Save for house down payment or max 401k

[brownie44]

27m, single making $100k income living in a Chicago. So far I have $10k in savings and $25k in my pre tax 401k. My issue is I’m torn between maxing my 401k and saving for a condo or house. I don’t really have the desire to own as I don’t see that much of a benefit since I don’t plan to leave the city any time in the next 5-10 years. Also, condos don’t seem to appreciate that well and property taxes/HOAs seem crazy and could increase so what’s the point of building equity vs just renting and having the flexibility.

Am I crazy to just rent for the next 5-10 years and not worry about increasing my emergency fund past my 4 months of expenses? I’m contribution 10% in my 401k right now with a 5% match so if i don’t save for down payment I’d just max my 401k and that’d be about all my disposable income.

 

[cosimnot]

@brownie44 If you contribute to a Roth IRA, everything you put in can be withdrawn to buy a house/condi and $10k of earnings, without penalty (the latter after at least 5 years).

So if you get up to your match in a trad 401(k) and put the rest in a Roth IRA, you will have some flexibility.

I feel like this is not the prevailing wisdom on this sub but it’s what I did and I have no regrets.

 

[kathyjenkins]

@cosimnot better returns, but boy it hurts to take from the Roth knowing that you're probably losing 90x on that and you can't put it back, if you weren't maxing your Roth though it's definitely a more realistic option then a 10k 401k loan you pay back to yourself

one thing to note is 6500 a year is probably less then house inflation on the average house as you aren't touching the returns, doing this is better than nothing, but investing and being able to tap into the returns is generally going to insure you get there.

 

[brownie44]

@cosimnot My employer offers a Roth 401k option as well. My company matches 25% match of my contributions with no limit and also gives 3% safe harbor. Should I do the Roth 401k with the idea I can withdraw from that early if I decide I need funds for a down payment?

 

[jonnegetier]

@brownie44 Roth 401k and Roth IRA are different. If you are planning to withdraw contributions I’d do rith ira. Regarding the once per lifetime 10k withdrawal you can do - that applies to regular 401k also. Just have to pay the taxes on it in that case

 

[ian1978]

@brownie44 FYI emplyer match dollars always go into pre tax not Roth.

 

[cosimnot]

@brownie44 Problem with a Roth 401(k) is you can only put in 7k a year. If you’re making 6 figs at 25, you can afford a traditional 401(k). I made $50k/year in my 20s, so all I could afford was the $6k/year (limit at the time) into Roth. Once I was in my 30s and making 6 figs, I went as hard into traditional as I could afford. Eliminating a lot of my Roth b for the downpayment DID put me behind for retirement but I’ve since caught up.

I don’t think you can take money out of a Roth 401(k). You can roll it into a Roth IRA when you leave your job, but then you’d have to wait 5 years from that point to withdraw.

https://www.bankrate.com/real-estate/roth-ira-first-time-homebuyer/

 

[cosimnot]

A lot of people in finance subs say you need a fully funded emergency fund and need to save 15-20% year for retirement AND save for a house. That is only possible though high income, parental help or eating rice and beans. You also need to enjoy your youth (at least in moderation). Reality is for most people have to get a little creative to buy a home. But only buy if you want it. It’s not an investment in the traditional sense, it’s a place to live. Interest rates and high prices make the “investment” discussion very different. In hindsight, I look like a genius because I have a low interest rate and lots of magic equity now but it was a lot of luck and timing.

 

[zongruger]

@cosimnot It’s 23k limit, not 7k. 7k is for IRAs

 

[cosimnot]

@zongruger Dang didn’t realize that. Stopped the Roth 401(k) years ago.

 

[zongruger]

@cosimnot 401k has always been the higher limit one vs IRAs. Roth just speaks to whether it's before or after tax money.

 

[spinner981]

@brownie44 5 years on 400k =

30 year mortgage interest 7% with 20% down~ 100,000
Taxes (8000 yr) ~ 40,000
Home owners (2000 yr) ~ 10,000
Hoa (total guess prob low 300) ~ 18,000
Closing costs ~ 7000
Increase in principle value ~ 15,000

Over 5 years ( not including repairs) 160,000 in sunk cost. So if you think property will go up 160 you’d break even.

Rent $2500 for 5 years = 150,000

Both cost about the same, if it was me I’d rent.

 

[fullofspirit]

@spinner981 The current market is a renter’s market, in most places. Housing prices haven’t fallen and interest rates have more than doubled. Until interest rates drop or the housing bubble pops, I’d rent too, if I weren’t already an owner.

 

[june1989]

@fullofspirit That and the job market is...weird, if not bad. I just had to relocate to a new state for work. Was easy to do as a renter. Even if affordable, I can't picture buying my "forever home," because I can't trust a forever job right now, or even a forever career...

 

[tracieplaxton]

@fullofspirit The current market is a wash; both overpriced being on the outside looking in.

It’s a Hobson’s Choice.

The issue OP is facing is what to do to mitigate the worst of both of these bad choices.

It all depends on income.

Less than 100k? You have to rent and try to save for a downpayment some how

Above and around 100k? You get to save for a downpayment faster and also fund your 401k moderately. But the goal is the same, saving and waiting for more attractive rates or a good opportunity.

Making 150k? Absolutely save to buy a property now. Refinance. Save for 2nd property and prosper.

 

[saskia]

@spinner981 If the cost are the same as you show I’m buying. I get my downpayment and principal payments back and appreciation. With rent I walk away with nothing after 5 years.

Cost are the same or close then I’m buying

 

[spinner981]

With rent you walk away 10k positive, plus what ever repairs would be say 5k, you still will be ahead of buying by 15k not to mention when you sell real estate agent is going to take at least 12k in fees this puts renting positive more than 20k. As others said OP is 27 this will not be his forever home IMO. I still say renting is better not to mention Chicago is jacking up real estate taxes.

Op can throw said down payment in t bills and make 4% with no risk. To buy you must truly believe you are going to make 40% in value increase which IMO just isn’t going to happen in 5 years.

 

[growinguplordian]

@brownie44 I cut my 401k investments while I saved for a down payment. I think I cut out like 10k/yr. Still made sure I got my employee matching.