Reader Case: Buying a House in La La Land

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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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As I write this post, I’m hacking my lungs out and building an impressive tissue mountain. I was supposed to wake up at 8am for a hike, but instead spent the night drowning in mucus and getting zero minutes of sleep. This would’ve SUCKED back when we were working, but since we are now slow travelling, I just let myself sleep until noon, putter around our Airbnb, and watch a ton of Netflix.  Missing out on all the activities doesn’t matter because I can just postpone them for another day. Zero worries. Zero stress. Long-term travel rocks!

AND, on the plus side of having the plague, I’m now holed up in this cozy house on top of the mountains writing up this reader case for all you fine people.

And this killer view doesn’t hurt either:

So without further ado, here we go! (email has been edited for brevity)

I’m a 37 year old woman. My nickname is KK! I’m almost 3 years married to an amazing woman, KM. We both left our hometowns in the Midwest after graduating from college, and headed for LA to pursue jobs that our hometowns couldn’t provide. Oh, and to also be openly gay.

KM and I both had a similar upbringing where we had SO much love and emotional support from our parents, and they provided everything we needed from the years of 0-18, but once college hit, we were mostly on our own, taking out sizable student loans, covering room and board, and any fun money. So we graduated college with a decent amount of debt. Couple that with insane high cost of living in LA and low paying jobs, well we then accumulated credit card debt just to survive.

Back in 2002, I was pursuing a career in entertainment, and it’s well known that you have to bend over and take it in order to get a coveted job in the chosen entertainment field much longer than it takes to advance anywhere else in the country, world, planet. So I was making roughly $30,000 – $42,000 from the time I was 22 – 30. Shit was brutal. I nearly gave up. I was always spending more than I made, because I now had crazy minimum payments on credit cards. I had about $27,000 in credit card debt (primarily food, gas, minimal entertainment expenses because I had to wine and dine writers, people in the industry) and $10,000 left in student loan debt.

At 31, another company reached out to see if I’d come work for them to develop tv shows and I took that job. I went from making $45,000 to $90,000 plus a $5,000 bonus. I also had an amazing 401k plan where our company matched 133% up to the first 6% we contributed into a Fidelity 401k plan. So I decided to do the full 6% out of the gate.

In 2013, I got an offer from another company to do what I do, but my current company made a play to keep me. So I went from $95,000 a year to $130,000 a year with a $15,000 annual bonus all for being good at my job and someone else recognizing it. My 401k has $26,350 at the end of 2013!

The end of 2015, KM and I completely pay off our credit cards and for the first time in over 12 years I have no credit card debt! KM still has $37,000 in student loans at this point and I have $7,000.

In Sept of 2015, I’m now making $180,000 a year with a $25,000 bonus. We get the student loans down to $25,000 and take it from having to pay these loans for the next 17 years to 4.

Fast forward to 2017, here I am at 37 at the same company, and I’ve doubled my base salary from when I first started at the end of 2011, and am making $186,000 a year with a $35,000 bonus (that gets taxed at 50%) and I have zero debt finally!

KM and I been in the same apartment since we moved in in 2017 and have CHEAP rent for Los Angeles. We pay $2000 a month for a 2BR/1BA in a desirable part of town. I realize that the last 5 years of salary could’ve made a HUGE chunk of change if we had invested it, but it was more important for us to pay things off. But now we want your advice. We’re itching to buy a home and expand our family in LA. My job can’t be done in another city, and KM has a SWEET job with tons of flexibility and bosses who want her to get pregnant. We are going nuts in our small apartment, and we both miss hosting people, having dinner parties, and having grass to put our toes in that’s OURS. Houses that we’ve been looking at are anywhere from $595k-$800k for a 3 or 2 BR that we could live in for the next 5+ years.

We love our jobs and love what we do, so there’s not AS much of the urge to retire immediately. We know we’re catching up for lost time with the damage we did in our twenties and early thirties, so realistically we’d love to retire when I’m 50 and KM is 46.5 or 47. Ideally we’d love two kids and would love to help them with some or most of their college.

