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My total compensation is $168k/year ($285k gross) and my goal is to purchase a house in the range of $1M to $2M. I plan to invest my savings in the S&P500 for about 10-15 years, hopefully, to make ~$1M, and then use a mortgage to pay the rest of the house cost.

It is well known that the historical rate of return of the S&P500 is 10% (although I know that for all recent periods of 10 years, it has been either higher or lower than 10%). Doing the calculations (e.g., using this bankrate calculator), if I make an initial investment of $50k and then invest $5k/month with a hypothetical return of 10% and inflation of 2.5%, and a long-term tax rate of 15%, after 12 years I should be able to have ~$1M, thus being able to achieve my goal.

My question is that is there any wrong assumptions I have made or anything important that I have not included in my plan?

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    @NN In the U.S., you'll be subject to the net investment income tax (3.8%) on some/all of your capital gains, and the LTCG rate increases to 20% at certain total income levels. Plus state income tax if applicable.
    – Stan H
    Commented Dec 14, 2023 at 4:16
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    You're asking "is it wise"...
    – littleadv
    Commented Dec 14, 2023 at 8:21
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    that only 60k per year out of 285, meaning you're spending another 225k per year?
    – njzk2
    Commented Dec 14, 2023 at 18:11
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    How much will your dream house cost 10-15 years in the future? Commented Dec 14, 2023 at 21:50
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    To the point made by @jcaron you need to consider the cost of your housing for 10-15 years in your calculations i.e., how much are you 'throwing away' on 120 to 180 rent payments that you wouldn't have to pay if you owned a home. Also consider that the home you can buy for a million now, may be a lot more then.
    – JimmyJames
    Commented Dec 15, 2023 at 22:14

6 Answers 6

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Maybe Buy Sooner

Starting with 50k, and adding 5k a month, you get to 200k in 30 months (2.5 years).

Using this calculator, I assumed 7% interest rate, 1M home value, and 200k down.

The $5,300 monthly payment is roughly equal to your current 6k rent, so you still have the 5k a month for investing left over - which means you can make 5k a month in extra payments.

The calculator says that those extra payments will pay off the home in ~8.5 years, and that you would make about 250k in interest payments over that time.

You'd only rent for 2.5 years instead of 10, and 7 years of rent is about 500k, so even paying all that interest you come out about 250k ahead!

This plan has the home paid off ~11 years from now, saves you a net quarter million, and completely sidesteps the uncertainty of market returns.

Bottom Line - I'd save up for a down payment and buy the house ASAP and then use all the extra cash flow to pay off the mortgage aggressively.

Edit: You also get some interest on the down payment while it's in the bank, and some tax breaks on the mortgage interest while you pay it.

Additionally, the purchase price for your hypothetical home is probably lower in 2026 compared to 2033.

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    I think this is good advice if the OP does indeed want a house now, and is only planning the 10-year timeline for financial rather than personal reasons. It might make sense to wait if the OP plans to move in the next few years, but probably not if they're only waiting for the purpose of saving up an unusually large 50-100% down payment Commented Dec 15, 2023 at 15:41
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    @NuclearHoagie - I'm assuming OP is concerned about the current high interest rates, and is trying to side-step them by basically paying in cash. But with OP's cash flow, they can save a lot of interest by making principle payments - and like I demonstrated, rent is a major expense as well!
    – codeMonkey
    Commented Dec 15, 2023 at 15:59
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    @NN I would argue that this is not only "emotional". There is hard value in your plan, in the sense that you are not nearly as path-committed when you are saving up for something than if you pay it with debt. If things change (lost your job, big financial crisis, break-up, etc.) you can certainly pivot in your plan, but not necessarily when you have a big mortgage. Whether that's worth it is up to you, but "what gives me the highest expected net worth 50 years from now" is not the only question you should consider when considering your personal finance.
    – xLeitix
    Commented Dec 16, 2023 at 18:48
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    @xLeitix - I'd go the opposite direction - I think OP is making an emotional decision but that's OK because all financial decisions have an emotional component. (I also think your point about flexibility is very valid.) OP is interested in avoiding debt at the cost of "wasting" money on rent. They've got the cashflow to make that kind of trade-off, so power to them.
    – codeMonkey
    Commented Dec 19, 2023 at 17:54
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    @NN - if you're going to put harder numbers on my math, you should use all the numbers. ;-) So how much will the 1M in 2033 house cost you in 2026? (at 4.5% housing inflation, ~750k.) How much of a tax break do you get? (if single, 35k saved for every 100k in interest you pay) -- I suspect that buying earlier is going to have a significant cost advantage, but like I said to xLeitix above, all financial decisions have an emotional component, and if you'd feel better paying more rent to avoid debt, then that can be a good enough reason to do it - as long as you're honest with yourself about it
    – codeMonkey
    Commented Dec 19, 2023 at 18:08
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I am not checking your math. I as assuming that you feel confident that if you start with 50K, add 5K a month, that in 10-15 years you can have $1,000,000 after taxes.

