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To switch things up, we’re guest posting on Financial Samurai today, one of the top personal finance blogs we read on our way to financial independence.
If you haven’t read Financial Samurai before, the blog is written by Sam, who after working 13 years on Wall Street, retired from the corporate world by cleverly engineering his own layoff and building a passive income stream of $70-80K/year. He regularly blogs about how to buy rental properties, stocks, bonds, and CD’s so you can do it too.
And here’s the full post:
The following is a guest post by Kristy from Millennial Revolution. Kristy and her husband have been all over the Canadian news recently for denouncing homeownership. They considered buying a Toronto property in their late 20s when they realized they couldn’t get anything nice for ~$500,000. Instead of buying, they saved as much as they could, rode the bull market, amassed a $1M investment portfolio, and quit their jobs to travel the world by age 31.
Given I’m pro homeownership because I’d rather be a price dictator than a price taker, I thought it’d be great to get the other perspective. Their blog is written with an irreverent flair that I enjoy. It’s one of those things that happens when you become financially independent and don’t give a damn what other people think. So for those of you who are pissed off about ridiculous home prices in places like San Francisco, Honolulu, London, Sydney, Mumbai, Hong Kong, Vancouver, Toronto, and New York City, know that homeownership isn’t the end all be all!
Disowned For Being A Millionaire: Why I Still Won’t Buy A House
When I first told my mother I was a millionaire, her response was:
“So what? You don’t even have a house.”
Didn’t matter if the houses in Toronto were unaffordable. Didn’t matter if I didn’t want to work a stressful job I hated just to pay off a massive mortgage. Didn’t matter if I have enough money to live the rest of my life with complete freedom, never having to set foot in a corporate prison again.
Without a house, I was a loser.
My parents and I barely speak anymore. Other than the occasional e-mail or phone call, we haven’t seen each other in a year. What’s the point? It’d just be the same fight every time.
My friends think I’m nuts. They think I’m anti-house for the sake of being anti-house. They think I’m having SO much fun being a contrarian. But what they don’t see is that, as the child of Chinese immigrants, it’s sacrilegious to not buy a house. Home ownership is part of our culture. It’s part of our DNA. Financial Samurai can back me up here. In Asian cultures, paper assets aren’t real. Only things you can touch with your hands are.
So even though I knew that logic and statistics and cold hard MATH told me I was right, because of my culture I had to get disowned for believing that the purpose of money wasn’t to buy granite countertops, hardwood floors, or soaker tubs.
The purpose of money is to buy…
Time.
Time is our most precious resource. We can always make more money, but we can’t make more time.
So I decided to buy back my time. Instead of paying off a mortgage for 30 years, waiting until I was 65, only to get too sick and too bedridden to travel, I decided to build a 7-figure portfolio, live off the passive income, travel the world, volunteer for non-profits, and be an author/blogger instead.
And here’s what I’ve learned about the benefits of not owning a house and why I was willing to get disowned for it:
Benefit #1: You are NOBODY’s bitch
When you own a property, all your money is stuck in the house and because you can’t sell a brick or window to pay off your house, you have to continue being a bitch to your boss in order to pay the mortgage, insurance, and property taxes.
And if you decide to rent your place out, you become a bitch to your tenants. Because of rental laws that somehow heavily favor deadbeat tenants who refuse to pay their rent over the property’s rightful owners, you somehow live in fear of them! After all they could take a claw hammer and destroy your life savings in an instant.
When you rent, if you don’t like your job and find a better one somewhere else, you can leave. Even if it’s in a different city. Without the house tying you down, you’re free to move anywhere for better career opportunities.
And sure, you can argue that as a renter, I can get kicked out whenever a homeowner wants to sell. BUT, as a renter, I can also take advantage of moving to “renters market” areas and take advantage of the high vacancy rates. I can also rent an apartment building, where the chances of the landlord kicking out the entire building to capitalize on the housing market is next to nil. As a renter, my choices are endless.
The last three times I’ve left my rentals, all three landlords begged me to stay. They kept throwing irresistible offers at me, like lowering my rent, and when that didn’t work, they even offered a special deal to a friend if I could recommend someone trustworthy. Guess they’ve been burned more than once.
Property prices have risen way beyond the 2008-2010 financial crisis levels
Benefit #2: You won’t be hit with a wealth tax
When you are a homeowner, you have to pay property taxes. And if the value of your home goes up? Even HIGHER property taxes. Oh and if out of the blue, the government decides to slap on an additional “land transfer tax” or “15% foreign ownership tax” like they did in Vancouver? Too bad, you’re paying for it.
Houses are the perfect vehicle for the government to screw you, because they know you’re landlocked and have no choice.
But when you’re an investor, you can shelter your dividend income BIG TIME! You can make up to $37k each in qualified dividend income, and pay NO taxes in retirement (since your earned income drops to 0). When you’re working, you can take advantage of the lower qualified dividend tax rate.