So, what the hell do you think we should we do? Be brutally honest, we can take it.

Love,
KK + KM

Is it just me or does this reader’s life sound exactly like the plot of La La Land? But with less dancing (I’m guessing).

Now I don’t know much about the film industry in LA, but KM ended up going from $30,000 salary to $221,000 (including bonus) in 15 years! Which just goes to prove if you want it bad enough, you don’t have to be an engineer, doctor or lawyer to earn that kind of moolah. Kudos, La La Landers!

Anyhoo…movie references aside, let’s look at their finances:

Summary:

Pre-tax combined salary: $186,000 + bonus of $35,000 (KK) + $130,000 (KM) = $351,000/year.

Net Monthly Income (after-tax and maxing out 401K for both): $8625 (KK) + $5946 (KM) = $14,571/month

KK/KM EXPENSES
Rent $1,970.00
Cable $75.00
LADWP $50.00
Cleaning $176.00
Groceries $400.00
Dining Out $865.00
Netflix $15.00
Laundry $10.00
Joint Soul Cycle (spin class) $240.00
Dry Cleaning $40.00
Lyft/Uber $100.00
Gas $325
Car payment $458
Movies/subscriptions/entertainment $180
Insurance (car + rental + earthquake) $329
Clothing/Hair/Toiletries $175
Drybar (hair blowouts) $120
Gifts $350
Medical $100
Gym $60
Misc $518.50
Cell phone $80
TOTAL $6,636.50

Debt: 0
Investable Assets: $128,000 (KK’s 401k) + $50,906 (KM’s 401k) + $5000 +$57,000 + $1200 +$1100 + $10,350 (investments) = $253,556

KK and KM are making an astounding $14,571/month after tax and spending $6636.50, which means they have a savings rate of 55%! Amazing, considering that they had a combined $74,000 in student and credit card debt with a starting salary of $30,000/year. WOW. You ladies have come a LONG way and I’m so impressed with how far you’ve come. And not only do you have a 55% savings rate, you also have $253,556 in assets! Even if you buy a house for $595K right now, you’d been able to pay off just 3-4 years. Given your incredibly high salary and the fact that you like your jobs, a house at that price range wouldn’t be a problem for you at all.

But let’s MATH THIS SHIT UP and see what happens to your retirement goals with and without the house:

You mentioned “realistically we’d love to retire when I’m 50 and KM is 46.5 or 47”. Since you are 37 now, that gives you a 13-year runway. Can you make it?

Scenario 1: Retiring while continuing to rent

Given your current yearly expenditure of $6,636.50 * 12= $79,638, you would need $79,638 * 25 = $1,990,950, so around $2M to retire using the 4% rule.

You save ($14,571 – 6,636.50) * 12 = $95,214/year. If you were to invest that plus yearly max contributions of 18,000 each to both your 401ks, that would be $131,214 a year, all compounding at a conservative 6% return, here’s what your numbers would look like:

Year Starting balance Annual contribution Return (6%) Total
1 253,556 131,214 0.00 384,770.00
2 384,770.00 131,214 23,086.20 539,070.20
3 539,070.20 131,214 32,344.21 702,628.41
4 702,628.41 131,214 42,157.70 876,000.12
5 876,000.12 131,214 52,560.01 1,059,774.12
6 1,059,774.12 131,214 63,586.45 1,254,574.57
7 1,254,574.57 131,214 75,274.47 1,461,063.05
8 1,461,063.05 131,214 87,663.78 1,679,940.83
9 1,679,940.83 131,214 100,796.45 1,911,951.28
10 1,911,951.28 131,214 114,717.08 2,157,882.35

Note: rent increases will be offset by salary increase and promotions, which have been omitted from this chart.

This means you’d be able to reach your $2M portfolio and retire in 10 years! So yes, with this scenario, you will beat your targeted retirement age of 50 by 3 years and retire at age 47.

Scenario 2: Retiring with a house

But since you’ve expressed your desire to buy instead of rent, what will happen if you retire with a house?

Let’s say you buy a house for $700,000, the middle of your housing range.

