Investment for Noobs

[Boyiee]

Our closing date is October 31st. She's had an apartment for a year and we needed bigger, I needed residency where I work, and Interest rates are stupid low with so many incentives for first time buyers that they are practically giving houses away. Basically it comes down to renting for 1500+ a month or owning for 2000, easy decision. We did very well, and if we need to expand in 5-8 years we'll do that, cause the house is easily going to be worth more then.

[test123]

No, a down payment mostly burns off into interest payments on the principal of the loan. 30 year loan at 5% juice is like 90% of the principal in interest over the lifetime. Considering that you're probably putting down 20% of the principal, you pay almost 5x as much interest as the down payment. And god help you if your property value tanks.

That is wrong, at 5% interest + down payments over 30 years you only pay 2x what you borrowed in total. In 30 years that house has doubled in value many times. Plus your income/debt ratio changes significantly over time.

[Headspace]

. In 30 years that house has doubled in value many times.

Uh

[test123]

Uh

http://dhkzkmq0ef5g3.cloudfront.net/...e1940-2010.png
Yea

[Kalmado]

http://dhkzkmq0ef5g3.cloudfront.net/...e1940-2010.png
Yea

[BaneTheBrawler]

test, just so you know, nothing you say in this thread has any weight at all.

[Boyiee]

Well, at 5%ish interest, you are paying around 500k over a 30 year for a 250k house.

[test123]

Well, at 5%ish interest, you are paying around 500k over a 30 year for a 250k house.

Right, but aurik does not seem to get that lol. Also good savers can pay down even faster. Say 15 years. Think about it, if you own a home and are debt free at age 40 you never have to pay rent or interest for the rest of your life. Which could be another 40 years. 40 years of rent is a lot of money.

[aurik]

That is wrong, at 5% interest + down payments over 30 years you only pay 2x what you borrowed in total. In 30 years that house has doubled in value many times. Plus your income/debt ratio changes significantly over time.

If what I said is wrong, how come you basically just repeated what I said? 30yr 5% interest total amount of juice is 90% of the principal. Over 30 years you pay ~2x what you borrowed. Those two statements are pretty much equivalent, minus the rounding you applied. The market grows just as fast as house prices do - about a factor of 20x over 40 years.

PS all this bullshit about "earn more and pay it down faster" just means that you would be able to invest more in the market.

A house is just another asset you can own as an investment; the value of living in it and saving on rent is already priced into the value growth of the asset.

[test123]

If what I said is wrong, how come you basically just repeated what I said? 30yr 5% interest total amount of juice is 90% of the principal. Over 30 years you pay ~2x what you borrowed. Those two statements are pretty much equivalent, minus the rounding you applied.

No, you said: "you pay almost 5x as much interest as the down payment". Which means that the interest paid on the loan is 5 times greater then the down payments, i.e the loan cost 6x then what is borrowed.

A house is just another asset you can own as an investment; the value of living in it and saving on rent is already priced into the value growth of the asset.

This is also wrong. The savings on rent is not priced into the value growth... The value growth is what you cash out if you ever sell, your profit.

If you rent from a landlord that money goes into his pocket. And most likely that landlord already has a mortgage on that home anyway. So your rent basically goes straight into a down payment plus interest. You are paying his debt in exchange for housing. Only you don't get to cash in on the value growth, the landlord does.

[Drakath]

If you had just received a $60,000 inheritance in cash, what would you do with it?

[archibaldcrane]

Here's the order you should focus your money, as a general rule:

1) Get out of whatever debt you might be in. Only exception to this is a mortgage or student loans. If it's under 3% interest, don't bother because your money will make more than the interest will accrue due to inflation.
2) Create an emergency fund, 3-6 months' expenses is recommended depending on your job stability.
3) Max to whatever percentage your employer is matching in a 401(k).
4) Open an HSA if you have a high-deductible healthcare plan, max that out ($3300 for a single person for 2014, not sure how it is with kids).
5) Open a ROTH or Traditional IRA, max that out ($5500 for 2014).
6) Max your 401(k) to the annual match (I think it's $17,500 for 2014).
7) Invest your post-tax income in Vanguard index funds.

I think that's the most foolproof and straightforward way to manage your money. Keep track of every dollar you spend and find places you can cut back. Spending less is just as important as saving more.

^
This

And then see what is left.

[*Shinzon*]

For what it's worth: I spent a lot of time in law school studying finance, and in my last semester I studied tax credit financing for affordable housing. As a precursor, we learned the basics of investing, particularly in real estate, and about leverage. Investing in real estate is one of the surest ways to increase your wealth, and it is also a great way to explore the benefits of leveraging debt. To effectively invest in real estate, you need to carefully calculate all your expenses, possible maintenance, and carrying costs yearly, such as insurance/utilities, etc. Even if you don't want a roommate, what you might be able to explore is buying a legal two-family house that's in decent condition and start renting it. For most people, rent will cover mortgage costs and make living much more comfortable.