And even if they pull a Cyprus-style wealth tax, they might get you once but after that you’re going to pack up your money and ditch the country. With your house, you have no choice but get screwed year after year.
The system is designed to reward investors, and punish homeowners.
Benefit #3: You have ALL the TIME in the world to do WHATEVER you want
When you’re a homeowner, there is always a lawn to mow, a porch to fix, a roof to re-shingle, a driveway to clear. Because let’s face it, unlike a portfolio, a house deteriorates over time and parts need to be replaced.
And hey, if you’re handy like Financial Samurai and love fixing things, great! But I’d rather use my time to travel, spend time with my family, and write the next bestseller (HA! Yeah right). Sure, I could pay a property manager and hire contractors to do all those things, but that still involves oodles and oodles of time and effort to find, vet, and manage contractors, and that is not my idea of fun.
My time is too precious to waste on home maintenance and babysitting contractors/property managers.
Benefit #4: Your assets are liquid
Stocks are easy to buy and easy to sell. Within seconds, you could be out of the market.
Not so with a house. You have no control over who moves in next-door (ever seen the movie “Neighbors?” Would YOU want frat boys moving in next to you?). If they start making your life miserable and you want out? Your house could be sitting on the market for months.
What if you bought the house at the peak and now you’re in a down market? Well, guess what? All your friends and neighbors are also trying to unload their houses, so good luck trying to get out. Your house will be sitting on the market, while it continues to lose value, and you continue tearing your hair out. And when you do finally sell? You get slapped with another 5% in closing costs.
Benefit #5: You are diversified
With a diversified portfolio, you are hedging your risk. As stocks plummet, inversely correlated assets like bonds will rise. And if you own REITS, you can even take advantage of a rising real-estate market, without having to put everything into 1 asset.
With a house, all your wealth is stuck in 1 asset. If that falls, you’re screwed.
Benefit #6: You have no maintenance costs
It costs next to nothing to own and maintain a portfolio of low-cost Index ETFs. Maybe a $5 transaction fee here and there, and a rock-bottom 0.1% MER. But for a house the costs just never end: property taxes, insurances, maintenance, lawyer fees, and closing costs when you sell.
On the contrary, a portfolio pays YOU, not the other way around.
Benefit #7: You don’t need to time the market
If you’re doing long term investing like me, you don’t have to time the market. Simply buy low cost index ETFs, and rebalance periodically. This ensures that you buy low and sell high. And with the portfolio structured to pay me enough dividends to cover my living expenses, I never have to touch the principal. This means I never have to figure out when to buy or sell. It’s a no brainer and very passive.
With housing, however, you need to time the market. You need to know when to get in, and when to get out.
The difference in US and Canada home prices is large. Is it because it is comparing median versus average? Or is something else going on?
Housing: Is it EVER a good idea?
Now, before you all get out your torches and pitch-forks, let me explain. I’m not saying all houses are a bad investment…I’m just saying they’re a bad investment for MOST people.
Take Financial Samurai, for instance. If we ever opened up his laptop, I guarantee we’d find reams and reams of spreadsheets and analysis on every house he’s ever invested in. To put it mildly, the guy does his homework. Here’s an article detailing his insanely rigorous method of finding good tenants. Here’s an article talking about how moves in the LIBOR affect adjustable rate mortgages.
He knows what he’s doing because he puts a ton of thought into any financial decision before pulling the trigger. Someone like him SHOULD be investing in real estate.
The average real estate “investor”? Not so much. Armed with the knowledge that “houses always go up” and that “rent is throwing money away,” they just put in a bid after a 10-minute inspection. That can get you into a lot of trouble, as a reader on my blog recently learned when they bought a luxury condo in Edmonton, Alberta right before oil crashed 70% in value.
So if you live and breathe numbers, know how to read a US Treasury yield curve, and like spending your time doing house maintenance, I’d say housing is a good bet for you.
But if you’re dumb and lazy like me and would rather spend your time traveling and doing what you love, renting and index investing is a better way to go.
Even if you get disowned for it.
Discussion Questions:
1) Why is Canadian real estate so much more expensive than US real estate? It’s cold half the year, oil prices have taken a hit, and you seldom ever hear about new innovation or huge company growth stories like Amazon, Google, Facebook, etc. For example, Vancouver is more expensive than San Francisco, yet I don’t think they have nearly as many six figure jobs. Shouldn’t Canadian real estate trade at a discount instead?
2) In a bull market, almost all investors win. If a $500,000 Toronto property was purchased with 20% down in 2012 when Kristy and her husband were considering, and the rest of their money was invested in the stock market, how would their net worth differ? Let’s do the math.
3) Do you think the culture of homeownership will ever fade to the point where the desire to rent and invest in the stock market will overtake the desire to own and invest in the stock market? Does homeownership really tie you down more than renting?