In order to avoid the PMI, you’ll need at least 20% in down payment, or $140,000. You have $74,650 outside your 401k, so you’ll need to save up an additional $65,350, which, based on your current savings rate should only take you only 7 months.

At that point, you would need a mortgage of $560,000. Plugging that into the mortgage calculator, we get:

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

Your monthly payment would be $2,864, $1707 of which would be interest in the first year.

We would then need to add property taxes, insurance, and maintenance, which adds another $462 (LA property tax) + $100 + $583 (1% of property value) = $1145

So your total monthly payment would be around $4,009 and this is not including closing costs, lawyer fees, home inspection, real-estate agent fees when you sell, etc, etc.

Of the $4,009 monthly cost, $2852 goes towards interest, property taxes, insurance, and maintenance, NONE of which adds to the value of your home. That’s actually HIGHER than your rent. YIKES!

But but but the House Horny Idiots will automatically point out that the taxes you save in mortgage interest deduction will fix everything. Right?

Well, let’s see if that’s true.

Since you max out your 401K, your tax burden before claiming the mortgage interest is $130,511. After you claim it, it is $122,346. So you’re saving $8165 in taxes, or $680/month. Which brings your $4,009 monthly cost down to $3329. Of this monthly cost, $1156.67 is principal, so you are still throwing away $2171.33, which is STILL more than your rent.

In 10 years, at the point where your other “renting” self would be retiring you will have paid 10 years into principal, but guess what? You would STILL have a monthly interest payment of $1251/month. Property taxes, maintenance, insurance, none of that goes away no matter how much of the principal you pay off, so that still adds $1145, which gives you $2396 that you are throwing away in year 10. Because your interest has gone down, your tax savings are also reduced to $480/month at this point, so you are STILL throwing away $1916/month after paying the mortgage for 10 whole years!

Now, let’s see what that does to your retirement date.

Assuming you want to keep the house to live in when you retire, your housing expenses would increase from $1970/month to $4009/month, pushing your yearly expenses to $8675.5 *12 = $104,106. This would require a portfolio of $2,602,650. Taking into account the extra $8165/year she would receive in additional tax refunds, and the extra $24,468/year increase in expenses, she would be able to contribute $78,911/year , instead of $95,214. Assuming you invest what’s currently in your 401k, as well as continue maxing out both your 401K’s each year, that’s a total savings of $114,911/year. Since you had to use money outside your 401Ks for the downpayment, your starting balance would be only the amount in your 401Ks, so $128,000 + $50,906 = $178, 906. With those numbers, your retirement date looks like this:

Year Starting Balance Annual Contribution Return (6%) Total
1 178,906 $114,911 0.00 293,817.00
2 293,817.00 $114,911 17,629.02 426,357.02
3 426,357.02 $114,911 25,581.42 566,849.44
4 566,849.44 $114,911 34,010.97 715,771.41
5 715,771.41 $114,911 42,946.28 873,628.69
6 873,628.69 $114,911 52,417.72 1,040,957.41
7 1,040,957.41 $114,911 62,457.44 1,218,325.86
8 1,218,325.86 $114,911 73,099.55 1,406,336.41
9 1,406,336.41 $114,911 84,380.18 1,605,627.59
10 1,605,627.59 $114,911 96,337.66 1,816,876.25
11 1,816,876.25 $114,911 109,012.58 2,040,799.83
12 2,040,799.83 $114,911 122,447.99 2,278,158.81
13 2,278,158.81 $114,911 136,689.53 2,529,759.34
14 2,529,759.34 $114,911 151,785.56 2,796,455.90

Taking into account the extra 7 months she would need to save the 20% down payment, her retirement date would be around 14 years instead of 10.

The Verdict

So by buying a 700K house, she pushes back her retirement date by 4 years. She will only be slightly off target and retire at 51.

So are we *gasp* saying that buying a $700k house ISN’T a bone headed idea? For this couple, yes we are. And it’s not because of home appreciation, or the mortgage interest deduction, or leverage mumble something leverage, it’s because they’re making over $300k gross a year. Their house price is just 2.5X their pre-tax salary. So it’s difficult to really blow yourself up too badly with numbers like that.

