Reader Case: Want to Retire but Trapped in a 1.6 Million Dollar House

FIRECracker
Follow me

FIRECracker

FIRECracker is Canada's youngest retiree. She used to live in one of the most expensive cities in Canada, but instead of drowning in debt, she rejected home ownership. What resulted was a 7-figure portfolio, which has allowed her and her husband to retire at 31 and travel the world. Their story has been featured on CBC, the Huffington Post, CNBC, BNN, Business Insider, and Yahoo Finance. To date, it is the most shared story in CBC history and their viral video on CBC's On the Money has garnered 4.5 Million views.
FIRECracker
Follow me

I was going to write a travel post this Friday, but then I got a distracted by another Reader Case.

What’s so juicy about this reader case is that it’s epitome of what people in big expensive cities love to complain about:

I make a ridiculous amount of money, but why I can’t seem to get ahead?

Healthcare is so expensive in the States, how can I possibly retire?

Legitimate questions to be sure, but the answer to why this reader isn’t getting ahead with a pre-tax family income of $300,000 isn’t because of the expensive cost of living in a big city or healthcare. It’s because of…

Houses. And how they completely SCREW UP your life.

Don’t believe me? You decide (e-mail edited for brevity):

“Congrats for what you have accomplished! It was almost exactly what I envisioned for myself 15 years ago. I thought I would get a million dollars by age 35 and retire and enjoy life. Somehow it hasn’t worked out that way. I just turned 40 a few days ago, and am not sure when I’ll be living that dream, but I thought I’d take you guys up on your offer to analyze my situation and would welcome any thoughts you might have.

Gross/net annual family income

  • $300K/$200K US

Monthly family spending

  • $7K (house costs) – $5000 mortgage, $2000 for property tax, insurance, maintenance, etc
  • $3K on everything else
  • $1250 ($30K a year, with about half covered by employer and half out of pre-tax salary.)

Debts:

  • The interest rate on house: 3.375%
  • minimum monthly payment: $5,000
  • outstanding balance: $1,100,000

Fixed assets (house, car, etc.):

  • Worth about $1.6-1.7 M (maybe $1.6M after commissions/fees–base purchase price was $1.5M),
  • An apt in Korean Worth approx $300K, construction of which will be completed within 2 years –not easy to turn into US cash, but could be useful if we ended up in Korea–wife’s investment
  • 2 cars worth 20K each

 Investments or savings:

  • $100K cash
  • $60K stock
  • $280K in 401K 
  • $270K segregated for kid’s education fund ($180K in 529 funds and $90K of which I could technically use for anything)

As you can see, I have a fair amount of assets, and I could even be considered a paper millionaire, but I have trouble envisioning how all of it could be used to support my family if I don’t work, even though I have some things in my favor, including that I could probably bum 10K per year off my parents and, in an emergency, move my family in to live with them rent free, and that my wife and I will probably inherit between $1M and $3M (depending on a number of factors) within 20-25 years, which potentially helps a lot for retirement.

Also, our house is in an area (in what may be a slightly undervalued part of LA) where it could easily appreciate 5-10% a year in the next few years. However, with health care as ridiculously expensive as it is in the US., even 40K a year doesn’t seem like enough for a family of four. My wife is also a city girl and probably wouldn’t be enthusiastic about moving to a small town to save rent (moving to Korea, where there is cheap healthcare is at least an option, though not optimal for kids).
Anyway, I’d appreciate any thoughts you guys have. Also, have you guys ever thought about using a big chunk of cash for real estate? E.g., you could use $500K to buy 10 $200K houses (or equivalent multi-unit properties) with 25% down. It would require a little work (or you hire a property manager), but potentially provide higher fixed returns with good appreciation potential (particularly given the leveraged nature of the investment) and manageable risk if it’s not your portfolio and you have property in a couple different places.
I appreciate any thoughts you have. I feel very blessed, but still trapped in the machine…”
–Trapped

 

Okay, now, most of you will probably expect me to balk at his cost of living. BUT considering how he’s making $300K/year, it’s actually not that crazy. Even after the high expenses, he’s still saving 33% of his after-tax salary. Pretty good for the average person. But here at Millennial Revolution, we never settle for average.

Let’s see how we can blow this average shit up and give him an extraordinary life instead:

Summary

Net Income: $200,000
Spending: $11,250
Debt: -$1,100,000 + 3.375% interest
Investable Assets: $100,000 + 60,000 + 280,000 + $270,000 = $710,000

So, he’s currently spending $135,000/year, but if he were to retire, he’d have to cover the other half of the healthcare costs. That means, he would need $13,750/month or $165,000/year in passive income to retire.

By the 4% rule, he’ll need $4.125 Million to retire. At his current savings of $65,000/year and investible assets of $440,000 (excluding his kid’s education fund), it’ll take him a whole 20 years to build that portfolio, assuming a conservative 6% ROI:

Year Balance Contrib ROI Total
0 $440,000.00 $65,000.00 $30,300.00 $535,300.00
1 $535,300.00 $65,000.00 $36,018.00 $636,318.00
2 $636,318.00 $65,000.00 $42,079.08 $743,397.08
3 $743,397.08 $65,000.00 $48,503.82 $856,900.90
4 $856,900.90 $65,000.00 $55,314.05 $977,214.96
5 $977,214.96 $65,000.00 $62,532.90 $1,104,747.86
6 $1,104,747.86 $65,000.00 $70,184.87 $1,239,932.73
7 $1,239,932.73 $65,000.00 $78,295.96 $1,383,228.69
8 $1,383,228.69 $65,000.00 $86,893.72 $1,535,122.41
9 $1,535,122.41 $65,000.00 $96,007.34 $1,696,129.76
10 $1,696,129.76 $65,000.00 $105,667.79 $1,866,797.54
11 $1,866,797.54 $65,000.00 $115,907.85 $2,047,705.40
12 $2,047,705.40 $65,000.00 $126,762.32 $2,239,467.72
13 $2,239,467.72 $65,000.00 $138,268.06 $2,442,735.78
14 $2,442,735.78 $65,000.00 $150,464.15 $2,658,199.93
15 $2,658,199.93 $65,000.00 $163,392.00 $2,886,591.93
16 $2,886,591.93 $65,000.00 $177,095.52 $3,128,687.44
17 $3,128,687.44 $65,000.00 $191,621.25 $3,385,308.69
18 $3,385,308.69 $65,000.00 $207,018.52 $3,657,327.21
19 $3,657,327.21 $65,000.00 $223,339.63 $3,945,666.84
20 $3,945,666.84 $65,000.00 $240,640.01 $4,251,306.85

Yuck. Retiring at 60? What’s the point of that?!? Anything can happen between now and then. A layoff. A health issue. And then what would be the point in working all those years if you never get to enjoy it?

Screw retiring in 20 years.

We can do better than that.

Now, the first time I read through his story, this is the what stuck out the most:

 $7000/month housing expense. $5000 for mortgage, $1500 for property tax, $500 for insurance/maintenance/etc.

Seriously? With $1.1M left on his 29-year mortgage at an interest rate of 3.375% (which won’t stay that low for much longer) the interest portion of his mortgage is a WHOPPING $3057.17/month!

Since this is the interest/property tax/insurance, which doesn’t add a cent to equity,  he’s taking $1500+500+$3057.17= $5057.17 and lighting it on fire EVERY SINGLE MONTH!

source: http://www.canadamortgage.com/calculators/amortization.cgi

Holy shit.

Now, I don’t know how much rent is where he lives, but if it’s anything less than $5000/month, he’s WAY better off renting and investing instead.

A cursory look shows that average rent is $3000/month in LA, so what if he were to rent instead, reducing his cost from $7000 down to $3000, and invest the $4000 surplus?

Assuming he could sell the house for $1.6M after fees, he’d get 500K after paying off his balance of $1.1M.

So, that would add $500K to his investible assets and increase his yearly contributions from $65,000 to $113,000.

BUT WAIT! It gets even better.

By lowering his housing expenses, his monthly cost drops from $13,750/month down to $9750/month or $117,000/year.

This means, he will no longer need $4.125M to retire. He now only needs $2.925M.

THAT right there is the beauty of reducing your expenses. Not only do you end up having MORE money to invest, you also need LESS to live on. So if early retirement were a marathon, this is like cutting the race in half while accelerating your speed with a ton of steroids. You get there so much faster.

Let’s see how that affects his TTR (time to retirement) shall we?

Year Balance Contrib ROI Total
0 $940,000.00 $113,000.00 $63,180.00 $1,116,180.00
1 $1,116,180.00 $113,000.00 $73,750.80 $1,302,930.80
2 $1,302,930.80 $113,000.00 $84,955.85 $1,500,886.65
3 $1,500,886.65 $113,000.00 $96,833.20 $1,710,719.85
4 $1,710,719.85 $113,000.00 $109,423.19 $1,933,143.04
5 $1,933,143.04 $113,000.00 $122,768.58 $2,168,911.62
6 $2,168,911.62 $113,000.00 $136,914.70 $2,418,826.32
7 $2,418,826.32 $113,000.00 $151,909.58 $2,683,735.90
8 $2,683,735.90 $113,000.00 $167,804.15 $2,964,540.05

Wow! From a 20 year sentence down to only 8. Just because all that money is no longer tied inside an overpriced house and he’s no longer setting $4000 on fire each month.

