Stock Market While Saving For Down Payment?
Dallas, TX · Member since 2017 · 52 posts · 5 votes
I am currently saving for my first down payment on a buy and hold real estate property. I'm using Barclays with their really high 1.5% APY savings account. A lot of people will argue that if you are saving for a down payment you shouldn't put your money in something risky like the stock market. But if you are saving for an investment property, why not double down and invest my savings for a down payment in the stock market to potentially capitalize on higher gains and try and make my money work harder for me until I pull it out and invest it in real estate? Arguments for or against this idea?
If real estate is your focus and goal, don't invest in the stock market. Whatever you focus on, grows. A short term correction can wipe out any potential gain. I would only invest what I was able to lose, especially if I want to repurpose into real estate.
Gino
I am currently saving for a down payment on an investment property through Vanguard's S&P 500 ETF and have seen about a 13% return in a matter of a little over a year. With that being said, you need to consider the current standing of the market. Many will argue that it is long overdue for a correction, so moving your money into the Stock Market now maybe is not the smartest move. Just something to think about.
Hope this helps!
@James Krahula Of course. Simply because I was willing to take on the additional risk for the additional reward. Vanguards S&P 500 ETF had produced an average of around 8-10% in returns during the last 5 years. I know that historical results does not dictate future performance, but my mentality was that if I can get at least half of its average returns in the last 5 years, I would be a few multiples over what the highest interest-earning savings account would produce.
Thanks @Alex V.
@James Krahula Don't know if you say what the markets did today, but every major indices was down by around 2%. Imagine if you had just found a great property for $100k after looking for a few months. You go to get an updated pre approval letter to submit with your offer and the bank needs to see proof of funds. The $25k you had on Thursday its now worth $24.4k. Now $500 bucks isn't a deal beaker in this case, but what if the house was $500k or a $1M multifamily.
That's enough, I'm off my soapbox.
If you want to update your model, I'd suggest doing daily gain/loss instead of monthly to more accurately reflect the timing issue that will come into play with this issue. With the increased use of computerized trading quick 'flash crashes' are likely to become more come rather than less, so having granular data will help to better quantify the risk.
As promised, here is the spreedsheet that you can edit. I ask that everyone copy and make their own sheet so we can and leave the default page intact.
@James Krahula I am going to disagree with the majority here, even after what the stock market did today and say that in your case, you probably should invest in the stock market while waiting, or at least invest in SOMETHING.
It takes the average first time investor a long time to save up the 25% down payment for that first property. I would guess the average is 2-5 years for a 100k home. If you allow money to sit idle in a 1.5% interest bank account then are you guaranteed to lose value every month against inflation. 2-5 years is a long time to be doing nothing in the hopes that maybe someday possibly if the conditions are right you could potentially one day buy some RE and then suddenly start making money. The closer you get to being able to actually fund your first deal, you may want to start withdrawing money, but while you are in the general process of saving, that money should always be invested in something worthwhile. Whether that be stocks, notes, whatever.
@Bill F. Yes, I am aware what the market did today, but I'm sure you are equally aware what the market has done for the past few years, or what it's historical average is for that matter. Even after today's dip, Vanguard VTI fund is up 19% since 3 Feb 2017, with an additional 2% in dividends for roughly a 21% return for the year. While it's certainly possible to lose money even with index funds, the same can be said with any investment. However given enough time, the market will always go up in value.
Additionally dips in the market like today aren't necessarily a bad thing and can actually be a good thing! They are only bad if you need to sell your funds immediately. Anyone saving for a first home will be contributing money every month to the account, and thus is buying using the dollar cost averaging technique. Take this example, lets say you invest 1k every month for the next 5 months, and buy a stock that initially costs 100 a piece...
Scenario A: The stock steadily increases and you buy 1k worth every month with monthly prices of 100, 110, 120, 130, 140. Pretty good right!!
Scenario B: You spend the same 1k/month and the stock bounces around with monthly prices of 100, 60, 60, 110, 100. Ending at the same price that it started with. Kinda sucky.
Most people if given the option would be thrilled at the opportunity to get the returns in Scenario A. And while those results are good, the reality is that due to cost averaging, Scenario B actually wins with 5.5% more money at the end! If you don't believe me, do the math yourself. Scenario A only wins if instead you simply put down the full 5k worth of money on day 1, instead of buying 1k/month for 5 months. But this lump sum buying style is not how the average american invests in the market because the average american doesn't have some huge chunk of cash that they suddenly want to invest unless they get an inheritance, instead they generally contribute a portion of their income every month.
As investors, we like to talk about how the equity in our homes is dead equity that is not generating additional income. However even that dead equity still saves me the roughly 4.75% interest I would have otherwise had to pay, which is 3x better than a 1.5% bank account.