All this is to be able to put $1,000,000 down on house that will cost $1-2 Million.

Your math shows you it is possible. Except there are risks:

  • 1987 crash takes 23 months for the S&P 500 to return to the same value
  • dot.com bubble followed by September 11th, takes 7 years to come back to the same level
  • Housing market crash, takes almost 6 years to recover.
  • Currently it has been more than two years since the peak value.

If an event hits as you are nearing your goal, it can extend your investment time even longer. Of course if you are investing during the ride down and back up you are buying bargains and you will recover quicker than the market does.

As you approach your goal you may find that you want to do what 529 investors do, and switch to more conservative (lass risky) investments tp protect you from a drop that complicates your timeline.

Now to be honest if you are working during those 10-15 years, you may find it easy to invest more than $5K a month as your income goes up.

Of course that ignores what will be happening to the housing market. In my neighborhood, the price of houses almost doubled between 1999 and 2006. But then they dropped almost back to the original level by 2008. That $1-$2M house 15 years from now could be the $500K house of today.

With the ability to put away $5K a month above your living expenses it could make more sense to put the money in the bank, and in a few years be able to put 20% down on a house. That way you can start living in the house you need/want sooner.

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    +1 Some people advise investing instead of putting money in the bank, yet the bank is FDIC insured and an investment could be completely lost, so you might be "losing money" by keeping it in the bank compared to the stock market doing well, but if the stock market takes a dive (as it does every few years), you'll be further ahead with the savings account than worthless stocks. And you still have to consider broker fees, if someone is managing it for you. Commented Dec 15, 2023 at 1:26
  • @Thank you for your detailed answer. For the house price changes, please note that I considered an inflation rate of 4.5% for house prices (so $1M is inflation-adjusted). Also, for the last point you mentioned, the main reason I try to avoid large amounts of loans is because it will cost you interest, while by investing you can instead increase your assets.
    – N N
    Commented Dec 15, 2023 at 4:53
  • Even if the stock market goes down, a net loss of 10% would mean $60/year for 10 years is $540k, which is plenty for a down payment. Commented Dec 15, 2023 at 6:27
  • +1 most people ignore the fact that you can keep investing when it's down and therefore don't need to wait for a "full" recovery in order to recover your investments. Of course most people only buy when it's up and sell when it's down.
    – jesse_b
    Commented Dec 15, 2023 at 11:55
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    @NN Granted, it's not as true now as it was for most of the last 15 years, but the appreciation rate of houses quite often exceeds the interest rates. As someone who bought a house at the end of 2009, I know the value of my house has increased by much more than I've paid on it in interest. For that matter, even if my house had gained no value over that time, inflation alone was near or in excess of the interest rate, especially after considering the interest being tax-deductible. Also, I haven't needed to pay rent since then, which must also be factored in. You get no equity from rent.
    – reirab
    Commented Dec 15, 2023 at 23:01
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You are essentially short a house (that is, your financial picture is negatively correlated with housing prices). Therefore, your portfolio should aim for a greater positive correlation with housing prices than the average portfolio. This means things like REIT and real estate ETFs. This will act as a hedge: if housing prices go up, then you'll need more money, but your investments will be doing well and you'll be able to afford it. If housing prices go down, your investments will lose money, but the amount of money that you'll need will also go down. This is far from a perfect hedge, since whatever house you end up buying won't be perfectly correlated with the overall real estate market, and you shouldn't necessarily put all of your money in real estate, but you should increase the share compared to otherwise.