Now, if he were able to somehow magically get back the $300,000 that seemed to have vanished into the Korean condo…

Year Balance Contrib ROI Total
Year Balance Contrib ROI Total
0 $1,240,000.00 $113,000.00 $81,180.00 $1,434,180.00
1 $1,434,180.00 $113,000.00 $92,830.80 $1,640,010.80
2 $1,640,010.80 $113,000.00 $105,180.65 $1,858,191.45
3 $1,858,191.45 $113,000.00 $118,271.49 $2,089,462.93
4 $2,089,462.93 $113,000.00 $132,147.78 $2,334,610.71
5 $2,334,610.71 $113,000.00 $146,856.64 $2,594,467.35
6 $2,594,467.35 $113,000.00 $162,448.04 $2,869,915.39

BAM! Without the house and condo dragging him down, he’s only 6 years from retirement (6 years 2 months to be exact)!

We just reduced his TTR by 70%, just by cashing out on the equity and renting instead of owning.

This is why I keep saying houses are money pits. Money goes in, never comes back out.

Even with a salary that is 150% HIGHER than the RetireIn7Years couple from our last Reader Case, if Trapped keeps his properties, it’s going take him 3 times as long to retire as them because so much of his net worth is stuck in real-estate, and he’s setting $5057 on fire every month.

But if he were to sell the properties and rent, he’s only 6 years from retirement.

Trapped better hope he doesn’t get laid off, because if he keeps doing exactly what he’s doing, he’s going to have to keep that job for at least another 20 years.

Or he could get rid of the shitty housing “investment” and coast there in 6 (Even with healthcare and kid’s educations both taken care of!) years.

What do you think? Chime in the comments!

99 thoughts on “Reader Case: Want to Retire but Trapped in a 1.6 Million Dollar House”

  1. Whether or not a house is a good idea depends on the house. I bought a house a year ago for a total price that is 40% of my annual income. It’s small, so taxes and utilities are cheap. Problem is, houses like this don’t exist in Los Angeles. I live in a small town in the South, so it’s pretty easy to find affordable housing down here. That’s the price you pay for needing to live a big city.

    1. Yup. So if he wants to work for another 20 years, it’s his choice. But if he can find rent for less than $5000, he’s ahead since he’s setting that amount on fire every month.

  2. The ridiculous house is exactly what traps so many people and you can see exactly how a $300k salary doesn’t seem like all that much. The problem is that $7k is a fixed cost that he can’t get rid of for basically his entire life. Even selling his 1.6 million dollar house could take years (what percentage of people in the world can afford a house that expensive?).

    This is a problem that a lot of doctors and lawyers fall into. And it’s so freaking hard to avoid that temptation. Even now, my fiance (soon to be wife) is talking about how she wants to have a nice house one day. And admittedly, I want a nice house too. (our current house is the epitome of a crappy college house). But we need to train ourselves that it’s going to be a trap if we do that, even though a lawyer and dentist are “supposed” to have a giant McMansion.

    1. “Even selling his 1.6 million dollar house could take years (what percentage of people in the world can afford a house that expensive?).”
      —————————-

      I’ve got to disagree there. Judging by the number of mega-mcmansions going up right now (given the state of job market, stock market, red-hot economy, etc.), apparently a lot of people can afford such a house.

      1. Perhaps the difference is “afford” vs. “buy.” All of us can buy anything, but that doesn’t mean we can afford it.

        Could also be I’m a little skewed in my thinking of home prices since I live in the Midwest, where a $1.6 million dollar home would basically be a celebrity mansion.

        But, how exactly do so many people afford to buy a house like this? Just Googling around tells me that median income in a place like San Francisco is in the $80,000 to $90,000 range. What millennials can afford a house like this? The market for this house has to be for older people who are making a ton more money right?

        And if you’re older, why would you buy a house like this and what’s the plan? Presumably, you’d already have a perfectly good home by the time you can buy a 1.6 million dollar house. Let’s say a 40 year old buys this house after spending their 30s in their “starter home”. Is the plan to pay $7k a month now to live until you’re 70?

        1. With regard to San Francisco there are tons of people making $300k Or more working for companies like Google. There is also a large swathe of foreign buyers with money to spend on homes and real estate investments. In China alone, there are more millionaires than there are people in all of Canada (population ~30 million). Have a look at some of the articles on https://betterdwelling.com/ to see the impact that overseas money is having on major cities across the globe – London, Paris, NYC, Sydney, Toronto, and so on.

    2. You’re right. It’s all about choice. If someone wants to be saddled with a fixed cost of $7000 year that’s their choice. But what exactly are they giving up to have that house? Time with family, health, being an corporate done? If the person is perfectly happy, they can continue doing what they’re doing, but Trapped clearly doesn’t.

  3. Trapped? Really? You’re literally swimming in money.

    #first.world.problems

    I don’t think I can muster any kind of sympathy for this family. Sorry. I tried. But just can’t.

  4. Great analysis. I agree that having too much of your net worth concentrated in real estate is a double whammy – you have less money to save for retirement, and you’ll also need a larger portfolio to support the higher ongoing costs.

    I own my home, but it’s small (“cozy”) and simple in order to keep the costs down. This has translated into (relatively) low ongoing costs, and more ability to invest, since mortgage payments and other housing costs are only a small part of my take-home income.

    1. Awesome! Glad to see a level-headed homeowner. Buy or rent less than you can afford. That’s the key to financial happiness.

  5. Your variables and options are a bit off I think:

    1. Seriously? With $1.1M left on his 29-year mortgage at an interest rate of 3.375% (which won’t stay that low for much longer) the interest portion of his mortgage is a WHOPPING $3057.17/month!

    – the interest rate is fixed in the US for 30 years – it won’t go up.

    – The amortization on your table should be 30 years, not 29 – 29 is remaining on the 30 year term and this error affects the monthly payment, as does the rounding up the interest rate .25%.

    2. He has 500k in equity in the home and says it is worth about 1.7 million currently and is in an area (in what may be a slightly undervalued part of LA) where it could easily appreciate 5-10% a year in the next few years

    – You have not accounted for appreciation on the house in your comparison calculations – they don’t have to stay there in retirement. If it grows 5% per year the house will be worth $2,169,678.66 in five years – 10% and they’d be at $2,737,867.00. In five years the mortgage will be $1,088,156.39.

    And yes, there is risk that prices will fall, but they should be prepared to stay in place if this occurs. LA has had a long-term average appreciation rate of between 5.5-6%. If you can use long-term averages for stocks, you should definitely be able to apply this to housing in HCOL markets like LA if you are able and willing to hold.

    If they sell in five years they will likely net 1-1.6 million, plus have a portfolio valued at $1,104,747.86 and will likely have a significant inheritance plus a paid-off apartment in Korea.

    3. Now, I don’t know how much rent is where he lives, but if it’s anything less than $5000/month, he’s WAY better off renting and investing instead.

    Why not just ask him about his area? That average you have quoted is for a 2 bedroom rental apartment. They are currently living in a house. You are not comparing apples to apples and you’d need to know whether a 2 bedroom rental is worth the lifestyle compromise to them.

    If they stay where they are and then they sell and move to Korea in five years they will most certainly have enough to retire. If they move to a lower cost housing in five years – whether rented or owned, they likely have enough to retire.

    He can just ask Justin at rootofgood or gocurrycracker how they manage health care costs and education for the kids, but their net worth should support retirement in the US too.

    The biggest obstacle to any of the changes might be his wife. He needs to get her on board imo.

    1. “interest rate is fixed in the US for 30 years”
      – depends on the type of mortgage. Regardless, I didn’t including raising interest in the calculations so it’s a moot point.

      “The amortization on your table should be 30 years”
      – he mentioned his has a mortgage of 29 years, so that’s what I entered. Also, the rounding is done by the online calculator not by me. It’s small enough that it doesn’t change the outcome.

      “home appreciation”
      – if he doesn’t sell, doesn’t matter what the appreciation is, it’s trapped in the house. In the meantime, he’s still burning $5000 every month, which doesn’t go towards equity.

      “moving to Korea”
      – he mentioned he doesn’t want to do that because of the kids

      I do agree on the point about his wife. It’s much easier to become FI if they are both on the same path. But in her case, she seems to want to stay in the city and invest in property overseas. Those are two giant obstacles that will keep him “trapped in the machine” for the next 2 decades.

      1. You are right that the interest and term are not as big of an issue as other things in your analysis. The biggest issue is a failure to attribute any appreciation to the house and assume they will never move despite the fact that they could likely reach FI by staying and downsizing in 5 years.

        His wife does not want to move to a small town, but there is no indication she is unwilling to downsize later for retirement and she may want to go to Korea given that she has invested in a condo there and is presumably from there. Regardless, there will be other options in five years in the US.

        They are not “burning $5000 every month”, they are gaining a shelter benefit plus the return on the borrowed funds which, together, likely exceed the costs of borrowing. And, of course, there is a risk of a housing downturn just like with the stock market – but the housing market in LA, like the stock market, has always gone up over time – even after an earthquake. The real risk is the risk of having to sell in a downturn which could be devastating.

