.

Retirement accounts. How much do you save a year? How much do you need when you retire? If you were to plow your entire windfall, how big of a nest egg will it be thanks to compounding interest by the time you retire? By some super general guidelines, are you roughly on track for retirement?

Student loan debt -- how high is your interest rate? How long will it take you to pay that off? By the time you pay it off, how much interest will you have paid over the life time?

And, you mention you have kids -- when will they go to college? How much money do you want to sock away for them?

And, then, I would think about the "opportunity cost" of buying a very expensive house, when you're just putting down ~20%. The NY times Rent vs. Buy calculator as mentioned above is sobering. Once you put your windfall into a *minority portion* of what is basically a LONG TERM DEBT PAYMENT, do you still win out at the end? Because when you've channeled it into a downpayment, that money is no longer working for you (i.e., earning interest, giving you an emergency fund if you or your spouse gets laid off, reducing your principal/interest for your student loans, giving you a promise of an unanxious retirement, or financial peace of mind for your kids when they go to school). Instead, that money is now working for your mortgage lender, and your mortgage lender gets to make interest off of it, and bide their time waiting for you to pay the rest of the mortgage off for the next dozen years.

Even if you just funnel that money to a diversified portfolio, nothing will stop you from buying a house 1 or 2 or 5 years from now. But, in the time it's taken, that windfall will have had a chance to grow, and maybe, you've used that extra money to pay down your student loans a little bit faster, or fund your retirement savings a little faster.

I've had to come to terms recently that I will never be able to buy where I am living (due to crazy housing prices), and it's a hard emotional decision, but renting is such such such a better deal given where I am in my career/life. Having $500k+ in debt is such an anchor, and honestly, you never know if/when housing prices crash, and well, by golly, you still owe more on the mortgage than the house is worth.
posted by ellerhodes at 1:35 PM on April 29, 2017 [3 favorites]


I am not sure where you live that is both expensive and only 8-900 for a 2-3 bedroom but depending on what you pay for rent for a similar place (eg, more or similar to the mortgage) it might be a good deal. That said I wouldn't do it and I have no kids, no plans for them, and no debt. I would describe my financial health as poor with more savings, btw. YMMV.

If you have debt I'd get rid of that before taking on even more debt. If you pay that down and you would be able to do a shorter mortgage (eg, 15 year) that's very attractive to me personally but so is a FDIC insured savings account and a bit more in the retirement fund.

Given the political climate I'd be a bit wary of most financial moves right now, including dumping a lot of $$ into either a home in a "expensive now" city that ten years ago wasn't that expensive (NY or LA ok, but SF or SEA seem ... completely insane to me) or a 529 (free college for middle class! maybe! it could happen!).
posted by love2potato at 7:33 PM on April 29, 2017


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