But is the house worth an extra 4 years of working? Unfortunately, that’s where the power of mathing shit up ends. This La La Land couple will have to answer that question for themselves.

Intrepid readers, what would you do? Sound off in the comments below.

Update: Astute readers have mentioned that this analysis doesn’t take into account kids and college costs. That is correct. Since the costs of kids would be the same regardless of whether they buy or rent, this has been left out. KM and KK can feel free to add these costs and rerun the scenario themselves to see how much it would push out their retirement date.

47 thoughts on “Reader Case: Buying a House in La La Land”

  1. I live in Ventura County and think these two should RENT a slightly larger slightly more expensive place in the same neighborhood near where they are now. Go from 2BR/1BA to 3BR/2Ba and increase rent from $2k to say $3.25k and still be able to retire closer to 10 years away vs 14. This continues to give them financial flexibility and keep the savings rate really high. Either way now they have the math and can make an informed decision either way…good luck!

    1. Thanks for your input, Jeff! How’s the weather in Ventura County? Must be an awesome change from our freezing Canadian wasteland 😛

  2. That is pretty good, but the calculations don’t seem to take into account the “ideally we’d love two kids and would love to help them with some or most of their college” and no amount assigned for home appreciation, although over the long-term LA RE has appreciated above 6% per year.

    Having kids will add to expenses, including housing expenses, whether they rent or buy, and will also bring some additional tax breaks and benefits, but will be net negative to the budget.

    You’ve stated that salary increases will take care of rental increases, but you have not accounted for the fact that their salaries will stop upon retirement and their rental expenses will be much higher, while their mortgage costs will be stable with a greater proportion allocated to principle. Owning will also leave them with more money in their pocket at some point prior to retirement when rent increases above the mortgage interest amount and costs of ownership, and after for the same reason.

    Property tax payments are tax deductible which I don’t think you’ve accounted for? In addition, the interest on up to $100,000 borrowed on a home equity loan or home equity line of credit, regardless of the reason for the loan is tax deductible should they wish to borrow to invest later. I expect they could save more on their taxes than they do in other ways and they should probably get some advice on this.

    I think with their salary levels they are in a good place either way ie. they’ll be able to retire early if they save and invest which is nice to see.

    1. This is kind of standard anytime MillenialRevolution analyzes a case study involving house purchases. I think it’s fair to say that it’s not a secret that they’re incredibly biased against home ownership which can lead to these tilted analyses.

      It’s an absolutely massive tilt to leave them with the same rent in the rental situation when the whole point of the case study is that they want to expand their home to support family growth. It should be something like a minimum $3000 apartment vs. $4000 mortgage/etc. There’s also no accounting for the fact that they will have a massive drop in housing costs once the mortgage is done (could conceivably drop the amount they need to have stashed but might be a bit difficult to calculate), and as you mentioned, at some point there will be a crossover point between rental costs and mortgage (a much sooner occurrence if we don’t pretend that they’re going to stay in similarly cheap apartments for the rest of their lives).

      It’s also clearly incorrect to cancel out rent increases by using salary increases in the rental situation but then not include salary increases in the buying situation (either by increasing contributions or using it to cancel out something similar to rent increases). That’s not how math works.

      The funny thing is that I’ve generally never disagreed with the conclusion in these housing related case studies so I think we’re coming at this from the same place, it’s simply the scale of the agreement.

      I think if we take all this into account it’s much more of a slam dunk for the house purchasing situation. I believe the actual difference would end up being almost 0 or maybe 1 year or so. If you then take that and add in the emotional appeal of owning your own property and being able to do what you want, I think it’s a sure win.

      Now to do this for myself we just need to get to 350k household income…

      1. I also didn’t take into account increases in property taxes, interest rates, home inspection, lawyer fees, closing costs to give housing an extra boost. But of course, the house horny idiots love nit-picking and not doing the math themselves. The last time I checked “emotional appeal of owning your own property” is not math.