4) Do you think the desire to live in a nicer place has faded for the desire to be more mobile and free? For example, Kristy and her husband have been living in a one bedroom apartment or smaller since college and are fine with it. I, on the other hand, got sick of roommates after I turned 25 and am currently looking for a 40 jet, out door hot tub that seats five so I can soak my muscles after a long tennis match and drink a beer while watching the sunset with friends. Is this abnormal?
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A house in Canada is worth 35% more than one in the USA. Does your numbers take into account our Canadian Peso?
That graph is normalized to USD, and should in and of itself be cause for alarm. Is our economy performing 35% better than the US? Are we 35% nicer to live in? An American couple we met told us they can pick up a 4-bedroom house in North Carolina for $108k USD. Right now they’re looking at our housing prices and thinking we’re insane.
I think buying house make sense if you are living in cheap real state market like most of Texas. But buying in places like NYC or Bay Area does not make any sense.
Kristy,
Nice write-up. This goes to show that the way to FI is through portfolio investment. One will never run out of fund with the additional cushion of emergency fund in cash.
In contrast, such approach is well despised by ppl whl still view the property imvestment as the way of FI. It’s quite difficult for such group of ppl to ditch the property approach for portfolio investment as another viable alternative to FI.
Guess that there is only this much one can do.
Ben
I know very smart people (engineers who normally live and breathe numbers) who got suckered into believing this despite the numbers. Reinforces my belief that housing is a cult.
Houses are anchored to the ground, immobile and highly visible.
And the folks who “own” those houses are chained to them with their mortgages, their careers, their desire to look good, etc, etc.
Houses are the easiest and most obvious targets for broke governments to exploit.
Homeowners might be more vulnerable than they think. A rise in taxes, an increase in basic service fees – what can they really do about it? Sell and move somewhere else? And what if the next government ends up doing the same thing?
A handy rule: the majority is ALWAYS wrong. If you find yourself running with the herd, maybe it’s time to look the other way…
Andrew,
I totally agree. It makes no economic sense to own a house which resultsin bearing the burden of housing loan. As such, it is more prudent to rent. Living normadically enables one to move at short notice.
Ben
Jeez, where were you two when I was trying to convince my parents?
I think like any financial decision you:
(1) first have to do some serious thinking about what you want out of life (maybe a lot of travelling? a lot of pets? a lot of eating out with friends? a big family?). Most people don’t really know what they want, what the end goal even is, other than a vague “being happy” and “starting a family”, if you don’t have a clear idea of what you are aiming for then you can’t plan to get there;
(2) understand discounted cash flow analysis, basic financial analysis and basic taxation and use these tools to project where different choices will get you. As Kristy pointed out a house is not a ‘good’ or ‘bad’ investment, it is a set of cash flows and obligations that is unique to every property, if that combination is something you want out of life then do it, but I think if most people understood what real estate (both living and being a landlord) entails they’d pick a simple low-cost ETF portfolio and spend the rest of their time enjoying themselves.
First you have to figure out where you are going and then figure out how to get there.
The ‘wisdom’ of previous generations gets passed down with good intentions but typically is: (a) usually out of date (b) wasn’t very good analysis even at the time (c) doesn’t take into account that people are unique individuals with different desires and values and (d) is often more a form of judgement than an earnest wish for the person’s happiness and well being.
I totally agree with J.
I think many people don’t spend much time ever thinking about what they really want out of life. Most people also don’t seem to have the basic math skills to analyze the value of their time. And humans are herd animals. Most just flow to the point of least resistance. Hopefully, brave and witty people like Kristy can at least get people to start thinking about what they really want out of life and to think about what truly makes them happy. Freedom to do things that gives your life purpose and freedom to spend as much time as you want with the people you love seems pretty conducive to happiness in my opinion. No where in that last sentence do I see a need to have a house!
I love everything about what you just said!
From Steve Saretsky’s Twitter feed today (referring to Vancouver real estate):
“all areas.. Sales for first 11 days of sept are lowest in last 10 yrs”
https://twitter.com/SteveSaretsky/status/775391052781924352
It’ll be interesting to see the breakdown of the numbers when they get released.
That IS interesting! Thanks for sharing. Let’s see what happens to the prices going forward. They say real-estate prices are sticky coming down but if sales have seized up, that is NOT a good sign.
I’ve been reading this blog since the Bearded One linked to you, and what I can’t get over is how often you two need to defend your position on housing, because of how many people insist on coming here (or writing blog posts/articles about you) and arguing with you about it ad infinitum.
Even if their cherry-picked numbers for housing were realistic (they’re not), at best you’re 5-10% better off. That seems like a small price to pay to not shovel snow, clean gutters, fix shingles, replace hot water tanks, and chase down deadbeats for damaging your basement. Of course, in their analysis, they never assign a dollar value to all the time wasted on those activities, either.
