- Does Gen Z Have it Harder Than Millennials? - November 20, 2023
- When To Pay Off Your Low-Interest Mortgage - November 6, 2023
- Reader Case: Can’t Work Because of Health Issues and Worried - October 23, 2023
This morning I woke up and realized it’s been a long time since I did a rent-vs-buy reader case. So I thought I’d dust off the ol’ “Housing” Gmail folder and take one for a spin. I’m weird like that.
It’s getting hot here in Fort Lauderdale, Florida and I don’t mean just the temperature. My wife and I are being tempted to buy a house (gasp!) due to rising rents and the fact that we have a little baby girl due in July 2020. We feel like we’ve been doing well in our financial situation but have gotten confused lately. Here’s our info:
“Fed husband” aka “sugah” is a 32 y/o Federal government employee for an agency that regulates financial institutions. He started in the federal government at 22 but has to wait until 57 to retire with a pension providing 40% of his current salary. “Saleswoman wife” aka “mango spice” works as an insurance agent, is 31 y/o, and is currently pregnant. We also have an elderly father-in-law who can afford groceries, health insurance, etc. but can’t afford rent, or live alone, so he lives with us.
We have $0 debt, make $91K per year, and have approximately $224K in total assets. We currently rent a 2/2 in the “hood” for $1,225/month but are tempted to buy a 3/2 for $165K in a nice area with great schools.
Everyone in the family has lived in South America and the Caribbean. We are considering moving in 10-15 years to Jamaica and retiring early.
We’ve attached monthly/annual budget, and estimates on the house cost but aren’t sure our assumptions are correct or what the best option is.
Is there anyway you can MATH SHIT UP and analyze our situation?
Sincerely,
Sugah
Sugah attached a very detailed spreadsheet which is WAY too complicated to digest in a blog post, so I will sum up here.
| Income | Amount (Annual) |
|---|---|
| Salary (gross) | $90,586 |
| Taxes/Deductions | -$20,416 |
| Matched Contributions from employer | $14,947 |
| Total Net Income | $85,117 |
| Expenses | Monthly | Annual |
|---|---|---|
| Charitable Donations | $605.90 | $7,270.78 |
| Rent | $1,225 | $14,700 |
| Food | $350 | $4,200 |
| Utilities | $65 | $780 |
| Internet | $42 | $504 |
| Cell (Wife) | $38 | $456 |
| Cell (Husband) | $45 | $540 |
| Renter's Insurance | $40 | $480 |
| Entertainment | $200 | $2400 |
| Toiletries | $65 | $780 |
| Clothing | $150 | $1800 |
| Wife's Personal Expenses | $100 | $1200 |
| Car Insurance | $300 | $3600 |
| Vacation | $300 | $3600 |
| Total | $3525.90 | $42,310.80 |
Right away from how finely broken down Sugah’s expenses are you can tell he’s a really detail-oriented guy. I like him already.
| Assets | Amount |
|---|---|
| Traditional & Roth 401K | $46,811 |
| TSP | $50,403.17 |
| Roth IRA | $12,055.74 |
| Cash | $107,770.72 |
| Misc/Alternative Investments | $7,246.44 |
| Total | $224,287.07 |
Just as a refresher, a TSP is a Thrift Savings Plan, which is a 401(k)-like plan available to Federal employees. The only key difference is that unlike 401(k) plans which often offer shitty high-fee funds, a TSP only allows participants to invest in index funds. Radical.
So basically, Sugah has a father-in-law living with him and a baby on the way. He needs more space.
His choice: move to a more expensive rental and increase his rent (in his spreadsheet he estimates $1500 a month), or buy a 3 bed/2 bath house for $165,000.
He’s tried to run the math, but looking at the mental gymnastics he’s going through in his Excel formulas, it’s not clear what metric he’s trying to optimize. Should he be trying to increase his retirement savings, or lower his living expenses? Is it better to spend a chunk of money now, or do it gradually month-to-month? And what time period should he be calculating his portfolio value? Aaaargh!