    2. Don’t you just love these reader case analyses? It’s normally a case of who can find the most mathematical flaws in the argument. This one seems to have a few evidently haha.

    3. Valid points, but their property taxes are low enough it doesn’t change the answer. As for the kids, you mentioned “kids will add to expenses, including housing expenses, whether they rent or buy”, so even if we add the expenses for the kids and their college tuition to both scenarios, it will likely stretch out their time to retirement but it’s still 4 years difference between rent versus own.

  3. I’d buy the house considering the quality of life that moving from a small apartment to a 2 or 3 bedroom house would offer especially if they want children and want to entertain guests in their home and since they actually like their jobs it’s not like they are in a hurry to retire as fast as possible.

  4. Agreed, they have a healthy income. Similar to my wife and me. We also live in the LA/OC area. But for us, we’re ok with a ~$550K house because we’re more conservative than most.

    Because the average house around here is $700K+.

    I know lots of people who live in $1MM+ houses, driving Tesla S and X’s.

    Not sure how they do it. But mathematically speaking, I doubt any money’s left over for retirement.

    1. Most likely not. That’s probably why people are now working well into their 70s. But hey if they’re willing to trade off freedom for shiny things, that’s their prerogative.

    2. There are a ton of people making way over 500k, that’s why. I honestly believe that.

      I am in Northern CA, there are Tesla owners everywhere. The poorest Tesla owner I personally know is worth about $10 million. I would guess many are worth much much more.

      I know a Tesla owner in LA, he and his wife work at UCLA medical center. He pulls in $500k and she pulls in $1 million a year.

    3. I know another Tesla couple who just moved to LA, husband started a job at Snapchat. They bought a 2 million house there and already have an 8 million house in the Bay Area. Wife is in biotech. Their combined income around 800k but they have millions in stock grants from previous employers.

  5. I have to agree with Indigo, that unless you add child expenses to the calculation this is kind of meaningless.

    I love when you “math this shit up” – this is one of the best things you guys do, but KK and KM need to give you some info about their childcare plans and average costs where they live in order to add it to the calculation. As every scientist/engineer knows, you have to start with good quality data in order to get relevant, real-world answers

    The first sign of trouble is that they want to help their children in college. If they retire in 15 years the (yet unborn) kids are still in high school. If at this point they have quit their jobs and live off their investments, they have nothing to fund college as it did not go into the calculation of the portfolio size they need. Same goes for medical expenses for the kids, dental, daycare at the young age, summer camps, etc. All of this will need to be added to their monthly expenses and factored into their required portfolio size, as well as reducing their monthly contributions.

    They have done fantastically so far, keep it up, but keep it real too – use real numbers for what you plan to do, come up with the realistic plan and go get it!

    1. The question was about whether they should buy a house and how that would affect their retirement date. Adding college costs would push out their retirement date, but the college cost would be the same regardless of whether they buy the house or not. You would end up adding it to both scenarios, and still up with with 4 years difference between the two.

      1. Fair enough, comparing only the rent vs buy situation and the delta in retirement age shouldn’t change with/without kids.

        But it’s a big issue for them to consider when they are looking to retire at age ~50. It is of course up to them to run the scenarios with the childcare costs in them, (you can’t be expected to run every scenario for your reader-cases), but it should be mentioned for them to do it and see how it changes things.

  6. Wow, LA is like a different planet! It sucks that the cost of living is so tough there, but it’s cool to see KK and KM finally crushing it. 🙂 Sometimes it’s worth the early retirement tradeoff if you achieve your dreams.

    1. I know right? LA is definitely a different planet. That’s why their story reminds me so much of the movie LA LA land 🙂

  7. We live in the LA/OC area, as well. Real Estate here is crazy!! We’re completely happy renting. And we even have a little house. Our rent is way less than what our mortgage would be on the same house had we bought it.

    In fact, I think our rent would be less than the interest and insurance on the exact same house. So, yeah, we’re content renting for the time being.

    As for rent constantly increasing, that’s not true either. We actually negotiated our rent down a little for our lease renewal. Helps to be a decent tenant, and actually take care of some things on your own.

