Reader Case: Starting Over at 35

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FIRECracker

FIRECracker is Canada's youngest retiree. She used to live in one of the most expensive cities in Canada, but instead of drowning in debt, she rejected home ownership. What resulted was a 7-figure portfolio, which has allowed her and her husband to retire at 31 and travel the world. Their story has been featured on CBC, the Huffington Post, CNBC, BNN, Business Insider, and Yahoo Finance. To date, it is the most shared story in CBC history and their viral video on CBC's On the Money has garnered 4.5 Million views.
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Since the last Reader Case somehow generated over 11K views in one day and a front page feature on the RockStar Finance, it looks like these Reader Cases are kind of popular. So…back by popular demand, this Friday we’re doing another reader case!

And to all the house-horny idiots who accuse me of being unfairly biased against housing, you’ll be happy to know that this reader asks whether he should buy a house. *sharpens claws*

Here we go (email edited for brevity):

“First and foremost, your blog is incredible and is inspiring me to invest in my knowledge about the market and take action. I was always the “this stock will win” kind of guy where every few years i’d pick a “winner”(loser), throw a dart and invest $500-1000, and watch it all tank away, I was the “this is how you lose money in the stock market” guy you talk about. I knew diddly about dividends, volatility, indexes, or really anything that is beyond a savings account or buying a single loser stock. I still to this day have $0 invested in a 401(k) because I was too ashamed to invest in something I knew nothing about. I still don’t know all that much…but i’m learning from your blog and have purchased the top 2 books from your “shit we love” list to start reading and learning. When I get passionate about something I don’t stop until I get dangerous 🙂

My Situation

I’ll be 35 in July and was also stuck in the “work and be loyal” crowd for a long time so instead of investing in my education (either college or self study), I just jumped into the work force and found whatever job(s) would pay me enough to pay my bills and play a little and worked my ass off 50-60 hours a week trying to climb the “ladder”. I climbed the ladder in various stressful sales jobs until 2015 when I was reaching for a director role and was then laid off.

After that I decided to get out of sales and get my life together by doing something I loved. I knew I was going to take a financial hit for a bit until found my footing, so I threw caution to the wind and followed my passion for cloud computing/CRM, got certified and got a job.

I’m now doing better than I ever have, and am being courted by companies that are going to start me in the $100-120k(USD) range starting either end of 2017 or early 2018. So now that I work in a great ecosystem that I enjoy and some good companies, I can start working on getting my finances back in order and putting money in the RIGHT places. I’m kind of treating “now” like I just graduated from college since I finally have a job I LOVE, its lucrative, and will allow me to work remotely from home. But understanding where to start the journey for FI is where i’m struggling and why I could use your wisdom.

So here’s the situation. Any paltry savings my wife and I had was washed up when my son was born. He had severe medical issues and caused us to blow through savings and take out a short term loan to pay off ridiculous medical bills. So like I said prior, with a new career, decent pay, and 0 savings i’m treating now like i’m just starting out because I kind of really am.

Current Debts
• Car Lease (up in May 2019 with $10k buyout if I decide) $215/month
• Personal Loan (up in August 2018) $248/month about $4200 remaining
• Rent: $800/month (includes rent, property taxes, gas, water, electric) – long story, but we can get out whenever we want. We have $9k tied up in the house earning interest which we get back when we leave. 
• Misc Fixed Expenses(includes gym, subscriptions, misc dues, car insurance, etc) $1200/month
Income
My income is $70,000/year before taxes, current take home is $52,650. My wife works a part time job during the school year but I don’t count that toward any financial goals because its so very little ($80-100/week) and we mainly just use that for groceries.

Goals
1. Become financially independent in 10-15 years
2. Buy a house – Now I KNOW what you’re going to say to this lol. Houses where we are targeting (Southern Delaware) are cheapish. You can get a modest 12-1500 square foot home from $180-225k with about $1500/year in property taxes in a good school district. The area we are targeting has become a target for retirees and small families trying to escape the INSANE house prices and property taxes in NJ and NY and builders can’t keep up with the demand, as well as a ton of businesses moving in. So we are thinking the house will without a doubt appreciate.

We have a goal of getting a home there with a 10-15 year goal of appreciation and trying to keep maintenance and furnishing costs down so we make money in the long run, and once my son is out of college profiting off of the sale and moving into a smaller rental somewhere.