        I like your blog. Your travel and investment posts are really good. Your writing is well done and you stick to a schedule. However, your analysis of rent vs. buy is consistently distorted.

        I’m not the only one to say this, and I’m not sure if this distortion is intentional to go along with your blog theme, or unintentional, but it is going to get in the way of credibility at some point because… math… and there are many people out there with both stocks and houses who have done the math.

        And you don’t need to make the point by dismissing facts and options, renting and investing is a viable alternative. Especially for someone who does not already own, lives in a HCOL area, and wants to travel and live a lifestyle like yours – which many would.

        1. Fine. Show me the math or shut the Hell up.

          My point is, if he wants to retire, he has to sell the house eventually. Either now, or in 5 years, the answer remains the same. If he stays put, most of his equity can’t be used to fund his living expenses and as a result he will retire in his 60’s. But if he sells and unlocks it, he can do it in a third of the time.

        2. Indigo, Totally agree. I read this blog from time to time but the housing parts I usually ignore. I understand their point of view coming from a HCOL area in Canada. I own three homes and still invest. The two I rent have a positive cash flow and the one I live in is on a large body of water and appreciates yearly. I also take advantage of the mortgage dudcutions and other tax write offs that are allowed in the US. Firecracker doesn’t take any of that into account. It seems like she specifically ignores those important parts of owning that don’t fit her argument.

          1. I, too, agree with Indigo. His/her reply is what I believe to be a respectful, well-thought-out counter-argument. Disappointing to see Firecracker’s disrespectful reaction.

            Here is how I see the numbers:

            5% down payment on a $1.1 million dollar home (the assumed purchase price) is $55,000.
            Appreciating at a VERY CONSERVATIVE 2.5%, then case study equity growth = $27,500/year.
            That is a 50% return on investment. Annually! Nice.

            According to LA Times: average purchase price of a home in Los Angeles is $507 per square foot, suggesting the readers home might be 3,156 sf.
            According to LA Times: average annual rent is roughly $34 per square foot, meaning this same property would rent for $10,730/month.

            A quick look at Zillow shows 86 comps renting in the 8k-12k range, so this assumption seems reasonable for LA.

            My advice would be to rent the home out at $10K/yr, yielding gross rents of $110,000/yr (assuming 1 month vacancy/yr). After expenses of $84,000/yr, this yields an annual net profit of $26,000. Now you are cashflowing 47% of your initial $55,000 downpayment and still enjoying the VERY CONSERVATIVE equity growth of $27,500 for a total annual return of $53,500.

            But wait, there’s more. Then add in the benefit of principle pay-down for an extra $/30k+ year for annual return total of $83,500!

            Move in with the in-laws for one year, then repeat.

            Please feel free to comment how you might see the numbers differently.

            1. First of all, ROE stands for Return-On-Equity. His equity is $500k, not $55k, so his return on $26k is 5.2%, not 47%. And over time, as he pays down his mortgage, his equity will rise, which will reduce his ROE. More money will get trapped in an asset earning the same amount of money.

              Second of all, “the benefit of annual principal pay-down of $30k.” What?!? Do you think that paying down your own mortgage is somehow an investment return?

              And third, he has to move out. What exactly is the point of real estate if you have to move out of it to have it make financial sense?

              Real estate math. Ugh.

        3. The fact that the reader named themselves “Trapped” is a good indication that they won’t be moving to Korea for a while. It sounds like they are in LA for the long haul and this reader is lamenting that they’ll be in this house as long as they are, despite the high cost.

          They are getting a shelter benefit for the 5k in monthly expenses that don’t go towards equity. However as the blogger points out they could probably get shelter benefit from a rental for less than this cost.

          A nominal return of 5-6% on LA housing over time is significantly less than the 7-8% for the stock market over time (actually, the S&P 500 has returned 12% per year since the 1970s). This is a significant opportunity cost. It will compound into a very substantial lost sum if this couple really is staying in LA for a while.

          After reaching FI, my wife and I de-FI’d ourselves (is that a term?) by purchasing a second home in an expensive coastal city we plan to move to. We’ll need to work more to pay off the new mortgage, which is our choice. But we are almost certain that we are giving up a lot of investment gains by spending our income on the mortgage, even though we expect the value of the home to appreciate by a healthy amount.

          Additionally, one who invests in a stock portfolio can sell gradually in a down market; one who puts much of their worth in a home will have to sell it all at once when they are ready to retire, no matter what prices are at that moment. I found myself nodding my head in agreement when reading this post. There’s no getting around the fact that, for those with the goal of early retirement, an expensive house is an anchor.

          One more thing about “math” – when applied to something intensely personal like someone’s housing preferences, it tends to get get a little fuzzy. I wouldn’t say math undermines the logic in the post any more than it undermines the logic in indigo’s comment.

          1. >”A nominal return of 5-6% on LA housing over time is significantly less than the 7-8% for the stock market over time (actually, the S&P 500 has returned 12% per year since the 1970s). This is a significant opportunity cost. It will compound into a very substantial lost sum if this couple really is staying in LA for a while.”

            It is actually more when you add in low cost leverage and the tax deductions and exemptions. Once there is greater equity in the house the ROI declines and buying with cash – well you’ve only got appreciation less costs there unless you are willing to rent it out so that can be a lot less than tax sheltered index funds. A second home is definitely an anti-FI choice for most unless it is rented out – but worth it for some.

            “one who puts much of their worth in a home will have to sell it all at once when they are ready to retire”

            Markets are cyclical. Be prepared to sell when they go up and base your retirement date on this. Mitigates risk and no-one is forcing you to sell or retire at a specific time.

            “One more thing about “math” – when applied to something intensely personal like someone’s housing preferences, it tends to get get a little fuzzy.”

            Math is math. I’d agree that emotional returns can make it worth it to keep working for a fancy house or a second house – just as long as you do the math first.

            1. I hate to pile on, but do you have the math to back up your assertion that homeowners come out ahead of renters because of tax deductions? I have read the opposite. And you say “math is math” so can we see your math?

              https://www.nytimes.com/2016/04/02/your-money/to-buy-or-rent-a-home-weighing-which-is-better.html

              Regarding the cyclical nature of markets, the 4% rule was designed for a stock/bond portfolio. You can’t sell 4% of your house very easily – most people have to sell it all at once, which deprives them of the opportunity to wait for a rebound if they retire in a down market.

              1. I did the math below for this scenario. Just control F my name.

                I also never said homeowners always come out ahead of renters. In fact I specifically stated the opposite below in another post. They do not always come out ahead, you need to do the math and it really depends where you live.

                In LA and in my market, both HCOL desirable appreciation-based rather than cash flow markets, the math has favoured holding for appreciation if you are using leverage (a mortgage) as gains will be amplified by this. In Trapped’s specific case it favours continuing to own for a period of time vs. selling immediately imo.

                If there is a market downturn you need to be prepared to hold. The average appreciation in LA over the last fourteen years or so has been 5.52% – that includes the 2008 housing market crash period.

                My view is that if you are wanting to rely on historical appreciation rates you need to mitigate risk by being prepared to ride out a downturn if you’d like to cash out home equity to retire. The window that I use based on past performance in my market is seven years.

                Some areas of the US it is better to rent than buy imo – also covered in another response below by me.

                1. Ok, I do see the math in your other post now. I apologize I missed it earlier. I personally would assume a higher rate of return on stocks. I also, personally, would look further back into the past to estimate the rate of return on housing. Looking at housing over the past, say, 100 years or so, to predict future returns. Maybe that explains our difference of opinion.

                  1. Those numbers might be conservative for both stocks and home appreciation in LA over the long term – not sure but time will tell.

                    I totally disagree that you can look at 100 years’ of house appreciation as an accurate measure. In 1917 the economy and population was so different as to be a ludicrous economic comparison – and it would likely skew the numbers higher than we could realistically expect.

                    I’d say the furthest we should go back would be about 50 years so as to miss the war and depression effects. In my area the 55 year average return is 7% not adjusted for inflation – 3.74% adjusted for inflation. Again, desirable HCOL area. If only my grandparents had been land barons.

                    https://househuntvictoria.ca/2016/03/17/a-brief-history-of-prices/

                    1. I don’t think 100 years would necessarily be an accurate predictor. But I don’t think a shorter time frame is any better. I would want to include wars and depressions in my analysis. After all, you never know, they might happen again, especially if the wrong people are running the government…

                      As an aside, my grandparents were land barons! Unfortunately, the land is in the middle of nowhere. Not a big part of our FI plan.

                    2. Another thing to factor in is that rent increases might outpace ownership cost since most of the ownership cost is locked in (interest) while some ownership cost will face inflation as well (taxes + maintenance). The “math” will become very fuzzy once you build in some sort of rent inflation. I think moving to cheaper location or downsizing is the prescription instead of just swapping mortgage for rent.