    Good on them for the great career trajectory and killing the debt!! As for the house thing, that’s all a personal decision.

    1. “Helps to be a decent tenant, and actually take care of some things on your own.”

      This is SO true. We had the same experience back when we were renting in Toronto. Apparently good tenants are hard to find because our landlord didn’t raise our rent for 6 years, and then only raised it by $50 for the 3 years after that to account for increasing electricity costs.

  8. The other thing that often happens when you buy a house, is that some expenses may go down, or they may be willing to make sacrifices to retire even sooner while still buying a home. For example a house may give you room to have a home gym. No more spending time or money commuting to gym. Also eating out….you tend to eat home more, dining in your back yard with grass under your feet.
    The comparison is interesting but kinda off since they would very likely not stay in their current 2 bedroom apartment with two kids. So if we compare to house rented to raise their kids versus a house bought to raise their kids would probably be a better comparison.

    1. Those are all valid points, Suzq400. The opposite could also be true…as I’ve seen people whose costs go up significantly after buying a home (buying more furniture to fill up the extra space, money to hire cleaners, gardeners, etc). So it really depends on the person.

      Yes, there could be a third scenario where they rent a more expensive house, but again, the comparison is between what they’re currently doing, versus buying a house, which is what they mentioned in the email.

      Thanks for your input! Always appreciate it 🙂

      1. Very true….I tend to think more like MMM, and forget how most people spend! I’m still cringing over their dining out budget!

        1. I can’t judge them for that because I love food too much! I’ve been guilty of spending WAY too much eating out on occasion 😛 Good thing is that I do it mostly in South East Asia where eating out is dirt cheap. But yeah, if you eat out often in LA it’s going to be tough on the budget. Good thing they’re high earners and can afford it!

  9. I suspect they are under-reporting their expenses significantly, based on how long it has taken them to pay off their debt, even after they were making good money. Two examples: I would assume the standard of dressing for someone in that business making 200k would be high and more than the amount allocated. And they don’t take any vacations or does the “Misc: $518.50” category cover that? A weekend at Motel 6 every Christmas?

    1. Well, I really hope not. Because they reported spending $250/month on soul cycle while at the same time having a gym membership. That’s seems pretty brutally honest to me 🙂

  10. They are in a good spot but I agree with the other posters here that if they are thinking about kids, you’ve got to deduct a healthy $20k from annual savings in a market like LA if they are both working until each child reaches age 4. In Chicago, you’re talking $300 a week minimum for childcare for children aged 6 months to 4 years ($14,400 a year). As they both plan to keep working, child care is unavoidable unless they have some relatives or just kind neighbors who will watch their kids for free. After 4 tho, assuming their kids go to public schools, those prices could be cut down to like $3k per kid I think.

    Also, I’m not sure I agree with that house purchase. Follow me here, the email indicates that they want kids (plural) so if they are already feeling that housing itch as well, they will want more than 3 bedrooms with 2 kids. Meaning they will move and moving costs money (the move is the cheapest part – where you get hit is on the buying and selling commissions and taxes – that’s why the threshold is normally at least 5 years before you consider moving). Therefore I think they’ve got 2 options, buy more house (4 bedrooms) or rent until they are done growing their family.

    We own and love it. Our house has been a great investment (10% growth in value [which is liquid – I know] each year so far) and has saved us a ton over renting but we paid it off in 2 years; similar to the KK. Even if they invest in upgrades (upgraded electrical and plumbing – new appliances and a water heater,etc) like we did, they’ll still save over renting. However, they’d need to stay put – 10% increase year over year isn’t the norm –
    we got lucky.

    I’d look at renting until their family is finished growing or they commit to owning a more expensive (grasp) bigger place that they could ideally commit to indefinitely.