It’s like the people who come here completely gloss over the whole retiring-a-millionaire-at-31 part.
Meh. It’s the internet. People who have 100% of their net worth in housing NEED to justify their decision. I get it. Doesn’t change the fact that I’m living the life of my dreams and don’t give a rat’s ass which way the housing market goes.
Thanks for your support though! Being a contrarian is NOT easy, but it’s served me well so far.
So the other day at dinner your story came up with my parents, as my mom had read the CBC article.
They’re better than most people in regards to financial literacy, but my Mom had questions like…
1) How are they able to travel for that much a year?
I introduced her to travel hacking, and really…depending on where you are, it’s sooooo much cheaper for everything, beyond flights to get there from Canada.
2) What about children?
They can always do that later, and actually spend time with them should they choose.
3) Who would hire them back if they want to rejoin the workforce?
Well, you guys have many options now with what you want to do, and if you DID want to go back to the cubicle life, you have skills that are in-demand.
She works at a super bureaucratic-heavy organization and doesn’t really get this world you guys live in. My Dad has been retired since he turned 55 4 years ago (way better than most) and she still works (I think because she wants to). She was a bit shocked when I told them that despite always being quite frugal, had they invested in index funds years and years ago, they could’ve easily retired in their 40s.
I think my Dad gets it, my brother is a bit skeptical, but I’m not wasting time trying to convince them otherwise. I told them, “Here are some blogs online, go read them if you want, or don’t.” And that was that.
Those are all good questions and responses. And congrats to your Dad for retiring at 55! I get that this whole early retirement thing might be foreign to them (my parents still don’t get it), but I think, overtime, as more and more people get sick of working the 9 to 5 and having very little job stability, they will seek alternatives and it won’t seem so shocking any more.
Paul, nice comment.
1) On travel hacking – People are shocked when I tell them I was living in Thailand (this was back in 2003) on £500 a month. Even recently in Philippines we were living on less than £1000 a as a couple. AirBnB is EPIC in Philippines – downtown Manila apartments for $30 a night that would blow your mind. We spent a month there – flights were £800 each. We did a LOT of island hopping. Total bill was under 3K but I’m convinced a more normal lifestyle there would be well under a £1K
2) I’ve got two. No comment! 😉
3) On ageism. It does exist. I’m in the software industry and at 56 I have experienced ageism from time to time. However I have never had any issues getting work. I thought taking 6 months off recently would be the death of my career – in fact I was inundated with contract work when I returned. If you’ve got the skills this is a non-issue I think. I worked hard at “getting the skills”.
As has been said on this site – let the results speak for themselves.
I’m Asian as well and there is definitely cultural opposition to FIRE! Not so much the FI portion as much as the ER portion. I just returned from a visit home and was reminded of the kids I grew up with who are now extremely successful (have their own medical practice, partners at law firms, dot com millionaires, etc) and it seems like the idea is just to be become more and more successful for bragging rights, not to just have “enough.” Success is measured by titles, degrees and accomplishments, not early retirement (which would be considered “lazy”). Still trying to figure out how to navigate this and overcome the social pressure/brainwashing I was raised with!
You speak the truth. It’s hard having that kind of pressure. I have a friend who became an engineer to appease her parents. After that, her mom started nagging her about getting married and having kids. So she did that. But then her mom started nagging her about getting promoted into management at work. It never ends.
Trying to derive happiness from pleasing others never works. They’ll just find something else to judge you about.
That’s why I stopped caring what other people think just did what made sense for me. Now I’m really happy and have zero regrets.
I often think your twenties are for undoing the damage school does to you and your thirties are for undoing all the damage your parents do to you. 😉 How does the song go? Let it go, let it gooooo…. 😛
On the other end of the FI spectrum is the millennial in the article below. He isn’t buying a house in Toronto either- however that’s the only thing the guy is doing right IMO.
He lives at home with his parents and apparently spends every dime of his $130K salary on a very lavish lifestyle of food, booze and high-end travel. Yeah, it’s fun to live the luxurious life but when he turns 40 and realizes he’ll have to work till he’s 70 I think regret will set in hard. Pay now or pay later.
http://torontolife.com/city/life/spend-generation-manifesto/
I agree with you that you can shoot yourself in the foot with rent too. That’s why some people say a house is a forced savings plan. But if this guy bought a house, he’d probably buy all sorts of crap to fill it with. So if someone is irresponsible financially, doesn’t matter if they rent or buy, they will always be shooting themselves in the foot.
Good one Firecracker. I used similar argument even 10 years ago when Washington DC market was like your Toronto today. See how the story evolved here: http://tenfactorialrocks.com/buying-vs-renting-a-capital-tale/
I am glad I had the sense 10 years ago, and my decision has been vindicated ever since. Hope you don’t have to wait 10 years for people to agree with your decision! But then, so what, you don’t care what they think anyway. Good for you!