That’s what I love about doing an FIRE analysis. Rather than trying to juggle investable assets, home equity, present value, and future value, a FIRE analysis like the ones we do here collapse every scenario you’re trying to evaluate into a single metric that everyone understands: time. Specifically, time to retirement.
How many years does it take you to reach your FI number? You take each scenario you want to evaluate, you figure out that time-to-retirement number, and at the end you just pick the shortest one. That’s the thing you should do.
Now normally, we would just do a two-scenario analysis: Pick the rental or buy the house. But in Sugah’s case because his net worth more than the price of the house, we actually have 3 options he could do:
- Move into the rental
- Buy the house with a mortgage
- Buy the house outright with cash
After doing so many of these things, you develop a kind of instinct for what the right answer is even before you do the math. $1500 per month for the upgraded rental is quite high (though the Californians may not agree), and compared to a housing price of just $165,000, I agree with Sugah that it probably makes more sense to buy.
But should they do it with a mortgage or with a suitcase full of cash? On one hand, buying the house outright would eliminate the mortgage from their monthly spending, which drops their FI target number. But on the other hand, mortgage rates are super low right now, so they might be able to score a cheap interest rate.
Before we start, grab a piece of paper and write down what you think is the right choice. We’ll see if you’re right at the end.
For the record, I’m guessing Buy With Cash. FIRECracker disagrees and guesses Buy With Mortgage.
Did you get your guesses down? All righty! Here we go!
Time to…MATH SHIT UP!
Option 1: Rent
In his spreadsheet, Sugah made a note that the average rent of a big enough place in a good school district goes for $1500 a month. We’ll take him at his word on that one.
Of his $3525.90 monthly expenses, $1225 is his rent. So if he moves to a bigger place, his new expenses would be $3525.90 – $1225 + $1500 = $3800.90 per month, or $45,610.80 per year.
We can use this to calculate his FI Portfolio Target. As per the 4% rule, $45,610.80 x 25 = $1,140,270
His annual savings would be $85,117 – $45,610.80 = $39,506.20. This represents a 46% savings rate.
And how long would it take Sugah to retire, given that he’s starting off with $224,287.07?
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $224,287.07 | $39,506.20 | $13,457.22 | $277,250.49 |
| 2 | $277,250.49 | $39,506.20 | $16,635.03 | $333,391.72 |
| 3 | $333,391.72 | $39,506.20 | $20,003.50 | $392,901.43 |
| 4 | $392,901.43 | $39,506.20 | $23,574.09 | $455,981.71 |
| 5 | $455,981.71 | $39,506.20 | $27,358.90 | $522,846.82 |
| 6 | $522,846.82 | $39,506.20 | $31,370.81 | $593,723.82 |
| 7 | $593,723.82 | $39,506.20 | $35,623.43 | $668,853.45 |
| 8 | $668,853.45 | $39,506.20 | $40,131.21 | $748,490.86 |
| 9 | $748,490.86 | $39,506.20 | $44,909.45 | $832,906.51 |
| 10 | $832,906.51 | $39,506.20 | $49,974.39 | $922,387.10 |
| 11 | $922,387.10 | $39,506.20 | $55,343.23 | $1,017,236.53 |
| 12 | $1,017,236.53 | $39,506.20 | $61,034.19 | $1,117,776.92 |
| 13 | $1,117,776.92 | $39,506.20 | $67,066.62 | $1,224,349.74 |
13 years. That’s within his range of retiring in 10-15 years to Jamaica, so that’s good.
Now, let’s see what the math tells us for the other options.
Options 2: Buy With a Mortgage
Our reader is in Fort Lauderdale, and if we plug in a Fort Lauderdale zip code, along with the purchase price and a 20% down payment into Zillow’s mortgage calculator, we get an interest rate of 3.875%, with a monthly mortgage cost of $621 for a 30-year fixed amortization.
In our book, we caution against using just the monthly mortgage cost to figure out the cost of owning a house. There are lots of other costs like real estate commission, insurance, property taxes, maintenance, home insurance, etc. that you will have to cover that you wouldn’t as a renter. A good rule of thumb is the rule of 150, which means you multiply your mortgage amount by 150%, and that’s your actual cost of owning the home.