Our home now is 980 square feet, no storage, the town is starting to fall apart around us, the school system is sucking, and the county in general is crumbling, we need out. To rent in the area we are targeting to move to will cost significantly more than owning ($300-500/month on average).
Where should I start? I can’t enroll for 401k until open enrollment in November, so between now and then its just a matter of getting my priorities in line and the journey started.”
–StartingOutAt35

All right, first of all, let me just say, I really admire your hustle. Considering how you didn’t end up investing in an Ivy League degree, jumped into the workforce and worked your ass off until you pushed your salary up to 100-120k USD /year, that is amazing! Kudos.

Now, let’s take a look at your situation:

Summary:

Current Net Income: $52,650

Spending: ($215 + $248 + $800 + $1200) * 12 = $29,556/year

Debt: -$4200

Investable Assets: $9000 (available only when they move out)

Now, since a couple things will be changing for StartingOutAt35 (moving to a new city, new job with higher salary, etc), we’re also going to look at his projected income situation:

2018 Summary:

Projected Gross Income: $120,000
Projected Net Income: $94,060 (Source: https://smartasset.com/taxes/delaware-tax-calculator#ItJWomvDRj)

Projected Spending:

  • A $225K house
  •  To avoid the PMI, assuming he waits until he can save a 20% down payment. For a $180,000 loan @ 4.375% 30-year fixed mortgage, the monthly payment would be:
    • $988/month
  • Ownership costs: $125/month (property taxes) + $187.50/month (1% of home value for maintenance) + $66/month (insurance) + $200/month (utilities) = $578.50/month
  • Total monthly costs: $1566.50
  • Plus, setting aside some money for one-time costs of home inspection ($400), lawyer fees ($500).

Now, I know all the house-horny idiots are going to assume I’m going to yell at him for buying a house in Southern Delaware, but given that the home prices in DE are less than 2X his gross salary, he actually LOVES his job, and the rental prices in that area is around $1200-$1500, his decision to buy a home in this case is actually *gasp* not idiotic. With his new higher salary, he could easily handle the mortgage, or (even better) pay it off pretty quickly.

Given his new house spending, his new projected yearly cost would be:
Spending: ($215 + $1566.50 + $1200) *12 =$35,778 (assuming personal loan paid off by the time he has enough for the down payment)

In order to generate this passive income, he would need a portfolio of: $894,450

To add a cash cushion for 3 years of living expenses, he would need $107,334, but since the portfolio would return at least 2% in dividends, he will only need $53,667.

So to include the cash cushion, he should aim for a portfolio of $948,117.

With his shiny new salary of $94,060 after taxes, he would be able to set aside $58,282 each year. But, that’s only AFTER he’s saved up the $45,000 down payment and paid off the personal loan. Which, at his current rate of savings rate of $23,094/year, should only take him 2 years.

So, assuming by beginning of 2019, he’s saved the down payment, bought the house, paid off the personal loan, gotten the new higher paying job and maxed out his 401K, here’s how far he’s from retirement:

Year Balance Contribution ROI Total
0 8,100.00 58,282.00 3,982.92 70,364.92
1 70,364.92 58,282.00 7,718.82 136,365.74
2 136,365.74 58,282.00 11,678.86 206,326.60
3 206,326.60 58,282.00 15,876.52 280,485.12
4 280,485.12 58,282.00 20,326.03 359,093.14
5 359,093.14 58,282.00 25,042.51 442,417.65
6 442,417.65 58,282.00 30,041.98 530,741.63
7 530,741.63 58,282.00 35,341.42 624,365.05
8 624,365.05 58,282.00 40,958.82 723,605.87
9 723,605.87 58,282.00 46,913.27 828,801.14
10 828,801.14 58,282.00 53,224.99 940,308.13

* 9000 -900 (house closing costs) = $8100

So StartingOverAt35 is able to reach his target, with the house, in slightly over 10 years from 2019! And since he needs 2 years to save up the down payment that’s only 12 years from now.

Okay, now for all those whiners complaining about not taking into account mortgage interest write-off?
Let’s see what happens if we do that shall we?

Of the house payments, $7800/year is interest. So plugging that into the Delaware tax calculator, he ends up having $94,170 after tax salary instead of $94,060 (Source: https://smartasset.com/taxes/delaware-tax-calculator#MHXxTc1FMp)

A WHOPPING tax savings of $110/year! BIG. FUCKING. WHOOP.