Wow, very eye-opening story! I had no idea how much home values dropped in the DC area. This is why I think Americans are much wiser about home purchases. Us Canadians haven’t felt what it’s like for housing to crash, so we’re still very oblivious. Thanks for sharing!
Thanks FIREcracker. Give it time, Canadians will learn the same lesson we did almost a decade ago.
Answer to #1: Collatoralized Debt Obligations (CDOs), Canada-Style
http://www.theglobeandmail.com/real-estate/vancouver/out-of-the-shadows/article31802994/
And of course, you know the good folks at CRA are just sweating it (and likely have been for quite awhile) since if they effectively crack down (or even appear to be effectively cracking down), that bubble might burst…yet the bubble is unhealthy. We all know that the bubble is unhealthy, yet the cure might wipe out a wide swath of innocent bystanders too. Sigh…I predict fun times ahead.
Sam sent me that article and I was SHOCKED. Why would the CRA just brush him off like that? Very shady stuff going on in Vancouver.
I also read another article where a Vancouver real-estate agent threatened a buyer with the Chinese mob after he reporter her to the real-estate board. Apparently she’d flipped the same house several times in the same year. Feels very much like a ponzi scheme.
LOL, you haven’t been reading the Canadian press linked to the Panama Papers obviously. The CRA was gutted under Harper. They’re puny and generally outclassed (sound familiar? US CDO bubble anyone?). Also, stop and think for a moment who history lauds and who it castigates. Greenspan was loved by the press…yet it was he and his ilk that allowed the US bubble to continue to expand as far and as fast as it did…with the resulting pop, of course, being that much more damaging to many. The CRA too must walk the line between its mandate of enforcement and the ultimate priority of any government…to not be the ones who caused the music to stop. Because, let’s be realistic – big bubbles do not ever lead to ‘soft landings’.
You have a solid position. There is no doubt about it. You’ve done an amazing job of explaining index investing and its benefits versus home ownership. I can attest to the costs involved in home/property ownership, and I completely agree that there is nothing more valuable than free time. Income properties have afforded me plenty of free time which I cherish. Quite frankly, I don’t know how people are able to get up five days a week or more to work 9-to-5. Brutal.
I can always use more free time and you’ve provided a good basis for incorporating index funding into my overall wealth strategy.
Great blog!
I’m sorry that your parents are close-minded, but it’s their loss.
Thanks, Tommy! Glad you are sold on the indexing strategy. I mean, it IS recommended by Warren Buffett, and he seems to know a thing or two about investing 😉
The issue with the 9 to 5, is that it’s no longer the 9 to 5. For IT people, it’s more like 9 to 8 or 9 to 11, plus weekends, since we’re expected to be on call to deal with tech issues. Now that we have the internet, we’re expected to work around the clock. This is something that our parents can’t quite understand because I don’t ever recall my dad having to work after leaving the office.
Each generation has a different set of issues, so we need to come up with our own solutions. Solutions that worked for our parents no longer work for us. This is what I’m trying to get my parents to understand. Hopefully, one day they will get it.
The thing that amazes me about houses is how much people will pay for something that overwhelmingly is of poor quality. I’ve very much become a person that will pay for quality over quantity for things and the lack of option to do so is making our new renting situation all the more appealing.
Sure there are a few builders that in the past two decades have build OK homes in Ontario cities, but based on my own observations over the years as prospective buyer, prospective tenant, or just a nosy open house attender is that much of the past two decades has been a rush to slap up crappy homes with a superficial trendy addition, to give a good first impression and a tidy profit.
I’ve seen new model homes with creaking hardwood floors because the subfloor was poorly built, talked to contractors replacing kitchen cabinets less than 7 years old because they were cheap and insufficient to hold the eye catching granite that the builder installed. Drafty windows, flimsy window frames and moisture between the panes in under 10 years. Super thin walls to meet the minimum building code requirements so that you feel and the windows themselves are low quality, heat losing and due for replacement after 10 years, crumbling shingles at 12-15 years. Never mind the undersized air ducts that prevent air conditioning or heat from reaching the second floor adequately.
And this is pride of ownership?
And as for the whole touchy feely thing that is supposedly lacking for stocks… I’ve recently found the headquarters for a few of the companies that comprise parts of my portfolio. Short of being asked to leave by security, I could certainly go feel the brick or two that I own, and even talk to employees as they leave. I could ask them if the contribute to the company making money and then thank them for working for me. Very abstract indeed.
“a rush to slap up crappy homes with a superficial trendy addition, to give a good first impression and a tidy profit.”
Yup. This is what I found too. Saw a flipper renovate a house in less than 2 months and re-sell it at 150% of the purchase price. I tripped 3 times on my way in! Stupid stairs weren’t even at all and the floorboards were creaky! Nobody seemed to care though. Sold over asking after multiple bids. I bet the owners are having a field day paying for all the renovations to be re-done again. Glad I’m not them!
