Would We Be Richer If We Had Bought a House?

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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.
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Since I’ve been ranting non-stop about the unaffordability of the Toronto and Vancouver housing markets, every day someone has come after us in the comments or email by saying “You’re not taking into account house appreciation!” or “If you had bought a house in 2012, you would’ve been even richer!” Followed by all sorts of questionable and hand-wavy justification to make themselves feel better.

To which my response is: “You wanna dance?”

Hey, if you want to bring feelings to a math fight, go right ahead my friend. I will be more than happy to hand your ass back to you, all red and spanked.

Let’s math this shit up!

Let’s say we suffered the sufficient traumatic brain injury required to buy a house with the cash we saved in 2012 for $500,000 and sold it at the end of 2014 instead of investing. What would’ve happened?

According to TREB, the average price of a Toronto home 2012 was $497,130, and increased to $622,120 by 2015.

This gives us an appreciation of $124,990 over 3 years. Sounds like a pretty good chunk of change. That is a healthy 7.8% year-over-year gain. A 60/40 portfolio had about the same gain during that time, so these should be pretty close, right?

And here’s the part that everyone forgets. There are reams of little (and not so little) costs of ownership that would’ve eaten into this appreciation. Stuff like real restate agent commissions, land transfer taxes, lawyer fees, maintenance. You know, the stuff that real estate agents always brush off while saying “yeah, but prices always go up.” Let’s pull back the ugly curtain on that, shall we?

Item Cost
Real-estate agent commission (5% to sell): $622,120 x 5%= $31,106
Land transfer tax (municipal AND provincial) $12,085.20 (source: TREB LTT Calculator)
Property Taxes: $3,420.12 (2012) x 3 = $10,260.36 (source: Toronto Property Tax Calculator)
Lawyer fees: $500 x 2 (buy and sell) = $1000
Home inspection: $500
Home insurance: $100/month * 36 = $3600 (source: Toronto Home Ownership Costs)
Maintenance: You should set aside 1-3% of the price of your home for maintenance per year. So let’s say 1%. $4971.3 x 3 years = $14,913.90 (source: Toronto Home Ownership Costs)
Gas, Electricity, Water (included in our rent): $125/month (hydro) + $125/month (gas) = $250/month * 36 = $9000 (source: Toronto Home Ownership Costs)
TV Cable (included in our rent): $25/month * 36 = $900
Furniture We would need to buy furniture to furnish the addition bedrooms. Assuming 10K and a 50% resale value = $5000
Total costs over 3 years $88,365.46

Holy shit. Even I was surprised by how high this was. This is like a whole Engineer’s salary in ownership costs! And that’s after taxes!

And keep in mind, in many ways I’m being extremely conservative. This house was bought with CASH, so there are NO interest charges. And most people then follow up their unaffordable housing purchase with a severe case of Keeping-Up-With-The-Jonsitis, filling their 2-car garage with 2 cars (bought using borrowed money, of course), then hiring maids and landscapers to take care of their house for them, then remodeling their kitchen because they HAVE to have the newest granite countertops, etc. We will ignore all that, but you KNOW the actual extra costs over renting are much much worse.

So our net profit would’ve been $124,990 – $88,365.46 = $36,624.54

Meanwhile, a 60/40 portfolio of $497,130 generated after-fee returns of 7% (2012), 8.39% (2013), 8.1% (2014). This gives us a return of $126,129 by 2014.

Extra costs of owning this portfolio? None. No insurance, no commissions, no stupid 2% MER, and not even taxes since the gains are either unrealized capital gains or dividends, which are basically untaxed up to $50k.

But, since we continued renting, we’ll need to deduct the cost of rent from the gains. We paid $850 per month for 36 months of this time, so our gains are now

$126,129 – $850 x 36 = $95,529

So that’s a gain of $95,529 over 3 years from investing and renting versus $36,624.54 from buying the house.

Actually sitting down and doing the math surprised even us!

By investing instead of buying, our gains were 2.61X the gains from the house. And this is during one of the most powerfully accelerated booms in house prices in Toronto! Both houses and stocks appreciated at about 7-8% year-over-year during this time, and yet investing absolutely MURDERS housing!

I find it hilarious when people say “the majority of your portfolio came from your savings not investing. That has nothing to do with not buying a house.”

Wrong. It has EVERYTHING to do with NOT buying a house.

Would we have been able to save and invest that much had we bought a house? Nope. The costs would’ve eaten up OVER 70% of our gains!

Clearly they people that chant “House! House! House!” do not understand the real costs of owning a home. If you just punch some numbers into the mortgage calculator (like the real-estate agent told you to), and ignore the real costs of owning a home, you have NO IDEA what you’re doing.

And that’s the real problem of houses as a wealth-generating tool. Yes, people have gotten rich off real estate, but if you were to ever dig deeper into their analysis, you realize that people like Financial Samurai or Paula Pant understand the complexity and math behind their decision on a level of complexity that most people aren’t even aware exists. The vast majority of people walk into an open house, look around for 10 minutes, coo at the granite countertops and fancy faucets and say “Wow, I could really see myself living here.” And then promptly get into a bidding war for more money than they’ll ever earn in their lifetime.

In other words, most people bring feelings to a math fight.

And that’s what makes real estate such a seductive and dangerous thing. We’ve gotten countless emails from people saying “the stock market seems scary and I don’t understand it, so I don’t want to invest.” There’s a natural fear of the unknown when it comes to investing, and in many ways that’s normal. There’s a natural tendency to fear what you don’t understand.

That fear is completely missing with real estate. People will absolutely throw good money after bad towards a house purchase they don’t understand. And that’s why most people never get rich.

Don’t bring feelings to a math fight people!

Math always wins.

 

127 thoughts on “Would We Be Richer If We Had Bought a House?”

    1. That’s not math… it’s just poor assumptions and wrong conclusions. Please don’t do your own math if you can’t see numerous issues with the biased nature of that calculation. Outsource to somebody that can do math.

  1. Well when you put it like that… Math wins again! 🙂

    I’ve always thought that buying a house to live in was a good way to (mostly) remove rent payments from your annual expenses (assuming purchase price to rent ratios make sense in your area).

    But it’s a horrible investment (compared to the alternatives) in general, on average, across most geographies. The costs of buying and owning more housing than you need swamp the gains you can get in all but the most bubbly of housing markets.

    So let’s lay to rest the old saying “buy the biggest house you can afford because housing is a great investment”. Buying a house might make sense to live in, but not so much if your goal is building net worth.

    However, there is one reason to buy a house. If you absolutely suck at saving money and need a forced savings account, paying several thousand per month toward a mortgage you can barely afford is slightly preferable to blowing it all on useless crap or frivolous expenses. Just slightly. At least at the end of 30 years you’ll have a paid off house instead of nothing. But that’s one of the worst reasons ever to buy more house than you can afford instead of simply buying real investments (be they stocks, bonds or anything else that tends to go up in value over time).

    1. Ha ha. Yeah, if they have to force themselves to do something, that’s an emotional response not a mathematically one. But hey, if they choose to make themselves miserable, they should be allowed to make that choice.

    2. I agree with the use of mortgage as a force savings account. It works for the less disciplined saver. To be fair, for most on average wage, mortgage is the only way they have means of getting up the savings ladder. Investing takes a little more to understand and train the mind and heart for.

  2. I could use a good ass kicking, I’ll be very honest with you. (My Cousin Vinny)

    You make some really solid points about the inadequate financial analysis most people do when calculating the cost and return of a home purchase. And the over abundance of good feelings that overshadow rational decision making. We need to teach people when and how to buy homes properly.

    That said, I think a math fight might be a good idea. Let’s dig deeper and see how the ‘investments’ compare.

    Disclosure: I am a real estate Broker in California and believe there really are appropriate circumstances, both personally and financially, for owning real estate.

    1) The returns for both housing and the stock market were very strong in those years. It makes comparing financial returns possibly misleading. But, that’s what we have to work with.

    2)I would never advocate buying and selling a home within a 3 year window. About half the costs you propose are transaction costs and are one time only. Owning a piece of real estate should be long term only. Think 10 to 20 years. Better yet, never sell and own an income producing property. What a great retirement plan!

    3) You did not include the rent you paid in the analysis. This investment saved you 3 years in rent. What would a comparable (similar size, location and quality) rental have cost you?

    4) What would taxes be on the gains of each of these transactions? In the US there are tax advantages on sale of primary residence.