    1. Wait, why would 3 bedrooms not be enough for 2 kids? 1 bedroom per kid, and the couple shares a bedroom. Unless they hate each other and want separate bedrooms…but then they probably shouldn’t be having kids ;P

      1. 1 bedroom would be fine for 3 kids (e.g. the Brady bunch) but they are already in a 2 bedroom and want to expand to a 3 bedrooms and currently don’t have a child. They mention wanting to have guest visit and entertain. Per my reading of their message, I’m guessing each kid gets their own room and they will want a spare guest room/office. Thus 4 bedroom house.

        1. “Ideally we’d love two kids”. They want 2 kids, not 3. Also why wouldn’t they be able to use the basement in the 3 bedroom house for guests? Or just put the kids together for 1 night occasionally for guests. Being a space hog and having an extra bedroom that sitting empty most of the time “just in case” guests come is wasteful. I’m saying once they have kids (which may or may not happen), then buy the 3 bedroom house. Buying a 4 bedroom house for kids that aren’t there yet and guests that may or may not come just causes them to bleed money unnecessarily.

          1. I think your missing my point. I think your analysis is good (I continue to love “Mathing Shit Up”) but it is done ceteris paribus when KM indicates that she and her spouse want kids and thus it doesn’t account for that expense. Also, they could have a child in a 2 bedroom apartment – they have no NEED to move now. They could have a family of 4 in a 2 bedroom apartment (lots of folks do). I was just saying its my suspicion that based on how it’s worded in her email about a buying a home they could live in for 5+ years and their desire to have kids (plural) after having 1 or 2 in a 3 bedroom house – I’m guessing they will say their home isn’t big enough. It’s just a guess.

            It’s easily determinable, just ask KM if she’d prefer her potential kids to have their own rooms… We bought enough house to house all of our desired (and at that point totally imaginary) children so we wouldn’t have to move again down the line to accommodate our ideal family size. My suggestion is that if they really want a lot more space and are committed to buying then buy what you really want (more space) with that in mind instead of buying now and then selling again in a few years when they want to buy something else (if they are going to buy at all).

            1. Thanks for the input, Dave. Based on your and NewB investor’s feedback, I’ve updated the post with a note about kid and college costs.

              1. No, thank you for the great posts! 🙂 BTW, our YTD daycare costs = 21% of our total expenses. Kids in big cities in the US are expensive if both parents work outside the home and don’t have childcare options other than private daycare (meaning before the kids can go to a public/free school). It’s worth noting b/c it can seriously throw your FIRE plans out of whack. Especially, if one of the main reasons to buy a home is to start raising a family. As soon as you RE, no more daycare. 🙂 I hope your feeling better.

  11. I have been lurking on your​ site for months but I need to mention something about home ownership that is brushed over (lived in my house for 16yrs). Maintenance and furnishing the house.

    When you buy a house you need
    More tools, ladders, hoses, landscaping items, lawn mower, gutter cleaning, sump pump repair, water heater replacements, remodeling costs ($$$$$), new roof, furniture for EVERY room. Repair or replace HVAC. Siding repair or replacement. Cracked drywall. Possible basement flood (happened to me and several peeps I know). New carpet for more sq feet. The list goes on and on.

    Add more if you want but add this to the “math this shit up” list.

    Plus, my house is under 3000 sq ft WITH my basement. The houses behind me are over 5000 sq ft easy. Their costs are much higher.

    I will never break even with interest, taxes, fees and Maintenance. Appreciation in most of the country will not make up for it. And let’s not forget all of the time spent working on the house. Try to math that up.

    1. You can furnish a house cheaply – just like you would have to furnish a rental unless you rent a place that is furnished. Maintenance etc. should be factored in but in some parts of the country (like Chicago) even after maintenance costs and traditional carrying costs (property taxes, insurance, etc.) owning can make sense depending on your financial situation. A lot of the calculation has to do with the amount of the mortgage. For example – if you’ve got cash sitting around that you don’t want to put in the market and you need somewhere to live then buying a place to live isn’t a bad option as compared to having it sit in a money market account at some financial institution netting only 1% interest per year. Again, it has to do with how much you can and are willing to put down, your interest rate and what you’re buying.

