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It’s Friday, so you know what that means…Reader Case time!
Today’s reader jumped out at me because of the provocative subject line: It is EVER OK to buy a house?
Now, we here at Millennial-Revolution.com have taken some strong positions on housing, but don’t get us wrong. We’re not against HOUSING, we’re against massive, unsustainable DEBT. After all, the decision to buy a house has to be weighed against the cost of rent. If it cost $1,000,000 to rent every month, yet buying cost $1, then obviously it would makes sense to buy. So there’s a balance point somewhere on that continum where it makes sense to do one or the other.
So let’s see which side of that argument our reader’s on, shall we?
Hello,
I’m interested in your take on whether it’s better to buy in my situation. You are generally highly in favor of renting but most of the case studies I’ve heard are for people who live in cities where the numbers are much different. We already own a home but I’m curious what your numbers say. Some other rent vs buy calculators say we are better off owning a home if we stay 3-5 years minimum but I’m curious on your perspective.
Our numbers:
39 years old, married with 3 kids ages 13, 11 and 8.
Gross income $108,000 + ~$12,000 bonus.
Net income $63,000 + bonus amount. This is what goes into our bank after taxes, 401k, medical, dental, and HSA come out.
Monthly spending is roughly $4,400.
We have two paid for vehicles (2007 Honda Odyssey and a 2007 VW Jetta)
We bought a house 2 years ago for $110,000 and still owe $23,000 on it. The monthly payment on it is $718 for a 15 year fixed interest rate at 3.75% which includes property taxes and homeowners insurance. (taxes are $162 and insurance is $72)
To rent a $110,000 home in our area would cost around $800-$1000.
We have ~$300,000 in a 401K, ~$10,000 in a Roth IRA, ~$15,000 cash and ~$10,000 in an HSA. I also have a pension with a cash value of ~$100,000.
Other factors:
Both the homes we have owned were foreclosures purchased below market value. The first home we made $25K on mostly due to buying at less than market value. The current home is valued at $160,000 and we purchased for $110,000. Repairs have cost about $5,000 so we have currently gained about $45,000 in equity.
My wife would prefer to own a home so it can be painted and customized to her liking. I like the idea of tax free gains which the tax laws allow if you live in the house for 2+ years.
Even without these “special circumstances” it seems to me we are slightly better to buy a house for $110,000 vs renting for ~$900 if we stay there for 5 years or more. What is your take?
Thanks,
RentOrOwn
Now, in the endless rent vs. own debate, there are so many rules of thumb floating around the internet that it makes your head spin. The Rule of 90, for example, states that you take 90, subtract your age, and that’s how much of a percentage of your net worth should be in real estate. The 1% rule, popularized by Paula Pant from AffordAnything.com, states that buying only makes sense if your monthly rent is greater than 1% of your purchase price.
Which one is correct? Damned if I know.
The fact is, these rules of thumb are just first-pass estimates. Nobody actually advocates spending hundreds of thousands of dollars based on a quick back-of-the-envelope calculation. If you dig deeper, you realize that Paula actually advocates using the 1% rule just as a way to tell if a property deserves further investigation. She makes her purchase decisions based on many, many factors that can’t be summed up in a pithy rule of thumb.
So I don’t use any of them. Instead, I run the math.
And I’ve found that regardless of whether you actually choose to pursue FIRE or not, the process of calculating your FIRE date delivers a really useful, concrete way of evaluating nearly every financial decision. Should I do A or B? I don’t know! But if you calculate your FIRE projection under assumption A vs. assumption B, the choice becomes clear because it translates something we all have trouble processing (money) into something we can all process easily (time). Is this decision worth an extra X years of working? If yes, go for it! If not, don’t.
So without further ado, let’s MATH SHIT UP!
How Much is this House REALLY Worth?
Even though we talk about finances so often here, I like to remind people that at the end of the day money is just pieces of coloured paper. The ACTUAL resource we need to manage is time. We all only have a limited amount of time on this planet, and money only has value when translated into the resource that REALLY matters.
And that’s why even though the rules of thumb mentioned above can be useful in weeding out truly shitty deals, the real acid test comes from seeing how much of your time this house will cost you. How many years of wage slavery does this convert to? And are you willing to pay that price?