And what does this do to his time to retirement?

Year Balance Contribution ROI Total
0 8,100.00 58,392.00 3,989.52 70,481.52
1 70,481.52 58,392.00 7,732.41 136,605.93
2 136,605.93 58,392.00 11,699.88 206,697.81
3 206,697.81 58,392.00 15,905.39 280,995.20
4 280,995.20 58,392.00 20,363.23 359,750.43
5 359,750.43 58,392.00 25,088.55 443,230.97
6 443,230.97 58,392.00 30,097.38 531,720.35
7 531,720.35 58,392.00 35,406.74 625,519.09
8 625,519.09 58,392.00 41,034.67 724,945.76
9 724,945.76 58,392.00 47,000.27 830,338.02
10 830,338.02 58,392.00 53,323.80 942,053.82

NOTHING. Absolutely NOTHING. It’s still 10 years from 2019 (plus 2 more to save for the down payment). I find it hilarious that people gloat about saving $110 bucks in taxes while forking over thousands in property taxes, maintenance, insurance, etc.

Oh and guess what else? I’m also NOT going to take into account home appreciation. Why? Because he says he won’t be downsizing or moving to a rental until his son is out of college, so the appreciation is useless.

If you have a problem with that, here’s Chris Brown to explain exactly how many fucks I give:

So as usual, money in a house is dead equity. But because our intrepid reader here is opting NOT to buy an overpriced house that will swamp his net worth, StartingOutAt35 gets the Millennial Revolution’s seal of approval for *gasp* BUYING A HOUSE. It still delays his retirement by 2 years since he has to save up for the downpayment and that money can’t help him retire, but in this case buying the house DOESN’T blow up his finances.

The reason? He will earn a lot, his house value is modest, and he’s not relying on home appreciation to retire.

What do you think? Chime in in the comments!

59 thoughts on “Reader Case: Starting Over at 35”

  1. This is a proof that you’re not against buying a house just because that’s your philosophy..it proves you’re a math lover and numbers never lie.
    Can’t stop admiring you ! Go FireCracker !!

  2. A couple things to note: you only get to claim mortgage interest as a deduction if you itemize deductions, and you only do that if your itemized deductions are higher than the standard deduction. The standard deduction for married filing jointly is $12,700 for 2017. It is possible that this reader won’t be able to take advantage of this deduction at all unless his itemized deductions exceed the standard deduction. Other expenses that can be itemized include property tax, state income tax, charitable contributions, etc.

    So buying a house in a low cost area will have minimal income tax implications as you noted. However, buying a $1.1 million house in LA has a huge tax implication…. probably something like $30k in mortgage interest, $10k property tax, $10k state income tax (because you need a high income to afford such a monstrosity) for a total itemized deduction of $50k. Subtract the standard deduction, and your federal tax “savings” are (50k-12.7k) x 28% = $10,400.

    1. Correct. The mortgage interest deduction didn’t do much in this case because his home price was more reasonable, he’s filing as a married couple, and his mortgage interest wasn’t that high.

      The mortgage interest deduction only really matters if you’re paying a much higher interest rate, but in those cases it’s usually much harder to justify buying that house cause, you know, you’re paying so much interest for the jumbo mortgage.

  3. Yeah. This is assuming the market doesn’t crash during that 10 year period, of course.

    Can you give more details on how exactly you calculated the ROI column?

    1. ROI of a 6% is a conservative long-term annualized performance of a 60/40 portfolio. Of course it won’t be 6% each year (it’ll jitter from year to year), but it’s a reasonable estimate for forecasting purposes.

  4. Yes, if you can avoid the crazily overpriced housing areas buying can sometimes make sense.

    There are many areas throughout the UK, away from the central South, where properties are 1/4 of the cost or less.

    With these costs it makes a 10-15 year mortgage possible for someone on a moderate income.

    1. She didn’t said that…the limit is a little over $18k. And who would keep all this money trapped in a 401k anyway..I just don’t understand people who max out 401k..it’s not smart

      1. A ROTH Ladder can help you get the money out without paying penalties and little/no taxes. I’d Google that, and you’ll see why maxing out a 401K is the smartest option, barring high fees and poor fund selections in your at work plan. If that’s the case, invest just enough to get the match.