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    I think this answer is good but misses the inherent flaw in OP's plan: They want to wait until they have the full purchase price before buying a house [rather than getting a mortgage], presumably at least partly because there is risk in buying a house, that gets multiplied when taking on debt. But... investing in REITs in the meantime to achieve the same correlation with house pricing, is basically bringing that risk right back into the picture. No debt, sure, but it's arguably higher risk to attempt to create a housing-correlated investment portfolio, than to take on a fixed rate mortgage. Commented Dec 15, 2023 at 16:36
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    @Grade'Eh'Bacon Yes, but the OP's stated goal is to buy a house in 10 years. Do we take that goal seriously, or do we impute not buying it now as evidence we should not?
    – Yakk
    Commented Dec 15, 2023 at 21:39
  • @Yakk I think the plan has flaws, if it is being done for risk/financial purposes rather than lifestyle. Highly worth pointing out those potential flaws to someone who may be significantly off-base with their assessment. Commented Jan 8 at 14:20
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Better to buy a house

  • Investor purchases (businesses buying residential houses) have been rising steadily. More demand will push up prices.
  • S&P500 rises 10% per year average, but that's 10% of your money. Houses rise 5.4% (avg of the past 30 years in USA) but that's 5.4% of the total value (1-2 million). In other words, if you have $100k in S&P500 you'll get $10k in one year but the house's price will go up $54k-108k. You only gain the advantage of the higher % when you've saved up more than half the price of the house.

Note this is all based on avg rates. There could easily be a boom or bust in both stocks and housing over the next few years. Civil unrest is sky high. AI might destabilize industries. A big house-of-cards debt collapse might start from China and hit the whole world. Inflation has been volatile. These are all scary things but we don't even know how they affect the markets. Covid hit, and the stock market dipped then soared in the fastest bull market since WWII.

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  1. How steady is this income?

  2. Do you have an emergency fund currently? It should be 3 months of expenses minimum, up to 6 depending on volatility of your income or number of people who depend on your income.

  3. Do you have any debt? First, you should pay off any and all debt as aggressively as possible, attacking the lowest balance aggressively while paying minimum payments on the others.

  4. Home prices will go up. What you want will go up, or the quality of home you want will go down to reach the $1M- $2M goal.

  5. To avoid from being house poor, your mortgage should be no more than 1/4th of your take-home pay. Assuming your take-home pay is 200k a year, you should be spending no more than $4,166 a month on housing. This would mean at current interests rates (7ish %) with 20% down on a 15 year fixed rate mortgage, you can only afford $520k worth of home.

You'd have to put something like $600k down on a $1M home at your income.

Assuming your initial and monthly investment and the rate of return at 10%, you could have that down payment in 7ish years. Depending on your risk level, that time horizon could long enough to invest and your probability of losing money would be sufficiently low. There are a few sources on probabilities of losing money in the market over different time horizons. Here is just one. enter image description here

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  • One should pay off the highest interest rate debt first, not the lowest balance. Commented Jan 3 at 16:27
  • @MichaelFoster Incorrect. If this were a math problem, you'd be right, but it's not. If it were, we wouldn't be in debt in the first place. It is a behavioral problem. When you attack the lowest balance first, you get a win much faster. That debt is out of your life forever. The second debt will soon follow. Then, you’re throwing a monster snowball of a payment at your last debts—instead of chipping away with bite-sized minimum payments. Commented Jan 23 at 18:29
  • 1.List debts from smallest to largest (regardless of interest rate). 2.Make minimum payments on all your debts except the smallest debt. 3.Throw as much extra money as you can on your smallest debt until it’s gone. 4.Take what you were paying on your smallest debt and add that to your payment on the next-smallest debt until it’s gone too. 5.Repeat until each debt is paid in full . ramseysolutions.com/debt/how-the-debt-snowball-method-works Commented Jan 23 at 18:29
  • That gets you out of debt slower, though. If behavior is the problem, attack that with something else. Otherwise, once you get out of debt you will be in debt again in a few years. Commented Jan 23 at 19:10
  • @MichaelFoster Incorrect. The debt snowball gives you motivation, and motivation is the secret that gets you debt-free faster. When you pay off that smallest debt first, you get a taste of victory. That feeling of success is the momentum you need to tackle the next debt with a vengeance. With the other way, you won’t get a feeling of accomplishment for a long time. You could lose steam and give up long before you even pay off the first debt. It might make sense mathematically to begin with the highest interest rate, but if we were focused on math we wouldn’t be in debt in the first place. Commented Jan 23 at 19:55
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Endowment manager here. Your timeline is a little short for my comfort. If you want a timeframe of "effective certainty" like we require in endowment planning, you need to be out 30 years or more. In only 10-15 years, a lot of adverse stuff can happen and you can actually be down in the wrong 10 year period. You're really rolling the dice in a way I do not like.

I also think 10% a year is optimistic, even if we're not considering capital gains tax.

What is not optimistic is a fixed mortgage rate. You can count on that being what it is. It's not going to turn against you or have a really bad decade.

There is also the practical fact of having the use of the house for those 10-15 years. Which means you are not paying separately for housing all that time, which will be a total loss if you are renting.

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