So let’s find out.
Here’s the summary of RoO’s numbers.
| Summary | Amount |
|---|---|
| Income | $63,000 + $19,000 (401k) + $6900 (HSA) = $88,900 |
| Expenses | $4,400 per month, $52,800 per year |
| Debt (non-housing) | $0 |
| Assets (non-housing) | $300,000 + $10,000 + $15,000 + $10,000 + $100,000 = $435,000 |
OK so where do we stand here? First of all, let’s figure out his FI number, which is $52,800 x 25 = $1,320,000. Ouch. That’s a big number.
And now let’s figure out how long it will take to get there given his current trajectory.
At his current income/spending levels, his savings rate per year is $88,900 – $52,800 = $36,100.
And given his current, rather impressive investable assets of $435,000, we can predict RoO can retire in…
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $435,000.00 | $36,100.00 | $26,100.00 | $497,200.00 |
| 2 | $497,200.00 | $36,100.00 | $29,832.00 | $563,132.00 |
| 3 | $563,132.00 | $36,100.00 | $33,787.92 | $633,019.92 |
| 4 | $633,019.92 | $36,100.00 | $37,981.20 | $707,101.12 |
| 5 | $707,101.12 | $36,100.00 | $42,426.07 | $785,627.18 |
| 6 | $785,627.18 | $36,100.00 | $47,137.63 | $868,864.81 |
| 7 | $868,864.81 | $36,100.00 | $52,131.89 | $957,096.70 |
| 8 | $957,096.70 | $36,100.00 | $57,425.80 | $1,050,622.50 |
| 9 | $1,050,622.50 | $36,100.00 | $63,037.35 | $1,149,759.85 |
| 10 | $1,149,759.85 | $36,100.00 | $68,985.59 | $1,254,845.45 |
| 11 | $1,254,845.45 | $36,100.00 | $75,290.73 | $1,366,236.17 |
| 12 | $1,366,236.17 | $36,100.00 | $81,974.17 | $1,484,310.34 |
…12 years.
OK great. We now have a baseline number. Now let’s simulate the scenario that RoO sells his house.
By his estimates, he can get $160,000 for it. After real estate commisions of 5%, and after paying off his mortgage, he should net $160,000 x 0.95 – $23,000 = $129,000. This amount he can add to his investible assets.
But, he’d now have to pay rent. He’d save $718 in mortgage payments, taxes, and insurance, but have to pay ~$900 in rent for an equivalent place. This actually increases his costs, and on the surface this sounds like it’s not going to work, but let’s run the numbers.
First of all, his FI number will slightly increase to ($4,400 – $718 + $900) x 12 x 25 = $1,374,600.
His starting balance and savings rate also changes, to $435,000 + $129,000 = $564,000 and $36,100 + (718 – 900) x 12 = $33,916, respectively.
And his time-to-retirement? Well, let’s see…
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $564,000.00 | $33,916.00 | $33,840.00 | $631,756.00 |
| 2 | $631,756.00 | $33,916.00 | $37,905.36 | $703,577.36 |
| 3 | $703,577.36 | $33,916.00 | $42,214.64 | $779,708.00 |
| 4 | $779,708.00 | $33,916.00 | $46,782.48 | $860,406.48 |
| 5 | $860,406.48 | $33,916.00 | $51,624.39 | $945,946.87 |
| 6 | $945,946.87 | $33,916.00 | $56,756.81 | $1,036,619.68 |
| 7 | $1,036,619.68 | $33,916.00 | $62,197.18 | $1,132,732.86 |
| 8 | $1,132,732.86 | $33,916.00 | $67,963.97 | $1,234,612.84 |
| 9 | $1,234,612.84 | $33,916.00 | $74,076.77 | $1,342,605.61 |
| 10 | $1,342,605.61 | $33,916.00 | $80,556.34 | $1,457,077.94 |
Slightly over 10 years. So surprisingly, despite the fact that his per-month costs by moving to renting went up, the amount he made on his house (even after real estate commissions) more than made up for the difference. By selling and moving to renting, he will save 2 years of working.