    In the end, these are very different things (financially speaking) and there is obviously a place for both.

    I’ll wait here here for that ass whoopin’ I know is coming.

    Bill

    1. “I would never advocate buying and selling a home within a 3 year window. About half the costs you propose are transaction costs and are one time only. Owning a piece of real estate should be long term only. Think 10 to 20 years. Better yet, never sell and own an income producing property. What a great retirement plan!”
      – This post is about answering the question “you would have made more money if you bought in 2012”. And from 2012 to 2015, that’s 3 years. So clearly that argument has been debunked.
      – Also, if you own for 10 to 20 years, the costs I mention above still apply, year after year. And during this time, the stock market would’ve also ramped up higher (over 20-25 year period, stock market has historically beat the housing market). So I fail to see how that changes anything.

      “You did not include the rent you paid in the analysis. This investment saved you 3 years in rent. What would a comparable (similar size, location and quality) rental have cost you?”
      -Yes I did. Read the post: But, since we continued renting, we’ll need to deduct the cost of rent from the gains. We paid $850 per month for 36 months of this time…” And no, it’s not about a comparable rental. I already had a rental. So the choice was to stay and invest or go and buy a house.

      “What would taxes be on the gains of each of these transactions? In the US there are tax advantages on sale of primary residence.”
      – There is no tax on the primary residence, but we can’t deduce mortgage interest like you guys.
      – For the portfolio, we don’t need to sell (unlike a house) to get the passive income needed in retirement. The dividends are tax free up to 50K, allowing us to pay essentially no tax.

  3. Praise the spreadsheet gods! And math, let’s praise math too. Thanks for setting my mind free from the jail of home ownership. Pinky ring cheers!

  4. I’ve always thought of a house you live in as a consumption item, you buy it if that’s what you want to spend your money on. And all the fees and expenses you spend are just a part of that consumption item you chose to buy.

    The only time I really see housing as an investment is if you are buying it as a rental. In that case, I see it as similar to investing in a business.

    As Justin pointed out, housing could be viewed as a form of forced savings, but it’s a pretty expensive way to save.

    1. hmm, a consumption item that’s returned 8.7% ROR (tax free btw) over the time I’ve lived in it – not shabby.
      oh and my housing costs (property taxes, maintenance, utilities (no cable though), no mortgage ) run around $900/month currently (lower in the past) so I get to live in a nice place with no landlord for about what Firecraker pays in rent – not a bad deal.

      each to his own

    2. “housing could be viewed as a form of forced savings, but it’s a pretty expensive way to save.”

      Agree. And not to mention “forcing yourself” doesn’t yield the best results since it’s triggered by emotions not math.

  5. There is a bit of confirmation bias creeping into your comparison of two different investments in order to support your thesis. I do not deny that the math still likely favours renting/stock investing versus home ownership price appreciation.

    However, a couple assumptions above are estimated higher than it should be IMHO.

    1. Realtor fees are typically 7% on 1st $100K and 2.5% on the balance, so a $622K house would cost closer to $20k + GST.

    In a heated sellers market it would not be too crazy to expect a house to sell itself quite easily, so using a discount realtor such as 1% Realty could bring cost down to maybe $8K or so.

    2. If your home ownership holding time frame was really limited to 2 to 3 years, then there is no sane way you spend over $10k on maintenance. Realistically maybe $2k max for fresh paint and updating to help the house sell, but nothing more.

    3. Profit from selling your home as principal residence is exempt from any taxes. Sale from stocks, which the bulk of it is likely outside your RRSP & TFSA, would be subject to 50% of it reduced by capital gains tax.

    4. Gas & electricity cost estimate is double what we pay for a family of 4 residing in Vancouver ( $75 gas & $50 hydro). However, I think you neglected annual City Utilities (not typically part of property tax unless it got lumped in together in the above), so it is probably a wash with the higher figure listed anyways.

    So potentially one could realize another possible $36k profit from the house in above scenario or $73K net profit (tax free).

    Compare that to net profit of stocks of 95.5k less about 48k * 30% marginal rate or 14.4k or net overall profit of about $81k. Assumption not considering TFSA/RRSP assets though.

    Just my two cents for various factors to also consider. But fascinating subject and article to let someone unemotionally reason it out.

    1. “Assumption not considering TFSA/RRSP assets though.”

      Exactly. If you structure the portfolio properly in TFSA/RRSPs, you essentially pay no tax. And especially now in retirement, our income has essentially dropped to 0, we can withdrawal the investment proceeds tax free.

  6. Great analysis, but I think you’re being inconsistent by assuming that you sell the house (triggering realtor and legal fees), while ignoring the tax on the capital gains you’d have to pay if you sell your portfolio.

    This is tricky to quantify, because it depends on three factors. First is whether the investments are unregistered, held in a TFSA, or held in an RRSP. Second is whether those are total returns (capital gains plus dividends) or just capital gains (as the tax treatment differs). Third is what tax bracket(s) the income falls into.

    For simplicity, let’s assume these are unregistered investments, the return come solely from capital gains, and all of the income falls in the 43.4% tax bracket.

    In this case, the total tax payable would be approximately $31K ($126,129 * 0.5 * 0.434). So that would really be a gain of about $64K for investments, versus $37K from buying the house.

    To be clear, this doesn’t change your conclusion. You’re still better off financially had you invested. (Also, there are a host of qualitatively issues with real estate – it’s not easily divisible, it’s hard to diversify, etc). But I think the comparison needs to be apples-to-apples.

    1. “the return come solely from capital gains, and all of the income falls in the 43.4% tax bracket.”

      In the accumulation phase, we didn’t need to sell anything, so no taxes were paid. And now that we’re in retirement, our income essentially drops to 0, so no, we would not be in the 43.4% tax bracket. We would be able to gradually withdrawal the proceeds tax free.

      1. Let me know if I’ve misunderstood you, but I think this is what you’re arguing:

        You’re saying that, in order generate an income stream from your house, you’d need to sell it, triggering realtor fees, legal fees, etc, referenced above.

        In order to generate an income stream from your investments, you have discretion as to when you sell the investments (to access the capital). You don’t have control over when you receive the dividends, but I agree the tax would be minimal based on the size of your portfolio.

        Thus, you’re not actually being inconsistent by assuming you’d have to sell the house, and not doing the same for the investments. Your approaches are different because real estate is difficult to divide into pieces. If this is your argument, then I agree with your position.

        ****

        To quantify the second point – let’s assume you live off of $40K per year as a couple. You each earn $10K in dividends (assume all are eligible dividends for Canadian income tax purposes) and you each take out $10K of capital from your RRSP. My calculation shows that in Ontario, in 2015, the two of you would pay a combined $456 in income taxes on $40,000 worth of income.

        A poor old salaried couple earning that same $40,000 would have to pay nearly $2,800 in income taxes alone, plus another $2,400 in payroll taxes (CPP and EI).

        Thus, even though both couples earn the same amount of income, the salaried employees are paying about 13% in income and payroll taxes, while the two of you could be paying 1% – a result of smart planning and hard work.

  7. We owned for 7 years, in a slightly lower growth area and the realtor/lawers/taxes fees wiped out most of the return, particularly when you considered keeping the house up with the neighbourhood as it had been a new build.

    My main criticism of your analysis is that you couldn’t rent the equivalent house to the buy case for your basement apartment level rent and would have had to pay your own cable package for the apples to apples standard of living. But, the difference isn’t enough to swing the math to favour owning a house.

    1. “My main criticism of your analysis is that you couldn’t rent the equivalent house to the buy case for your basement apartment level rent”

      It was basement apartment level rent but it wasn’t a basement apartment. That’s the beauty of it :). It was a second floor 1 bedroom apartment with everything we needed. So I definitely would not have traded it off to rent a house.

      And if I was the type of person that would give up a perfectly good rental and throw money away to rent a house? The cost of ownership would be WAY higher than $88K over 3 years! That type of person would go buy a car (probably 2), spend more than 10k on furniture, pay people to mow the lawn, etc. So that case, the math would still favour renting.

      1. My error on your accommodations. I’m glad it worked for you. My brother and wife have a similar setup near High Park, although I believe more expensive, but works well for them.

        Personally, I go crazy in those types of accommodations. I took mechanical engineering for a reason. It fits my personality. I like to tinker, I like tools, to fix things to build things. I’d get kicked out of a second floor apartment if I tried to fire up my wood working tools. We are now renting a house because that suits us.