  6. This house indeed looks like a trap for me. Even though I agree that they can afford it. What they can’t afford is losing their job with such house. 3k interest, 2k property tax… Jesus…
    Financially the smartest decision would be to sell this house and rent. But let’s say our man is voted down on this and the house must stay. First of all what the hell does that 100k do in cash? I agree that everyone needs an emergency fund, but it’s way too much. Especially when you’re paying 3k per month on interest. They should pay a big part of it against their mortgage plus do the same every month with their extra monthly saving (around 5k if I see well). By this, within 2 years their 5k mortgage payment will go down to 4k (if it’s an annuity mortgage), meanwhile based on his expectation the property value will increase around 10-20%. By the way I hope his interest rate is fixed.
    If the house must stay I’d do the above, but I agree that getting rid of it would be a quick fix…

    1. Paying down the mortgage would reduce his monthly payment over time, BUT, that just ends up trapping more cash in the house. So you just end up with an opportunity cost of less money to invest to generate passive income, and more of it disappearing into the house.

      If his plan is to have a paid off house, that’s fine, but he wants to be free from his job.

  7. I’d have to agree that it depends on the reason why the house was bought. I bought my first condo precisely because it was actually cheaper (mortgage, taxes and condo fees, which included utilities) to buy than to rent at that point in time. Instead of falling into the ‘lifestyle inflation beyond happiness return’ trap, when hubby and I traded our condos for a house, we deliberately bought a semi that was 1) downtown so that we could stay car free, 2) require renos since we didn’t want to pay for someone else’s crappy inflated flip but rather reno ourselves with an eye to maximizing function and minimizing utilities forevermore, and 3) same reno could net us new ongoing income streams (roof solar + basement suite). It also, however, had to mathematically work: all-in estimated to be roughly equivalent or cheaper than the alternatives.

    I expect if the case reader went looking for rentals the same way as houses, the larger problem would remain unresolved – they’d wind up with an overly large, higher end lux beauty with far pricier rent than its happiness return factor and costs a mint in utilities and associated fees to boot.

    1. That’s why it’s gotta be about the math and not the fancy granite counter tops. If he actually wants to retire, he has to do the math and figure out how to get to there. If he wants to continue feeling “trapped inside the machine” just to have a fancy house, then he can keep doing what he’s doing.

  8. Your initial calculation that it’ll take 20 years to retire if he keeps the house seems completely off, unless I’m missing something.

    It doesn’t take into account the valuation of the house whatsoever, which is their largest asset. If they keep the house it will increase in value considerably over that time frame and probably be worth as much as, if not more than, their investment portfolios. To be a fair comparison you should add the current value (not equity, since any gains is on the value of the house, not the equity in it) of the house to the starting portfolio, which might even bring them an earlier retirement thanks to leverage.

    Right now your calculation INCLUDES the cost of the house each month and EXCLUDES the value of the house and any gains on that value. It’s completely skewing the results. Your second calculation of an 8 year retirement has essentially magically included the $500,000 equity in his house which you excluded from the first calculation.

    1. Who would invest in a house in the first place. It doesn’t pay you a cent of dividend for 20 yrs in this case and has high maintenance cost. It might appreciate a lot but it might not while in the market the portfolio can also appreciate a lot or not but dividends come every month or quarter no matter what happens ! There is nothing a realtor could say to make me think otherwise !

    2. Yeah, I really hope this doesn’t come off as mean, but this seems like a thing that this blog does a lot.

      The hatred of housing (also kind of bizarre) leads them to make completely biased calculations so that the conclusions line up with their preconceptions. Not everyone wants to travel the world all the time. Some people like to own a house because there are factors beyond purely financial.

      If this were me, I would definitely sell the house, but as you say it’s not so cut and dry as this post makes it seem.

      1. I’m all for “own vs. rent” comparisons and I’m actually a firm believer in renting in many cities, but as you say there seems to be a lot of these comparisons that ignore the value of the house to make it seem better to rent, whether intentionally or not.

        They have over complicated this analysis when it really just boils down “will I reach retirement earlier by owning or renting?” They haven’t actually included any facts in the analysis though, such as renting a comparable house, nor the potential for house value appreciation in that location. They’ve assumed a 6% gain on investments per year, and not only ignored the value of the house, but also any gains on that value, which someone above said would be in 5-6% range as well.

        The writer blows a gasket at the cost of interest on the mortgage, without actually considering that the bank has given them hundreds of thousands of dollars to INVEST, with returns probably being over 5%. As such, they’re making considerable PROFIT on the mortgage.

        If they re-did the math and included the value of the house on the first calculation they would have a little over $4,000,000 in net assets after 8 years, some of which would still be owed on the mortgage though (didn’t bother with the math on what, but much less than the $1.1m they owe on it now). Compare that with the under $3,000,000 on the other calculations and it’s potentially better to own. They could then sell the house and move to renting if it’s cheaper, lowering their monthly outgoings.

      2. “Not everyone wants to travel the world all the time. Some people like to own a house because there are factors beyond purely financial.”

        Nowhere did I ever mention in the analysis that he should “travel the world”. Also he mentioned he feels “trapped inside the machine”. Does that sound like someone who’s perfectly happy and want to stay in their currently situation?

        If you want to do an better analysis for keeping the house, go right ahead. Complaining without offering solutions is a waste of everyone’s time.

    3. “You should add the current value of the house to the starting portfolio, which might even bring them an earlier retirement thanks to leverage.”

      Wow, that is some pretty messed up real-estate “funny” math. Making up random appreciations, while throwing around the word “leverage” even though THAT is what’s causing him to burn $3000 a month.

      Please step away from your Excel spreadsheets before you hurt yourself.

      1. House appreciation has a track record, it is not magical. Just like with stocks.

        Sometimes houses lose value. Overall in LA they exceed inflation long-term which creates significant returns with the use of leverage. If you are going to assign a value to future stock market increases you need to do the same with a house if you are in a HCOL area with a long track record of appreciating at a certain rate.

        5.52% is the LA average per year since 2000 – even after the 2008 crash. Houses in his value range appreciated 7.4% last year. The poster has indicated he thinks it likely there will be 5-10% appreciation for the next five years.

        https://www.neighborhoodscout.com/ca/los-angeles/real-estate

        1. SIGH.

          Just because the average YoY increase in LA is 5.5% doesn’t mean his PARTICULAR house will increase YoY 5.5%. It’s the same reason why I don’t say that because the S&P500 increases at 7% annually that Apple will also increase 7% annually.

          Putting most of your net worth into a single stock is idiotic. Just like putting most of your net worth into a single house is idiotic. Neither will help you retire. Learn how investing works.

          1. Diversification in stocks does spread risk. I understand that some argue that you need to spread risk out with money in multiple houses well to mitigate risk. I’d strongly disagree. Buying a primary residence can be a great investment.

            If you are a HCOL area with a long history of strong appreciation and you can hold through a downturn like 2008 in the US. Victoria, where I am located, has a 50 year history of an average appreciation rate of 7%. Some markets are not like this, like a lot of the East Coast and many areas of the US including the rust belt. Housing may be good for cash flow there, but not appreciation and I would be tempted to rent there and own only investment properties.

            Strategic thinking is key here as well. If you buy a house in an area with strong appreciation do it when you are ready and able to hold through a downturn. If you want to retire early, be prepared to sell at a peak and downsize or relocate like people from Vancouver are doing now (not that that market is representative). I don’t want to make this post too lengthy, but this works and is not “idiotic” and you can do index investing as well as the OP is doing – they are not mutually exclusive. And yes, I have held through both down and flat markets.

            “Just because the average YoY increase in LA is 5.5% doesn’t mean his PARTICULAR house will increase YoY 5.5%.”

            Ask the OP whether his home has appreciated in tandem with the market since he bought. Given his valuation and the fact his location seems good, my guess is that his appreciation rate has been a bit higher than average. In order to mitigate risk here you need to pick the best neighbourhood you can afford, my guess is he did, and be able to hold through market cycles – not buy 20 houses in different parts of the country. Don’t forget that a primary residence in the US has tax deductible mortgage interest, cheap financing and exempt capital gains – I don’t believe rental property does which changes the numbers along with the high transaction costs. Although this method can work too: http://www.adventuringalong.com/our-story/

            “Putting most of your net worth into a single house is idiotic.”

            No need to put most of your net worth into a house if you are using a mortgage unless you are just starting out – although your net worth is probably small if you are. In fact you can HELOC a home to invest in the market if you are into that and believe you’ll get 6-7% long term and the interest on the HELOC will be tax deductible.

            Forty percent of Canadians already have a paid-off house. That is a ticket to ER and you cannot beat the low cost leverage that assists with this type of investment or the primary residence tax exemption imo. You might want to consider doing a sell and invest story instead as many Canadians seem loathe to downsize or relocate for ER even if they hate their jobs. Positive examples of this succeeding would be good to get out imo.

            “Learn how investing works.”

            I have. I am retired in my 40s and have worked only PT since 2007 after starting my professional career in 2003. This is primarily due to real estate, but also due to low cost index investing and business ownership. My net worth exceeds yours. Grew up on welfare, had no parental financial assistance and made many mistakes. There is more than one way to meet a goal – the key is strategic thinking no matter which route you choose.

            Your method works at your net worth if you are willing to live on 40k a year and forgo home ownership. My guess is that you are looking to raise this amount through blog income. This is smart and I wish you every success. You will likely need additional income/assets if you decide you do want to own your shelter costs one day in Canada.

      2. Wow, you just lost any semblance of respect I had for your argument now. I was giving you the benefit of the doubt for making an error in calculation, but now I just feel like you are being deceitful to the reader by purposely omitting any appreciation on a house over a 20 year period to support your clearly biased argument.