I definitely agree with all the points you make about housing, especially in over-priced places like Vancouver and Toronto, and no doubt you guys made the smartest decision in your situation! However, I am curious whether you would ever consider buying to be a good choice, in other areas of Canada where house prices are more reasonable? Not sure if you’ve covered it already in one of your previous posts (I haven’t had a chance to read all of them yet), but is there a certain ratio (e.g. rent cost vs. house cost, or house cost vs. household income) where you believe that buying DOES make sense?
We are actually considering buying a modest townhome in the near future–I would never do so if we lived in Toronto, but houses around here are not so bad. We could buy a house that would cost less than 2x our total pre-tax household income (after tax, it’d be a bit over 2x). Reading articles on other sites, it’s commonly said that houses should be no more than 3-5x household income, so based on that, we are well within “safety” range. However, I’d prefer to err on the more conservative side, so I’m curious about your thoughts on this matter!
(Of course, I realize that with a house comes many additional costs. We hope to minimize these though, by buying a small place and therefore less property taxes/utilities, re-using furniture we already have instead of getting new stuff, buying a newly-built home which will hopefully reduce maintenance costs, planning to stay here long-term to reduce the impact of one-time transaction fees, etc.)
2X your salary is pretty good! And if it’s a small house and you are buying less than you can afford, the costs should be manageable. If I were to buy, I would do it only if the monthly rent was 1% the cost of the house (ie, $1000/month rent on a $100K house). This is a rule of thumb I got from Paula Pant (affordanything.com), one of my favourite finance bloggers. She’s really conservative about the Cap Rate, so this rule gives enough margin to cover unexpected maintenance costs.
Thanks for the reply and the link! I will definitely go check out Paula Pant’s blog as well.
Hmm, in my area rent is pretty cheap as well so it is definitely well below 1% of the house cost–looks like I will have to do a bit more in-depth math to see if the home purchase is worth it then.
(I know your blog is all about NOT buying a house, but I think it’d be interesting if you guys do a future post showing the math on when it *would* be a sensible idea. It might also serve as a good comparison to help show some of the skeptics out there just how out of whack some of the house prices really are–if they see that they are paying, say, 5x what a sensible amount would be. To be honest, watching the real estate craziness in Vancouver/Toronto, I am just relieved that I left Toronto after graduating university. Although, I do realize that many people have to stay in the GTA for jobs etc…)
“I think it’d be interesting if you guys do a future post showing the math on when it *would* be a sensible idea.”
Good idea. Will do some brainstorming for a future post.
Enjoy your blog. Agree with your premises. But wanted to comment about areas on the fringe that you perhaps have not experienced yet.
I left the workforce in my 30s about 9 years ago, with a cushion of 120x expenses. I’m currently sitting at 100x: my net worth has increased since then, but my expenses have gone up 50% due to getting married and having a kid. I’m still in the same house (paid off) and driving the same car.
After nine years, I have found the following consequences of not having a regular huge paycheck and a steady job:
1. Can’t take advantage of market corrections as well.
2. Even with a large net worth, difficult to buy real estate without paying all cash. Can’t take advantage of real estate downturns as well.
3. Cost of living is increasing much faster than reported inflation rates in my area, especially for education, health care, and dining out.
4. Health care is out of control in the U.S. I just had a bout of appendicitis and so far the bills total $60k for treatment, but more are coming. Not sure how much of this I have to pay out of pocket yet, but I wouldn’t be surprised if it is in the 5 digits. In US, individual health insurance plans are inferior to employer plans.
5. Having a kid may change priorities. You may want to stay in one place and not always be on the road in a foreign or undeveloped country. There are all kinds of unknowns introduced, including the personality/health/development/social considerations/temperament/educational needs of the child.
6. Without those regular high savings deposits, after a few years you’ll find that your old associates/family/friends have all passed you up financially as they’ve been able to add to investments while you’ve just been beating inflation. You may or may not care if you have enough already, but in my case it raises concerns about future purchasing power. I used to be able to afford a luxury purchase (e.g. a vacation home)… not so much anymore.
7. Whereas downturns didn’t used to matter much while working, when retired they are harder to ignore. I left the workforce the year before the financial crisis, and watched 120x in expenses drop to 70x… not fun. I think at the time I had at least 10-20x expenses in cash, but it was very hard trying to figure out when to put it to work, I probably averaged it in too early in the downturn. With a regular income, you don’t really have that problem.
8. I’m sure there are many others, some which I haven’t experienced (yet).
All very good points.
Here are my thoughts:
1. That’s true, but I’ve left 10% of my portfolio is cash. I can use that to take advantage of the market downturns. I can also re-invest dividends.