As stated earlier, I don't care what venue you choose to invest in, and am not necessarily advocating specifically that you should be buying stocks. However Rich Dad's invest, while Poor Dad's tuck money away into a bank account for years at a time.
Another limitations to real estate is that it can be a challenge to make the best investments if you aren't near a strong market. There are ways around this of course but it definitely more work involved. In stocks I have access to information and ability to invest in companies that I think are the best companies around as far as stability and growth are concerned without needing to make connections across the country like buying out of state RE. You can invest in the entire market, but if the entire market tanks, I still believe my portfolio to be superior to the index because I only try to buy what I believe to be the best companies. An S&P 500 index is a great place to start don't get me wrong, but in a declining economy the S&P will follow. Even in a strong economy the S&P still has losers in it(take general electric for example). I just prefer to buy the winners.
A strategy I like as well is to invest in the hot industries in ETFs. I don't necessarily have the expertise to know which semiconductor, artificial intelligence, marijuana, or blockchain company is going to be the next big winner; however I do know that regardless of how one company does, these industries are on the rise, therefore I invest in ETFs that follow the index of these industries I just mentioned. If theres a loser in the bunch so be it, I still have exposure to their competitors that are winning and are weighted in the ETF that follows the entire industry as they are on the rise.
You could go for less risk than stocks but more than a savings account and invest in a bond fund which has low volatility but decent returns in the 3 - 5 % range.
Personally I use a portfolio approach and have 70 % stocks and 30% bonds. But I'm OK with the risk I'm taking on even for the short term.
The 30% accounts for my emergency fund.... I also have a cash portion in a savings account for immediate emergency fund which is not for investing at all.
Usually takes 3 - 5 days to access funds in my portfolio.
Jeff V
If you're saving up to buy an investment property in the next 1-2 years, I don't think putting the money in the stock market is worth the risk.
If you're talking about saving for 5+ years, then maybe.
But if it takes you 5 years to save for a downpayment, you should probably rethink your strategy and find ways to increase your income and/or savings rate rather than worry about where to keep your money.
As for a more general rule (i.e. overall portfolio allocation vs. saving for a specific goal) I think it make sense to have at least a portion of your investments in stocks.
@James Krahula thanks for the post. Very interesting discussion not seeming to lean towards one way or the other...I'm curious James, what way did you go with this? Did you end up investing in index funds in the meanwhile? I'm looking at possibly going the same route but the stock market is pretty volatile lately. It seems that even with the market conditions lately, the returns on the S&P 500 will beat a 1.75% interest rate savings no matter what. Just wondering what route you decided on going with..
@James Krahula thanks for the post. Very interesting discussion not seeming to lean towards one way or the other...I'm curious James, what way did you go with this? Did you end up investing in index funds in the meanwhile? I'm looking at possibly going the same route but the stock market is pretty volatile lately. It seems that even with the market conditions lately, the returns on the S&P 500 will beat a 1.75% interest rate savings no matter what. Just wondering what route you decided on going with..
So yes I am moving forward with this. The Bigger Pockets Money show with JL Collins really cemented my comfort level on the subject. So essentially I'm putting all of my investment money into VTI through M1 Finance. M1 just came out with a borrow feature that you can borrow up to 35% of your portfolio at 3.5%. To me it's like. HELOC on steroids. That's the plan I'm moving forward with and I feel really comfortable with it. Go and check out that show, sorry I don't know the Episode number off the top of my head.
@James Krahula, do you plan to use the SBLOC to buy RE or is that just an added bonus of the M1 account?
@James Krahula, do you plan to use the SBLOC to buy RE or is that just an added bonus of the M1 account?
Yes now I plan I use that to help fund some real estate deals. I look at it as another tool to help build my portfolio. I'm thinking I'll even utilize this and not sell stocks but I'm not completely sure on that yet.
@James Krahula, do you plan to use the SBLOC to buy RE or is that just an added bonus of the M1 account?
Yes now I plan I use that to help fund some real estate deals. I look at it as another tool to help build my portfolio. I'm thinking I'll even utilize this and not sell stocks but I'm not completely sure on that yet.
Good luck and hope you find some great deals.
Be careful about the minimum LTV requirements of the SBLOCs, especially investing in a iliquid asset with funds secured by a liquid and volatile assets.
@James Krahula, do you plan to use the SBLOC to buy RE or is that just an added bonus of the M1 account?
Yes now I plan I use that to help fund some real estate deals. I look at it as another tool to help build my portfolio. I'm thinking I'll even utilize this and not sell stocks but I'm not completely sure on that yet.
Good luck and hope you find some great deals.
Be careful about the minimum LTV requirements of the SBLOCs, especially investing in a iliquid asset with funds secured by a liquid and volatile assets.
Essentially my portfolio would have to drop by over half in order to call a selling of stocks how it's currently setup if you have it maxed out. But you should constantly be paying that down to lessen your risk if you experience a market crash.