        You obviously have an issue with leverage investing and love to spout the argument that they’re “burning” $3,000 a month in interest without considering the possible significant upside of potentially gaining $8,500 interest in appreciation.

        Just because this person has put all their money into one asset rather than a diverse portfolio doesn’t mean you ignore any possible appreciation of that asset just because YOU consider it risky. The vast majority of housing markets, especially LA, will appreciate long-term. I’m sure you could readily find average appreciation information to use to calculate potential gains on the house, but no you lazily assume assume 0% returns over 20 years, which is embarrassing to someone who claims to support math.

        I’m usually a big supporter of renting over owning and I like the comparisons but I’ll have to take anything you write with a pinch of salt from now on as it’s quite evident you are so against home ownership it affects your judgment when making a comparison.

        I hope the owner of this house at least reads the comment section before making their own decision as your argument smacks of bias without any consideration to the other side of the coin.

    4. “To be a fair comparison you should add the current value (not equity, since any gains is on the value of the house, not the equity in it) of the house to the starting portfolio.”

      Ugh…hoo boy.

      No, no, a thousand times no. The value of the house cannot compound at the market rate because you can’t invest the total house’s value in the stock market. If I were to buy a $500k house with a $500k mortgage, how much do I have to invest? 0, not $500k.

  9. If I may, I would suggest for you to post reader cases every Friday and post your travel adventures over the weekends. This reader cases are really getting a lot of attention and they are insanely helpful for hundred of people in similar situations. Thanks so much for this!

  10. A nice analysis but I can sum up to “trapped” in one word ….”DUH”. I have seen even more ridiculous things in my time, like people bidding double for houses in Toronto (asking $500k AND SOLD FOR $1M) which after purchase will need tens of thousands more in repairs. How about relatives of mine that make $500K per year and are broke and a childhood friend who earns $1M per year, owns a 10,000 sq foot home which he lives in less than 100 days per year with matching Benz which are never used. How about another couple who wanted to show they had arrived and bought a monster home only to discover after closing they could not afford the $7,000 per year in property taxes.You have to wonder at the stupidity of folks where owning a home is concerned.

    1. Yup. That’s what house horniness does to you. If your dream is to own a home, fine, but if you’re unhappy and being trapped by the cost, why wouldn’t you make a change?

  11. Sorry, but I have to be the one to point out the elephant in the room here and agree with “FromUSA.” It seems like a consumption problem to me. Live smaller – live happier. The “readers” have apparently been focused on earning and spending for a long time, that’s how they got where they are, and now they’re starting to worry if it’s the right path. Of course it’s not the right path! I know that’s a typical response for reader cases on personal finance and FIRE blogs, but this is a fairly blatant example of it.
    Otherwise… why not keep the house, rent it out, and move into a smaller apartment? Maybe the house is too big for that to be a viable option.
    Good luck either way. I’d say sell the house if you can’t rent it out. And downsize. -Aaron

  12. Yep, this maybe well be an interesting if biased viewpoint but the calculations are completely wrong. Both the house in the US and the house in Korea are excluded from the first TTR calculations, both their current value and the increase in value going forwards, there’s also the possibility of the rental income from the property in Korea as well. This is very poor advice to give this guy, you’re basically telling him to drop his standard of living; but he may well not have to do this given what is likely for the increase in value of his house. The leverage will actually increase his return and he could well do better from the property than he would do investing the money in the stock market.

    You really can’t include the value of the house in one calculation and not in another and you can’t ignore the increase in the value of both properties over the time frame either.

    It’s kind of disappointing that your bias against property is stopping a proper, useful analysis.

    In fact, because I’m a real geek, I took a look at the figures…..

    If his current house grew 6% a year (to compare with the stock market calculation) compounded it would be worth $5.44M after 20 years, alongside the portfolio this would give him a total wealth of $9.69M.

    Actually if you do this calculation and add the value of the house to the value of the portfolio, he reaches $4.24M in 11 years with HIS CURRENT STRATEGY. (it will actually be better than this as I’ve removed all of the $1.1M to payback his mortgage)

    In fact he reaches $2.9M in 7-8; similar to putting it all in the stock market WITH HIS CURRENT STRATEGY. He can then sell his house and reduce his living expenses and he hasn’t had to live in a 2 bed condo instead of his lovely $1.6M house for the last 7-8 years.

    And BTW that’s not adding in Korea or the uplift in value there.

    He doesn’t have to cut his expenses right down, his house is NOT dragging him down.

    In fact he can sit tight in this property and not have to do any of the reducing living expenses stuff (but he will have to think about it down the line if he wants to live off 4% of his wealth)

    Crucially though….he’s also spread his money across asset classes and that reduces his risk.

    I’ve just done a bag of a fag packet (excel) calcuation and there’s probably loads it doesn’t take into account, but I’m happy for people to pick holes in it.

    Hope this helps the debate.

    If anyone wants the spreadsheet, let me know.

    1. “If his current house grew 6% a year (to compare with the stock market calculation) compounded it would be worth $5.44M after 20 years,”

      And how exactly would that help him quit his job? He would still be working for 20 years, tying up his money in the house, which would continue costing him money over time while paying him nothing.

      1. Because he does not have to stay in the house 20 years. Try the numbers at 5-8 years. It is likely a faster way to FI than selling and renting now with no lifestyle impact.

        1. So Judith’s strategy allows him to retire in 7-8 years, mine allows him to do it in 6, all without the risk of unexpected costs like his roof collapsing or basement flooding.

          MAN I’m getting tired of being proven right all the time.

          And indigo, still waiting on that math of yours…

          1. I think unfortunately you’ve been proved wrong.

            The figures are comparable.

            If you’d actually looked at this you’d know that the 7-8 years are comparable to your calculation of 8 years.

            The 7-8 calcuation excludes the house in Korea, which how YOU got it down to 6 years….

            I’ve posted the maths and I’ve offered you my spreadsheet – if you could be specific about exactly what maths you’re waiting for……?

            If you like I can take you through how to do the maths at Chautauqua UK?

  13. I agree with many of the commenters that his house could potentially appreciated a lot, especially in a place like LA. But…and maybe I’m just reading too much into this, he seems unhappy? He’s making 300k and has a (I assume) loving family living in a big fancy house with him, and he’s still feeling unsatisfied and stressed about money just seems very sad to me. I understand money serves a good purpose, but after all of our needs are met (and by “needs” I’m including everything on Maslow’s hierarchy of needs), how much more does one need?

    1. Exactly. If he’s perfectly happy where he is, keeping the house and making 300K a year to cover his lifestyle, then what’s the point of even writing in?

      1. Ok, I realize I have not provided any useful suggestions (really wasn’t trying to be critical of the reader who wrote in). So if he’s really feeling dissatisfied with his current situation and wants to change, here are something things that may help:
        Sit down with his wife and discuss their shared values and goals in life.
        1. If they both love their jobs and want to work there full-time for the next 20 years then they do not need to change their spending habits.
        2. If they want to retire in, say, in the next 3-5 years, they should sell the house in the next 1-2 years. They can then downsize and rent, invest, and do a test run of their post retirement lifestyle and see if that’s for them. This will insulate them if there is a market downturn since they will still have a job, and will also allow them to purchase another big house if they realized that’s what truly will make them happy. While they will be out of the housing market for 1-2 years and potentially lose 5% per year of house appreciation, that’s not a bad price to pay for figuring out what he wants in life.
        3. What about the kids? How do they want to raise them? Good private schools plus a nanny? Working part time so they can spend more time with their kids? Being retired/working very little and homeschool the kids? *There’s really no research showing one method is superior to another in raising children, so that’s something he will have to decide what’s the best fit for his family.

  14. $5,000 mortgage. Oh noooo. And the Korean apartment that’ll be built in two years… Hm. I’m not sure about keeping that one around if I were you. Is it already completely paid-for, including taxes? If not, I would get rid of that.

    I do like the idea of renting over owning, though! It’s interesting that home ownership is more expensive in this case, but it really depends on where you live. In my city in Texas it’s a wash between renting and owning, so it just depends on your priorities. It’s really hard to live in a place like LA. I would personally consider moving elsewhere after saving a crapton of cash. Your money would be worth a lot more in Texas!

    1. Cashing in and moving to a less expensive location is definitely the fastest fix. But he mentioned that his wife doesn’t want to move so can’t do much about that…

  15. Depending on the size and layout of the house, he should consider renting out a portion of it – say the basement. This will reduce his monthly carrying costs substantially. He could even rent out the entire house and move his family into a rental. This way his house carrying costs are covered completely and he gets the benefit of home appreciation practically for free, and at the same time he costs for supporting his family are cheaper since he is renting and investing the difference in what he earns.

    The psychological benefit alone of having tenants carry the burden of those huge monthly mortgage and utility bills cannot be underestimated.

    This gives him both the benefit of the stock portfolio and home appreciation to reach his FI dream.

    1. Depends on what the cap rate is if he rents it out. Also depends on whether he wants the headache of being a landlord. Sure, he can hire a property manager, but if you get one bad renter (and all it takes is one), the property manager can’t protect you from squatters or renters who destroy your property.

      Renting out part of the house would help reduce the monthly expenses, so that could be an option. But again, the headache of being a landlord still applies.