        My point is that to some, there is a huge lifestyle gain by renting a house. Having more money just for the sake of having more makes no sense if you have to put the things that are important to you on hold.

        There needs to be balance in both life and finances, but the right balance is very personal.

  8. So I’ve read your posts on home buying and I agree with you that it’s a waste of money that’s better off being put towards investing. When you buy a house, there’s money that’s thrown away such as with Property Taxes, Closing Costs, & Mortgage Interest just to name a few. So with that being known, I invest instead of buying a home. My question though is what about the money when you sell? Say I can rent & pay utilities for $1,000/mth, or I can buy a house with PIMI (Property Taxes, Interest, Mortgage, Insurance) over a 30 year mortgage & Utilities for $1000/mth. Let’s say even that 1-3% of maintenance/yr could fill in that $1000/mth. Yes you’ll waste money on taxes, interest, increased insurance, maintenance, etc. but what about renting where that $1,000/mth is put to nothing?

    Basically it’s the sunk cost of renting vs. retained value of home ownership. If you have rent for $1,000/mth ($12,000/yr) then over 15 years, for instance, that’s $180,000. If I buy a $130,000 home, but paid more via interest, insurance, tax, maintenance, etc. then I still get somewhere near that $130,000 when I sell it. Even if I spent a cumulative $200,000 to buy that home over 15 years, I still get roughly $130,000 back when I sell depending on property values and how well I improved it. Net loss would be $70,000 vs the loss of $180,000 to rent over the same time frame. I’d much rather invest to make a solid 7% at least per year, but then again I need to live somewhere too. Bringing the home value proposition down to a reasonable $130,000 instead of a $600,000+ home-which is absurd and I’d rather house hack than buy that- what are your thoughts on this?

    1. If you can buy a home for $130,000 and the rent in that area is $1000/month, then that’s an insanely good cap rate, and completely unheard of in Toronto or Vancouver. And hey if that’s what reflects the reality of where you live, then I would agree buying makes sense for your city.

      1. This is how the housing market in our area is. An acceptable apartment is usually around $1000 a month. We ended up finding an amazing deal and bought our house for $95,000. We did also put up a new garage which has increased the value of the house and plan on keeping the house to rent out when we decide to move on. It isn’t always a bad idea to buy a house but you really have to be in the right market. If I were in a larger city or weren’t planning on staying in the area for quite some time I wouldn’t have bought a house. I cant imagine having a $500,000 mortgage. I think it would stress me out far to much!

        1. Wow. That is an amazing deal. You can’t even buy a parking spot for $95,000 in Toronto.

          And you are right about the house needing to be in the right market. That’s the thing with houses. People see house appreciation in Toronto and they think they’re going to make a killing. But after you add in all the costs, 70% of their gain is gone. They don’t realize that a rise in price also means a rise in costs. They also don’t realize the opportunity cost of not investing the money lost to ownership costs.

          In your area, you can’t shoot yourself in the foot too badly. If houses are less than 100K, you could have a paid off house in 5 years. And with rents at $1000, buying makes more sense.

          1. North west Minnesota. It’s generally very insulated from market swings. The area I live in has a huge rental housing shortage at the moment. It doent seem to be getting better. There also isn’t the issue like many larger cities of crazy housing inflation. You do have to search for good deals and our realtor thought we were crazy for buying much less house than we could afford…

  9. I’ve been trying to break it down in terms like this to my friends who are current and prospective homeowners for the last 6 months.

    6 months ago I found Garth’s website; a month after I had been house shopping and a few days before I planned to put an offer in on a house.

    6 months later I’ve got a 5 digit ETF portfolio (and a bit of a remaining MF chunk that needs to be switched over ASAP) and am living in South Korea.

    Glad I found you guys through Greaterfool, a nice balance to what he does. Very inspirational! Keep it up

    Colby

  10. Math – what about the tax difference, extra leverage if you only put 20% down, and if you held the house for a normal period, say 5 years? Only $850 for rent -wow. Have you checked how much a $500k condo rents for in Toronto? I find your blog very inspiring btw.

    1. Leverage would be even worse, because then you have to pay the bank interest. That’s an added cost to the house side of the comparison.

      Yeah, we definitely lucked out with the $850 rent. Though there’s no way in hell I would ever rent a $500k condo. Why? You can find much cheaper rents if you just go a bit further out (east york instead of downtown). Those townhouses and apartment are a bit older, but since the landlord bought them way back when housing was affordable, they offer cheap rent.

      And thanks for the kind words and for reading the blog!

      1. Leverage increases return on investment by reducing the cost base. Mortgage rates are super low. Just ensuring you’re making an apples to apples comparison, hence, 500k vs 850 rent doesn’t make sense. Plus, holding period and taxes..

        1. It makes sense in my situation because those were the choices I had at my disposal.

          Besides, you can rent a 3 bedroom house in East York for $1995/month (utilities included): http://www.kijiji.ca/v-house-rental/city-of-toronto/3bdrm-for-beautiful-house-in-east-york/1191847549?enableSearchNavigationFlag=true.

          That’s $126,129 – 36*$1995/month = $54,309 which STILL beats the $36,624.54 from the house.

          As for leverage, having to pay interest makes things worse. Not to mention the fact that the same home ownership costs apply:
          http://www.millennial-revolution.com/rent/leverage-friend-enemy

  11. Love your writing. Very thought provoking and helpful for those who don’t want to be sheep. (baaaaaaaaaaaa!).

    While I 100% agree with the premise and the most important piece not in the equation is FREEDOM, I think an apples to apples would be:

    a) Making your rent the average versus what you were paying.

    b) Doing the math on a more conventional 20% down on purchasing. Yes… interest cost more but the homeowner gets the advantage of leverage on their money (driven by the government wanting to keep the scheme going). When I did it, in your example $400K would keep earning returns unfettered (total $100.9K over the period … 80% of your total) while $100K is used as a deposit secures the property. .. gains $130K over the period (less interest, mortgage payments and all of the other costs you outlined).

    Net-net, the returns are roughly going to be the same. Of course this is using metro GTA in one of the craziest bull runs in housing in the country’s history… and a loss of flexibility not to mention having to live with having the debt (which could go upside down – see USA in 2008).

    Chris

    1. a) if we made rent the average versus what we were paying, then I’d have to make the owning house more reflecting of what a spendy person would pay. No way would they only spend 10K on furniture, not have a car, and not pay someone else to do the gardening, cleaning, snow removal. So you’re looking at an extra $30-50K just for the car. And they would probably buy 2, so that would make it an extra $60-100. So it would still work out in favour of investing.

      b) This is actually a trick the banks use to make you think leverage is better. Sure, you’re borrowing money but most of the profit will go to the bank and real-estate agent, and you still have the same costs of ownership. Will do a future post on this.

      And I agree with you that this is using GTA, which is in an abnormal bull run that is not reflective of house appreciation on average.

  12. Great analysis guys! Don’t forget to take inflation into account. Inflation goes up by about 1-2% each year, so the house would have naturally increased from $497,130 to $527,420 just by keeping up with 2% inflation (i.e., not really making a profit at all). So, if you were to sell it for $622,120 in 2015, you would only be making a profit of $94,700 in today’s dollars, and that’s before you took the additional expenses into account. Subtract the crippling expenses over the years and you’re not making much at all.

    When people say their house went up by 200k in 10 years, they often don’t realise that a majority of the increase is due to inflation, causing sellers to feel much richer than they actually are. Similarly, when we say the stock market returns an average of 7-8%, at least 1-2% of that increase is inflation as well. So, for anyone who is working on building a million dollar portfolio, it’s best to forecast with a 5% rate of return, keep your forecasting in today’s dollars. For example, if you have 100k invested today, assume it will be around 127k in five years in today’s dollars. Of course it will be upwards of 140k, but that’s with inflation.

    You might want to check my numbers though. Math is hard!

    1. “When people say their house went up by 200k in 10 years, they often don’t realise that a majority of the increase is due to inflation, causing sellers to feel much richer than they actually are.”

      A very good point. But it’s the same for investment as well. Since inflation is reflected on both sides, we can disregard it for simplicity sake.