2. But why would you need to buy real-estate? If you move to a lower cost area, the portfolio pays for you rent.
3. I’ve actually found the opposite. When you’re not working anymore your costs drop (no more daily commuting, childcare costs, dry cleaning etc). I also managed to travel the world on 40K, so I totally don’t get it when people say their costs go up after retirement. Maybe they’re just pickier than me.
4. Can you not use ACA/Obamacare? Once you retire your salary essentially goes to 0, so you should qualify for this benefit.
5. Again, this is if you choose to live in an expensive area. There are many small cities in Canada and the US with a low cost of living, so it doesn’t mean you have to move out of the country.
6. Okay, if you have “vacation home” as a need in retirement, we are extremely different people 🙂 As for comparing yourself to friends/family, who cares? That’s just the old “keeping up with the Joneses” talking. If your derive your happiness from comparing yourself to others and needing acceptance from them, you will never be happy. Working or retired.
7. This can be mitigated by structuring the portfolio so you can live off the dividends and fixed income during downturns. The capital value can drop and it won’t matter because you don’t need to depend on it to live. It’s also a good idea to keep a portion of the portfolio in cash as well.
I think the main take away is this “the less flexible you are (need to live in a certain city, need fancy things, etc), the bigger the portfolio you need to retire. As we have seen from other retirees (mr.money moustache, justin from rootofgood, madfientist, etc), they are doing just fine using the 4% rule and their costs have not inflated after they retired. Justin has 3 kids and raises them on 40K/year. So I don’t think kids are the reason why you can’t retire early. I also read that in Canada, the average retiree household income is $42K, and they are doing just fine.
Another point I want to make is that when you retire young, it doesn’t mean you’ll never work again. It simply means you can choose to work as much or as little as you want. And quite a few early retirees have made MORE money in retirement than when they were working (Mr. Money Moustache, Financial Samurai).
Just curious, which city do you live in?
Appreciate the detailed reply, love the dialogue.
1. As I said I actually had 10-20x expenses in cash during the financial crisis. I bought as the stock market was falling, but I remember DCA’ing in too early as I didn’t anticipate a 57% decline in S&P 500. It was very difficult to time, having a regular paycheck would have helped here as I could have kept pouring limitless money in.
2. I actually am a real estate vs stock market agnostic, I own plenty of both and have done very well with both. I bought two rental properties all cash during the financial crisis and their values have more than tripled while providing a very good stream of rental income. I waited to buy until my annual net rental income was about 10% of the investment I put in. As with anything, I don’t see real estate as a money pit if prices are good, so I definitely would want to buy again if there is another similar downturn. But I’d have to do it with all cash (hard to get a loan without that W-2 income).
As for the home I live in, it also has tripled in value since I bought 15 years ago. I have history in this area since childhood (even though I’ve spent a lot of years all over the world, including 4 years travelling after ER), most of my family is in the area, love the weather, love the food, love the cultural diversity, and love proximity to the beach, skiing, and nature. That’s why I’m not motivated to move. If I were still single in my 20s, no problem stretching that 4 years abroad into 10-15 years.
3. Main reason for my costs going up 50% is because I got married and had a kid. But it’s been 9 years too, so almost half of that 50% is probably just due to inflation. I don’t dispute at all that I could move out of the country or to a cheaper area and live fine on 40k a year, but for reasons I’ve mentioned, I have chosen not to.
Every kid is different. Maybe Justin’s are older and well behaved (and school age?)? Our kid was at home before I put her in daycare at 3 yrs old. It’s good for her socialization, and I’m actually able to do things again during the day. It’s hard to work on anything when there is a 2 year old hanging on your leg and banging on your keyboard when you need to get something done, and most time is spent playing with her, reading to her, cooking for her, talking her through tantrums, etc (she gets all of that at daycare, along with a bunch of playpals her age). But my average no frills daycare facility is $18k a year. Her health insurance adds about another $4k a year. Then there’s dentist visits, swimming classes, etc.
Jeremy’s blog has really slowed down after they had a baby…
I don’t really know enough about other peoples’ family lifestyles so I can’t really comment. I don’t know how healthy they are eating or how their kids are developing and whether going to the best schools and exposing kids to a lot of activities like sports and music and dance and art makes any difference in the end… still figuring those things out myself.
4. I do use ACA/Obamacare. In my situation it’s not all champagne and roses. I had health insurance for the whole family before ACA that covered 100% for about $1100 a month. Once ACA came along, those plans were cancelled and I was forced onto ACA. My costs went up to $1400 a month for a platinum plan (covers 90%) that had worse coverage than what I had. The following year, the rate was increased to $2300 a month for the same plan. I had to change to a silver plan, which is now $1100 a month but only covers 70%. I get no subsidies because my passive income is too high… $250k last year.
