Reader Case: Am I Fake FIRE?

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Today’s reader case comes from the Czech Republic (now Czechia). I loved Prague when we visited, Czechia will always hold a special place in our heart for the classical medieval architecture combined with metal-ass churches made out of real human bones.

So without further ado, let’s see how our Eastern European reader is doing, shall we?


Hey FIRECracker & Wanderer,

This might not be your typical case study request. I believe I am already FI, or getting really close. But all things might not be what they seem. 

We are a family of four living in Eastern Europe. About ten years ago I inherited some money (about EUR 80 000) and blew half of it on travelling the world. No regrets. After I got back I managed to work my way up through reasonably well paying jobs to some really well paying jobs for my region. I invested most of my money into S&P500 and a smaller chunk in my company stock (which grew a lot in the recent years, but I can’t get myself to diversify). A few years back I inherited a smaller apartment which I am renting out.

My partner and I have 2 kids now. We always lived quite frugally, being from Eastern Europe and all. We were also very lucky when it comes to finding cheap rentals. Whenever I was considering getting a mortgage to buy a place of our own, the math never worked out. The issue is, this string of luck must end at some point. 

We now live in a pretty nice house for about EUR 600/month. Yes, that is very cheap even for our ex-communist standards. Similar houses for rent in our area go for EUR 2 000 – 2 400 per month. You probably can see my issue: I could retire this year (if I sold the apartment, I don’t think the 4% rule applies to real estate), but the moment we get booted out of our current place, our housing cost will quadruple. It isn’t likely it will happen soon, but there is no guarantee.

I see a few options:

  1. Keep working, get a mortgage (5,5%), buy a house (EUR 640 000) and keep working until my portfolio doesn’t grow enough so that it covers the mortgage costs. This will take a long time plus when the kids grow up (in 15 years), we won’t need such a big house. We could also see us travel or move to a cheaper place.
  2. Keep working until my portfolio grows enough so that I can buy the house with cash, in the meantime enjoy my discounted rental. Risky — house prices are likely to grow further and I am not sure if my portfolio will be able to catch up.
  3. Retire and hope for the best.

I’ve been trying to math shit up on my own, but I don’t think I am doing it right. 

Help!

Your’s truly,

Fake FI

  • Your net annual family income: EUR 67 000 + EUR 7500 from renting the apartment and nearby garage
  • Your monthly family spending: We tend to keep our average monthly spendings under EUR 2400 including rent (EUR 600).
  • Debts: none
  • Any fixed assets you have (house, car, etc.): An apartment worth about EUR 250 000, a garage worth about EUR 28 000, a 9 year old car worth about EUR 6000.
  • Investments:
    • EUR 460 000 in stocks and ETFs
    • EUR 22 000 in Bitcoin
    • EUR 12 000 in cash

Hmmm…Fake FIRE, eh? That sounds like a variant of FIRE that’s not so great. The only time a FIRE should be fake is in one of those electric fireplaces with the orange LEDs.

ANYHOO, let’s take a look at Fake FI’s numbers and see where he stands.

SummaryAmount
Income€67,000 annually, €7500 rental
Expenses€2400 monthly, €28,800 annually
Investable Assets€460,000 (ETFs) + €22,000 (BTC) + €12,000 (Cash) = €494,000
Debts€0

First of all, if Fake FI is serious about retirement, they’re going to have to free themselves of their infatuation with Bitcoin. It’s a relatively small part of their portfolio (<5%), so it’s not a red flag or anything, but when you retire you need stuff that will pay you dividends, not just be volatile for the sake of volatility. We will assume that when the time comes to pull the trigger, the BTC will be rolled into the rest of their index-fund based portfolio.

So where does Fake FI stand right now? His family has annual spending of €28,800, plus €7500 of net rental income per year, so his FI target will be (€28,800 – €7500) x 25 = $532,500. Right now, his total net investable assets is €494,000, so he’s incredibly close. One more year of saving should do it.

But, as he’s mentioned, if he sells his apartment and garage (which he seems to be renting out), he should be able to retire this year. Is that true? Let’s see!

If he were to sell his real estate holdings, he would raise €250,000 + €28,000 = €278,000. Czechia real estate commissions are 5% + 21% VAT, so a total of 6.05%. After these commissions, he would net €278,000 x 6.05% = €252,630.60.

This does two things. First, it raises his FIRE target because he would no longer be getting the rental income after retirement, so his target becomes €28,800 x 25 = €720,000. But it also increases his portfolio size, to €494,000 + €252,630.60 = €746,630.60.

So yes, according to the math, if he sells his current real estate holdings, he should be able to retire now.

However, the big conflict here is that they’re living in what appears to be a below market rental, which is great, but it does create a risk that if they lose the rental and have to find a new place to live on the open market, their retirement falls apart.