  13. I think some people forget that the home has to be sold in order to get this $126,000. Meaning the sales and transaction fees are applied otherwise the appreciation is not real, because it only potential value, simply put it had not generated you any money what so ever, but has only cost you money. Investing on the other hand year by year will either increase or decrease, but in this case increase which results in actual money being generated that you could then use… Thus it remains rent/invest wins in this scenario…. Of course nobody thinks of buying a home and selling in 3 years, but for sake of argument to receive anything the house MUST be sold or its $90k vs $0.00 , because you never sold to get the $30k you would have received after all of your fees.

    1. “Meaning the sales and transaction fees are applied otherwise the appreciation is not real, because it only potential value, simply put it had not generated you any money what so ever, but has only cost you money…. Investing on the other hand year by year will either increase or decrease, but in this case increase which results in actual money being generated”

      Well said! I would take it one step further to say that, with investing, even if the capital value decreases, money is STILL being generated…because of dividends.

  14. I thought I will give a real life example (with a 20% downpayment scenario). 🙂

    In 2011, we bought a townhouse in Toronto for 470k.
    — We had a downpayment of 95k.
    — OMG, the double land transfer tax was a killer, around 11k!
    — It costed me 1500 in lawyer fees to buy it. (I previously sold a condo at the same time which costed me 900 to sell in lawyer fees.)
    — There was hardly any maintenance because it was less than 5 years old. Our bills (HWT rental, gas, hydro, water, home insurance, internet) ran about 400/month on the conservative side.
    — We got quite lazy with doing upgrades. We did want to do some landscaping with interlocking in the front and 2nd level deck or finish the basement in the long run. We didn’t end up doing either. If we did, I think that would have cost us about 10k for landscaping and 10k for the basement on the cheap side. Thankfully we didn’t upgrade as in our hot seller’s market those things wouldn’t really matter.

    Thankfully, our neighbourhood was high in demand and we sold this year under 665k so almost a 200k return in almost 5 years. (We did plan on staying longer but we moved to another city.)
    — We were able to get a 3.75%+HST realtor fees (1.5% for sell and 2.25% for buy) . I think my lawyer fees were quite high to just sell, probably 1500 (700 base rate plus disbursements and HST).
    — Our mortgage started at 375k with 30 years amortization at variable rate (prime-0.85%). We ended up around 305k with prepayments and increasing our regular payments. (We were only a few months away from renewal but I had to break my mortgage in both times I sold which cost about 3 months interest, so it was about 2k each time.)

    Overall, we netted about 325k from this transaction, maybe more as we used the proceeds to buy another house so we paid land transfer tax and lawyer fees for that. Now we have a paid off house in a cheaper city.

    Even with our good luck (as I made 75k from the first sale with the condo in 4 years and 200k from the second sale with the townhome in 5 years), I totally agree that if you invest “wisely” you can get those gains in the stock market too which is more liquid and avoid the headache of closing costs headache. I really really really wanted to put the proceeds into the stock market instead. But owning this home for me was more of a personal life decision.

    It is so risky to tie your entire net worth to your house. Even though housing is more affordable in this cheaper city, real estate prices only increase 2%/yr (ie inflation). Just a few years ago, people had to sell for less than what they paid for but the market in my suburb has corrected and is more stable now. I definitely agree that home ownership is a consumption item.

    We were really lucky that Toronto is doing well. If we sold last year, we would have missed over 60k in gains but if we sold next year, we might be selling for another 100k. Who knows?!?

    1. Thank you for giving a real life example! Very useful. And you make a very good point about market timing. If you sold earlier or later, you could’ve missed out on gains. So with houses you have to time the market. Not so with long term index investing.

  15. Why can’t people just realize that a house is another purchased item instead of an investment? It’s worth is only based on what someone else will pay for it. I love when people say they “own” a $700k house as if it’s in their savings acct when they really should say they “owe” a $700k house (because it’s not paid off yet and never will with an attitude like that!). How can it be an investment if a mortgage payment is the biggest monthly bill? I purchased a house well below our means, because frankly, I was tired of moving and sharing a wall. I didn’t buy a house because it was an investment, but just a place to settle for awhile. There are people who judge us based on our zip code, but it doesn’t matter. The zip code doesn’t define a financially independent person, it’s their net worth. And people who judge others based on zip codes will surely miss out on meeting authentic awesome greatness 🙂

    1. Completely agree with you. And good work buying a house below your means. This rarely happens since people are so busy keeping up with the Joneses. I guess those are the very people judging you on your zip code, but you’re going to be the one laughing when you’re FI and they’re not.

  16. Great Analysis! In my first property purchase, a lot of expense accumulated.

    If you live in a condo, condo fees increase every 1-2 years, and because they like to increase the fee as a percentage of existing fees. It snow balls very quickly. My condo fee was $700 before I sold it. Special assessments will also kick your ass. My ass was been bruised pretty badly this year.

    If you are a non-resident, that sucks even more. If you sell as a non resident, your lawyer is required to hold 20% of the sale proceeds until CRA approves and provides you with a certificate. I’m still waiting for my money. I had to pay my accountant to deal with that.

    There are a lot of pit falls when owning a property.

    1. You get confused whether it’s an investment or your home
    – When your house appreciates, your mentality is to never sell because it’s the greatest investment ever. Prices will keep going up.

    2. If you treat it like your home, you tend to spend a lot on fancy furnitures and renovation. I should not have spent $3K on a sofa. I believe a lot of homes (which are barely livable) needs reno. I have a family member who had a kitchen remodeling cost over 70K.

    It’s your home or it’s your investment. It’s difficult to be both because the objectives contradict each other.

    1. Thanks for sharing your experiences as a home owner, Pon! And very good point about the home or investment contradiction.

  17. Would you please provide some clarity regarding the investment portion, I have very little knowledge in investing.
    “60/40 portfolio of $497,130 generated after-fee returns of 7% (2012), 8.39% (2013), 8.1% (2014). This gives us a return of $126,129 by 2014”
    Do you mean to invest $497,130? Majority of the people don’t have that kind of money on hand, at least I don’t.
    Also, what do you mean by 60/40 portfolio, do you mean stocks (mutual funds, indexes, ??)
    Would you be able to give some examples or how to identify and invest in these types of stocks, please & thank you!!

    1. 60% stocks, 40% bonds. Using ETF’s (exchange traded funds), bought from an online discount brokerage like Questrade. Go read The Canadian Couch Potato website to learn more on how to invest in indexes.

  18. Would you be able to do a calculation for someone who bought the place in 2012 with 2% down, so around 100k? and take into account interest payments, say 3%… Let’s say for argument they still have 300k in the bank account, and invested that in index funds just like you did.

    I have a feeling that with leverage they might still be doing better, but if you have time to do the calculation and confirm, that would be good. thanks.

  19. Considering F&W’s financial objectives, it makes perfect sense to sell the damn house.

    It’s all about generating positive cash flow. OR I should say, its all about the SOURCE of cash flow, per Kiyosaki’s cashflow quadrant concept.

    As I understand it, F&W’s main objective was to have a steady income while they traveled the world over many months, maybe even years. And that having “steady jobs” during they journey was definitely off the table.

    So they needed an alternative source of non-job cash flow – ie. interest, rent, royalties, dividends, etc. In Kiyosakian terms, that is positive cashflow from the “right side” of the cashflow quadrant.

    Now, “owning” a personal residence, while offering a potentially great chance of capital gains, produces no positive cash flow at all. In fact, the opposite is true – it takes a big chunk of money out of your pocket for as long as you own it.

    So, to reach their objective, F&W would have been compelled to sell the damn house, but not their paper asset portfolio.

    The house would have needed to be liquidated and the proceeds invested in some other cashflow-producing asset. What good would their house do them while travelling? Uh, can you say zero…?

    Their paper asset portfolio, in contrast, was set up from the outset to produce a positive cash flow, without having to sell anything, no matter where they found themselves in the world….

    btw, brilliant distinction by Pon about getting caught between conflicting objectives.

  20. “Hey, if you want to bring feelings to a math fight, go right ahead my friend. I will be more than happy to hand your ass back to you, all red and spanked.”

    This is quite possibly my favourite line written in a blog post by anyone ever. I may have to borrow it to spank any of my friends or co-workers who spout the “renting is throwing your money away!” nonsense.

    The point made by someone above about how the discussion is meaningless unless the house is sold, because until it is sold it is only potential value, is one that I’m glad to see someone bring up. My biggest pet peeve is listening to people talk about how much their house is “worth” and how they’re so rich because of it (I live in Vancouver). I just want to grab them, shake them, and remind them that unless they sell, that gain literally DOES NOT EXIST. It is a made-up number that they keep in their head because it makes them feel good about themselves.