  5. So to summarize you only suggest purchasing a house when the carrying costs are equivalent to (or less than) renting? Seems a bit of a no brainer in that regard, you’d be a bit of a fool to not buy if it’s cheaper to own than rent (unless you expected markets to crash drastically).

    I’d be fairly content to buy a house when the carrying costs are a bit higher than renting, assuming you are set on staying in the area for over 5 years. I certainly wouldn’t assume appreciation of 5%+ for real estate, but you can safely assume SOME appreciation over a long-term horizon. That’s more realistic than assuming none.

    I’d bite your hand off if I could buy an apartment in Vancouver with carrying costs of $2,000 when rent is $1,800 for example. Sadly, owners here are more accurately paying in the region of $3,000-$4,000 a month to own an apartment and receiving rent of under $2,000, so that’s a major gamble on appreciation that I’d never be comfortable with.

      1. Upending your children every few years isn’t a good thing for development. It’s good to have roots for a bit, then once they’re off and running sell as quickly as you can and go back to having wanderlust

    1. You got it. Because home equity cannot be used to retire unless you sell and go back to renting (which no homeowner ever does), home appreciation is useless. So the only time it makes sense is when TOTAL carrying costs (including utilities, taxes, maintenance, closing costs etc.) equal or are less than the costs to rent. Otherwise you rent.

      1. >Because home equity cannot be used to retire unless you sell and go back to renting (which no homeowner ever does)

        Many Canadians down-size in retirement and do, in fact, use home equity to buy something smaller and live on the rest. Stats Canada has lots of data on this. You should look it up before making blanket statements.

        About 1/4 of Canadians will use their home equity to retire. And try telling all the Vacouverites who cashed their homes in, retired, and bought in the Okanagan or on Vancouver Island for 1/4 the price that this is not the case. Or all the expats living in Mexico on house proceeds.

        Also, for folks over 65 the stats show that when they sell they are more likely to move into a rented place. https://www.cmhc-schl.gc.ca/odpub/pdf/67514.pdf

        Home equity is like any other asset or investment. It can be used to retire and it commonly is.

    2. If *some* appreciation is just the rate of inflation (1-3%) then all the equity you are building in the property is definitely *dead* and thus the property is definitely not an investment. If you are buying for *emotional* reasons, that is ok but then i would not try to justify the financial side of things with what you are willing to *accept*, because in fact what you’re willing to accept (really) is a bad investment on a place to call HOME.

  6. That’s fantastic. Those calculations also don’t include the fact that this includes zero financial contributions from his wife and that they will be making zero income post retirement. I love it.

  7. Interesting case Firecracker. I know you don’t like the house thing, but this is very thorough! 🙂

    But I’m quite interested in whether if he cashed out his house at some point (or indeed the end) how many years that might knock off to reach his end goal or how much extra he might have.

    I had a quick look at the delaware housing apprecation calculator. Here:

    https://www.neighborhoodscout.com/de/real-estate

    It’s a bit rough and ready because it clearly depends on the actual area in Delware. 3.23% annual appreciation in housing seems to be the figure – although it’s quite variable in this area annually (another thing for him to look at perhaps?). So this would make his property end value after 10 years around £255k (working on your £180k starting price). It’s a lower value property to start with so the extra £75k doesn’t add much value – his accumulated saving is adding much more.

    The appreciation rate in housing in this area looks like it might be a good bit lower than the stock market, so that’s a really important consideration.

    I had a quick look and the house value won’t take his fire time down really – it still looks like he needs 9-10 years (he’d get to $1,017,000 year 10 – taking off his original £180K mortgage) but he’d need to sell the house to then put this extra capital in the stock market to live off it which doesn’t seem worthwhile at all (since the extra capital is small). Finding another way of monetising the house after or during 10 years (Airbnb? Lodgers?) might well be a really good thing to do, or increase the home value (renovation, etc.) if the area is good for that.

    I’ve dashed this off a bit, so let me know if I got anything out of whack here.

    1. It’s an unusual situation to be in, where real estate appreciation is a lot lower than the stock market, but rent is more expensive than owning. It’s almost the opposite of any comparison I’ve ever seen, where buying is usually more expensive than renting, but appreciation is high to offset the increased cost.

      You can kind of argue both sides of the coin, where it’s better to own as renting is more expensive, but it’s also better to rent so you don’t tie up that much money in an asset that is only appreciating at 3% when the market could average 6 or 7%+.

