Hedge against real estate appreciation?

[dh1989]

Just happened upon this forum and have been reading through the posts and advice on here. Seems like exactly the type of site I've been looking for.

Here is my situation: I'm 21 years old, work full-time making about $30k/yr, live with parents and pay no rent, utilities, etc. I get to live virtually for free for the next few years, as I'm saving my money to buy a house. So far I have $25k saved. My plan is to save for the next five years and have somewhere in the $100k range to put down. At the same time, I'm earning a masters degree through a 100% tuition remission program at work, so I hope to boost my income and be able to pay the mortgage off in about 5-7 years.

Now, here is my only real concern. House prices have been falling over the past year, but appear to be stabilizing at some point within the next year. I want to ensure that the money I have now, and the money I will be saving, will be able to keep up with the rate of real estate appreciation. Basically, I want to protect my buying power so that I'm not 'chasing' rising real estate prices and having to save more and more money to put the same percentage down. As it stands now, I have a small portion (25%) invested in stocks, and the rest is in a savings account earning 1.25% APY. What is the best thing I can do with my money to preserve my buying power while limiting risk?

Thanks.

[jIM_Ohio]

I think your plan has some gaps.

Have you ever lived on your own?
LOL I think I know the answer, (I assume no) and going from parents house to putting 100k down on a 400k house has lots of problems.

1) you have little experience paying rent
2) you have little experience dealing with bill collectors (utilities, phones)
3) you are on hook for all repairs (to roof, hot water heater, HVAC etc...)
4) you have to learn to deal with neighbors
5) Once you buy, moving is really really difficult.


Those problems exist whether real estate goes up in value, goes down, or stays the same.


1) A house is not an investment- do not buy one because it is an investment. From an investment scenario, it is terrible on the surface.

100k down, 400k house (300k mortgage) 5.0% interest rate has you pay $579,000 for a house worth 400k. Tell me again how paying $579k for something worth $400k is a good investment?

2) A house is a place to live, so is renting. They each have pros and cons.
A house might go up in value (so that 400k asset might go up 44% so when you sell it is worth 579k and you break even). You would probably need to live in house for 15 years (minimum) to see it go up 44%, and probably 20-30 years.
A house fixes your living costs. This is the single biggest reason people own- over time the COST of living goes down because costs are locked in over 15-30 years. For example if you focus on condos (great for single people) vs renting, you will probably see rent of about $700-$1000/mo. The same condo (meaning same square footage in a similar location) might cost you $800-$1200/mo. If you fast forward 5-10 years, the costs change. Renting might be $800-$1200 for same location. The cost of the condo is fixed once you get the loan (5 years earlier). Over time that value increases (the value is the difference in cost between renting and owning).
A house is not liquid. This means if you put 100k into the house (down payment), that money is tied up until you sell. Renting on other hand required 1 month rent as deposit, and you can get that money back by moving out.

3) The price point of a house is negotiable. I would not try to "lock in today's prices" or hedge the prices going up. I would focus on making sure budget works, and you know how to live on your own.

People which say rent is throwing money away... ask them how much they have in the bank? The money they put into their house is also money they cannot get back. Focus on money in the bank, and minimize living costs (rent costs) and try to keep those costs fixed.

[ea1776]

I think the biggest reason people think of houses as an "investment" is because when they do appreciate a small amount, your return can be HUGE because you are using the LEVERAGE of a mortgage to do that. However, when you use LEVERAGE you increase risk. Plenty of people were home buyers and wish they wouldn't have been. I guess this seems a little off topic, but I thought I'd mention as something for you to think about.

I'm not really sure how to track local real estate. I mean, you could invest in REIT's, but that's more geographically diverse I think, and besides, it'd be tough to create enough leverage to really shield yourself against a big rise in real estate. My advice would be to not worry about chasing real estate, and purchase a home when you are ready. Stocks far outperform real estate in the long run as an investment.