  21. What if you kept renting for 850, bought the house rented it out for the three years at the incredibly high rental rates that t.o. Has to offer, and sold privately.

    1. So total costs for rental house plus selling privately would be $44,500 approx. add 1200 for selling with com free or prop guys. So say 43,559.46 in costs. Plus 850 rent x36 months 30,600 total costs 74,159.46. Say you rented the house for 2000 plus utilities. This earns you 72,000. Plus appreciation of 124,990 you get 196,990. 196,990-74,154.46=122,835.54 PROFIT
      of course rental income minus costs of running rental would be taxed income. Plus you would need to manage the property.

  22. Amazing analysis!
    Anyway, to play as devil’s advocate:
    – Maybe you should mention that your rent is a little bit unrealistic for the same apartment: 850 per month is 10K per year, which is 2% of house value which is not realistic. I mean you’re comparing apples with oranges here. You should compare against the market value of the rent in the apartment under analysis.
    – Utilities I guess you paid them too in the rented apartment, so they’re neutral.

  23. Hi

    I completely agree with your post and your blog. Don’t get discouraged by the complainy pants.

    I have a unique situation where buying a home worked may or may not have worked out better for me then investing in stocks and bonds. Here it is

    I bought a home in Victoria, BC for 650,000 6 years ago with 200,000 down. It is a 4000 sqft 1994 build on 10,000 sqft that borders on farmland. It has 2 existing suites. I rented both suites out (3 bed 2 bath up and a 2 bed 1 bath down) for a combined 2700 including utilities. I then invested $12000 in the garage (500 sqft) and converted it into a full suite with a sleeping loft with skylight windows ( it’s beautiful). The home is worth about 685,000 now.

    expenses/month:
    mortgage (principal plus interest) 1900
    taxes 360
    hydro cable and internet and gas 490/month
    maintence 300 month
    total $3050 month

    income 2700 from rentals
    that means I 350 month for my monthly portion (the 500 sqft converted garage)

    if I invested the 200,000 in indexes I would have received about ~1300 a month
    so even with this “perfect” maximizing the properties money making potential I may have done better investing the money instead. That way I would have more freedom and not have to take care of a house with tenants lol.

    I think you are on to something by not buying and renting. Looking forward to your comments 🙂

    Thank you for your insight.

    1. Thanks for sharing your story, Matt! It’s always good to run the numbers and I’m glad you did just that.

      And you’re right, the freedom from renting and investing and not having to worry about tenants/housing costs is incredible. But you won’t know what it’s like until you’re actually doing it 🙂

  24. Selective math indeed. Few people buy a house outright with cash. In your scenario, if you bought a more expensive house and had a mortgage, you would have been far better off than investing in the markets. Mortgage rates have been flaccidly low ~2% which is essentially free money. Had you bought a 1M+ dollar house, you would have had a 7.8% per year gain for the money you didn’t have to put out. That and the fact it would be your primary residence, when it is time to sell you pay no capital gains tax.

  25. Why in the world are we comparing a $500k residence to a rental that must be worth less than $100k? Talk about apples and oranges!

    And I always find it funny when home maintenance costs are used as an argument against home ownership – as if rentals don’t have maintenance costs that are built into the rent. Guess who paid for the new furnace and roof on the rental – the renters.

    Then there’s the issue of fixed selling costs. The $44,691 of commissions, legal fees, and home inspection costs listed above may, or may not, be accurate – no doubt real estate transaction costs are ridiculously high. But there is an easy way to minimize those costs – move very infrequently. Spreading the selling costs over 15 (or 30) years, instead of 3 years, makes a world of difference. It’s worth telling people that they are better off renting than buying if they aren’t committed to living in one house for a long time. But, again, the deck was stacked in your example to include these huge transaction costs for a 3 year period when the average ownership period is probably somewhere between 7 and 15 years.

    It would be a heck of a lot more interesting and informative if every effort was made to actually compare apples to apples.

    1. Again, this post is answering the question “would WE have made more money if we bought a house”. If the numbers aren’t applicable to your situation, just do the math yourself.

      1. Thank you for the reply. Here’s my math: We bought a house in the Denver suburbs 10 years ago for $339k. At the time it seemed pretty expensive to us. During the last 10 years we elected to finish the basement, remodel the kitchen, replace the furnace, AC, and hot water heater. But we did as much ourselves as we were comfortable with, given our limited skills. Total improvement costs were about 50k (paid with savings, not loans). The house is easily worth over $520k now. So keeping the math simple, the value of the house has increased an average of more than $1k/month, even through the Great Recession. That’s math that makes me pretty happy. As a percentage though, it’s only about a 3% return on investment, not taking into consideration the leverage of a mortgage – nothing spectacular by historical standards. Obviously that’s a lot less than stock market returns over that same period. But our family of four has had the pleasure of living in a much nicer home than could be rented for the equivalent monthly payment.

        Since we’ll be here for at least another ten years (until the youngest turns 18) we won’t incur any of those dreaded real estate transaction costs anytime soon. We now have a 15 yr mortgage at the CRAZY rate of 2.625%. Principle, interest, mortgage insurance, and property taxes are only $1.9k/month. Three bedroom apartments in our part of town rent for waaayyyy more than that. And there’s absolutely no comparison between our spacious three bedroom home and apartment living. For me, this is the most important argument against being a renter for life. We can be in a home that comfortably fits our lives at a fraction of the cost of renting a home this nice. So does home ownership work for us? Heck yeah!

        And if the question is simply “would WE have made more money if we bought a house” the only way to make a reasonable comparison is to compare the rental against the purchase of an equivalent size and quality of home. It’s simply not fair to compare a rental worth less than $100k to the purchase of a $500k home, sold 3 years later, and conclude that renting wins. And it’s not simply that you’re asking that question – you’re making the case that buying a house is a dumb financial move. For some, it really is. But for most people, home ownership is a great move, especially when compared against renting an equivalent quality property, assuming that you can and want to stay in that property for a long time.

        BTW, I really do love your writing!

  26. The RE industry is stubbornly holding on to a 5-6% selling commission rate here in the US even though the internet has lowered practically ALL selling costs in every industry! Maddening and insane.

    Hence, I’m on strike and will NEVER sell until the selling commission is lowered to around 2%-3%. They will never get my money at 5%-6%. It’s just absurd.

    Sam

      1. We managed to cut the “normal” fees almost in half when we sold our home. We simply paid an agent a few hundred dollars to list it on the MLS (which is crucial) and lend me a yard sign, then offered the standard commission to the buyer’s agent. Buyer’s agents had no problem working with me since I offered them their normal compensation.

        Then on the buy side I found an agent that offered to rebate of part of his commission based on how much (or little) work he did. I did all of the internet research and preliminary drivebys. He simply opened a few doors and helped a bit on the contract negotiations. It was win-win. I took less than 8 hours of his time and I got $6,000 of his commission refunded to me at closing.

        I’d would do all of that again in a heartbeat if I ever moved again. Luckily, I have no plans to move any time soon.

  27. I can’t get over the Toronto housing costs!!

    When I moved to my current city (Flyover Midwest Metro, US), I ended up buying because it was so much CHEAPER to buy than rent– total costs were about $750/mo for a nice house in a nice neighborhood vs >$1000 for a one br apartment. Now that I’m moving, I’m seriously considering holding my house and renting it for almost double my mortgage.

    The costs you cite are UNREAL! This is why it’s better to do the math first!!

    Great blog, I’m compulsively reading it from start to end now. I’m like you guys but only 4 yr in… so only 8-10x expenses saved so far…and about to switch to a cushy working from home arrangement. At least, I hope it’s cushy!

    Tracy

    1. Americans have a much more realistic view of the housing market than us Canadians. You guys also have WAY better Price to Rent ratios, so I’m not surprised that in your area it’s better to buy than rent.

      Thanks for reading and hoping your cushy working from home arrangement works out!