      It’s almost like investing in a bond, but buying a house, with low returns but guaranteed income (in the form of a lower cost of living).

      Something tells me he would end up in a fairly similar position no matter which way he went.

      1. Yup, in this case. I mean, buying the home does delay his retirement by 2 years since he needs to save the downpayment, so renting is still a slight winner, but in this case owning a home isn’t a catastrophically bad decision like usual.

    2. He says Southern Delaware, that retirees from NY and NJ are moving there, and supply can’t keep up with demand–I would bet he means the Delaware beaches (Rehoboth, Dewey, etc.) or beach-adjacent, where appreciation is much higher than state-wide generally.

  8. So how far ahead/behind would he be in 25 years if he owned vs. rented?

    The total interest paid on the loan after 25 years (based on an amortization table for a $180k mortgage with 25 years, at 4.38%) = $116,483

    Total “cost of home ownership” (using your numbers for taxes, utilities, insurance, maintenance) = $578.50 * 12 * 25 = $173,550

    So…the total loss after 25 years of “owning” is $116,483 + $173,550 = $290,033

    Compared to the cost of renting for 25 years, assuming $1400/month rent (“To rent in the area we are targeting to move to will cost significantly more than owning ($300-500/month on average).”)…

    Total Rent = $1400 * 12 * 25 = $420,000

    Therefore, after 25 years, he comes out more than 100k ahead owning vs. renting. Investing that extra 4k each year for the first ten years could speed up his path to FI by about 6 months, a 5% increase.

    Of course, this doesn’t completely account for realtor fees, closing costs etc. and it assumes he will stay in the house for 25 years (unlikely). The real way to look at this is: How long does he need to “own” in order to safely come out ahead? It looks to me like that number is about 10 years. But, if he plans to own for less than ~10 years, renting at $1400/month isn’t a bad option either.

    What am I missing?

    1. It takes time and energy to maintain a home. So you have to look at more than just the hard numbers.

      Also renting offers “peace of mind,” with absolutely nothing to worry about even if the roof caves in. No need to worry about your home when you’re on a long vacation, for example.

      How much is all that worth to you?

      1. “with nothing to worry about even if the roof caves in”? Hmmmmm
        You may be tooo calm. I’d be worried whether I owned the roof or not.

  9. Not a house person myself, but your analysis of the mortgage interest deduction just puts it head-to-head against their standard deduction. If they’re already itemizing or if the mortgage interest would put them in a position where it becomes worthwhile to, they’d be able to deduct that interest from the full 25% marginal rate. That means an annual savings of up to ~$1,950, compounding to ~$26k over 10 years. Perhaps not enough to move the needle on whether buying a house is worthwhile, but definitely more than zero.

    1. Correct. The mortgage interest deduction in this case doesn’t help him that much because he’s not getting into too much debt.

      However, don’t make the mistake of thinking that because your mortgage interest deduction is a lot of money that means you’re doing something smart. That means you’re in a lot of debt.

  10. “all the house-horny idiots”

    How pleasant.

    Given the price to rent ratios they should consider buying multi-family if possible. They will likely exceed the cash flow metrics for buying rental property in the US in a cash flow market.

    A duplex will substantially reduce his time to retirement and they can move out at the end and rent the other side or sell if appreciation outweighs the cash flow ROI.

    In a low value market like this I’d look for something newer because renovations will not likely be supported by appreciation or resale value.

    1. He wants to buy a reasonably priced house and retire, and we said “sure go ahead.” Your response is “you don’t have ENOUGH real estate! You need more!”

      I think I’m beginning to understand now. You’re a real estate salesman. All credibility gone.

      1. Actually I’m a professional who retired in her 40s on a combination of RE, stock market investments and small business ownership. I have personal experience with all three. I did not work in the investment or real estate fields and have no connection to the business of real estate other than personal experience and interest.

        My analysis of the situation you posted is solely based on what would produce the best ROI under these circumstances. This will assist him in retiring early. It may not be worth it to them to live in a duplex or multi-family house for other reasons, and they may be willing to work longer to have a SFH, but the math in a cash flow market favours what I’ve proposed. YMMV.

      2. I think you are failing to see indigos reasoning. It makes good sense, if you want to invest in real estate and are interested in early retirement, it is a great suggestion to invest in multi family dwellings. Even if it has an income suite in the basement, in an area that has low house cost but high rent, the opportunity to retire earlier is there.

