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We just purchased a house last year with 20% down payment on a 30yr fixed mortgage. Everything finally settle down (remodeling, new furniture etc.) and we're on track of saving again.

We don't have any debt and are thinking to purchase second house in 5-7 years or until another housing depression. When we buy the second home and move in as the primary residence, we'd like to keep the first house as rental. The current house is around $250K and for the second house, we're thinking around $750K.

Currently, we only contribute max to HSA in order to reduce the risk of potential medical bill. We have not contributed to 401K or IRA because my employer does not require matching.

In the meantime, where should we park our money in preparation of second house down payment?

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    You have no retirement savings? Many people skip the 401K and use the IRA or Roth IRA if the company 401K isn't very good. But of course that would be for retirement not for saving for a house.
    – mhoran_psprep
    Apr 8, 2014 at 12:02
  • why do you expect your next house will cost 3x your current one?
    – warren
    Apr 10, 2014 at 19:43
  • Even if your employer doesn't match, you should still be taking advantage of the retirement savings/investing you can do - especially because that will stick with you even as you change employers through life
    – warren
    Apr 10, 2014 at 19:43
  • IRAs are not [generally] done through your employer - if you have the funds to contribute, you should be doing that, too, on your own.
    – warren
    Apr 10, 2014 at 19:44
  • @warren the cost of next house is just a goal, nothing special. I will look into IRA, sounds like I can save money in that account and cash out when i need. Assume i only use the money i put in and not the interest.
    – Patrick
    Apr 10, 2014 at 22:55

2 Answers 2

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Couple of factors here to consider: 1) The savings vehicle 2) The investments

Savings Vehicle: Roth IRAs allow you the flexibility to save for retirement and/or your house. Each person can save up to $5,500 in a Roth and you can withdraw your principal at anytime without penalty. (There is a special clause for first time home buyers; however, it limits the amount to $10k per person. Given your estimate of $750k and history of putting down 20%. It would require a bit more.) The only thing is that you can't touch the growth or interest.
When you do max out your Roth IRA, it may make sense for you to open a brokerage account (401Ks often have multiple steps in order to convert or withdraw money for your down payment)

Investments: Given your timeline (5-7 years) your investments would be more conservative. (More fixed income) While you should stay diversified (both fixed income and equity), the conservative portfolio will allow less fluctuation in your portfolio value while allowing some growth potential.

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I have considered doing the same thing. One idea I have tossed around is investing in a REIT. A REIT is kind of like a Mutual Fund for real-estate. They normally own a large portfolio of real-estate (perhaps apartments, or commercial space, etc) and by owning a share you get some of the upward swing, without the hassle of ownership (i.e. you can sell instantaneously). The REIT sometimes handles the whole lifecycle of property management: finding renters, collecting rent, maintenance, etc.

There are a lot of public REITs in the US that you can buy.

Another option might be to buy shares in a Home Building company like KB Homes.

Yet another option that ties onto your lack of retirement savings is the little known fact that after tax Roth IRA contributions can be withdrawn without penalty! Since 401ks can be rolled over into a Roth IRA (normally you have to leave your employer), in theory a 401k contributions can also be cashed out you just need to be careful about tracking your contributions.

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