  28. On the whole, excellent analysis. I only have one quibble, and it’s more for what you don’t make explicit in your analysis, which is that the real trap that folks fall into time and time again when they buy, and that is the ‘Upsize me!!!’ game. You rightly stated that you were only paying $850/mo. all-in for renting. Even by 2012 standards in Toronto, that sounds like fairly modest digs. The average house price you quoted, on the other hand, while probably needing some work, is still, well, a whole house, i.e. I suspect much larger & fancier than your rental. A truly equal (but dispassionate) comparison would have had you buying the exact equivalent space as what you were renting (or perhaps by manufacturing it, by buying the house and then renting out all the additional space), but, of course, as buying is often an emotional experience (aided and abetted in many cases by artful staging and all those ‘helpful’ folks telling you that you need to ‘stretch’ your budget or move farther away), most people end up doing the apples to oranges that you’ve provided above. Plus, of course, the exact reason for buying is to live there…not to sell again 2 1/2 years later. Of course you’re going to be hit by excessive transaction costs if you do. Particularly if you can’t negotiate better fees. 🙂

    1. “the real trap that folks fall into time and time again when they buy, and that is the ‘Upsize me!!!’ game”

      Very true. People who rent wouldn’t have the same emotional attachment, and thus can avoid the whole “upsize me” and “upgrade everything” frenzy.

  29. You arent comparing apples to apples here.

    You are forgeting that if you did not buy a house, you would be renting over that same period no? Throwing that money into the pile with zero appreciation.

    Also you bought your house cash. Which is not what I would ever advise anyone to do. The reason is as you say, the money is better invested elsewhere. This is why its smart for people to take mortgages out. You can invest the cash you saved into a higher yeilding investment. And I know you’re screaming but interest! When the math is done its still a win. Because mortgage interest is not compounding, while appreciation is. You end up earning more than you lost in interest on appreciation itself. Then you invested in your portfolio to top it off. Its a net win over renting however you look at it.

    Buying cash is not smart and I advise against it. But thats not how most people own homes.

    1. Read the post. The price of rent is included in the calculation.

      Also, saying things like “when the math is done its still a win” without ACTUALLY doing the math is laughable. Read the post the math is all there.

      1. You’re comparing and $850 rental to a $500,000 purchase, in that case, the rental will always win financially because it’s the smaller purchase. It doesn’t take a genius to figure that out. The math is there. It’s just not right.

        1. Okay, first of all, when you rent, you actually rent exactly what you need because you don’t need to think about resale value. When you buy, you make decisions like, oh I need a 3 bedroom house, even though I actually only want a 1 bedroom, because it has better resale value.

          And even if I do compare it with renting a 3 bedroom house, they are renting for $1995/month (utilities included) in that area.
          So that’s $126,129 – 36*$1995/month = $54,309 which STILL beats the $36,624.54 from the house purchase.

          1. You are correct, but only if you are buying cash, If you use a mortgage, the numbers are different. This is because you can put the cash you would’ve put into the house into your portfolio at 7% instead. Let’s say you put 5% down because you have good credit. (I don’t know enough about Canadian loan products to tell you if this is possible there but it is here in the US)

            So you put down $25k+ all the fees you mentioned or $88k, Total cost to own the house $113k. I’m assuming you had $500k in investments so that leaves you with $387k ($500k-113k) to invest in your portfolio, instead of $446k ($500k – 54k Payment) with the rental.

            I did the calc, 4% on a morgage like that would put your monthly payment at $2020 (because you included taxes and insurance for 3 years in the 88k already.) That includes the 4% interest but also assumes you are in a 25% tax bracket. (I’m a mortgage planner I know this to be true.)

            In 3 years if your house appreciated at 7.8% (remember we already paid the maintenance in the 88k) and you made your payment, your net equity after selling your house, paying the realtor, and paying off the rest of the mortgage (Remember you paid it down over the 3 years) would be $177,494. So in three years, you would get a check for that amount upon selling your house. You also have $387k Invested in your portfolio. Which would now at 7% be $474,091.07

            $474,091.07+ 177,494= $651,585.07

            Now lets say you rented and invested 446,000 over 3 years and somehow you got a whopping 10%, Guess how much you would have? $593,626.00

            You lost $58k over 3 of your best years ever because you rented.

            I understand you were comparing buying cash. And you were right in that comparison. There’s also the chance that you can’t sell your house. Just as theres a chance the stock market could crash like in 08.

            Just know that buying a house not a loss as you are trying to portray it here.

            I teach financial planners and advisors this stuff for their continuing education. I’ve helped hundreds of people build net worth with just what I’m saying. If there is one thing I know, it is the financials of buying a house. The numbers get even more outrageous the longer you hold the house.

            1. In the example given, the capital appreciation on the house is $124,990 before expenses. Somehow in your example, layering on a mortgage makes that gain $177,494. So you’ve added expenses, yet somehow the gain is higher. That makes no sense.

              1. This is because when you pay a mortgage your principal goes down. Yes the house apprecited 126k but you also paid your mortgage down 60k. It is not a full expense the way rent is because you get that principal back when you sell it. It’s more like savings. Do better math. It is only different if you buy cash.

                1. Exactly.

                  And then add on the ROI on the retained capital you invest in the market. You put 120k down on the house and invest the remaining 480k. Add in a suite for income to give a different perspective too.

                  And your maintenance costs are completely off-base unless you have a series of serious issues – most of which you can control for by ex. checking perimeter drains and roofs prior to purchase. The 1% maintenance rule works where houses cost 150,000 – not 500,000 – you can see why a blanket rule is not workable given different prices for the same home in different markets.

                  There are many ways to reduce the costs of home ownership too. We certainly never spent an extra 10k on furniture. Just brought what we had and craigslisted the rest. And sell using a mere posting when the market is hot.

                  Homeowners don’t lose the ability to think strategically because they are homeowners. It is a transferable skill.

  30. All very interesting, but seemingly for a limited set of the population, especially when considering the huge difference between different markets, and this whole argument completely ignores the fact that you are at the whim of a landlord, rents can increase with no control on your part, it costs money to move, and many people have an actual “family” to accommodate, not just two people (who both happen to be working in the poster’s argument).

    And people should consider that, in some markets, rents are crazy and occupancy rates can be over 97%, which helps to hold up and/or elevate the cost of rent.

    In my area, we are paying $2500 for a small two bedroom (1 bath) place for 5 people, one working. The rent just went up $200 from last year. We have had rent increases at the 5 different properties that we’ve rented every year. The cheapest place we’ve rented, when we had 4 kids in the house, was $3400 per month, and then we had to leave because they wanted to sell. In my area, a small one-bed apartment is over $1000 per month.

    Additionally, you cherry pick some of the data. You are leaving out any tax benefits you gain from home ownership. Maybe it’s different in Canada, but in the US, there is a significant tax write-off for interest payments, of which the majority of the first few years of the loan are consisting of, so I actually pay higher taxes because I am not a home owner and I am not gaining anything in renting as far as gaining ownership of real property.

    There are certain downsides to home ownership, but being forced to move at the whim of a landlord several times (usually to jack up the rent beyond the legal limits or to have friends move in) has cost us many, many thousands of dollars in moving costs.

    Also, the other assumption you make is that your portfolio continues earning at a constant rate. There’s no guarantee of that. There’s no guarantee that everyone will pick funds or stocks that will go up, and just because you earn a dividend doesn’t mean the principle isn’t going down. You can get a dividend on a falling stock and end up at a net of zero!!

    We will need to move soon. With rents going up, the next place we get will be as small as what we currently have but the rent will likely be over $2800. (Note that apartments with just two bedrooms in the area are well over $2200 per month with no garage space.)

    Your calculations are interesting, but I’d rather deal with the cost and burden of home ownership and gaining real property with the option to eventually rent and leverage the property for future property purchases.

    1. We are using low-cost Index ETFs that buy the entire market, not individual stocks. Individual stocks can go to zero, but not the entire market. That’s the problem we’re trying to solve here. People don’t understand how to invest so they don’t do it, yet will throw good money after bad into a house based on the belief that “houses=bricks=good”. The solution to “rent is too expensive” isn’t to go “time for a multi-million-dollar mortgage!” The solution is to learn how to math shit up so you can make money your bitch rather than the other way around.

      1. You’re wrong here. The solution is exactly that, as I demonstrated above. Stop thinking of a mortgage as a debt. Unless you build it with your own hands, you are paying someone for space. If your rent is higher than a mortgage then you would be completley stupid to rent. That’s the way it adds up. Using a mortgage as a tool to invest with leverage IS making money your bitch. Not the other way around.

          1. You know, The reason I’m upset by this is because this post is giving advice she knows very little about.

            A mortgage is only a debt if you do not use the money you would’ve spent renting or buying cash the house cash to invest. If that is the case. Yes, do not get a fucking mortgage.

            If you have cash to invest, and rents are even close to what your mortgage payment would be it makes sense to buy.

