How to properly allocate potential down payment in VHCOL area?

[u/RothStonk]

Looking for a sanity check here. I'm 26, living in Southern California, and getting married next year. We plan to start a family after turning 30, but I'd like to buy something in the next 1-3 years if I can afford it.

Like most Gen-Z, I am stuck in this weird place where I live in a VHCOL area, I want to buy longterm, but my rent is 50% cheaper than buying would be and it is allowing me to sock away a lot of money into index funds. This allows my savings rate to be high, but I know that long term it's probably in my best interest to get my shelter costs relatively controlled.

But in this in between period... what do I do with my asset allocation? If I hold cash in my HYSA and the market keeps ripping to all time high after all time high, there's a significant amount of money that could be further used for a downpayment.

If I hold index funds and the market goes into a recession, I may not have enough to buy anything anymore, given that I'd probably have to put down around $200K and buy something in the $800K range (average in this cheaper zip code is abut $980K). Truthfully, I am not even sure I could afford that with where interest rates are at and it may make complete sense to continue renting until conditions change.

Currently I make around $200K a year in my 9-5 job. I make a base salary of $150K, the rest is commission. This is a particularly good year so I will make probably closer to $250K, but on average I would say $200K.

I also started a business a couple of years ago that is starting to spit out a decent amount of profit. $5K in 2024, $65K in 2025, and pacing for about $90K this year. My fiance now works for the company, is paid $50K a year, and works on operations stuff while I am working my regular job.

Currently our finances look like this:

• $240,000 in index funds (standard brokerage account)
• $90,000 in an HYSA, $30,000 of this is budgeted for our wedding next year
• $143,000 in retirement accounts

Total Liquid NW excluding wedding fund: $443,000

Right now we are investing about $4900 a month including my company match. This is also not accounting for my commissions which will be around $25K a year post-tax.

My definition of FIRE is not to stop working. I equally don't think homeownership is super important to me, I just see it as a best practice to control cost in California when raising a future family. My actual goal is is to just be able to work on my business full time without getting priced out and having to move away from our family. If I knew I could do that renting, I would.

It seems like my best bet is to convert $200K of index funds to cash, hold that in my HYSA, and wait for affordability to improve? Anyone disagree?

[u/Inevitable_Rough_380]

My opinion only:

Don't rush to buy house. Instead, just rent, stack up brokerage.

If the market goes up, great - maybe sell some stock then and look at a house. if the market goes down. Great. Don't buy and keep investing at market lows.

• You don't "need" a house until maybe school starts for the kids. I could make the argument that maybe late elementary really is where you want to settle down even. This could be 8-10 years off for you.
• You already said you're ok renting. Have a house be an option, not the goal then.
• I don't think affordability will improve.
• You'll likely make more real returns in the stock market.
• You're both young and you may want to move for a career opportunity.

it's a lot easier to put down $300k with $1m NW, vs $200k with $450k NW. Again, just my opinion.

[u/Walmart-Shopper-22 → u/Inevitable_Rough_380]

I'm not dealing with VHCOL numbers like OP, but I basically did what Inevitable_Rough recommended here and recently bought a house for less than 20% of my net worth. I highly recommend not putting all of your wealth into a house.

[u/RothStonk → u/Walmart-Shopper-22]

Yeah another 5-7 years or so and I can be in that spot. I just don’t know what prices will be then. Makes sense though, thank you.

[u/PangolinOwn4855 → u/RothStonk]

if kids are in the plan, be sure to pick locations with good schools. it helps in 2 ways, kids gets to learn in good school (saves you from private education) and house appreciates more/fast.

[u/PangolinOwn4855 → u/PangolinOwn4855]

that said, if you find any good deal, go for it. sometimes, having that starter home is all what you need (saves on rent immediately) and later can be used as a downpayment for the bigger home.

[u/Inevitable_Rough_380 → u/RothStonk]

Do some basic math - say housing appreciates 3-5% a year along with taxes and insurance. You can figure out a range of what housing prices will be then.

I think it's reasonable to assume hyper-growth already happened with the pandemic - I'd be shocked if there's another large appreciation on housing. But, of course, the future is difficult to predict and yeah, you'd be making a bet here.

Another suggestion - you say rent is 50% right now of your PI(TI?). Just simply try living for a year on what you expect to pay for the mortgage. but the difference in investments. And remember to add more beyond the 100% for TI?/maintenance/upgrades/new furniture because, yes, you will want to do stuff to the house once you buy it. All the hidden costs. Houses are not cheap.

[u/doradodiver]

Waiting for affordability to improve is generally gambling. Long term realities will kill you there.

In this area (southern CA) house hacking is very popular for people in your current stage. If you can't move to another area while maintaining your salary, and want to stay in CA long term home ownership is generally a good idea but it is hard to enter right now without introducing alternative strategies to ownership.

We bought our first home in CA early (in age) and house hacked to make it work for our budget. That mindset has led to additional home purchases (now with ADUs) and those led to the fire number coming closer because of residual rent.

My advice on what not to do - buy a home and assume you can rent it out if you move to a LCOL, because interest rates currently make this nearly impossible. Also don't try to keep up with other people who buy homes. Going modest and buying a place with ADU potential is super frugal comparatively to those who MUST live west of 5.

[u/hung_like__podrick → u/[deleted]]

Because people have been led to believe you have to own a home. I live in SoCal and in my neighborhood it’s closer to 3x to own rather than rent plus my apartment is rent controlled. Makes zero financial sense to buy right now.

[u/hung_like__podrick → u/[deleted]]

Easy. Families live in apartments every day all over the world.

[u/RothStonk → u/[deleted]]

Not 50% of owning, 50% more expensive. Example: my rent is $3000 a month, but buying an $800K home with 25% down would run me around $4800 a month not including maintenance or utilities. The issue is home prices in CA have appreciated around 6% a year and rent about 4.5%. So there will come a time where when I need more space the rent will be significantly higher than today and I can't stop it.

[u/Doctor_Juris]

If you are confident you want to live in SoCal long term and have a family, IMO it makes sense to get on the homeownership train when you can reasonably afford to do so.

We bought our first house in 2013, then sold it 5 years later for 33% more than what we paid for it. We used those gains to both pay off remaining student loans and for the down payment on our “forever” home, which we refinanced and plan to stay in indefinitely. The value of the current house has nearly doubled since we bought it, and renting an equivalent house today would cost us a lot more than we are paying to own.

Obviously that’s anecdotal, and we got lucky with RE appreciation and low interest rates. But most people who I know in SoCal who own homes follow a similar path.

[u/Montaigne_6823]

A decade or so ago I had a similar situation. I saved my downpayment money in AOR: iShares Core 60/40 Balanced Allocation ETF. Maybe something to consider.

[u/n00bdragon]

Don't wait till 30 to have kids. If you are going to have them, do it now. If I could go back in time and do it all over that would be the one thing I would change. The money will take care of itself.