There’s a common meme about boomers wondering why millennials don’t simply get a nice job, buy a huge house on a single income, and live happily ever after. Of course, when they were saving to buy a home, bank CDs paid 12% interest and homes cost $35,000 and came with a free mailbox. 

Now, banks laugh in your face when you ask about interest and houses cost $850,000 with a communal mailbox four miles away. It certainly isn’t easy to save to buy a new home—and earn a good amount of interest. But it is doable. Here’s the method my wife and I have used to buy four houses in the last eight years. 

How much should I put down for a new home?

Down payments are all about opportunity cost. When interest rates were at generational lows, I would tell everyone who asked, and several people who didn’t, to use the minimum down payment amount. The more you put down, the less money you have left to invest in other ways.

If you’re doing a VA loan or FHA loan, you can often put down as little as 0% to 5% of the purchase price, but the level of bureaucratic nonsense that comes with the lower down payment is almost certainly not worth it. 

If you’re looking at jumbo mortgages—that is, a loan over $647,200—those aren’t guaranteed by the government so the bank will be far less willing to go with a lower down payment. You may luck out with 10%, but you’ll probably be required to put 20% down. That implies a down payment of at least $161,800. That’s a lot of cash to invest in a depreciating asset. 

The other part of the equation is budget constraints.

What should I consider when investing my down payment money?

It depends on the time frame you’re working with, but the goal is generally the same regardless: capital preservation. The money that you’re saving specifically for a down payment shouldn’t go into bitcoin or Forex trading or the hot new ingrown toenail biotech stock. The more risk you take on, the greater chance you have of blowing it … and having to start the saving process all over again. 

Of course, capital preservation isn’t the only factor. Otherwise, I’d be writing about the best way to convert your savings into gold bars to bury in the backyard next to the bodies. Erm, next to the sprinkler line, I mean. 

After capital preservation, focus on return. You don’t want to be stuck in a savings account paying six basis points in interest or have to resort to digging up gold.

It’s also important to consider the method of saving. My wife and I use something we call “forced savings.” Each month we automatically transfer a pre-set amount into a brokerage account (one that is actually named “down payment account”) for future down payments. Over time, we’ve adjusted to not miss that amount.  

This is an easy psychological trick to saving. You don’t have to manually make the transfer, so you won’t forget or decide you can’t do it this month. And by naming the brokerage account, it becomes money for down payments in your mind. It’s far harder to raid that money for a weekend trip to Vegas if you have it mentally portioned off.  

Down payment investment options by time horizon

Let’s use the capital preservation and returns framework to decide how to invest your down payment based on the time horizon. The longer the time horizon, the more you can focus on returns. 

You’re buying a home in the next 2 years 

This is my sweet spot. My wife and I try to move every two or three years and then rent the previous property. That means we’re constantly funneling money into the down payment account to be used in the (relatively) short term. 

We like closed-end funds (CEFs) that buy municipal bonds (munis) for four main reasons:

1. Higher yields: The average savings account is paying 0.06% interest. You’d have a hard time buying a stick of gum with that level of yield. Munis, on the other hand, often have yields over 4%.
2. Tax benefits: Many muni bonds are tax free. That means a muni paying 4% nets you the same amount (assuming your marginal tax rate is 24%) as a taxable bond paying 5.26%. 
3. Discounts: Closed-end funds (CEFs) are exchange traded funds that have a finite number of shares. That means the supply/demand of share trading can cause the funds to trade at a premium or discount to the net asset value (NAV) of the fund. When it trades at a discount, you bake in a little arbitrage to your return. 
4. Safety: When you pick the CEF you want to invest in, you can choose the geographical area. That means you can buy a fund that only invests in Pennsylvania counties or Texas towns. Some of these municipalities have been collecting taxes for hundreds of years—longer than any bank you would save with has existed. 

The best way to find CEFs is to use a screener. I like the website CEF Connect, which is run by Nuveen. You can screen out funds trading at a premium, with low yields, and with taxable yields and then look at the discount and premium history to buy when it’s trading at a big discount.      

You’re buying a home in the next 3 to 5 years

If you’re right on the borderline of two and three years, stick to the munis. If you have more than three years to invest your down payment, you can start branching out into different kinds of income investments. That means corporate or government bond funds, dividend stocks, or REITs.

Each of these options is a relatively low risk, high income way to save. Even if the stock market crashes, dividend aristocrats and General Electric bonds aren’t going to fall by that much. And if they do, you can just wait an extra six months for the price to recover.     

You’re buying a home in 5+ years

If you want to segment savings for a down payment more than five years in the future, I still wouldn’t buy bitcoin or NFTs of Giannis Antetokounmpo dunking on Julius Randle. But otherwise, I wouldn’t really invest any differently than I do other savings.  

Growth stocks, value stocks, real estate investments, and even private business investments, if they’re liquid enough, can all work. The key is to be able to switch to low risk once you’re about two years out from your purchase. 

Set your system up now

If you’re planning on saving for a down payment for a jumbo loan, your best bet is to start your saving and investing system as soon as possible. It won’t matter whether you’re investing in muni bonds or racehorses if you don’t give your returns enough time to compound.