  16. There is a very basic problem that people have ignored. When they decide to buy a house the bank tells them since your salary is x this is what you can afford to borrow which is usually near the top of what you can afford. Instead they should figure out how much house they need which might be significantly less than what the bank tells them to buy. A person making 300k could be perfectly happy with a700k house vs 1.5 million house. But of course that won’t happen because the bigger the house the happier and more successful people will think you are. I’m in my 40s and will retire by 55 because I rent vs own an expensive house in San Francisco. I’ve had no shortage of argument with people about this strategy but that’s another story.

    1. Yup. Absolutely true. Back when we were still house horny, the bank tried to push us to get the max house we can afford. Didn’t matter if we tried to tell them we didn’t need a house that big. They just wanted to give us a rope to hang ourselves with.

      Could be what’s happening here. If his salary is that high, they would’ve definitely pushed the “buy the max you can afford” tactic.

  17. Sounds like he is trapped which leads to overstressed burnout and health problems …having a debt bomb hanging over your head doesn’t sound fun…he could grunt it out for 8 to 20 years hoping for appreciation or downsize or rent and invest…the latter 2 give him a safety investment nest egg investment buffer … God Bless Multi Mill… Misshy Investor Beijing China

  18. Soooooo much wrong with this……first off based on my research (tv show flip or flop)😜 You can purchase a pretty sweet house in l.a. For 500,000. So why on earth would he buy a house 3 times that price if he wants early retirement? Larger house means more tax and utilities. Also what is the apartment in Korea for? Selling or renting? Life is about choices. Stay in an expensive city…pay for it by working your life away. Move to a less expensive city and retire.

  19. The first thing I thought when usage this was “Holy crap! $7,000/month for the mortgage !? Sell that thing!”

    Then I checked to see if it was because he made giant principal payments or something. He seems to have not.

    Someone who makes $200,000 net should be able to retire at speeds so fast it would make Sonic The Hedgehog blush. The problem extends beyond a house; it’s lifestyle creep.

    I mean, I didn’t read all of the comments, but they all seem to be focused on his mortgage. Everyone seems to have glossed over the TWO cars they have that are worth $20,000 EACH (meaning they were purchased for more). Holy crap! Do they have Star Trek food replicators in the back seat? Why so much?

    If he insists on owning instead of renting, he should either downsize or invest in a similarly priced multi-unit and collect rent to put towards the mortgage. At least then, he could voluntarily continue to pay $7,000/month and have it be considered an investment into the principal.

    But Trapped needs to take a hard look at all his spending, especially food, housing, and transportation. He needs to cut back IMMENSELY. There’s no reason why someone making $300,000/year should still be trapped at their job for the next 20 years unless they’ve engaged in such reckless spending as Trapped has.

    It’s hard to feel that much sympathy for him. Not when I make less than a sixth of what he does and often take 90 minutes walks home to avoid paying bus fare. Get rid of those two $20,000 cars and then tell me you don’t know what to do.

    Sincerely,
    ARB–Angry Retail Banker

  20. First I want to thank you for writing this article – it’s thought provoking but I do have few issues with the analysis and the Reader’s alleged problem. Unlike some of the other comments, I’m not hating on either aspect but think this is what is missed.

    We live in a big expensive City also and so I understand that you can only cut expenses so much while you work (as FC has pointed out working costs money and we make more here than we would elsewhere so becomes a bit of a push). Seems to me the Reader simply bought too much house; he needs to move somewhere else in town – not necessarily rent. We bought a place in a high COL city but purposefully bought much less house than we COULD afford; paid it off in 2 years and as such have saved a ton versus renting (our yearly carrying costs are less than the rent we paid for an much smaller apartment while the house’s book value has increased by more than 30% in 5 years ). Also, as Indigo correctly pointed out; the average rental cost for LA is off and not applicable – Reader and his family may need a 4 bedroom place and may be living in a good school district which he’d lose if he moved (thus increasing his monthly expenditure – kids education expensive is big factor often unmentioned factor [I think FC is one of the few bloggers who DID talk about it re child care with that Canadian banker a while back – hat tip on that] no one seems to talk about when dealing with budgets).

    The future value of his house is pointless as FC points out; unless he liquidates it his money is gone and its ongoing liability. Doesn’t matter how fast his “investment” grows because honestly if you don’t own your home IMO its like trading on margin… I appreciate the post but Reader’s problem is simple – liquidate foreign real estate (unless its a quick money maker = cash flow now situation) and get a less expensive abode. I still think buying make sense if you want to stay somewhere but if not, rent and give up the hassle.

    As always, thanks for the awesome post. Also I liked the idea of doing 1 reader case every Friday but do whatever you want to guys; it’s your blog and it’s awesome as is. 🙂

  21. I think that a lot of the people accusing Kristy of giving bad advice by not taking the house’s equity into account are forgetting one thing: Trapped’s goals.

    This is not a guy who is looking to maximize his net worth.

    This is a guy who is looking to retire early.

    Cutting his expenses and increasing his investment income are his end goals, not simply having “more money”.

    Even if we had reason to believe that his home’s value would double in 20 years, that would mean he’d have to continue working for 20 years if he wants to take advantage of that equity gain. 20 years more of worked. THAT is what Trapped is trying to avoid.

    As for the people arguing that Kristy’s advice is bad because he’d have to lower his lifestyle standards, this guy makes $300,000/year and can’t afford to even pay off his mortgage early!? Or retire early!? Oh yeah, he needs to lower his standard of living if he wants to get out of The Machine.

    Sincerely,
    ARB–Angry Retail Banker

  22. (corrected for grammar – I hate typing on a phone) First I want to thank you for writing this article – it is thought provoking but I do have a few issues with the analysis and the Reader’s alleged problem. Unlike some of the other comments, I’m not hating on either aspect but think this is what is missed.

    We live in a big expensive City also and so I understand that Reader can only cut expenses so much while you work (as FC has pointed out working costs money and we make more here than we would elsewhere so becomes a bit of a push). Seems to me the Reader simply bought too much house; he needs to move somewhere else in town – not necessarily rent. We bought a place in a high COL city but purposefully bought much less house than we COULD afford; paid it off in 2 years and as such have saved a ton versus renting (our yearly carrying costs are less than the rent we paid for an much smaller apartment while the house’s book value has increased by more than 30% in 5 years ). Also, as Indigo correctly pointed out; the average rental cost for LA is off and not applicable – Reader and his family may need a 4 bedroom place and may be living in a good school district which he’d lose if he moved (thus increasing his monthly expenditures – kids education expense is big often unmentioned factor [I think FC is one of the few bloggers who DID talk about it re child care with that Canadian banker a while back – hat tip on that] no one mentions when dealing with budgets).

    The future value of his house is pointless as FC points out; unless he liquidates it – otherwise his money is effectively gone/locked-up and his mortgage is an ongoing liability. Doesn’t matter how fast his “investment” grows because honestly if you don’t own your home IMO its like trading on margin… I appreciate the post but Reader’s problem is simple – liquidate the foreign real estate (unless its a quick money maker = cash flow now situation) and get a less expensive abode. I still think buying makes sense if you want to stay somewhere but if not, rent and give up the hassle.

    Lastly, in response to some of the comments, some folks might want to work an extra year or 2 in order to not take a standard of living hit – that’s not a bad choice; it is merely a choice. I am one of those folks who believe that FI or FIRE need not be gained via austerity – nor would I want to be FIRE in austerity; to each her own.

    As always, thanks for the awesome post. Also I liked the idea of doing 1 reader case every Friday but do whatever you want to guys; it’s your blog and it’s awesome as is. 🙂

  23. Hi, I’m “Trapped” from this case study, and really appreciate Kristy’s analysis, as well as the comments from everyone (indigo in particular gets everything right). Gives me a lot to think about. I guess the real estate market here is just insane. The house I have is not super fancy or big (its old and less than 1800 sqf) like some of you may imagine (and our cars are nice, but both were purchased used–a 3K jalopy would not work well with my job). To get something much cheaper in a safe area with a decent school district would land me with a ridiculous commute and further erode my quality of life (flip or flop houses aren’t in LA itself). I believe my place would rent for around 6K a month. For $3,000 in this area I might get a tiny one bedroom apt, which would not be great family-wise… and no mortgage interest tax savings.

    I do think my home could earn a fair amount of money given market trends and the interest rate I locked in (it would be easy to sell–barely a day goes by without some real estate related solicitors). Cashing out 500K in appreciation tax free is a goal I have, but we would still need a place to live… and would want to be in a good school district.

    In the final analysis, only 3 things are really expensive in the U.S.: real estate, healthcare and education costs (whether private school tuition or property taxes) and they all hit pretty hard if you have kids (and all the smart, responsible people not having kids is a terrible result for society).

    However, retirement/job downsize is definitely out of the question as long as I stay in the home. Seems I would need to go somewhere cheaper to retire or at least get a less onerous job, but would need to get the wife on board with moving to a much less prestigious city and getting Obamacare….