            This is because… gasp* mortgage interest does not compound, but appreciation does. It is not a credit card. It is a fixed rate on the ORIGINAL loan amount for the entire 30 years. (if that’s what product you chose.)

            Appreciation does compound however. and so eventually, your appreciation will out pace your mortgage interest, exponentially. (In this case if rates were 4% it would do it in the first year or so)

            Couple that with the fact that you can invest the money you didn’t put down or in cash into a much higher yielding portolio investment, this is smart, and it’s pretty easy to see that a mortgage is not so bad as MSM would have you believe.

            And lets not even mention the fact that most of your principal will be paid back to you should you sell, as apposed to actually costing you if you rent. (because you don’t get that shit back, ever.)

            I do this math for a living, every day. I have no proof because we’re online, but I know it’s right because I’ve seen it happen time after time in real life.

            1. “Stop thinking of a mortgage as a debt” – wow. Anything you owe money for is a debt by definition. Period. And the interest you pay on that debt (which generally is compounded annually or so, not that that really matters) is something you never get back, ever. Like the property taxes, realtor fees, maintenance, etc. that is part of home ownership.

              Someone should math up a comparison of:
              Person A: Puts 20% down and pays interest over the life of a 25 year mortgage, then sells the house.

              Person B: Rents for 25 years, saves all the above costs by not buying, and invests the savings (down payment + monthly payments) into an mix of index funds.

              1. I didn’t say it wasn’t a debt. I said stop thinking of it as one. But this conversation isn’t going anywhere so I digress. There is more then one way to skin a cat. I’ve been skinning mine this way for 10 years, with my hand right on the pulse of it. But apparently I know nothing (Jon Snow.) This obviously worked for her. So I’ve nothing more to say on it.

  31. One important thing you are missing is the leverage of the real estate. Without leverage, real estate is not going to work. Look at the following math:

    If you buy the $500,000 house using leverage, you only need $100,000 (20%) down payment, the important point is you will invest the remaining $400,000 in stock too, the same way you invest for your $500,000. So you split the money into two portion.

    Real estate portion:
    extra cost will be interest, let’s say the interest rate is 4%, $400,000 (loan amount) x 3% x 3 = $36000. Total cost = $88365 + 36000 = $124365

    Total earning at the end = $124990 – $124365 = $625

    Stock portion:
    $400,000 x (1+7%) x (1+8.39%) x (1+8.1%) – $400,000 = $101,485

    Total gain = $625 + $101,485 = $102,118 (which is better than your $95,529)

    Not to mention that you used a much lower rent when compare to a $500,000 house.

    “from your previous comment”
    — if I do compare it with renting a 3 bedroom house, they are renting for $1995/month (utilities included) in that area.
    So that’s $126,129 – 36*$1995/month = $54,309

    I would say combination of real estate and stock will win in this case, let me know if my math is off or which part is not correct. I will be pleased and willing to discuss, cheers. I am also working towards my FIRE.

    1. “But but but LEVERAGE!!!” You have no idea how often I hear that argument 🙂

      Okay, so here’s the thing. You have a very interesting analysis and good number crunching. BUT in this scenario, you forgot to account for paying for a) the principal of the mortgage on a monthly basis and b) the cost of ownership needs to be paid throughout the 3 years, not just be covered by the sale at the end (with the exception of the real-estate agent fee). Unless you can somehow convince the government not to collect property taxes, land transfer taxes for 3 whole years;) Good luck with that!

      So because of that, you can’t invest the remaining $400K in the market. You have to set aside the principal mortgage cost and $57,259 (ownership costs excluding real estate fee, or $88365-$31,106) to pay for the ongoing bills of keeping a house. The principal for the 3 years would be $33,818. So $33,818 + $57,259 = $91,077. So you would only be able to invest $308,923.

      Re-calculating, we get:

      Investment gain on $308,923 over 3 years = $78,378.28
      Total gain $625 + $78,378.28 = $79,003.28, which is $16,525.72 less than the $95,529 I got from investing all $500K and renting.

      Now, if you were to assume that you invest all $400K, and the ownership costs + mortgage is paid by our salaries (outside the $400K) through those 3 years, then outside money is coming into this experiment, which means we have to add it to the investment side as well to be fair. My investing gains in the 100% investment scenario would be WAY higher than $95,529. Instead of $500K invested, that equation becomes $500K + the ownership costs + mortgage invested over 3 years.

      So you see, the thing that people people forget when they say “but leverage!!!” is that you have to PAY for the costs of ownership, principal of the mortgage, AND interest of the mortgage throughout the years of ownership, not just at the end when they sell. As a result, this is extra money that could’ve been invested in the market and you lose the opportunity cost of that investment gain because it’s swallowed up by the house.

      1. Those principle cost and monthly cost of ownership will be offset by your rent, as you need to pay rent every month! So you already assume you will have some money set aside monthly for housing. Previous calculation, I assume the fact that monthly cost of owning a house and rent will be similar for the sake of easier calculation, but let’s calculate exactly.

        Owning of house: 4% interest on $400,000 mortgage (I lived in US, so based on US number and 4% is way over-estimate of loan interest rate in 2012)
        mortgage (assume an interest-only loan): $1333
        property tax (1.1% of house price in California) $460
        Insurance $800/12 = $70
        Maintenance: $400
        Total monthly: $2263
        Not to mention about the tax incentive you will get when owning the home, so we will just ignore for now.

        Renting:
        for apple-to-apple comparison, need to use comparable rent for a $500,000 house, which is around $1995/month, otherwise, it is not valid comparison

        You got a good deal if you find a $1995/month for renting. But let’s focus back on the calculation.

        I will over-estimate quite a lot for this as it will give a confident margin.
        Owning a house will need $2263 and Renting will need $1995, so, it is extra ~$300 per month, and for renting, I assume you can invest that amount to stock monthly, so at the end of 3 years, total amount invested will be $10800. And I will over-estimate that you will get 10% a year and over-estimate that you will invest extra $10800 at front:
        $10800×1.1^3=~$15000

        — from previous calculation
        — if I do compare it with renting a 3 bedroom house, they are renting for $1995/month (utilities included) in that area.
        So that’s $126,129 – 36*$1995/month = $54,309

        add $15000 to the profit: $54309 + $15000 = $69000.

        Still lower than:

        Owning a house, total gain from previous calculation:
        Total gain = $625 + $101,485 = $102,118

        1. Interest only loans are non-standard, and are risky because any house depreciation puts you underwater immediately. Since we’re not considering risky moves on the investing side like using margin, we’re going to keep the same risk profile on the housing side.

          Putting the numbers into a mortgage calculator, a 400K mortgage at 4% interest amortized at 25 years, gives you a monthly payment of $2104 ($796 principal ,$1308 interest).

          So you’d get:
          mortgage: $2104 ($796 principal ,$1308 interest)
          property tax (1.1% of house price in California) $460
          Insurance $800/12 = $70
          Maintenance: $400
          Total monthly: $3034

          Your calculation doesn’t make sense because you’re mixing up the costs and using non-standard interest-only loans.

          Okay, let’s simplify. If leverage really is that great, let’s compare these 2 scenarios:

          1) $100K downpayment, $400K mortgage
          2) $100K investment + $1995/month rent

          1) The house appreciates by $124,990, but we have to pay the 5% real-estate agent fee to sell it: $124,990 – $31,106 = $93,884

          And also deduct the ownership costs over 3 years: $93,884 – ($1308 + $460 + $70 + $400) * 36 = $13,316

          So overall profit from sale = $13,316

          Now, we still have our $100,000 downpayment and the equity we built in the house over 3 years:

          So that’s $100,000 + $796 (principal of mortgage pymt) * 36 = $128,656

          So our overall net-worth = $128,656 + $13,316 = $141,972

          2) Difference between monthly payment for ownership versus rent:
          $3034 – $1995 = $1039

          As a result, we can invest $100K + $1039/month over 3 years. Assuming returns of 7%, 8.39%, 8.1%, we get a total net worth of $167,508

          So even with leverage and renting an expensive $1995/month house, we made $25,536 more by renting and investing. And most of the time, people rent exactly what they need, but they buy more than they need because of re-sale value. So the gap could be even wider.

          1. — And also deduct the ownership costs over 3 years: $93,884 – ($1308 + $460 + $70 + $400) * 36 = $13,316

            I dont know why you subtract that amount, as you already adding $1039/month in the investment approach, both approaches are EVEN now. One more time, even you dont buy house, you need to pay rent, but rent is just $1995. You can invest $1039 extra to investment account.

