Am I an idiot for buying a house vs co-invest allocation?
After a couple surprise investments returned at yearend + my annual bonus came in, I found myself in the rare position of holding a down-payments-worth of cash in my checkings. Instead of opting to throw that back into co-invest opportunity in our latest fund (just raised, with an open window for new allocations), I decided instead to make an offer on a primary residence and am now in contingency - it’s a ~$1.5M townhome, 3BR / 3BA, 2k sqft in a great neighborhood in LA. After factoring in closing costs, 1-2% cash reserves for emergency repairs, furnishing costs, first year’s property tax, and other minimum cash reserves I want to have on hand for other near term expenses (like tax bill, bunch of friends’ weddings this year, travel, etc), the cash at close I put up is around $400K which is around 80%+ of my personal brokerage. Plus, the monthly payments including HOA and insurance means I will want to hold ~$20k from my annual post tax bonuses going forward to go towards monthly payments (not the biggest deal as to me, this would just be instead of going into the s&p) as I’m at roughly $200k salary and $500k TC.
I still have ~$500K between retirement accounts and co-invest in our last fund (although obviously illiquid and last fund is tougher), but hard to consider these as investable $s at this point.
Ultimately, it came down to wanting to buy a place for our own (recently married) and finding a place it felt like we could grow into for the next 5 years, and then hopefully some years after that if we have a first kid around then. Still, part of me is constantly thinking whether any reasonable person in my position would have told me to throw that into co-invest (or anything else with a healthy ROI), continue building my earnings base, and rent until the 5 year mark where I probably could’ve just bought a real house. Give it to me straight - did I blow it (literally)? Anyone else who has found themselves in the same situation? Not sure if it changes the calculus, but I am 30 and SO is 28.
Big time.
Well you already pulled the trigger so
What are your monthly housing costs including mortgage etc?
Does your s/o help with paying for stuff?
Man asking the right questions but not getting any answers
Hah agreed, these are relevant. Monthly payment breaks down as follows:
- $7.5K P&I
- $600 HOA
- $140 Homeowners insurance
- $9K semi-annually in property tax
SO contributes ~$2K monthly which puts my monthly all-in, before property tax, at around $6.2K. All "common expenses" i.e., groceries, furniture, etc. we generally split as a % of salary (within reason).
I'd take some of these terse comments above with a grain of salt. Nobody can tell you what type of foregone ROI you missed out on by choosing to buy a house instead of throwing it into your firm's co-invest. Maybe that fund is the 5x fund that some of the partners will retire off of. Maybe it's an absolute dud. However, whether it was today or in 5 years, you will always have to face the feeling of major investment FOMO when it comes to buying (unless you're extremely financially prudent and a 20% down payment represents a small chunk of your discretionary capital - most of my friends in this industry work hard, earn a lot, and rarely go down that path, though, and I'd doubt you would either). At some point though, you need to remember that savings are meant to be used to an extent - what's the point of money if it's not to make you happy, and better yet, to provide for your family...within reason, of course.
I wouldn't sweat it. You're still young, you obviously have done well for yourself, and assuming that next fund isn't the absolute dud referenced above, probably have plenty of $s coming your way that you'll be able to invest in higher-beta assets. At the end of the day, take a look at the annual sum of your interest payments (excl. principal), property tax, insurance, HOA fees, and subtract deductible mortgage interest tax shield (which could be something like $30K with the latest $750K cap), and divide by 12. Is that less than what you think you'd be paying for rent in 3-5 years? If the conversation is even close, then you'll be OK.
Ultimately though, owning your home is priceless. Life is too short to do nothing but move numbers on an account on a screen to an account on another screen (again...within reason). Congrats - sounds like the next adventure is waiting.
If interest rates come down reasonably in the next 5 years you might be able to catch a nice little rise in home prices and be able to refinance into a lower rate mortgage. Purely from an investment perspective I’d say it depends on where the place is in LA. For a $2M 2k sqft town house, I’m guessing we’re talking about mid-city, culver city, mar vista or something similar, I’d bet those areas will have stickier prices as schools have gotten better and the west side is always a lock. If you bought a place in the valley, I’d rather hold 400K in Rivian stock, then pay those prices for a town house over the hill. Just my 0.02, congrats on the next chapter.
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