Is investing in S&P 500 a wise choice if you plan to purchase a house in 10-15 years?

Question

My total compensation is $168k/year ($285k gross) and my goal is to purchase a house in the range of $1M to $2M. I plan to invest my savings in the S&P500 for about 10-15 years, hopefully, to make ~$1M, and then use a mortgage to pay the rest of the house cost.

It is well known that the historical rate of return of the S&P500 is 10% (although I know that for all recent periods of 10 years, it has been either higher or lower than 10%). Doing the calculations (e.g., using this bankrate calculator), if I make an initial investment of $50k and then invest $5k/month with a hypothetical return of 10% and inflation of 2.5%, and a long-term tax rate of 15%, after 12 years I should be able to have ~$1M, thus being able to achieve my goal.

My question is that is there any wrong assumptions I have made or anything important that I have not included in my plan?

Answer 1

I am not checking your math. I as assuming that you feel confident that if you start with 50K, add 5K a month, that in 10-15 years you can have $1,000,000 after taxes.

All this is to be able to put $1,000,000 down on house that will cost $1-2 Million.

Your math shows you it is possible. Except there are risks:

• 1987 crash takes 23 months for the S&P 500 to return to the same value
• dot.com bubble followed by September 11th, takes 7 years to come back to the same level
• Housing market crash, takes almost 6 years to recover.
• Currently it has been more than two years since the peak value.

If an event hits as you are nearing your goal, it can extend your investment time even longer. Of course if you are investing during the ride down and back up you are buying bargains and you will recover quicker than the market does.

As you approach your goal you may find that you want to do what 529 investors do, and switch to more conservative (lass risky) investments tp protect you from a drop that complicates your timeline.

Now to be honest if you are working during those 10-15 years, you may find it easy to invest more than $5K a month as your income goes up.

Of course that ignores what will be happening to the housing market. In my neighborhood, the price of houses almost doubled between 1999 and 2006. But then they dropped almost back to the original level by 2008. That $1-$2M house 15 years from now could be the $500K house of today.

With the ability to put away $5K a month above your living expenses it could make more sense to put the money in the bank, and in a few years be able to put 20% down on a house. That way you can start living in the house you need/want sooner.

Answer 2

You are essentially short a house (that is, your financial picture is negatively correlated with housing prices). Therefore, your portfolio should aim for a greater positive correlation with housing prices than the average portfolio. This means things like REIT and real estate ETFs. This will act as a hedge: if housing prices go up, then you'll need more money, but your investments will be doing well and you'll be able to afford it. If housing prices go down, your investments will lose money, but the amount of money that you'll need will also go down. This is far from a perfect hedge, since whatever house you end up buying won't be perfectly correlated with the overall real estate market, and you shouldn't necessarily put all of your money in real estate, but you should increase the share compared to otherwise.

Answer 3

Maybe Buy Sooner

Starting with 50k, and adding 5k a month, you get to 200k in 30 months (2.5 years).

Using this calculator, I assumed 7% interest rate, 1M home value, and 200k down.

The $5,300 monthly payment is roughly equal to your current 6k rent, so you still have the 5k a month for investing left over - which means you can make 5k a month in extra payments.

The calculator says that those extra payments will pay off the home in ~8.5 years, and that you would make about 250k in interest payments over that time.

You'd only rent for 2.5 years instead of 10, and 7 years of rent is about 500k, so even paying all that interest you come out about 250k ahead!

This plan has the home paid off ~11 years from now, saves you a net quarter million, and completely sidesteps the uncertainty of market returns.

Bottom Line - I'd save up for a down payment and buy the house ASAP and then use all the extra cash flow to pay off the mortgage aggressively.

Edit: You also get some interest on the down payment while it's in the bank, and some tax breaks on the mortgage interest while you pay it.

Additionally, the purchase price for your hypothetical home is probably lower in 2026 compared to 2033.

Answer 4

Better to buy a house

• Investor purchases (businesses buying residential houses) have been rising steadily. More demand will push up prices.
• S&P500 rises 10% per year average, but that's 10% of your money. Houses rise 5.4% (avg of the past 30 years in USA) but that's 5.4% of the total value (1-2 million). In other words, if you have $100k in S&P500 you'll get $10k in one year but the house's price will go up $54k-108k. You only gain the advantage of the higher % when you've saved up more than half the price of the house.

Note this is all based on avg rates. There could easily be a boom or bust in both stocks and housing over the next few years. Civil unrest is sky high. AI might destabilize industries. A big house-of-cards debt collapse might start from China and hit the whole world. Inflation has been volatile. These are all scary things but we don't even know how they affect the markets. Covid hit, and the stock market dipped then soared in the fastest bull market since WWII.

Answer 5

1. How steady is this income?

2. Do you have an emergency fund currently? It should be 3 months of expenses minimum, up to 6 depending on volatility of your income or number of people who depend on your income.

3. Do you have any debt? First, you should pay off any and all debt as aggressively as possible, attacking the lowest balance aggressively while paying minimum payments on the others.

4. Home prices will go up. What you want will go up, or the quality of home you want will go down to reach the $1M- $2M goal.

5. To avoid from being house poor, your mortgage should be no more than 1/4th of your take-home pay. Assuming your take-home pay is 200k a year, you should be spending no more than $4,166 a month on housing. This would mean at current interests rates (7ish %) with 20% down on a 15 year fixed rate mortgage, you can only afford $520k worth of home.

You'd have to put something like $600k down on a $1M home at your income.

Assuming your initial and monthly investment and the rate of return at 10%, you could have that down payment in 7ish years. Depending on your risk level, that time horizon could long enough to invest and your probability of losing money would be sufficiently low. There are a few sources on probabilities of losing money in the market over different time horizons. Here is just one. enter image description here

Answer 6

Endowment manager here. Your timeline is a little short for my comfort. If you want a timeframe of "effective certainty" like we require in endowment planning, you need to be out 30 years or more. In only 10-15 years, a lot of adverse stuff can happen and you can actually be down in the wrong 10 year period. You're really rolling the dice in a way I do not like.

I also think 10% a year is optimistic, even if we're not considering capital gains tax.

What is not optimistic is a fixed mortgage rate. You can count on that being what it is. It's not going to turn against you or have a really bad decade.

There is also the practical fact of having the use of the house for those 10-15 years. Which means you are not paying separately for housing all that time, which will be a total loss if you are renting.