            You can take a look at the following:
            For house:
            Paid $100k for down-payment
            paid $3034 a month (including all mortgage, interest, property tax, maintenance and expense)

            For investment:
            Paid $100k initially for investment
            paid $ 1995 (rent) + $1039 (investment account)

            From either approach, you are spending $3034 total per month, they are EVEN now, you cannot subtract that from the gain any more.

            At the end:
            For house: you get back $93,884 (after agent fee) + $128,656 = $222,540

            At the end:
            For investment: $167,508

            Let me know if you think there is any mistake 🙂

  32. Hi. Love your post. In my area of Northern Virginia, only condos are affordable ($340K and up). Condo/Homeowner Association fees run from $300-$900 per month, yikes! Condos don’t always provide parking, so add parking costs to that equation.

    I have owned several homes and sold them. I now rent a tiny apartment close to my work. It is like heaven to call the landlord to fix things, and not worry about financing a broken dishwasher, refrigerator, etc. I am no longer “house poor” because I have a rainy day fund.

    My coworkers and friends frequently complain about how much it costs them to suddenly repair something in their home. They tell me I’m lucky. Yes, and thanks for adding math to that feel good equation of renting.

    P.S. In the USA you can deduct mortgage interest, but who wants to pay a high amount of mortgage interest? I would rather pay down the principal. According to Investopedia, the mortgage deduction does not provide a $1 tax break for every dollar spent; only pennies on the dollar.

    1. Thanks! Good to hear from a former home owner turned renter (most people can’t go back to renting after owning, so you guys are quite rare ;)). And I completely agree how awesome it is to call the landlord to fix things. It’s so much easier to plan for your finances when you don’t have “surprise costs” coming out of the blue all the time. Renting rocks!

  33. I appreciate this article, but have one question because I’m curious: You were spending $850 per month in rent for two people? May I ask what/where you were renting?

    1. Yup. Top floor of a townhouse in East York, Toronto. Safe area and only 30 mins to work. Still lots of good places to rent in that area under $1200/month. Wanderer’s friend is currently renting there for $650/month, living above a store. I suspect he’ll be FI very soon 🙂

  34. Oh man, I love your writing. And sqrt(-1) <3 math!

    Haha, we just made an investment property calculator on our site partly to help with a reader case study, but also partly to quickly assess multifamily properties nearby. Being in the greater Boston area, literally 0 properties so far have made sense as investments. And the single family homes? I've got coworkers looking in the $650k range who are having a tough time finding 2 bedroom condos because of bidding wars. Absolutely ridiculous.

  35. A math fight? Sexy.

    I would like to see you do a 10-30 year comparison of indexing in a 60/40 portfolio vs purchasing a house (no renting; primary residence only). This is only because the numbers would be a little bit more “realistic”, as no one would ever buy a home and sell two years later unless the place was haunted (Bill Murray and Dan Ackroyd are never gonna strap the proton packs ever again, so no Ghostbusters to save you).

    I’d love to see you run numbers based on the real rates of market and real estate returns from, like, 1985 to 2015 or something like that.

    Of course, what people have to understand in the end is that even if a home got you a higher net worth in the end, it’s all tied up in the property for XX amount of years. If your goal is to have the highest possible net worth while carving out your piece of a single area, that’s fine. If you are looking to retire early, travel the world, or at least have the OPTION of doing either or both, then you need your money in something more liquid, such as stocks or bonds.

    The whole “who makes more money in the end” debate is fun, but it’s ultimately pointless for this reason. What good is a high net worth if it’s all tied up in your primary residence, thus forcing you to continue working for your employee in order to make ends meet? For the person fighting for financial freedom? NOTHING!!!!!!

    Sincerely,
    ARB–Angry Retail banker

  36. You inspired me to sit down and research/figure out the Vancouver equivalent, so I did some calculations based on hypothetically purchasing a very modest “starter home” 2-bedroom apartment in a suburb (like the one we currently rent) and then selling it 5 years later (buying in 2012, selling in 2017). The results are actually shocking me right now. You’d actually wind up in the negative. $65,000 in the hole, to be precise. O.M.G. I’m seriously peeing my pants.

  37. Thanks for your mathematical calculation.
    On the other hand, diversifying investment is one aspect we need to take into account. Real estate can reduce some risks it means we will not put all of money into stock market (all of eggs into a basket.)

  38. You make too many bad assumptions and errors to outline, but the biggest ones are:

    with $497,130 in cash you could buy and pay the mortgage for the timeline being considered on a much larger house resulting in much higher gains. You took out leverage to manipulate your results despite this being the biggest reason to buy real estate.

    You included closing costs for one investment but not the other… capital gains taxes would have a huge impact on your investments… tax concerns are the second biggest reason ppl invest in real estate.

    And lastly the rent you subtracted would at most pay the rent on the basement of an average house in Toronto, but not much else. You used an average house to purchase, so you should compare it to the rent of an average house…otherwise rent out the house and live at the same current means. Those are your only options for comparison.

    So yes, if you ignore leverage, taxation, and standard of living then maybe just maybe you would have a point… but in reality buying a house would have resulted in much more wealth had you bought and sold in that timeline.

    I assume you are a result of our public school system, so I won’t hold it against you that you did such poor financial math. But in the future ask for help. That level of error should not be referred to as math… la sigh.

    Dahlsom

    1. Wow, so much ignorance coming from someone who knows NOTHING about investing. Why am I not surprised. Cleary, YOU are the one who’s a result of the public system not teaching a damn thing about how investing works.

      Capital gains on the portfolio don’t apply because the entire point of early retirement is to STAY invested long term and live off the gains and dividends. That’s why the portfolio continues paying you and covering your expenses. Houses do nothing but cost you money. You can only get the out equity if you sell…at which point you get hit with closing costs. And most people don’t end up selling anyway, and just buy a bigger house. That might be great if you want to retire at the regular age of 65 but is completely useless in helping you retire early.

      Also, the rent we subtracted is EXACTLY how much our rent was. And no, it was not a basement. When renting you rent exactly what you need, whereas when you buy, you end up stretching to account for re-sale value, etc. So comparing the exact same place for renting and owning makes zero sense. No idiot would rent a massive house with extra space they don’t need since they don’t need to worry about selling it.

      No wonder there are so many Home-Boners out there up to their eyeballs in debt, thinking they’re rich. La sigh is right.

  39. Damn – Holy Sh*t – Wow – … That kinda sums up my experience this week going through your blog.

    I’m coming from an engineering background myself and have always had an interest in finance. I’ve been trying this week to find mistakes in your arguments and reasonings, but I have to say that I didn’t find any and I’m kinda getting desperate.. You really are right!

    In fact, you are SO right that I might do the same! I’m starting my first job in September (final months of school now) and I was already planning on investing part of my money. I’m currently reading the book ‘The Intelligent Investor’ from Benjamin Graham to be able to do this with a sound base of knowledge. I wasn’t planning on ‘risking’ a lot of money with it, but now that I’ve read your blog and story I’m starting to think otherwise. Without panicking, a good diversified portfolio and consistently buying it’s not that risky at all.

    I’m from Belgium and the only thing I need to figure out is wether it’s reasonable in this country too. I hope so and maybe someday I’ll be back here to tell you my story 😉

    Keep up the good work and keep inspiring others with your story!

    1. And this is why we love engineers! Always math that shit up! Glad you see the light.

      And yes, many times what people considering not risky (buying a house, keeping money in savings accounts) is ACTUALLY risky and things that people considering risky, like investing, isn’t actually risky. It’s just due to lack of knowledge/experiences. I was in that ignorant boat too.

      Welcome to the blog! Very cool to see a reader from Belgium ( we went there 2 years ago and LOVED it).

  40. Finding a $850 rental with all utilities, is like a finding a home undervalued by 10%, which would mean the house you bought for $497,130 is actually worth $552,360** with an increase of 25%* over the time period makes $690,450.

    $690,450 (sell value)
    -497,130 (purchased price)
    =193,320 (appreciation)
    -88,362 (not adjusted for commission or land transfer***)
    =104,955 in gains

    That is fair math.
    *25% based on (622,120-497,130=0.2514)
    **497,130/0.9 = 552,360
    ***Easy to find discounted commissions, I would not spend $10,000 on new furnature

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