        1. Fair enough, but not everyone wants to share their space or become a landlord. All it takes is one bad tenant to destroy your property and cause you tons of headaches. Also, putting a big chunk of your liquid assets into 1 illiquid asset is not diversification. If, however, StartingOverAt35 wants to get into real-estate investing, he should look at Paula Pant’s explanation of the 1% rule of investing. She explains everything in great detail: http://affordanything.com/2016/04/28/one-percent-rule-gross-rent-multiplier/

          1. It’s true, not everyone wants to be a landlord. However, I have to say that most issues with bad tenants can be avoided by due diligence in screening. If starting over at 35 if planning to put a big chunk of his assets into real estate as he said he wants to buying a home with rental potential won’t change that. And I do love reading Paula’s blog, but the area that I completely disagree with her on is the 1% rule. That is her way of assessing a property’s investments worth, but should not be applied to ALL real estate investing. For example. I recently bought a house for 180,000, with an interest only loan. So by her rule I should rent for 1800. I rented it for 1350 plus utilities. After paying loan, taxes, ins, and contingency fund(my way to pay for maintenance), this house makes me 500-600 per month. Paula wouldn’t consider this house. I’m making that with none of my own money. This is just one example why the 1% rule shouldn’t be applied to all. And it definitely should not be a consideration for your case sty. He wants to buy a house. If he can buy a house and go without the recroom in basement, sacrifice a bit and get a house with apartment….it will be a huge boost to his income.

  11. Great write up. I might be biased since I’m a ‘real estate guy’ but… the cost savings alone between renting vs owning make BUYING the house a no brainer. Great analysis.

  12. Wait…what? You just approved the purchase of a home! My mind just exploded!

    Purple unicorns are flying through the sky and lightning just struck twice! Apparently this drummer can play another song!

    In all seriousness, congrats on the success of your case studies. Your blog is always very entertaining!

    1. Yup. And YET there are people screaming “I STILL disagree! You’re biased! You need to buy MORE house!”

      These people are insane. I think they may be members of the Freedom Caucus.

      1. +1 for the Freedom Caucus reference. But I do get the suggestion for a multi-family residence. It is, in the long run, a better investment if the rent from one half covers the mortgage.

        1. Not everyone wants to share their space or be a landlord. All it takes is one bad tenant to destroy your property or cause tons of headaches trying to evict them. Also sticking a big portion of your net worth in 1 property is not diversification. But, hey it doesn’t matter what I say. People obsessed with housing will buy regardless of the risk because they are too emotionally invested in the idea of home ownership. I’m glad our reader isn’t one of those people, since he chooses buy what he can afford and mitigate risk.

  13. Also, couple of points:

    1. Every single rent vs. buy calculator in use attributes an appreciation rate to the house. I understand you don’t give a “F”, but the money in anything is “dead equity” until you use it for something else. Not to mention the OP stated directly, “So we are thinking the house will without a doubt appreciate.”

    I’d suggest that you review the following calculators and reconsider your data inputs as it appears to me that logic is not at play here, but bias, and not giving an “F” with some song to support it is, quite frankly, juvenile and appears intended to pre-emptively shut down other information which, imo, devalues your analysis. Attribute a reasonable but low rate based on long term history in the city/sub-area if you want to be safe.

    https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
    http://michaelbluejay.com/house/rentvsbuy.html
    https://www.trulia.com/rent_vs_buy/

    2. I note you are making assumptions about the performance of the stock market based on long-term returns. If you are going to negate house appreciation entirely I suggest you negate stock returns, because, hey, the money is not yours until you actually turn it into cash and there is always a chance of a downturn or black swan event.

    3. In addition, a house can be HELOCed through a Smith Manoeuver (in Canada) and the proceeds invested, and there are plenty of similar options in the US. Look it up and consider whether this is something that is a desirable option. Also consider whether you are confusing overall liquidity with “dead equity”.

    4. “Okay, now for all those whiners complaining about not taking into account mortgage interest write-off? Let’s see what happens if we do that shall we?”

    How patronizing.