Renting is your friend for now, and that's OK. I'm a renter and love it. Sure, real estate may go up (may go down to). Rates may go up or down. But what matters to me is my personal economy, my net worth, my life situation, my mid-long term plans. And for now, it doesn't make sense for me to own, and I'm totally comfortable with that. Taxes, repairs, mortgage interest. Is home ownership a higher priority to you than other life goals? Retirement, travel, etc? Is there anyone in your life that pressures you to purchase a home (parents, friends, etc)? Just asking b/c I received a ton of pressure from friends/family to purchase a home. Turns out I'm glad I didn't listen. Turns out they are NOT financial/planning experts. Turns out they just wanted my wife and I to put an anchor down near them, which wasn't OUR priority, but THEIR priority.

And even if real estate goes to the moon, it's likely my stock portfolio will go with it, so no worries there.

[wincrasher]

I'd offer a different perspective - a house is an investment - an investment in lifestyle. So if you want the single family home, suburban lifestyle, then go for it.

I'd advise you to keep your money in conservative investments since your time horizon is 5 years. Your risk of loosing your money is far greater than your risk of being outpaced by real estate appreciation. So concentrate on managing risk first, returns second.

Not knowing your real estate market, or where it is or will be going, I can offer you this - even though you are not ready to buy yet, keeep studying the market. Only buy something that is a bargain - do your research.

Also, until your education is complete and you've settled on job, do not buy. In this crazy new economy, people are expected to move around. You may take a job and be relocated in a year or two. So renting may be a good "investment" in your career by making you easily mobile.

Lastly, make sure your parents feel appreciated for what they are doing for you.

Good luck!

[dh1989]

Thanks for the replies.

First off.. I don't know where this $400k house number came from. I don't in my wildest dreams think I would buy a house for that much. If everything is selling for $400k and I only have $100k, I'm living in a trailer park.

My plan is to hopefully buy the smallest, least expensive place I can afford, putting down about 60-70%. That means roughly a $150k limit. The market I am looking it is the Providence, RI metro area.

As far as the house as an investment philosophy, that isn't how I'm looking at it. I just want a place to live and not be tied down to either a huge mortgage payment or a rent payment. Rents around here start at $700/mo with no utilities. If I can take out a 15 yr mortgage for $50k I will pay roughly $675/mo including homeowners and property taxes. I hope to pay off the mortgage in 7-8 years. I'm not worried about repairs, as I can handle electrical/plumbing/roofing etc. and have done such work myself before.

As far as location and travel is concerned, I hope to stay in New England in the long term. The company I currently work for has a good deal of advancement opportunity, and is only locally based (it is a university), so relocation is not a factor. I will likely wait until I've finished my degree and boosted my income before I make any decision to buy. I suppose savings and CDs will be the best way to go with the cash I'm saving.

[wincrasher]

Since you work at a University, you may be able to find out how they invest their money. Usually these institutions have quite the portfolio for their endowments, etc. You may get some ideas for safe investments.

[nick__45]

If you and your parents are tight, how about maxing out your saving and putting something aside for them. I would make the house you're living a happy and comfortable place and look for a place to invest as rental property. Home ownership is over-rated the same way as new car smell.

If I was in your shoes, I would invest in a nice (not new) car and focus on personal relationship with someone compatible financially, emotional, and physically.

Without knowing your gender it's hard to recommend further. I do know that a good woman actually prefer a guy staying at home with his parents as long as he is working and investing that money in the right place (not stock.) As a guy, I would love to move in with a girl's family home to live rent free. I'll pay for utility and help around the house and focus on investing.

It is silly and childish to have a 3 bedroom house for only 2 people. We have a gargantuan 5 bedroom place and only using 1 room. The plan was to have relative move in later on if they want to, rent free. Not sure if that still happen but I have no problem with relative moving in living for free as long as I don't have to give them spending money, unless they're under 25 and in school.