    2. Thanks for your input, Dr. Saves A Lot! This is what I’ve learned from friend’s who own too. Generally their costs go up beyond the basic maintenance, insurance, and property taxes. It’s like what “the Wealthy Barber” says in his book. You buy a new carpet, then realize the couch looks too shabby, then buy a new couch, only to realize the room needs a fresh coat of paint…etc etc. So the extra home ownership costs could be a mile long, but since it varies from person to person, I’ve left out the additional costs in this analysis for simplicity.

  12. Beautiful view.

    I have to disagree with the people who say this site is biased against homeownership. They are just challenging the conventional (and often expensive) wisdom that homeownership is the greatest thing ever, the best thing for everybody, your greatest indicator of success, and even a good financial investment.

    Very often, the decision to rent vs own or to buy lots of house vs little house is a lifestyle decision. It’s heavily dependent on what you want in life. Using your money to buy a nice house may net you more money thirty years down the line than investing in dividend stocks and index funds (for the sake of argument, let’s just assume this true), but those stocks and funds pay a passive income that can be used to replace your working income. Depending on your financial goals, investing those funds into the market rather than real estate might be the smarter option, even if you are sacrificing some net worth down the line. Personally, I would value the ability to never work again over a higher net worth when I’m in my sixties, so I would rather invest and rent cheaply than to put all my money into a home. Give me the investments that pay passive income over the ones that pay me nothing, regardless of which one will end me up with more equity/capital gains/net worth in the end.

    I’ve got a quarterly staff meeting scheduled for tomorrow where we all get to listen to how s****y employees we are for ninety straight minutes. I would gladly sacrifice some equity thirty years down the line to not have to deal with that every three months for the next three decades.

    Obviously that was a more philosophical example than a mathematical one, and there are other options other than just simply renting vs owning a house (you could own a co-op for cheaper than renting, or own a multi-family home and actually profit each month from your home) that have different pros and cons. But my point is that I don’t think Wanderer and FIRECracker just hate homeownership. It’s just that most of society is so obsessed–biased, I would say–about owning your own big giant house with a big giant yard and big giant mortgage and FIRECracker and Wanderer are just calling them out and showing them that it’s not so simple. There are different financial AND lifestyle pros and cons that make homeownership great for one person and bad for another. Getting hung up on things like mortgage interest being tax deductible means you’re severely missing the point.

    Sincerely,
    A Soon-To-Be-Homeowner

    No, I gotta do my normal signature. This just doesn’t feel right.

    Sincerely,
    ARB–Angry Retail Banker

    1. Well-said ARB! I’m not surprised about all the anger though. Homeownership is very emotional and people tend to see it as part of their identity. You don’t get the same attachment to stocks. That’s ok. Let them have their precious bricks and we can have our freedom. We actually have to thank the homeowners, because without them paying their mortgage, which comes back to us as dividends and capital gains in our bank stocks, we wouldn’t be able to retire. So yay for homeowners!

  13. Hi FireCracker,

    Thanks for mathing this shit up in a fabulous manner, yet again.

    I’ve read through the post as well as every comment and response and it always seems to come back to the same thing. While all commenters have made valid points about different scenarios, adding this and that, forgetting bits and bobs, it comes down to the same point which you emphasise in each post. Keeping it simple will bring out the ‘essence’ and core reason why renting is better than buying, especially in this turbulent economic climate (note: The Greater Fool blog which has great analysis on the Canadian real estate market and of which I’m a great fan).

    What I’ve noticed is that most comments state that you’ve understated costs, however most of these commenter’s noted added costs look like ‘lifestyle’ costs, which are infinite depending on each person’s personal preference and lifestyle choices. Lifestyle purchases are not essentials and can be easily cut out if someone wants something badly enough – the points you’ve made bring the argument down to it’s essence and show that renting is the best choice due to the fundamental costs associated with renting v home ownership, especially for those with a lower income than KK and KX.

    Thanks for giving us more of your insight in another great article! Looking forward to the next one

    xx Miss Piggy

    1. Thanks, Miss Piggy! Appreciate the time you spent reading every single comment! (how are you not sick of us by now? :P)

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