So if we do that here, then the monthly cost would become $621 x 150% = $931.50
If our reader were to make this purchase, his monthly expense of $3525.90 would change. His rent of $1225 would disappear. So would his $40 renter’s insurance premium. But we have to add in $931.50. So his new expenses would be $3525.90 – $1225 – $40 + $931.50 = $3192.40 per month, or $38,308.80.
As expected, buying this house has actually lowered his annual expenses. That’s fun.
That has the effect of lowering his FI Portfolio Target, to $38,308.80 x 25 = $957,720. Whee!
But it’s also used up a chunk of his money, namely the 20% down payment of $33,000. So his starting portfolio is now $224,287.07 – $33,000 = $191,287.09. Boo.
And finally, it’s increased his savings to $85,117 – $38,308.80 = $46,808.20, or the equivalent of a 55% after-tax savings rate. Whee!
So how do these changing numbers affect his time to retirement?
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $191,287.09 | $46,808.20 | $11,477.23 | $249,572.52 |
| 2 | $249,572.52 | $46,808.20 | $14,974.35 | $311,355.07 |
| 3 | $311,355.07 | $46,808.20 | $18,681.30 | $376,844.57 |
| 4 | $376,844.57 | $46,808.20 | $22,610.67 | $446,263.44 |
| 5 | $446,263.44 | $46,808.20 | $26,775.81 | $519,847.45 |
| 6 | $519,847.45 | $46,808.20 | $31,190.85 | $597,846.50 |
| 7 | $597,846.50 | $46,808.20 | $35,870.79 | $680,525.49 |
| 8 | $680,525.49 | $46,808.20 | $40,831.53 | $768,165.22 |
| 9 | $768,165.22 | $46,808.20 | $46,089.91 | $861,063.33 |
| 10 | $861,063.33 | $46,808.20 | $51,663.80 | $959,535.33 |
10 years! That is a pretty big change. By buying this house on a mortgage, he’s effectively shaved 3 years off his retirement date.
But what about my initial hunch, that buying the house outright with cash would be even better? Well, let’s see…
Buy House With Cash
First of all, I’m aware that not all of Sugah’s cash is accessible. Of his $224k, about half of it is in a 401(k) or TSP account.
But that doesn’t mean he can’t still used it. To access it, Sugah could take out a loan against his 401(k). Here’s how it works.
- Raise some cash inside your 401(k) by selling some assets.
- Go to your 401(k) provider and ask them to take out a loan against your 401(k)
- The loan gets deposited in your taxable account
- Use the money to buy a house
- Pay the loan back to yourself by deducting more off your paycheck
By doing this, Sugah would basically be converting a loan to a bank into a loan to himself. He would still have to pay interest on this loan, but again, since the payments are just going from his paycheck to his own 401(k), no money has actually been lost in these interest payments, only moved from one account to another. For all the gory details, check out this article we wrote on this. Oh, and it also works with a TSP too.
So let’s pretend Sugah raids his retirement accounts (temporarily) to buy his house with cash. Is this a good idea? He won’t have to pay a mortgage, but he would be giving up years of stock market gains. Let’s MATH SHIT UP!
Like before, Sugah would be able subtract his rent and his renter’s insurance from his expenses. He doesn’t have to add back his mortgage, but he still has to add back in all the other home ownership costs, which we calculated in the last section to be $621 x 50% = $310.50.
So that means Sugah’s expenses are now $3525.90 – $1225 – $40 + 310.50 = $2571.40 per month, or $30856.80.
That means his FI Portfolio Target is now just $30,856.80 x 25 = $771,420!
It also means his savings rate is now $85,117 – $30,856.80 = $54,260.20, representing a savings rate of 64%!
So all that’s great. But on the down side, Sugah’s starting portfolio will be a lot lower. Precisely, $224,287.07 – $165,000 = $59,287.07.