So is continuing to own that house worth 2 years of RoO’s life? I have no idea. Only he and his spouse can decide that.
Pay Off The Mortgage
Sometimes our readers really show how smart they are, because they saw a solution that I initially missed:
Why doesn’t he just pay off the mortgage?
And I was like well duh, why didn’t I think of that?
If RoO took his Roth IRA contributions plus the spare cash he has, he’d have just enough to completely kill the mortgage. Which at an interest rate of 3.75%, you’d think wouldn’t make too much sense, but it does eliminate a big chunk of his housing costs. Right now, he says he’s paying $718 a month, including $162 for taxes and $72 for insurance. So that means his mortgage payment is $718 – $162 – $72 = $484.
What does that do to the math?
Well first of all, it would reduce his FI target. Lowering his monthly spending by $484 would bring his annual spending to $3916 x 12 = $46,992. And that would make his FI target $46,800 x 25 = $1,174,800.
It would also, however, shave $23,000 off his starting balance. BUT, it would also increase his monthly savings since he can put that saved mortgage payment towards his retirement portfolio.
So put all these factors together into our handy dandy spreadsheet, and what does it do to his time-to-retirement?
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $412,000.00 | $41,908.00 | $24,720.00 | $478,628.00 |
| 2 | $478,628.00 | $41,908.00 | $28,717.68 | $549,253.68 |
| 3 | $549,253.68 | $41,908.00 | $32,955.22 | $624,116.90 |
| 4 | $624,116.90 | $41,908.00 | $37,447.01 | $703,471.91 |
| 5 | $703,471.91 | $41,908.00 | $42,208.31 | $787,588.23 |
| 6 | $787,588.23 | $41,908.00 | $47,255.29 | $876,751.52 |
| 7 | $876,751.52 | $41,908.00 | $52,605.09 | $971,264.61 |
| 8 | $971,264.61 | $41,908.00 | $58,275.88 | $1,071,448.49 |
| 9 | $1,071,448.49 | $41,908.00 | $64,286.91 | $1,177,643.40 |
10 years, baby! So that means by paying off his mortgage now, he gets the best of both worlds: he (and his wife) get to stay in their house, and still retire in the same amount of time that it would have taken if they had sold it and went back to renting!
HUGE thanks to our readers for this one for the catch, especially Marie Jacobs, Jack, frugalgenx, Nate, and Court. We are so lucky to have such kick-ass clever readers here on MR 🙂 You guys/gals are the best!
Conclusion
So does it make sense for RoO to own his home? At his current situation, not really. He could retire two years sooner if he sold, got out the equity, and rented.
BUT, as our astute readers pointed out, if he were to pay off the mortgage, he’d get the best of both worlds: stay in the house AND retire in 10 years.
So even though it’s rare that owning a home beats out renting, in this case it’s true.
That’s the power of math. Math doesn’t judge. Math simply lays bare the truth.
And the truth is…it doesn’t matter how you spend your money. All that matters is how you spend your time.
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Great post! I noticed that you didn’t account for rent prices ever increasing. Does that drastically change any numbers?
I generally agree with everything you say here, but one thing I commonly see overlooked is rent more often then not increases 2-5% a year where the mortgage (as a rent payment) becomes more valuable long term as the payments stay the same.
Not only rent, right? Inflation will also increase other monthly costs. How do you account for that?
Ideally your property tax rate isn’t changing yearly, so for housing everything should stay the same with a home?
Generally these tables do everything at today’s dollars. So we don’t adjust costs for inflation, but we don’t adjust their savings rate to account for raises/promotions either.
This keeps the calculation simple and easier to understand. If you want to do it in nominal dollars, you’d adjust the savings amount for inflation each year, use a higher ROI (8%), and also adjust the FI target every year to account for the fact that you’d need more money saved in the future to have same buying power. Then you’d see where their projected net worth crosses the moving FI target.
It’s a lot more confusing and you end up with the same answer in terms of # of years, which is why we do everything in real dollars. It just confuses everyone if we do it in noinal.