And on the surface, that’s true. If their rent were to actually increase from €600 to €2400 a month, their monthly costs jump to €2400 – €600 + €2400 = €4200. This means annual expenses of €4200 x 12 = €50,400, for a new FI target of €50,400 x 25 = €1,260,000.

€2400 a month seems high for Czechia, which we’ve lived in before. The reader indicated they live in suburb outside of Prague and looking this area up on the Czech real estate listing site sreality.cz, rents do some to be in this range, though there are still options below €2400 a month depending on lot size and neighbourhood.

So how does this possible impending increase in living costs do to our reader’s retirement, and will buying the house make it better, or worse? To find out, we shall…MATH SHIT UP!

Buy The House

What happens if Fake FI were to buy the house now on a mortgage?

I plugged his target price of €640,000 into a mortgage calculator, assuming a standard 25 year amortization, 5.5% interest rate, and a 10% down-payment, and the monthly payment came out to be €3537 a month, which is considerably more than renting the equivalent house. And remember, because you own this place, you’re on the hook for maintenance, insurance, property taxes, etc. which will add approximately 1% of the sale price, or €533 to your monthly expenses.

How does this affect our reader’s time to FI?

First of all, they have to spend 10% of the house price on a down payment, so €64,000 gets lopped off their net worth, for a new starting point of €746,630,60 – €64,000 = €682,360.60.

Second, their monthly expenses go up. The €600 rent is gone, but in its place is housing costs of €3537, so now their total monthly expenses is €2400 – €600 + €3536 + €533 = €5866. This is considerably higher than the €4200 a month they would pay if they rented the house, so I’m not too optimistic that the final numbers are going to look too good.

The new higher monthly expense of €5866 a month translates to €70,392 a year, and this represents expenses greater than their monthly income of €67,000, so this means that if they go down this route, they will never become FI, which is…less than ideal.

So I’m really not feeling this idea, but let’s see what else we can do.

Buy The House With Cash

Another possibility our reader has mentioned is working until they can afford the house with cash, buy it, and then keep working until their portfolio can cover their new expense level. What does that look like?

First of all, they don’t have to work for any length of time to afford the house. If they sell their existing rental apartment, they would have enough to purchase the house immediately. Of course, it would drain their portfolio, taking it all the way down to €746,630,60 – €640,000 = €105,630.60.

On their expense side, this move would eliminate rent of €600 a month, but it adds back in the ongoing cost of owning the home (maintenance, etc.) to the tune of €533. Their new living expense would be €2400 – €600 + €533 = €2333 monthly, or €27,996 annually.

This changes their FI target to €27,996 x 25 = €699,900. It also maintains a positive savings rate of €67,000 – €27,966 = €39,034.

Put it all together and we can predict Fake FI hits Real FI in…

YearBalanceSavingsROI (6%)Total
1€106,630.60€39,034.00€6,397.84€152,062.44
2€152,062.44€39,034.00€9,123.75€200,220.18
3€200,220.18€39,034.00€12,013.21€251,267.39
4€251,267.39€39,034.00€15,076.04€305,377.44
5€305,377.44€39,034.00€18,322.65€362,734.08
6€362,734.08€39,034.00€21,764.04€423,532.13
7€423,532.13€39,034.00€25,411.93€487,978.06
8€487,978.06€39,034.00€29,278.68€556,290.74
9€556,290.74€39,034.00€33,377.44€628,702.18
10€628,702.18€39,034.00€37,722.13€705,458.31

About 10 years. This is a pretty dramatic improvement on the mortgage option, in that FIRE is still possible, and is likely a reflection that mortgages are now more expensive that before, so saving the interest has a pretty substantial effect.

Rent The House

Incidentally, we never did run the math on simply renting the house at €2400 a month, so let’s do that.

What I like about this option is that it allows our family to keep living in this discounted €600-a-month house rental for longer. Speaking from personal experience, if you can lock in a low, below-market rental, you want to ride that train for as long as you can because it allows you to really build up your savings. This option allows them to do that because they don’t have to move until they absolutely have to, allowing them to save for longer. But how long will that take to get their portfolio up to a point where it can support that higher projected rent?

Once they move, their living expenses will increase to €2400 – €600 (old rent) + €2400 (new rent) = €4200 monthly, or €50,400 annual.

This increases their FI target to €50,400 x 25 = €1,260,000.

Now that sounds like a lot, but remember that this option allows them to keep their current rental, so their starting balance remains at €746,630.06, with an annual savings rate of €38,200.