    Only someone who does not actually understand how this deduction works would make this statement on these facts. The last case study was VERY different, high income earner and house valued over a million. The deduction becomes valuable in those circumstances. In these circumstances with a low income wife it makes sense to claim the standard deductions as a married couple rather than itemize (look it up). You might want to read this link and research things a bit more before writing in such an insulting manner when you clearly don’t understand the underlying tax rules or math that will be immediately obvious to many US readers:

    https://www.fool.com/investing/general/2015/01/11/why-your-mortgage-interest-isnt-actually-tax-deduc.aspx

    You are not experienced in home ownership, medical insurance costs, or the tax and lending rules in the US yet you take on these topics with inadequate research. Everything is available to you online and you are purporting to have some level of expertise in these matters. Why not do it properly?

    If I was the fellow in the case study I’d do my own research and run my own calculations using the rent vs. buy online calculators and post a case study on mrmoneymustache.com. There are lots of experienced US folks from Delaware with knowledge of the state and 2008 is still playing out in the minds of many so you’ll get a conservative analysis imo.

    1. Wait, I do a case study in which I APPROVE buying a home and you’re STILL upset and calling me biased because I’m not approving hard enough?!?

      Heeey theeere Crazy…

      Are you a member of the Freedom Caucus by any chance?

      1. Actually, I’m quite pleased that you published my comment. I appreciate that you are open to the critique and willing to discuss the points.

        Here is my response:

        I am not an obsessive fan of home ownership, I’m a fan of financial independence and early retirement. I don’t care how you get there, I do care about the math and analysis. I also care about the overall efficiency rate because, for me, greater ROI equaled faster time freedom.

        Just because my responses to you previously on the last case study contradicted your advice and analysis does not mean that I am opposed to the idea of renting and investing and am obsessed with housing. I am not. I just oppose a flawed analysis applied to the case studies which you have, imo, done again here.

        There are situations in which home ownership is not a good option. For example, if I lived in TO like you do and did not already own a house I’d probably be looking for a cheap rental too. I’d also probably consider leaving the city to buy if I didn’t want to travel as much as you do because the time freedom sacrifices required to buy high might be too great, even though long-term there might be a windfall.

        If you can afford to buy and hold you can usually mitigate home ownership risk. If you are in a shaky relationship or might have to relocate, or in an area dependant on one industry (hello oil and gas), I’d factor this in and probably not buy either. Too much risk of having to sell without adequate appreciation to pay for transaction costs or, worse, having to sell during a downturn and having leverage turn into your enemy.

        So, as far as approving or disapproving of home ownership, that is not even the issue. Your bias shows in the fact that you do not do the research and analysis you need to do to create a proper framework for analysis, and I assume this is due to both inexperience and a repeatedly stated aversion to home ownership – going so far as to denigrate and lob personal insults instead of logically considering the facts presented. I do not see you making the same data input errors when you calculate stock returns so, unless your partner is solely responsible for those posts, you should be capable of applying the same logic and analysis to different types of assets.

        Again, for me, the issue is what makes the best financial sense and gets you to financial independence faster. What is important is calculating the ROI accurately and managing risk adequately.

        As far as the OP goes, again, I’d consider a duplex if they are up for it. They will get to FI in short order and can sell or cash flow it to support their cost of living. If ROI is not important or FI is not the goal, well it doesn’t really matter if they rent or buy unless they have an emotional attachment to owning.

        One final point, I’d leave out the personal insults, they don’t help. If you can correct what I state based on logically supportable analysis I’ll look at it and respond. If I’m in error I’ll just admit it and thank you for the information. I have no interest in being right or pushing RE, my only interest is what is going to work.

          1. I see. Well, I’ll leave you to your math then. Maybe one day you’ll run the numbers on the option I suggested. Cheers.

            PS. Didn’t watch the video – not a fan of youtube – but maybe it provided all the logic you needed and supported your views well.

  14. So nice to see all these real estate guys screaming….nobody sane will ever buy a house in a near future unless the RE market crashes…period…live with that !

  15. Here’s the thing: you have him saving for a down payment for 2 years, but starting at the beginning of 2019 saving for financial independence to achieve that in 2029. This is off by a year: save for 2 years means start at the beginning of 2020, achieve in 2030.

    However, should he instead pay off his $4,200 debt by the end of 2017 by using part of the $9,000 deposit when they move out, he can start setting aside $4,857 a month ($58,282 a year) at the beginning of 2018 while RENTING in new city (yes, rent cost more, but wait for it…). Assume the rest of the $9,000 gets recycled back into a rental deposit, so we’re starting out with zero.