Just curious, how did you establish those 6 and 8% baseline? I always assume on Garth Turner site that the 6% for a balanced and diversify portfolio was in nominal term and not in real term. Did I read that wrong?
I have rented for the last 12 years in the same city and my rent has gone both up and down depending on the year. This is a really great point but in the city I live in the house prices went up for approximately 8 of these years and vacancy was very low (less than 2%) and even when this happened my rent still dropped (I am a great tenant). Rent doesn’t necessarily act the same as house prices. I’m sure the opposite is true as well.
My landlord actually forgot to increase his rent for like 5 years. It helps to have a forgetful landlord 🙂
His monthly spending includes mortgage payment what will be gone in some time and will lower his spending and the amount he needs in his FIRE portfolio.
That’s actually a good point. Paying off the mortgage and killing the payment off his monthly expenses would effectively implement the “shave $500 off your expenses somehow” strategy.
I love your reader cases and mathing but am not following how building a portfolio of 900x12x25=270,000 is less time to FI than paying off a mortgage balance of 23,000 which then lowers the monthly costs.
As a parent of 3 I would also like to point out that Justin lives near generous relatives who provide free child care. In years we have paid for full time daycare for an infant and toddler plus after school and summer care for an older child our child care spending easily topped 25,000 so that could be part or all of the difference.
4,400 – 718 mortgage = 3,682 new monthly costs x 12 x 25 = 1,104,600+ 23,000 mortgage = FI at 1,127,600 which would be reached in year 9 keeping the house and ahead of the sell the house portfolio in year 10?
Tried and failed to edit as I see I forgot to account for the taxes and insurance in the monthly payment since those are ongoing. 4400-484 = 3916x12x25 = 1,174,800 + 23,000 = 1,197,800 which is year 10 and same year as sell the house portfolio.
GREAT point. I’ve updated the analysis to account for this. Thanks for the catch!
Agree!
This is the best one of these I’ve seen in a long time! The issue of time vs. money is excellently laid out. And I love that the “right answer” is almost too close to call…which happens a lot in real life. Nicely done!
I agree that it can be too close to call in a lot of instances. There have been plenty of times when purchasing a home where we lost money when we went to sell it. Real estate doesn’t always go up in price – this is something that people often forget.
Math works but you need to account for all relevant variables. You need to account for probable appreciation or depreciation on the asset based on the local long term data. In my area homes have appreciated 4% inflation adjusted over the last 60 years. Looks like they have already experienced some appreciation? Just like with stocks we need to look at inflation adjusted after tax returns based on longer term probabilities, not possibilities.
As others have pointed out, you also need to account for mortgage pay down on monthly costs and rental increases based on long term local averages.
If you factor in these relevant variables buying is going to come out ahead.
I’m a long time renter myself, but in this case, I definitely agree owning the house makes them come out ahead. Rent is going to increase over time, but once the mortgage goes away, their housing costs come down a lot. Of course, as a homeowner, you always have repair and maintenance costs. But I still think they come out ahead overall in the house.
I did take into account the higher housing price when I ran the numbers for selling and renting. I used the higher post-appreciation number rather than the buy value.
However, you’re right that I did NOT take into account paying off the mortgage, and once that scenario gets factored in keeping the house pulls slightly ahead.
Article has been updated with your suggestion. Thanks Jack!
The only thing I don’t see here is a general rate of appreciation on the house – I love that there’s someone out there saying it’s not always better to buy (although you guys are hardliners, which I also kinda like), but somehow if they were to hang on to their house for that 10 or 12 year period, presumably that house would be worth more selling it later on down the road. And if that’s the case…perhaps they could retire even earlier, although that entirely depends on the likelihood of the house appreciating significantly over time.
House appreciation is factored into the “sell and rent” scenario. I typically don’t include housing appreciation in the retirement projection table, however, because you can’t use that equity to retire.
Except a lot of people do when they retire. They sell the family home and move to something smaller. Some just cash out and become nomads or expats. All of my grandparents sold eventually and downsized. It is still an asset that needs to be counted.
This guy isn’t a silver-haired 60 year-olds who sell and downsize to a 1BR condo because the kids have left the nest. He’s a young guy who still has his family to take care of. He’s not going to downsize to unlock his equity.