  24. Good to hear from you! I forgot you get to deduct mortgage interest in the US as well.

    I’d recommend checking out gocurrycracker and rootofgood blogs. Both are US citizens. gocurrycracker is living in Taiwan with his Taiwanese wife and child and is a whiz with taxation. Rootofgood lives in the US and has figured out low cost health care and education solutions for his three kids. Obamacare might not last forever so a plan B for early retirement would be good to have. Both expat and US retirement are options for you in five years imo and depending on your wife’s wishes.

    My guess is the biggest thing for you will be change. Right now you are not entirely happy but you have a comfortable lifestyle with your family. There are other options but they all will require adjusting your expectations and your wife will need to be on board for unconventional choices. And school districts are a big thing. We have kept our kids in the same school district with the same friends and it has been a benefit. Once kids hit about third grade it is harder to change locations imo.

    Depending on how old your kids are it might be worth it to sell in five years, buy in a less prestigious city with excellent quality of life, and work pt in a job with healthcare coverage. Or perhaps work at a college/university which provides health benefits and tuition exchange benefits if you have that type of interest/aptitude.

    1. Suzq400, thanks for the idea, but I don’t think basements are very feasible in my neighborhood. Adding another story on top is an option, but not cheap… on the other hand, the two story McMansion right next door to me just sold for over 3M…

      Indigo, thanks for the links. I checked out Rootofgood and it was interesting… a lot seemed contingent on qualifying for Obamacare, which potentially raises ethical questions if you are a literal millionaire doing so. On the other hand, having paid in hundreds of thousands of dollars in taxes to the system, maybe I wouldn’t feel so bad about getting what I could out.. (I think there’s a good chance it all comes crashing down within the next 20-30 years, which is something to take into account when planning your retirement).

      The part time job or college gig is also a good idea. If you could find a job you actually enjoyed doing and weren’t a slave to, there would not be much reason to retire early (frequent travel is nice, but pretty tough when you have young kids). It would be nice to work when you want to instead of because you have to…

      FIREcracker, thanks for driving the point home re: my home. I think owning real estate vs. renting actually makes sense in most of the U.S. (if not Canada), but not in the big cities where housing prices have become disconnected from rental rates… I am guessing you guys will probably eventually buy something, but maybe you make sure you do it in a place where the hit to your dividends is offset by lowered rent, or maybe you buy a rental property to diversify your investments.

      1. Thanks for responding and adding to the discussion. If it follows the 1% rule and doesn’t deplete a large part of our portfolio, we would consider it. Also If it’s a place with low maintenance (though that’s not exactly something that’s predictable). One of the biggest downsides to homeownership versus rent is one is predictable while the other, just with one catastrophe (like leaky roof, flooded basement,etc) could derail your finances. I also like the benefit of location independence we currently enjoy from retirement. That could change if we have kids, but who knows. Also, if homeownership was on our list of life goals, we would’ve saved more than 1M before quitting to ensure the extra unexpected maintenance costs are covered. But given that I value my freedom a lot more than having a house, it was a no brainer.

        Best of luck to you and thanks for writing in! Even if you decide to continue being a homeowner, I hope you and your spouse can come to a consensus about moving to lower cost area and downsizing. That would help reduce the job stress and even if you don’t retire, help you find a less stressful job.

        Thanks for being a case study! Feel free to keep us posted.

  25. Mortgage interest deduction is fools gold. Take on $1 worth of debt to save $.35. It is shameless bank welfare written into the US tax code. Canadians can correct me if I’m wrong but I don’t think they get a tax deduction for it and as a consequence have lower rates.

    1. We have no interest deduction for a primary residence unless you rent out part of it and then the deduction is proportional to floor space.

      We have some lower rates now, but shorter terms. The max term you can get is 10 years. Most people (66%) get 5 year terms and the best rate right now is 2.6%. Ten year rates here are well above your 30-year rate. When the term is up you have to renew at whatever the going rate is which may well be significantly higher.

      I’d take the mortgage interest deduction and a 30 year term any day – way better deal.

      1. It seems like we’re fighting but we actually aren’t.

        Indigo is advocating selling/investing in 5 years. I’m advocating selling now and renting/investing now. If you truly believe your house will appreciate in the coming five years over the stock market, fine. I don’t know the real estate market in your particular neighbourhood. You do.

        But this line crystallizes your eventual choice:

        However, retirement/job downsize is definitely out of the question as long as I stay in the home.

        Correct. Sell now or sell later, you will eventually have to sell if you want to retire. Because money trapped in your home does nothing.

  26. >”MAN I’m getting tired of being proven right all the time.
    And indigo, still waiting on that math of yours…”

    ….

    >Fine. Show me the math or shut the Hell up.


    Really no need to be rude. I am not attacking you personally here. By presenting an alternate viewpoint based on experience I would hope it might make you aware that there is a possibility that could be some bias at work here which affects the credibility of your blog.

    I have no dispute with you that renting at a low cost and investing works. My only issue is the analysis you present is faulty and you seem to use hyperbole, curse words and personal attacks to try to make a point.

    In order to do a complete analysis, you need more info from the which presumably you could obtain by asking. Information about the US tax situation which you can obtain online, and you must assign a reasonable appreciation value to the house based on statistical data, and account for principal paydown.

    The OP has stated he cannot rent anything but a tiny 1 bedroom for the 4 of them for 3000/month which doesn’t work for them, and a similar house would be 6000/month.

    Let’s also take the Korea condo out as his wife does not appear on board with selling currently and it may also appreciate, I’m not familiar enough with taxation there and need OP input to do anything else.

    Also discount the kids’ education money – not sure if additional contributions need to be taken out of income going forward for this – need OP input.

    Please let me know if I’ve made an error here – possible. Happy to correct if I have.

    Scenario 1 – They All Live in a One Bedroom for 3000/month (for argument sake even though this is not something OP is willing to do) – 6% stocks
    Sells now and has an additional 500k to invest
    Pays 13k more tax each year as a result of losing the mortgage interest deduction.
    Invests 52k ( 65k-13k extra taxes) per year.
    Invests the 48k per year he saves by renting

    Net Worth Year Six – 2,072,791.73

    Scenario 2 – Apples to Apples – Rents Same House – 6% stocks
    Sells now and has an additional 500k to invest
    Pays 13k more tax each year as a result of losing the mortgage interest deduction.
    Invests 52k ( 65k-13k extra taxes) per year.
    Invests the 12k per year he saves by renting

    Net worth Year Six: 1,806,613.58

    Scenario 3 – Stays Where He Is – 6% stocks 5.52% appreciation
    Invests extra65k per year
    Leaves 440k invested

    Investments: 1,104,747.86
    House: 2,346,700.23 plus 33,816 principal paydown less mortgage of 1,100,000 equals 1,212,884.23 – 80k selling costs (including fix ups) equals 1,132,884.23

    Net Worth Year Six – 2,237,632.09

    He is 200k better off by staying where he is and enjoying his 4-bedroom home for another six years which he is going to need to work anyway unless they are willing to move to a LCOL area. The risk is prices don’t appreciate and he needs to stay longer. Some risk exists with the stock market as well in this short timeframe.

    And perhaps the biggest issue tax sheltered growth. I don’t know the US situation well but I do know there is a tax shelter limit and it is likely the proceeds of the home once invested would be taxable upon withdrawal. That means the net worth of the 500k equity invested in stocks will be far less in their pockets annually in future than the $1,132,884.23 equity invested six years later.

    Note that we have a house that is of a bit higher value to the OP but it is a triplex. We have experienced 7% appreciation on average and we obtain 54k in rental income each year from it as well. We live with zero monthly shelter or utility costs after tax (all income reported) and expenses. We can rent our unit out when we travel and it will pay for the cost of travel – we have a .6% vacancy rate and no problem renting furnished units. Multi-family can be great for early retirement. The hassles of being a landlord are pretty minimal with longer term tenants if you manage it well.

    I would expect that with a one-bedroom suite in the OP’s house that rents for $3000/month he could stay where he is and retire in a slightly longer time period if he wanted to and sell when the kids finish high school and have a large sum to retire on.

    1. Wow Indigo! No personal attacks or curse words and you presented the math. Firecracker, love the blog but follow your own advice and do the math. When you met Justin from rootofgood did you call him a dumbass because he owns a house? Didn’t think so. Good luck with the blog. I know you are helping educate lots of peeps. Humility is an awesome trait. You may want to look into it.

      Pete

      1. Justin owns a $100,000 house in an area where houses of that size rents for $1000/month in rental income. So no it’s not overpriced and it follows the 1% rule.

      2. Aren’t personal attacks and curse words a surefire way to get people to notice your early retirement blog? : )

        I own two houses at the moment – neither of which are rentals – but I don’t feel like this blog is personally attacking me. Which is a bit odd. After all, I do feel personally attacked when reading some other early retirement blogs.

        Here, I feel as though some anger is directed towards those who insist on home ownership. Which is pretty valid, IMO. Reminds me of some of the investment advice I’ve gotten from people who had no business giving me advice.

    2. OK good. Math. Yay. We can debate that.

      Your argument that staying in the house is all based on your 5.52% appreciation assumption. Maybe that’s true, maybe it isn’t. Nobody knows. But I’m basing my 6% portfolio returns on decades of long-term return data. And even then, it’s extremely conservative. Historically, real estate appreciates at the rate of inflation.