Put it all together than this option gets them to FI in…

YearBalanceSavingsROI (6%)Total
1€746,630.60€38,200.00€44,797.84€829,628.44
2€829,628.44€38,200.00€49,777.71€917,606.14
3€917,606.14€38,200.00€55,056.37€1,010,862.51
4€1,010,862.51€38,200.00€60,651.75€1,109,714.26
5€1,109,714.26€38,200.00€66,582.86€1,214,497.12
6€1,214,497.12€38,200.00€72,869.83€1,325,566.94

6 years, which actually beats both owning options. So even though their rent may jump by a factor of 4x in the future, allowing that to happen is still a better option than buying.

Rent A 3BR Apartment

This reader seems to be dead-set on living in a house, as all the options they’ve listed involve buying or renting a house. I don’t know exactly how negotiable this requirement is, but just for funsies let’s see what happens if they stay in their current rented house for as long as possible, and then move into an apartment if/when they’re forced to move.

They mentioned having 2 kids, so a 3BR apartment should be sufficient, and looking at that Czech real estate site, I can find plenty of listings for this. On average, the rent seems to be hovering around €800 a month, so that’s not going to break the bank at all.

At that rental price, their expenses (when they move) will total €2400 – €600 (old rent) + €800 (new rent) = €2600 a month, or €31,200 a year.

This equates to an FI target of €31,200 x 25 = €780,000. Again, this lets them stay in their current place and preserves their savings machine, so they’d be able hit this target in…

YearBalanceSavingsROI (6%)Total
1€746,630.60€38,200.00€44,797.84€829,628.44

One year. That’s it, they would be done in just one year.

So I guess the real question is…How badly does your family need to live in a house?

Conclusion

As it turns out, Fake FIRE’s numbers aren’t actually that fake at all, but what they decide in terms of their real estate decisions in the next few years will determine whether they can retire almost immediately, or whether that gets pushed off by a decade or two.

FIRE is, at the end of a day, a simple math problem, and in case you haven’t noticed, real estate can be absolutely poison to that math. It’s a pretty rare situation where real estate makes things easier for someone trying to retire, and this case is no exception.

What would you do? Would you stick to your guns of living in a house, or would you consider an apartment if it shaved years off your retirement? And if you prefer the house, would you rent or buy? Let’s hear it in the comments below!


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26 thoughts on “Reader Case: Am I Fake FIRE?”

  1. Fake indeed, just like FR guys. They live from blog and book income. These people aren’t real FIREs.

      1. Yeah but that port #2 gives them a nice piece of mind that they won’t run out of money. We mere FIRE mortals don’t have that luxury

          1. haha that wouldn’t be FIRE. It would be only another job, even if some call it FIRE, (witch IMHO is misleading with the community).

        1. When someone doesn’t know the difference between “piece” and “peace” it kind of gives you the idea that maybe they don’t look into things too deeply.

  2. I love this sort of question, because the result is often a question of “What’s most important to you?”

    One issue that may pertain to this letter is whether there are apartments available in the school district that they live in.

    But, yes, definitely go the apartment route if FIRE is the priority.

    1. Real estate that you own. It’s like having a share portfolio substantial enough to cover your rent for life. Take rent out of the FIRE math and suddenly the numbers aren’t so poisonous.

  3. I would absolutely stay in the cheap rental and move into the 3 bedroom apartment when I eventually got kicked out. It’s a no brainer. When the kids move out, they could move into a smaller, cheaper place, and be totally set.

  4. I needed this reminder. Currently living in my dad’s basement, rents are high, and the urge to buy is strong…

  5. Excellent analysis and I agree with the conclusions! As ever, the relationship between home prices and rents can get out of alignment. Clearly this is the case in the Prague area where one year of rent: €28,800 (@€2,400/mo) is just 4.5% of the cost of the €640,000 house. Usually this ratio is in the 6-7% range if things are in balance. Rents could go up but it is more likely that houses are overpriced and appreciation will slow down. It also seems that apartments in Prague are substantially lower priced “per unit of living space” compared to houses. If you can live in apartment, do it. If you can rent an apartment, ideally with a long term multi-year lease, do that. Either way, forget the house and retire sooner. That’s what we did three years ago with zero regrets.

  6. Personal choice. If I am stuck working anyway and have kids, owning is the preferable option as many of the family oriented rentals I have lived in force you to move regularly, which is less than ideal with kids and work. There was a point very recently where our investments were right on the edge of skinny FIRE, more than good enough for former dirtbags to take time off to raise kids without major work distractions, but alas we got greedy with our dramatically rewarding risky gains (6% of our portfolio grew 275% of our original portfolio) and we did not move them to our indexed section of our portfolio. So house slaves we remain (with a mountain view, how terrible). Perhaps skinny FIRE will grace us again one day, but the days of our 50% savings rate have passed until we ditch the real estate.