Probably best to ask him? We retired in our 40s with kids still at home – behind you but pretty early. We downscaled our housing costs by moving from a sfh and using the equity to buy a multi family with rental income even though we have kids. Might work for this family to put a suite in or buy a duplex with the equity later and have rental income. Equity still needs to be counted.
One of the things missing from the analysis is when the house is paid off. At that point, monthly cost likely drops in half (Marie Jacobs is also pointing this out). At the same time, rent will keep increasing (although probably so does the property tax). But if the house value increases over time, then that equity also has to be factored in. May not be as likely in a rural area. Pros and cons to owning, the con is you are stuck there, but that is also the pro! You don’t get kicked out by landlords or have to deal with them. So really it depends on your goals. This analysis is so close, I think it is a coin toss.
I can say that I “lucked out” buying a house when it really was paycheck to paycheck living, still had some student debt and was only working for about a year. But as my salary increased, the house was paid off quickly while property values rose astronomically. I haven’t mathed it up, but believe I am ahead because the monthly cost to live is about $800 and rent on my street for a house is now $5K (live in a decent neighbourhood in Toronto close to transit).
I do factor housing appreciation in the sell-and-rent scenario since they’re unlocking that equity in that situation, you typically don’t factor in housing appreciation long term in a time-to-retirement projection since home equity can’t be pulled out and used for retirement.
You (and others) are right that paying off the mortgage should be factored in, which is why I’ve updated the article. Once we take that into account, owning the home actually pulls ahead slightly! Good catch.
As several commenters above have pointed out, the math here is beyond terrible.
First off comparing apples to apples did not happen because in one scenario he sells his house and the other one he keeps it. A true comparison would be to assume he sells his house after reaching FI.
Doing this (the correct way) shows that in just a couple of years his mortgage payment goes away and reduces his monthly spend by the Principal/Interest part of his mortgage (leaving only insurance and property taxes). That will of course super charge his savings for the following years.
He can then elect to sell his house, adding that to his net worth (which your case study attempt didn’t account for), at some point in the future to further shave years off his FI timeline. Or keep it and continue to enjoy a housing payment of only a couple hundred dollars per month vs renting for $900
So bad
I also find it amusing you bring up Justin at ROG living on less than $40k but not mentioning that he has no house payment (you know, cause he paid it off just kinda like here) and isn’t paying $900+/month a rent which would be a steal in Raleigh. You add the $12k/year to Justin’s budget and it gets closer to the OP’s budget considerably
He wasn’t asking “should I wait until I sell the house once I become FI,” he was asking “should I sell it now?”
That being said, you are absolutely right about not taking into account the mortgage being paid off. Once I accounted for that, owning actually pulled ahead!
Always appreciate the extra scrutinty from you guys. Good catch!
According to my math, if they pay the house in full the first year, making it 18908 savings(instead of 36100), they then would have 41908 in the savings column every year after that. They would reach FI in 9 years.
income 88,900/yr
house mortgage 5,808/yr
house taxes and insurance 2,808/yr
food, utilities, gasoline, discretionary, basically everything else 44,184/yr
total left on mortgage 23,000
total expenses if paying mortgage 5808+2808+44184= 52800/yr
income minus expenses when paying mortgage 88900-52800=36100/yr
yes, this is all info we already know
but, if we pay the house in full the first year, that would eliminate the mortgage.
so, total expenses with house paid in full(first year only) 23000+ 2808+44184= 69992
income minus expenses(first year only) 88900-69992=18908 in the savings column for the first year only
second year expenses 2808(house taxes and insurance)+0.00(no mortgage)+44184(everything else)=46992(1175000 is their target FI number)
income minus expenses 88900-46992=41908 in savings column second year on
9 years to 1180000, keeping their expenses the same…..house paid in full the first year
if they were to reduce their spending by 500 a month, 6000/yr,
their new yearly expenses are 40992 with a FI target of 1025000
7 years and 1 month to reach FI if house paid in full first year and 500 reduction in monthly expenses
Their food, utilities, everything else expenses are currently 3682/month, very high
even with 500 reduction= 3182 is still pretty high
I bet if they were to take a fine tooth comb to this area, they could get it down to 2500 a month, making their yearly total expenses to 32808(after the house is paid in full the first year) FI target 820200. They would get there after 5 years.