    Projected net income $94,060.
    Projected spending (as a renter): $1,415 living expenses + $1,400 rent (note I’ve chosen high end of range) = $2,815 month = $33,780 annual.
    Income less expenses = savings = 94,060 – 33,780 = 60,280 available to save (more if renting lower end of range).

    So at the annual growth rate of 8.6432% that you used in your retirement calculations (based on monthly contributions of $5,023), he can retire with $948,117 in 119.6 months or 9.96 years, but the difference here is that he will retire in 2018 ( a whole 2 years earlier). Yeah, they won’t have home equity, but they’ll also be free a whole lot sooner.

    Are you guys getting soft, or what? The decision to buy here is still emotional (better schools, neighbourhoods, etc.)

  16. Posted that too fast…he will be able to retire in 2028 (obviously not 2018).
    Also, as a renter, he’ll be able to invest 60,280 (rather than $58,282) a year,

    1. Am I getting SOFT? *punches a shark*

      But seriously, yes that is true. If he were to rent in the area he’d able to retire 2 years earlier. I just thought this was an interesting case where a house DOESN’T completely blow up your finances. I.e. when it doesn’t involve an assload of debt.

      1. Hey FC. Just don’t give credit to people like indigo. There will always be people like them…but that’s great actually because they can buy the houses so we smart people can rent from them and live free! We need them…let’s exploit it !

        1. Very true. I mean who else is going to take care of the leaky roof and flooded basements so we don’t have to lift a finger. They deserve a badge of honour. Thanks, House Horny Idiots!

  17. Nice turnaround in his life. That is 120k USD not CDN. Not bad at all. And the USA is actually a country with different places where you can live, rather than the border hugging, Crown Land surrounded rat eat rat property market that you find in Canada.

    Learn how to value a business and you avoid the situation where you are tracking indexes (6% per year, every year, for the rest of your life). They are like living in a retirement home. (You know the food is coming, it’s not very good, and you have to eat it). The greatest investors all have the same one attribute that made them special: they have a talent for noticing mis-priced equities.

    So for example if you were playing the contrarian field, today you would be: buying shares of BUD (ridiculously underpriced due to an acquisition that put its price to earnings ratio up into the 200’s (but it is not really true!), shorting the crap out of snapchat (a half billion US per year in losses and it’s valued at $25 billion US?) and having a very close look at Canadian sub prime mortgage lenders (another target for the Big Short). There are tons more out there. You can make a sport of it. All based on a very simple formula (no math needed): Own the means of production, of the products consumed by the masses.

    That’s when you’re broke, starting out, and daring. Once you have a few mil, accumulated by partaking in contrarian investing, then you get more cautious. Like the good folks who run this blog, you stick your cash in safe stuff, run your risk margins, chart everything and try to stay on the upwind side of the path of risk and rewards.

    I would say right now if you are trying to be cautious, it is a very good time to purchase bond ETFs and ETNs. They are cheap and undervalued. Right now anyone running a portfolio should be re-weighting themselves into bonds and selling their stocks (markets are about to undergo a 10% correction on the negative side, as they are over valued). Might as well take the 10% before it dis-aparates and stuff it into some currently juicy yield bond ETFs before they go back up in price again.

    House: I have three. All owned. No mortgages. They’re sentimental. It is a hard thing to talk about. There is this ridiculous amount of money tied up in an asset that costs money to keep every year. If you look at renting, it makes way more sense than owning the house, in the Toronto market anyway. But he is US, so that is different. They have a lot more available land there and houses are cheap depending on where you buy them.

    I would not look at house price appreciation as a “thing”. Really, it is stupid as you just talk to people about your “net worth” but it is all tied up in real estate that you will never sell and it is just talk. The higher the house price, the higher the property taxes. If it makes you happy, then as Sheryl Crow used to say, it can’t be that bad. But a house is not an investment, it is a liability. The same as a car, a boat, a trailer. You will never sell it, and you will never make any money off of it. And it doesn’t matter what it is worth.

  18. What about rent inflation? If you are conservative about factoring in zero depreciation on home ownership, shouldn’t you at least factor in some type of rent inflation (conservatively 2-3%)?

    1. The key here imo is the point above ‘in the Toronto market’ in the UK its a very different kettle of fish.

      House prices are going up 8% to 10% a year and the rent on my house for example would be 1600 to 1700 a month vs 1100 on the mortgage. Different markets different factors at play

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