  7. The article’s analysis about how to evaluate and decide about renting vs. buying is very useful…even for those who aren’t FIRE aspirants.

  8. Great analysis and recommendations, Wanderer! Agreed that I’d stick to the low rent house and eventually go with the 3 bedroom apartment, getting to FI in 1 year allows this family to spend more quality time together when their kids are young (assuming that’s what they’d like).

    Lifestyle creep is real and the trap of buying bigger and more stuff becomes a total energy drain. My perspective is that it’s better to ignore the creep and focus on the real things that matter in life like new experiences, time with loved ones, and enjoying your healthiest years 🙂

  9. I worry about winding up in a similar scenario – I intend to go nomadic after I retire, but I won’t want (or, eventually, physically be able) to do that forever, and I worry that rents in Australia, where I live, will continue to sky-rocket such that I won’t be able to afford to move home later! I could hedge that risk by renting out my condo rather than selling it and putting the proceeds into index funds, but net rent would not be quite 4%, and managing a property remotely would be a huge pain!

    Also, a bit off topic, but I thought you might like to know, FIREcracker, that the bone church outside Prague is not the only one in the world, several are listed in this remarkable X thread https://twitter.com/culturaltutor/status/1606031570531684352?t=pYMrNgGNs5jJVtG6SWB-uA&s=19 – last year I went to the one in Portugal, it was amazing

  10. Sufficient facts, and great analysis, thanks, Firecracker and Wanderer!

    It’s worth noting that there are also non-financial aspects at play here. For example, does a person feel comfortable renting, or will they be stressed about where the price to buy housing is going, is renting stable, etc. At the end of the day what a person is comfortable with is a big piece of the puzzle.

    I actually have a similar dilemma, so it’s nice to read some perspectives about it. I’m in one of the larger Canadian cities, we’re a family of four, we pay 4K per month in rent now, but to buy that space or something similar would be about 850K. If bought with a mortgage, then the mortgage cost and other expenses will be very high. I have the cash to buy the space with no mortgage, but then my portfolio takes a huge hit. One other aspect that’s not discussed in the case study is that in most countries if you cash out investments, you’ll pay a whole bunch of capital gains tax. Especially if you’re working, that will push the rate up a bit, since the proceeds would be added on top of income. So then your portfolio takes an even bigger hit.

    Back to my city, renting is so unstable here, the purpose-built apartment buildings charge a ton, and with the individually-owned rentals, every two seconds the owner is telling you that they’ve changed their mind and they’ve decided to sell- not great when you have a family. Thus, I plan to buy so we are not constantly being forced out.

    I’m leaning towards financing, having very high monthly expenses, but preserving my portfolio. Luckily, my portfolio is getting close to the point where it could probably handle even those expenses on the 4% rule.

    Anyway, nice to see some discussion of this dilemma.

    Regarding Canada, seems like the moral of this story is if it works for you to leave the country, then leave, the cost of shelter is insane here!

  11. Just wondering, if the real estate in the context considers the total return(i.e % capital growth-never known but projected on historical growth) should be considered in the equation? I mean , is there a capital growth for the house when sold has impact?

  12. Would it be possible to extend the rent vs buy analysis out to 50 years? I’d like to see if that makes any difference to the math.

  13. Great Analysis. To add the flip side, real estate isn’t always so damn expensive. I have bought 2 houses in the U.S., both in lesser known cities, and fixer uppers, and it was more beneficial to my FIRE journey than renting. The first one I bought at age 25 for $135k, lived in it 3 years (and got a 8k homebuyer credit because it was during the housing crisis, that credit offset my small down payment amount, so acquiring the property was net 0). I then rented that house out for 10 years, and sold it for 376k after the pandemic run up, which put me over my F.I. number.

    Meanwhile, I bought my current home for 80k in 2016 (my income was 60k at that time and comparable rents were around $1,250 per month). I paid this place off over 3 years while still investing for F.I.

    In my neighborhood house prices have gone up, but there are decent places for sale in $180k range currently.

    The numbers are really situation dependent. Some areas are much more affordable to buy in, and it’s nice to find a modest cheap home and lock it in.

    My property tax is $650 a year and maintenance and improvements are affordable because we do the work ourselves. We also have plenty of room and stability for my partner’s art studio, a fenced yard for the dog, a nice patio and deck for bbqs etc.

    I balk at $650k houses, but not at the $150k houses, and the are still out there if you look in the right places. I traveled to Sicily last year, and stayed in a lovely town where nice places with land were going for 80k.

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  15. Personally, I’d lean towards renting the current geometry dash house for as long as possible and then transitioning to a 3BR apartment if necessary. This option allows them to maintain their current low rent and continue building their savings. Plus, it gets them to FI in just one year once they make the switch.

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