I guess it matters how badly they want to leave their jobs
I have an issue with the math. The base case (owning the home) includes their current expenses as their FI number and the annual spend each year. But if they only have $23k left on their mortgage, that mortgage expense will be gone in a few years and will no longer be part of their expenses at FI. So I disagree that it will take them 12 years to get them to FI if they own the home. The expenses should be as is while the mortgage is in place but should then be reduced, further propelling them the their FI number. And these FI number will be a lower number than what you calculated as the mortgage should be removed.
Correct. Great catch!
Once we accounted for the mortgage being paid off, owning the home actually pulled slightly ahead of renting.
🙂 happy to help
Hey guys question for you – not related to this case study. I know you don’t have kids but could you do a post on the Canadian Child Tax Benefit? Is it true that if our annual spend is reduced to say $30,000 come FIRE and if we have 1 or 2 little ones will we be getting paid ~$6,000/year/child until each child is 17 from the government!? If so, this is GREATLY reducing our FI number. Trying to see if there is anything I’m missing?? From what I’ve read it seems like this is a straight cash benefit that the government funds into your bank account each year (not a tax deduction type of credit)??
I hadn’t thought of that, but I’ll put that on my list of future article topics. Thanks!
Thanks! It was a pretty big relevation for us as it may shave hundreds of thousands from our FI number. Important to note that it’s all subject to change depending on who’s in power and not something to rely on. So we’re not banking it in our FI calcs but it may shave us from a 4% SWR to a 3% SWR. Would love to see previous historical data of what the federal and provincial credits were, if you had to pay taxes on them or not, what the sweet spot for annual income is to receive max benefits, and how it’s likely possible to receive the max (if not close to the max) once FIRE.
LOL, that was a surprise ending. You bring up a good point with just cutting out $500 from his monthly spending and he’d be better off owning the house and then renting. Thank you for that eye-opener.
Another example is, my family and I live in the suburbs of New York and to rent a house for a family of five around here is $3000 To $4000 a month in rent. But with 10% down payment and a fixed rate 4%, 30 year mortgage, the entire mortgage and property tax and insurance comes out to about $2000 a month.
To $4000 a month in rent. But with 10% down payment and a fixed rate 4%, 30 year mortgage, the entire mortgage and property tax and insurance comes out to about $2000 a month.
Thus saving $2000 a month. In the long run, that’s tens of thousands of dollars saved, which could be invested towards mutual funds to reach FIRE faster!
As always, a super interesting analysis. Thanks for this one.
RoO is in great shape who will soon have another paid in full asset to help secure his families future. Fantastic job. My three main take aways:
“We’re not against HOUSING, we’re against massive, unsustainable DEBT.” – debt is not that terrible unless it shackles you from your dreams. Use it to build assets. If I die with $200 000 in debt and $250 000 in assets, I did well. What scares me is when I hear numbers that Canadians carry a debt to income ratio of 169%!
“And the truth is…it doesn’t matter how you spend your money. All that matters is how you spend your time.” Very well said Wanderer.
Keep the house – Happy wife, Happy life. End of discussion.
I agree with other commenters that the analysis needs to account for a few more things: 1. Once the mortgage is paid off (likely in 3-4 years), their monthly bills will go down; 2. Rent increases; 3. Possible large changes in budget with 3 kids going to college. Do they have a 529?
My family used to rent and over the course of 8 years we had spent about $110K in rent alone (not counting utilities) and we moved to a different state with nothing to show for that investment. We then bought our first home (small, just right, cheap) and not only do we pay less in “rent” and utilities (we can control the HVAC) but we’ll be able to sell it easy since we got a small home for much less than it was worth at the time.
Home ownership CAN be a good thing if the buyer fully understands the costs. Sure, the market can be unpredictable and that’s why it’s important to buy only what you need vs. what your friends think will be cool… or to have an extra rec room that you’ll only use 5 times per year.