So how does all this affect his retirement date?
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $59,287.07 | $54,260.20 | $3,557.22 | $117,104.49 |
| 2 | $117,104.49 | $54,260.20 | $7,026.27 | $178,390.96 |
| 3 | $178,390.96 | $54,260.20 | $10,703.46 | $243,354.62 |
| 4 | $243,354.62 | $54,260.20 | $14,601.28 | $312,216.10 |
| 5 | $312,216.10 | $54,260.20 | $18,732.97 | $385,209.26 |
| 6 | $385,209.26 | $54,260.20 | $23,112.56 | $462,582.02 |
| 7 | $462,582.02 | $54,260.20 | $27,754.92 | $544,597.14 |
| 8 | $544,597.14 | $54,260.20 | $32,675.83 | $631,533.17 |
| 9 | $631,533.17 | $54,260.20 | $37,891.99 | $723,685.36 |
| 10 | $723,685.36 | $54,260.20 | $43,421.12 | $821,366.68 |
Huh. It doesn’t.
The number comes out to be 10 years also!
Conclusion
So I guessed that he should buy the house with cash, FIRECracker guessed he should do it with a mortgage, and in a stunning display of our instincts, it turns out we were both right.
Whether he buys on a mortgage or not, his time to retirement is still 10 years. And arguably, because of the added hassle and complication of setting up a 401(k)/TSP loan, it’s probably easier just to walk into a bank and get a mortgage.
But either way, he definitely shouldn’t move into a more expensive rental.
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Travel the World: Get covid-19 coverage for only $45.08 USD/month with SafetyWing Nomad Insurance
Multi-currency Travel Card: Get a multi-currency debit card when travelling to minimize forex fees! Read our review here, or Click here to get started!
Travel for Free with Home Exchange: Read Our Review or Click here to get started.
I think your cost of ownership value of 150% is really optimistic! I generally estimate (after many years of real estate ownership that I am glad to have escaped) that a house costs about 6%+ of its value per year to maintain – including taxes, insurance, maintenance, association fees, etc. That means that you actually need two and a half times the value of the home, not one and a half. (1x to buy the home and an extra 1.5x to generate 6% per year).
The real pain of it is that this percentage is higher for lower prices houses – a new A/C unit for a 1500 square foot house costs about the same in Ft Lauderdale as it does in San Jose. Same thing with a new roof. Or a refrigerator. Those things are ten to twenty percent more expensive, while a house is eight TIMES more!
Also, since the total cost is dominated by the annual carrying costs, buying doesn’t protect you from inflation – rent goes up every year, but so do all the homeowner expenses!
Plus the opportunity cost of taking money out of your index funds and speculating on real estate (which then costs you ten percent of the principal, not the profit, in real estate commissions and fees when you sell!), which might be net positive or not, because the real estate market is so volatile.
My rule of thumb (based on spreadsheets and experience) is 100-1 purchase price to rent. For really expensive areas, you can take that up to 150-1.
For your reader case, it’s pretty close, but I think your carrying costs for the home are very optimistic!
I would never buy a home unless there simply was no possibility of renting what I need – like if you need a horse farm, or you need a recording studio or something. If you just need a place to sleep, even the cheapest parts of America are barely a wash, everyplace else, it’s cheaper to rent.
I may have spent too much time thinking about this and all the money I wasted investing in real estate for so long.
This is a really good comment. Thanks for sharing. I tend to agree. The biggest point being the opportunity cost of investing in a well-diversified portfolio, which does hedge against inflation quite well.
The thing missing from the other side of the equation is the equity in the house when all is said and done. This value should be added to his net worth I think
Nope. When it comes to calculating time to retirement, home equity doesn’t count because it can’t be used to generate income to live off of.
It could be added if we were doing a total net worth comparison, but we’re not doing that.
Yikes! 6% of it’s value per year to maintain?!? I’m pretty pessimistic when it comes to home ownership, but I think you’ve had a run of abnormally bad luck. If that’s true across the board then it NEVER makes sense to own!
