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I'm 29 years old and my current financial situation is as follows:

  • 53 000 USD invested in equities (low cost index funds and some in bond ETFs)
  • 9 000 USD in cash.
  • I have fairly low fixed costs and can live fairly frugally.

(I live outside of the US but I've just converted to USD for simplicity's sake)

My financial plans/sentiments are:

  • I'm looking at possibly buying real-estate next year. A part of me feels like paying rent is a waste of money each month, however, I'm not completely sold on real-estate being a good investment vehicle and whether buying is indeed better than renting in the longer term.
  • I've been nervous about the markets. I'm no financial expert, however, from the reading/research I've done it seems there is a tremendous amount of uncertainty and the markets are at all-time highs.

My question is:

Given that the market is at a high and there is a lot of uncertainty, is the idea of selling my equity portfolio now to put down a much larger payment on the real-estate a good one? Or, is it better at my age to put less down initially on real-estate, keep the riskier equity portfolio (and diversify - stocks, bonds, cash, etc.) and just ride out any of the bad times with longer term horizons?

Thanks.

  • 2
    Welcome AverageJoe, the question as stated is too broad and any advice would be opinion based. If you can reword to be more precise it may help. – Dheer Dec 4 '13 at 6:40
  • I agree with @Dheer AverageJoe. Your question is pretty broad. I answered with how I would approach the general question for whether or not to invest in a property, but you haven't given us enough information to actually answer a specific question. – THEAO Dec 4 '13 at 9:56
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My suggestion would be to do the math. That is the best advice you can get when considering any investment.

There are other factors you haven't considered, too... like the fact that interest rates are at extremely low levels right now, so borrowing money is relatively cheap. If you're outside the US though, that may be less of a consideration as the mortgage lending institutions in Europe only tend to give 5-year locks on loan rates without requiring a premium. You may be somewhere else in the world.

You will probably struggle to do the actual math about the probability of the market going down or up, but what you can do is this:

  • Figure out what it would cost you to cash out the investments. You say your balance is $53,000 in various items. (Congrats! That's a nice chunk of money.) But with commissions and taxes and etc., it may reduce the value of your investments by 10% - 25% when you try to cash out those investments. Paying $3,000 to get that money out of the investments is one thing... but if you're sending $10,000 to the tax man when you sell this all off, that changes the economics of your investments a LOT. In that case you might be better off seeing what happens if the markets correct by 10%... you'd still have more than if you sold out and paid major taxes.

  • Once you know your down payment, calculate the amount of property you could afford. You know your down payment could be somewhere around $50,000 after taxes and other items... At an 80:20 loan-to-value ratio that's about $250,000 of a property that you can qualify for, assuming you could obtain the loan for $200,000.

  • What could you buy for that? Do some shopping and figure out what your options are...

Once you have two or three potential properties, figure out the answer to "What would the property give you?" Is it going to be rented out? Are you going to live there? Both?

  • If you're living in it, then you come out ahead if the costs for the mortgage debt and the ongoing maintenance and repairs are less than what you currently pay in rent. Figure out what you pay right now to put a roof over your head. Will the place you could buy need repairs? Will you pay more on a mortgage for $200,000 USD (in your local currency) than what you currently do for housing? Don't even factor in the possible appreciation of a house you inhabit when you're making this kind of investment decision... it could just as easily burn down as go up in value.

  • If you would rent it, what kind of rental would that be? Long-term rental? Expect to pay for other people to break your stuff. Short-term rental? You can collect more money per tenant per day, but you'll end up with higher vacancy rates. And people still break your stuff. But do the math and see if you could collect enough in rent from a tenant (person or business or whatever the properties are you could buy) to cover the amount you are paying in debt, plus what you would pay in taxes (rent is income), plus what you would need for maintenance, plus insurance.

IF the numbers make sense, then real estate can be a phenomenally lucrative investment. I own some investment properties myself. It is a great hedge against inflation (you can raise rents when contracts lapse... usually) and it is an excellent way to own a tangible item. But if you don't know the numbers and exactly how it would make you better off than sitting and hoping that the markets go up, because they generally do over time, then don't take the jump.

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