Yeap, rent will keep going up. Rent has been increasing tremendously in Oregon over the last decade. My tenant’s rent went up 70% in 4 years and that’s still below market rate. Anyway, the rent increase is slowing down so that’s good for everyone.
As for homeownership, Property tax and insurance will keep increasing too. Even after they pay off the mortgage, they’ll still have plenty of home-related expenses.
Nothing is ever simple.
I still think owning a home, in this case, makes more sense. His family wants a house and the interest rate is super low. Why make a change when it doesn’t buy you much?
Yup, totally agree, but your tenant’s rent went up 70% in 4 years?!? That seems excessive. Does Oregon not have any rent control laws?
Wanderer, another interesting analysis and I appreciate you’re always willing to go back and update the math as people help fine tune the scenario.
So here’s a question for everyone: is the realm of personal finance strictly math?
My answer is, it’s not just math. Personal finances also include individual preferences, risk tolerances, and goals. Math is important, don’t get me wrong, but for me there’s an interplay between math and our individual personal preferences.
I also think our frame of reference influences these personal issues. For instance, if I grew up in GTA, Vancouver, Hawaii, Bay Area, etc. I would probably be anti-home ownership too. We moved to a medium cost of living area, where a million or so gets a dream home vs. a tear down, and it’s an area with great quality of life. Our incomes assured we would not be mortgage slaves, and could still save substantial sums, so we pulled the trigger when prices were depressed in ’09.
Risk tolerance is another thing. I absolutely believe scenarios of being mortgaged to the hilt, with a low interest rate mortgage, and investing the money in the market will yield more wealth in most Monte Carlo simulations. However, we decided to pay off the mortgage (causing “dead” equity,) because we sleep better at night not being exposed to those iterations where we lose money with this strategy. That’s strictly our personal risk tolerance at work…but we feel comfy with 80% in equities due to this conservative move.
Enough rambling; what do you folks think?
That’s behavioural economics at work right there, and you’re absolutely right.
That’s a point of friendly disagreement we have with JL “The Godfather” Collins on the lump sum investment vs DCA debate. He’s on the lump sum debate, arguing mathematically it makes sense to invest as much money in the market as soon as possible, while I’m on the DCA side because while I agree lump-sum makes more sense mathematically, DCA-ing greatly increases the chance that the person will actually follow through with getting their money invested.
Psychology absolutely needs to be accounted for, and for that reason I’m OK if people do a correct, but sub-optimal thing if it makes it more likely that they’ll do it (DCA vs lump sum), but I’m NOT OK if psychology makes them do the wrong thing instead of the right thing (get vaccinated vs. whatever the hell the anti-vaxxers believe).
Another factor that I feel like may not have been completely addressed is the equity in the home, even if you don’t sell it during your lifetime. Granted, I agree that a house should be viewed as a place to live and not an ATM, but it does appreciate in value while also reducing the cost of rent.
I may not be able to sell off a part of the house to fund my own living expenses, but after I expire the house will still have a considerable value for my future kids to inherit. Likewise, my parents’ long-since-paid-for house gives them a very affordable cost of enjoyable living now, in addition to potentially being a decent-sized transfer of wealth to my siblings and me.
If your house is paid off an equity LOC can always be used to cash flow through a black swan event and that way protects any financial investments that may be down at the moment. It’s our secondary line of defense, after our cash cushion and interest/dividends, to guard against SRR.
That’s true, and a nice backup to have in your back pocket as a temporary measure. But if you start funding your living expenses with HELOCs and reverse mortgages, you bring significant costs eating into your equity that I would want no part of.
Agreed. Financial tools are indifferent and it’s how people use them that tends to lead to success or failure in meeting our financial goals.
Eep. I get extremely nervous when people use HELOCs to hedge against downturns. Credit dries up in those situations.
That being said, Chili said it’s a secondary backup after cash cushion and interest/dividends, so that should be fine.
You a buy a house because it suits your needs, and your sick of getting evicted. Rule of thumb, if your work is stable, you are thinking long term (15-20 years) and, you are not at the tip of a housing boom (aka now), i would much rather own than rent.