Great write, Wanderer! Love this reader case.
Momentum can’t be ignored, particularly at the sub 250k mark.
1. Living with 200k on hand vs 60k is very different. One makes you feel secure, the other is burning a hole in your pocket and is much easier to slice up. For your “MATH THIS SHIT UP”: Sub 250k, you can assign roughly a 10-15% penalty (almost universal propensity for interest on credit card, car, heloc, etc). Also, at 250/500/1000k certain doors are opened to you that are not available to riff raff (be it lower index fund fees or option to do geo-arbitrage). “The rich get richer and poor get poorer” has only increased in accuracy.
2. After 10 years 959k > 821k. Objectively, it is a better play, particularly since 164k of leverage is already smaller than ~200k they have. It also opens the door of jumping ship 1-2 years earlier should they need that option. This is also favored by the typically better index fund performance vs. housing performance as well as the whole “can’t sell a shingle should you need to”.
3. Pressure cooker: 64% savings rate is very difficult to pull off, much less 55%, from a human standpoint. With a baby on the way. And a house and all its potential money pits. In nicer weather region (vs hunkered down rain/snow areas). Just as in a car engine where too much boost in the turbo can blow it up – humans are rated for roughly 25-45% saving rate unless they have forged internals (ala horrific poverty). You will likely blow these humans up at 64% much quicker than if they run at a 55% rate.
4. Danger of fizzling out/going soft: If you blow away big part of nest egg and payoff house, you lose both momentum and the whip on your back/motivation. Some people might be productive without, but these are Jamaican/island bound folks.
Option 3 will almost certainly trust fund-ify/life style creep their dream future right out from underneath them. I have to give this one squarely to FireCracker.
True dat, it certainly felt easier once our bank account hit $100k, then $200k, and we did notice we became more motivated to keep our savings discipline going as we accumulated more and more money.
Also: “Danger of fizzling out/going soft”: heh.
Also: “you lose both momentum and the whip on your back…Some people might be productive without, but these are Jamaican/island bound folks.”
Good thing you’re not a politician. That’s the kind of quote that Fox news could take WAY out of context.
Always great to see you guys math shit up! I would however look at this a different way given that they are planning to retire to Jamaica… which will have very different living costs. Therefore I think they need to get a good handle on what those costs are which will tell them their real retirement number. Being conservative, let’s say they need $800k for the lifestyle they want in Jamaica (could be far lower, especially as he has a pension kicking in at 57). Using this as the target, renting gets them $833 by year nine, a mortgaged buy gets them $861, while a cash buy gets them only $724 in 9 years… and we have a clear loser! I’d say rent versus mortgage is pretty much a tie and the decision should come down to one of risk – is buying the type of house they can afford in that area a risky bet re future values and on-going repair/maintenance costs? They really need to apply personal knowledge and local circumstances to this decision.
Math is a bit misconstrued. With the mortgage route, you have to account that you won’t have the mortgage for the rest of your life so once the mortgage is gone, you’re true FI number will be in the $31k/year figure (as in the buy with cash option). So that second option math (buy with mortgage) should look a bit different. Certain savings rate/annual spend with the mortgage and then an adjusted savings rate/annual spend for your true long term FI number as the mortgage will not be with you forever.
I grew up in the Ft Lauderdale area and my mom still lives there. Rents are absolutely insane and without looking at any of your other figures I’m definitely on team buy vs rent for that location. My mom is hunting around right now and it’s either a 1/1 rental in the $1,100 range or a 1/1 condo (55+ community) for $40-50k. No brainer to buy. Within 4 years she can own her place outright vs what she’d be dumping into rent those years. The rent vs buy question is location dependent and for FLL the clear winner in my view is to buy if you can afford it. (Better yet, go north to West Palm, Jupiter, Hobe Sound, Stuart, etc. where it’s much more affordable.)
What is with Fort Lauderdale’s real estate markets? Why are housing prices so depressed yet rents so high?