Most people can't afford all those costs upfront, and while investing in stocks are a good idea, it might be worth paying off other loans instead and saving money for investing in real estate later. Real estate is more tangible and easier to understand than investing in stocks.

[test123]

If you had just received a $60,000 inheritance in cash, what would you do with it?

If you listen to aurik you would put that 60k in stocks and get a whooping 7% return, which is 4.200$.

But since housing prices also rise by 7%:

The market grows just as fast as house prices do

I would advice you to buy a 300k place in a good area and rent it out. After 1 year that 300k place has risen 7% in value, which is 21.000$. Alot better then 4.200$. This is what debt leveraging can offer.

[Conrad]

I don't think real estate values rise as predictably or at as much a historical rate as the stock market...

[Conrad]

Anyway, I answered the "What do I do with my money" question already, which does not include real estate because it's a high risk move for a person already in a debt emergency. I suggest reading up on Mr. Money Mustache, which is a good layperson guide for saving money and living a better life.

[RKenshin]

If you listen to aurik you would put that 60k in stocks and get a whooping 7% return, which is 4.200$.

But since housing prices also rise by 7%:


I would advice you to buy a 300k place in a good area and rent it out. After 1 year that 300k place has risen 7% in value, which is 21.000$. Alot better then 4.200$. This is what debt leveraging can offer.

$60k worth of stocks might have a couple hundred in trade fees or an expense ratio of up to like 1.5% on the high end... or even no trade fees with an expense ratio of 0.1%-0.5% if you purchase an index fund.

That works out to $60-$300 in fees on your 7% gain for the year.

A $300k home purchase, on the other hand, would typically also have a good $10k (MINIMUM) in fees/commissions/etc involved in the initial purchase. A house of that value in my area would also have yearly property taxes of $6,000 and a home insurance payment of $1,100 (this will vary of course).

It is also recommended/'expected' that you will spend and/or need to save about 1% of your house value per year to keep up on the minimum maintenance costs, which in this case is another $3,000.

You've already eliminated $20,000 of your $21,000 in hypothetical gains in one year, though yes the fees/commissions in the initial purchase are a one time thing. You can even add back the tax deduction of home ownership, which in the $37k-89k tax bracket will net you at most a $2,500 advantage. That brings you up to $3,500 in total gain for the year, which is still less than the stocks/index fund. Oh, and if you did try to sell the house after 1 year, you’d also once again lose $10k to commissions/fees/etc + taxes on your appreciations (aka, you’d be in the hole).

But, you're also comparing the AVERAGE market return of 7% versus a peak housing return of 7%. The AVERAGE housing return is 3.4% over the past 25 years.
http://michaelbluejay.com/house/appreciation.html
http://en.wikipedia.org/wiki/Case-Sh...me_price_index

Where as the AVERAGE S&P500 return over the past 25 years is 10.27%. (even higher than the historial 7%!)
http://en.wikipedia.org/wiki/S%26P_5005

Choosing a house over an index fund, purely from an investment standpoint, is like choosing an investment that has an expense ratio of 3-4%, that you have to actively manage and maintain yourself, that earns a quarter of the long-term earnings as the market does. If you tried to sell a fund with those stats, people would laugh in your face.

Housing purchases and real estate investments have their place, but you're being ridiculous if you think a smart housing investment can compare to a smart market investment in the pure long-term gains.

[Aksannyi]

This thread has taught me so many things, and although I can't invest right now, you guys have been so helpful, no lies.

[aurik]

No, you said: "you pay almost 5x as much interest as the down payment". Which means that the interest paid on the loan is 5 times greater then the down payments, i.e the loan cost 6x then what is borrowed.

Do you not understand the difference between a down payment on a house and the principal on a loan?

[test123]

Do you not understand the difference between a down payment on a house and the principal on a loan?

Excuse my poor English but when you pay a monthly sum of money to reduce your mortgage, are you not making a down payment? As in "paying down" the debt?

A $300k home purchase, on the other hand, would typically also have a good $10k (MINIMUM) in fees/commissions/etc involved in the initial purchase.

When you pay $300k for a home that is the only money you fork up. The broker would charge the seller $10k, leaving him $290k. And there is nothing that prevents you from selling on your own, saving that $10k. If the state has some kind of transaction tax for book keeping then you may get billed for that, but should not be much.

A house of that value in my area would also have yearly property taxes of $6,000 and a home insurance payment of $1,100 (this will vary of course). It is also recommended/'expected' that you will spend and/or need to save about 1% of your house value per year to keep up on the minimum maintenance costs, which in this case is another $3,000.

That is why you need to pick a good place to keep property taxes low, some states you get below 0.50%. And also in many cases the assessed value of the property is lower then the purchase price. So in a real investment situation you would see about $1k in property tax for a $300k home.

But, you're also comparing the AVERAGE market return of 7% versus a peak housing return of 7%. The AVERAGE housing return is 3.4% over the past 25 years.

The location matters. Just because Detroit pulls the average way down does not mean you have to buy there.