How do you measure the “Value” of being able to build a garage, or plant an apple tree, or decide to renovate a bedroom and add a walk in closet ? And nobody can tell you when to move, or raise the rent. You cant always “Math this shit up” as its not always about money.
Wanderer, i do like your analysis, the reader here has bought a conservative home, not a 2 million dollar mansion, so eather way it can work.
I can only speak from personal experience, and add to it that we got lucky, Victoria rent is absurd, and i hope some relief happens soon, a couple in my circle is being forced to move back to Winnipeg, as the rent on their 3bdr is $2300/month. I am paying $1800.00 in mortgage for a 4bdr, and 1/2 of that is going into principal.
There is something seriously wrong here.
cheers
In Victoria? There’s been something wrong there for a while now, but nobody seems to be able figure out what to do about it 🙂
I guess another factor to throw into all the math that is shooting back and forth here is that much of the mortgage payment is going right back in the homeowner’s pocket in the form of paying down the mortgage. So, they are paying $718, but perhaps $300 or $350 is being used to pay down the mortgage. With rent, it is all gone forever.
You are correct, the principle payback is savings money, also there appears to be something nobody caught, he lists his 401K contribution as an expense, its not an expense, its also a savings contribution. He doesn’t say how much this is, but it should be added to his FI savings. Also the pension has a much higher value than the cash out, y0u need to calculate the annutiy payments over your entire retirement length to get a true estimate, as most will not let you cash out.
128K Gross pay and only 63 net ? Something is wrong here. What did I miss?
I don’t split out interest and principal in cost analysis, because it’s still cash flowing out of your wallet each month and that’s what you care about when doing an FI analysis. You can’t decide to stop paying the principal part of your mortgage when a downturn happens, and rising equity in your house is not useful in funding an early retirement.
Sorry, why would house insurance costs drop off? Wouldn’t they be replaced by apartment insurance if theysold and continue even should the mortgage get paid off? Or am I missing something?
I never had renter’s insurance when I was renting. Even if they did use it, it would be way less, since renter’s insurance only covers your stuff, rather than home insurance which covers the entire value of the home.
OMFG, I NOTICED AN ERROR IN YOUR MATH THAT 14 OTHER COMMENTERS ALSO NOTICED!!!!!!! I KNOW FINANCE AND MATHS!!!!!!!
It’s good that we catch Wanderer on his mistakes in the Reader Cases, but I question the necessity of pointing out the same exact observation and reasoning as the last dozen commenters who said the exact same thing. You could fill an entire restaurant with all the people Wanderer said “Good catch” to.
Sincerely,
ARB–Angry Retail Banker
Come on now. People feel the need that they did something productive, regardless that it was productive or not. You’re being such a party pooper. LOL. Just kidding.
It’s ok though. I’ll extend a big hug to you. ?
All is now right in the world. Carry on. ?
The probable answer is people don’t read the comments before they comment. Why would I care what anyone else had to say? 😉
Also, I see you guys as collaborators, not opponents. If 10 people catch me in a mistake and it makes the article better, I will high-five all 10 of you.
Just wondering how you account for the fact that once the home is paid for, you no longer have to pay the mortgage. I know there are associated fees with home ownership, but in our case, we own a condo in Vancouver- mortgage is $930, strata fees are $325. Rent for something similar would be at least $1800, if not closer to $2500. We will be paid off in 6 years. That means that in our 50s until we basically die, we will only be paying the strata fee of $325. Of course there may be special assessments down the road, but we also have the benefit of the option of selling our place as a land assembly and doubling our money, because of our location. Thoughts?
Re-read the article.
Did you use a 7% interest on the stock market investments when you did the calculations? I am interested why people seem to use the 7% growth value when we have had such a long bull market. In the next decade a bear market will happen so it is unlikely to average 7% over the next decade.
We use a conservative 6% return over 10+ years.
In our area, rent is almost always higher than the equivalent monthly mortgage payment. You’d think we should buy, but that doesn’t factor in the irregular payments towards home repair/appliance replacement/improvement; Things that often don’t accompany apartment dwelling. Also, property tax can raise the mortgage payment twice per year (and regularly does).