It’s wild. Fort Lauderdale is ranked 14th most expensive rents in the US yet it doesn’t rank in the top 25 most expensive cities to live in. I think there’s a couple reasons. South Florida is a tourist destination – snow birds, international travelers, spring breakers, etc. allow for crazy seasonal rental prices. Some landlords hold off on long term rentals to rent seasonal instead. This then lowers the amount of supply for long term renters to choose from. Tag that up with elderly people looking to retire there but don’t want to be home owners and deal with maintenance issues. Also, tons of growth from the south towards the north – many South Americans move to Miami who then move to Fort Lauderdale which continues to boost up demand. There’s been 11.53% growth in Broward County since 2010 (currently 6.2 million in the metro population – the towns literally are non stop from south Miami to north West Palm).
I didn’t see a line item expense for fuel for their car. It doesn’t matter though since the same expenses were carried over for each scenario. If you are a home owner though, you should add in another expense for the home improvement store. Trust me. When you are a renter, you won’t step foot in one, but as a home owner, it can be hundreds of dollars every month. This is coming from a home owner.
That’s what the 150% of the mortgage is all about. The extra 50% is for maintenance.
Love the case studies … Just Be aware that if you take out a loan from your 401k you will pay it back with after tax dollars – and then be taxed again when you take your distributions at retirement (unless you can manage tax rate to minimal) – also most loans are due in full if you leave your job.
Agreed. If purchasing with cash + a 401(k) loan and taking out a mortgage are otherwise equal, the mortgage is the better option because it has less downside risk in the case of job loss.
Correct. Though he IS working for the federal government, it’s probably not worth the hassle and complication of doing a 401(k)/TSP loan given that it doesn’t really help vs. just getting a mortgage like everyone else.
I don’t agree that Real Estate is any more, or any less volatile than stocks, on average both are about the same, 6-7% return, but real estate is a leveraged 6%. I suppose the housing crash in the US kicked the crap out of a lot of people, but then so did the crash of the Nasdaq in 2000.
One thing that i don’t understand, is the comparison of expense, I calculate that he would pay about 700 per month on a mortgage, but not all of it is an expense. Some of this is principal repayment, which adds to equity. And since his time horizon is more than 10 years, there is a substantial chance he will be selling his $165,000 home for much higher than he paid, and also the payment stays the same, which is a hedge against inflation.
I will never rent again, absolutely hate it, hate landlords, hate broken shit that never gets fixed, hate rent hikes every year, hate getting kicked out just because owners sell, or want to move back in. Oh, and my home has doubled in price in the last 10 years…
This is a case of casflow when it comes to a mortgage payment. I get your point about the principal but the reality is that it’s irrelevant as, they mentioned above, you can’t sell a shingle or brick for cash and each payment cannot be reallocated to something else unless you borrow more against available equity.
Also, a house is a liability, not an asset unless you sell it. Until you do, a house is a cash sucking liability. It doesn’t matter even when the house is paid as it will always require you to pay money to maintain it. It doesn’t generate cashflow. That is why it should not be considered part of your net worth unless you sell and only the portion you don’t use to buy another principal residence.
Just wait until all the mortgage payment deferrals expire and people start trying to unload their houses. I guarantee the home equity the homeowners “think” they have may not be what they think it will be when they discover everyone is trying to unload their real estate at the same time and buyers sit on the sidelines because they wait for prices to drop further. Also, unemployment levels are likely to stay high for the foreseeable future which means homebuyers will be scarcer. So yeah, a house is a money suck which may become dead weight in short order.
Don’t take my word for it. Just wait for the inevitable. It’s coming and it will be ugly.