      But whatever. We can argue over numbers until the end of time. The point is, we’re not enemies, but FRIENDS 🙂 You are arguing that they should sell his house in 6 years. I am arguing that they should sell now. But in reality, we are saying the same thing. In order to retire, Trapped will need to sell his house. Otherwise, too much of his money will get trapped in the house, and he can’t retire until he hits his 60’s.

      We both want to invade the same island. You say west, I say east, and at the end of the day we want to accomplish the same goal.

      1. “Historically, real estate appreciates at the rate of inflation”

        And this is where you are incorrect. Real estate is local, not regional, national or international. Much of the US appreciates at or below inflation, but not all areas. The long-term appreciation rate in LA exceeds inflation.

        “But I’m basing my 6% portfolio returns on decades of long-term return data”

        Great. And I have no issue with that. The 57-year appreciation rate where I live is 7% not adjusted for inflation (comparing apples to apples with your stock rate). Even buying high and before a drop, if you held for ten years you did okay.

        See: https://househuntvictoria.ca/2016/03/17/a-brief-history-of-prices/

        Not all RE markets are like this, but some are and they tend to be expensive already with really poor cash flow as rentals but with higher appreciation than average. Plus you are using leverage (mortgage) which amplifies gains (and losses) and you gain the equivalent to rent shelter benefit. Your monthly payment is part principal and part interest. Your analysis needs to be more specific when you are talking about RE as returns are not standard as they are with index investments.

        You can lose your shirt if you have to sell in a downturn in these markets, but hold and your odds are as good as with the stock market recovering imo looking at the data.

        As for selling, yes, I think he should work to get his wife on board if he wants to quit his job more than he wants to stay in a SFH in a good area of LA. He can’t do it right away, but if he waits for greater appreciation gains and is prepared to hold through a drop his house and other investments should make this possible in 5-10 years. Maybe less if they move to Korea as we never looked at his health insurance issues. Luckily we don’t have this in Canada.

    3. I’d just like to say it’s awesome and really interesting you have done such a detailed analysis. I’ve been looking at the mix of property, shares and other things we own for a while now and analysis like this which take into account all the factors you need to consider in working out how to make that mix optimal are very helpful. Particularly with the different situations in different countries/areas of property/taxes, etc. It’s really difficult to understand how well a strategy might work in another country/area unless you’ve lived in it I think.

      Your experience tallies with mine in terms of return and rental; although because we invested in property in London we left the stock market standing years ago, which I think is true of property in a number of what I would class as ‘hot’ cities. However we have deliberately taken mortgages against the property because it’s such a huge opportunity with rates being so low at the moment. I’m in the process of doing analysis of the return on that strategy at the moment.

  27. There is absolutely no point in having a million dollar mortgage. Either find a cheaper house, or sell the one you have and rent. Plain and simple. What he is doing, is the same as purchasing a Bugatti Veyron on time and using it as a daily driver. He cannot afford that house, he should not be living in that house, and that house is killing him.

  28. Just again regarding this ridiculous situation (because it is so distressing that it requires input): This person is a debt slave. He fits the classic definition. He has a million dollar debt, that he cannot pay. He has two ways of getting out of this debt:

    1. Find someone with at least one million, one hundred thousand dollars, or the ability to borrow the same, and sell his house to this person.

    2. Win the lottery.

    That is it. Otherwise, he has to keep working. If for some reason he loses his job or gets sick, he is going down in the flames of bankruptcy.

    This situation is obscene and absolutely unnecessary and totally whack. Why anyone would do this to themselves is really beyond reasoning. Where you live is just not that important, to slave yourself for 20 years.

    He needs to sell the house, right now, while interest rates are still low and some other moron can purchase it from him with an equivalent mortgage. No one in their right mind, in possession of a million one hundred thousand dollars, would use it to buy that house, so his potential buyer pool is limited to other debt slave wannabees.

    Time is of the essence. Interest rates are going up on Wednesday…..

  29. “The OP has stated he cannot rent anything but a tiny 1 bedroom for the 4 of them for 3000/month which doesn’t work for them, and a similar house would be 6000/month.”

    This cannot be true. If it was, then every single family living in his area would have to be six figure income earners. We know that’s not correct. His income is likely in the top 1% of the people where he lives. Which means, 99% earn less than him. They all have families and they all aren’t living in 1 bedroom apartments.

    Look around a bit, find out how the other 99% that earn less than you are doing it. They all aren’t living in 1.6 million dollar houses and paying over 5k per month in interest.

  30. Wow. What a Sh!t storm. Ha! Good discussion.

    I’ll say this, we live in a nice area of LA in a 2 bedroom house, great school district, yard etc for 2500 in rent. It’s valued at about 1mm on Zillow and the like. They’re around you just have to look.

    The property values around here are nuts. And it’s part of what got us reading this blog in the first place. I have arguments with friends all the time about renting vs buying. And they’re convinced that buying is the way to go. Even though I’ve shown them their interest and insurance is more than our rent, they tell me I’m throwing money away renting. Ummm you don’t get interest back?!? So we just laugh and invest the difference and will be done way sooner than them, since they might have the value on paper, we’ll be able to draw it down and live off our stash. It’s not tied up in property.

    Everyone seems to forget all the expenses on owning the house even after mortgage and insurance,etc. Our roof is leaking, call the land lord. Termites? Land lord. We don’t bother with it. Oh and in order to sell the house they’re going to take a good 6% of the final value straight out of the gain for selling expenses. So that reduces the return quite a bit as well.

    Its a personal decision for everyone. Some like to own homes, and that’s fine. It’s a matter of the end goal.

    Anyway, keep up the good work!! Can’t wait to get out of this rat race and go diving!!

  31. What what what!?!? This guy is spending more on his house than I spend on my LIFE! I budget $3.5k a month, to pay for my house, my investment and everything else.

    Downsize stat – what’s the point of a $1.1mil mansion if you’re spending 40% of your life at work paying for it!

  32. 20 years ago I bought a house in Melbourne, Australia for $136,500.
    Sold it last year for $1,300,000.
    Best investment I ever made… Brought my retirement date forward by nearly a decade.

  33. The only thing I would be careful of is selling a million dollar home and investing it all in the stock market right now. We are due for a major correction and it could set him back a few years if he takes a 40% hit on a million dollar investment. It will come back but I don’t think now is a great time to make a big buy of the S&P index… I am holding my position and I’m mostly invested in the S&P because who knows what will happen, but I’m not buying anything new for now. I plan to save my cash up to invest when the correction happens.

  34. There’s is room for agreement with aspects of both Firecracker and the well argued comments.

    Firecracker, your initial analysis is lacking. If you are so convinced of renting vs ownership, do a fair analysis of both options and take into consideration you will need to keep renting in retirement which will cost more than a comparable mortgage free home. Also, you are paying property taxes when you rent, it’s just that it is someone’s else’s.

    The main problem with real-estate investing to me, is concentration risk and lack of cash flow.

    Most of the FI issues go away if you aggressively pay down the mortgage and have it gone at early middle age. That way you are avoiding the substantial monthly costs of renting for the rest of your life. Almost all of the issues pointed out go away if people simply bought less expensive homes.

    Nirvana is to have a decent paying job in an area with rational real estate prices.

    Cheers
    One Dad.

    1. Maintenance costs, property taxes, insurances…those are costs you pay forever, regardless of whether you pay off the mortgage or not. Also even if you have a paid off house, most of your equity is stuck in the house and you can’t get it out. So yes, you have a paid off house, great, but it doesn’t help you retire. If his goal is to have a house, then fine, continue working. If his goal is to retire, he’ll need to sell to get the equity out and invest it to earn a passive income to live on. Using real-estate investing on a 1.6 Million dollar house that rents for $6000/month, doesn’t give him the cashflow he needs to support his $165,000/year lifestyle. Read this article from an experienced real-estate investor: http://affordanything.com/2016/04/28/one-percent-rule-gross-rent-multiplier/

  35. Firecracker you should treat a house like commodity that the nay Sayers with this allergy. The mortgage rate as the yearly fee a ETF would charge, the taxes and maintenance as the hidden fees of these ETF. The asset appreciation as just that. I hit FIRE and pulled the trigger 9 months ago. Got life time health coverage due to government job in the US.

    1. Glad it was helpful! The freedom from stress that comes from renting is unmatched! Every time I talk to friends who own they’re always stressed about something. Whether it’s their property taxes going up or unexpected maintenance costs or bad neighbours, etc. Even the ones who’s property value has gone up are stressing because if they sell, they’ll just have to buy an even more expensive house. Meanwhile, our portfolio is growing strong, paying us dividends to travel the world and be completely stress free. In fact, I just called my landlord to fix the sink in our $420 CAD/month AirBnb and he worked on it for hours while we were out stuffing our faces. When when came back, it was all fixed and we didn’t have a lift a finger. Being a renter rocks!

      1. interesting you mention airbnb. One of our options once we reach ER (May 2021) is to travel and to be longterm guests (at least a month) at airbnb properties. It looks like most places offer huge discounts when you rent for a month or more. Is this the experience you have had?

        1. Yup. You get weekly and monthly discounts. I also found their customer service amazing! Anytime we have a problem, they respond and fix it right away!

Leave a Reply

Your email address will not be published. Required fields are marked *

Social Media Auto Publish Powered By : XYZScripts.com