We’ve always rented out a number of extra rooms in any house we’ve ever lived in (modified so we can maintain a certain level of privacy), and we’ve sold each house we’ve owned so far for a significant profit, all expenses considered (and accounted for in detail in our spreadsheets). Our mortgages (with home insurance, etc.) have always been substantially less than what we had been paying for rent in the same area. As a travel nurse, I find there to be benefits to having a house in a low-cost area, with just enough rooms rented out in an area where I still maintain a per diem job. I know there are exceptions, but I feel as if most people put a lot of unnecessary money into their homes for silly things… and that people, in general, should learn to do more around the house themselves. We’ve had to replace HVAC/AC in houses before (and attend to roofs ourselves), but this happens so infrequently across the lifetime of a home vs. constantly doing unnecessary remodeling……. also, people get too emotional in the purchasing of a house, forgetting that the real value you get from a home is made when you purchase it… that being said, I don’t mind renting and will definitely rent again in the future (I do it frequently when I travel for the very short term) but not necessarily because I feel it is the absolute best decision from a financial angle…however, this is also personally not the only value system by which I judge the merit of a decision… I would be looking forward to the devaluation of houses in the same way I look forward to it with the stock market…
The big difference is that money in a portfolio can be used to fund your retirement while money trapped in home equity can’t. You’re right that he will likely sell when he moves to Jamaica, but given what others have said about Fort Lauderdale’s real estate market, I’d be really uncomfortable forecasting real estate appreciation for this house…
Love when you math shit up. I think for me to carry a mortgage with the current low rates would be the way to go. What I really would love to know is how do you only spend 350 a month on food that seems so low?
*shrug* Lots of homemade Jamaican patties?
Interesting case. Some important assumptions:
– As many pointed out, the 150% depends on location, min maintenance vs improvement, and a lot of other factors, so I would use actual numbers like actual property tax.
– baby does not cost more money?! Checked college tuition rates recently, even at Waterloo engineering?? But maybe you can think now that Junior does not need to go to college…
– mortgage interest is guaranteed to be charged or the back takes your house, but there is no guarantee you will get 6% compound annual return on investments over the next 10 years, maybe over 30-40 years but 10 is too short to assume
Just a few observations
The baby will cost the same whether they buy or rent, so for the purposes of making this decision, the baby is irrelevant.
The improved school district where the house is located could become an important factor though, in the buy versus rent equation. At least IMHO.
In this case, the equity in the home should be counted as money towards retirement because they clearly said they want to move to Jamaica. So the mortgage will certainly be paid down and the house will most likely appreciate. That money can be used in their retirement after they sell the home. (many case studies assume that the owner will stay in the same location in which case the equity doesn’t do anything but reduce the housing cost when the mortgage is paid off)
401k loans are a really bad idea because if you leave your job for any reason the loan is due in full. I don’t know if TSP loans are the same.
If I was in their shoes I would buy a home with a mortgage and put 20% down from their cash reserves.
Whenever a rent versus buy comparison is done, I’m always very curious as to what your thoughts are as to how you (Wanderer and Firecracker) will structure your housing situation when you are in your 60’s/70’s and older. What would you do if life (as unfortunately it sometimes does) were to throw you an unexpected curveball and one or both of you were to become sick or disabled?
I probably think more about this than most on your site because I’m 50 and the thought of renting even at my age and older would scare really me. I have a friend who is 60, has rented for 20+ years and it’s been pretty sad seeing all the stress she’s had to endure dealing with securing long term housing. The thought of an insecure housing situation at an older age (especially if a person’s health and mobility starts to deteriorate) would really give me pause for thought.
Curious as to what sort of advice you would give someone who is older or what sort of plans you might have put in place regarding housing if you couldn’t travel or were to suffer a serious illness or disability.
Love all the travel stuff on your site!!
I think what truly matters is security of cash flow. Looks like our couple have solid. Don’t over leverage, buy a house near great schools, get a cheap mortgage and enjoy the home.
IMHO a home is just an asset that can/will eventually be accessed for it’s value. Even if it’s worth less then purchase price when you sell as long as you can walk away debt free after sale it doesn’t matter, especially if you also have been building up other financial assets at the same time.
I disagree with Wanderers’ comment that equity in a home cannot help fund retirement. I have been accessing HELOC for years to buy other assets, pay bills and have some fun. The cost to service my debt is less than my cell phone bill. Worst case for me; sell the home pay off the debt and I still create more than enough cash flow to live a quality life. It can be done. Good luck with the baby.