Admittedly I’d be fine for now wrt health insurance if I didn’t have that passive income. However, relying on a government plan with government subsidies and rates that can go up over 50% in a single year, and that is vehemently opposed by a lot of politicians does not give me assurance that it will be an option two years from now. Always better to rely on yourself.
5. Agree, I chose to live in this high cost area just because it’s so damn nice and has good Chinese food. Areas with good Chinese food happen to be the most expensive…
6. Agree. However, as early retirees we are more susceptible to being knocked out by a couple of bad luck events (e.g. a family health issue, or accident, or lawsuit).
7. Yes, your portfolio can survive like that, but the opportunity to make outsized gains by investing paychecks is no longer there. Just think how much of your portfolio was created from contributions rather than gains… and this is in an extreme bull market.
How many Financial Samurais are there? My idol. I don’t think he is really a retiree though, he replaced a job he hated with a business he loves… semantics.
I live in SF. I guess that pretty much invalidates everything I just said, lol…
“I live in SF. I guess that pretty much invalidates everything I just said, lol…”
LOL. +1000 points for self-awareness 🙂
The willingness to be flexible and have a simple lifestyle, is the key to early retirement.
Exactly!
Another point to add is that folks don’t “own” their homes until they’re fully paid off. Until then, they rent from the bank–and pay an absurd premium to do so. For example, down in Connecticut, if you bought a $500k home with a 20%/100k down payment, 30 year term, and a 3.92% interest rate, you’d ultimately pay $280,853 in interest!!! That’s an effective interest rate of 70%!!! People rarely calculate their interest this way. If they did, they’d be renters fo’ life.
Very true!
this is the equivalent argument to “rent is throwing money down the drain!!”
If they bought the house and have a mortgage of 2000/mo and average rentals for similar properties are 2300/mo then they’re saving $300/mo plus the equity build up. Sometimes renting is better, sometimes buying is better, details matter.
Would you pay $500,000 (house cost) +$280,000 (interest) to own a $1.2M property (3% average increase for 30 years) while also paying less for shelter each month until that mortgage was paid in full? I sure would.
I might consider it if I planned to live in that house for at least 30 years, but I can’t imagine staying any place that long (I literally only know one person that’s stayed in their house that long). Plus, investing the interest, taxes, insurance, maintenance, repair and renovation costs in a total stock market index fund during those 30 years would would result in at least that much in liquid assets, and historic returns suggest quite a bit more. I’d rather have more stock in my portfolio than a house that simply kept pace with inflation. I agree that no matter what, you have to run the numbers. It’s just the numbers for home “ownership” don’t work in my area if you’re more interested in building wealth.
I saw you guys on CBC’s On The Money. As a former home owner(?) and current apartment renter (Retirement downsizing) I couldn’t agree more with you. Home ownership is a form of corp’ brainwashing just like having a blowout wedding or funeral. We’re conditioned to this belief by the media too. Once retired and doing my own portfolio management I started to wonder what my results would have been if I’d invested the equivalent of all those home repairs instead in the stock market. It was at this time I heard of the Case-Shiller housing index in the US. I found out that even Robert Shiller didn’t own his own home for many years only to eventually cave in to his kids wishes to finally buy one. Even this economist regularly reporting on the housing market for years obviously didn’t think it was a good investment.
Thanks and welcome to the blog! It’s always good to have a previous home owner’s honest perspective on home ownership costs.
Whenever I hear from my friends “oh, my house is now worth 900K and I bought it for 650K, so I just made 250K, yeehah!” I roll my eyes so hard I almost pass out. Really hope these guys never start a business, because it’s like saying my company made $100K this year! Sure, it cost me $100K/year to actually run the thing, but hey $100K in profits! YAY!
So they’re up 250k on paper (a little more since they paid down the mortgage monthly as well) and you think they spent an equal amount on maintaining the property? I’d be happy for a friend who’s major life purchase was going so well.
I’m a home owner and a rental owner so maybe I’m biased here, but I think it’s important to note that when prices go up for owners like myself (property taxes for instance) then prices go up for the renter to compensate. It’s not like the owner is getting screwed and the renter is paying less than they would if they bought. There are many pros to renting, specifically mobility, but thinking costs don’t flow down to the renter seems flawed.
Your arguments are valid if you think of home ownership strictly from a financial point of view, especially in expensive Canadian cities. That said, it’s not fair to compare a tiny apartment to a roomy house that also includes a basement, a garage, and a large deck to relax and BBQ on, especially if you have a large family. I find houses to be more comfortable, and there are some other benefits like being able to own a dog, and being able to make a lot of noise without complaints from the neighbours.
That’s why I do analysis based on math not feelings. If you’re buying based on lifestyle choices, all the more power to you, but then it’s not an investment. It’s a lifestyle choice.
yes, that’s right. I consider buying a house a lifestyle choice. Different lifestyles work for different people. I might add one more thing that you didn’t mention about houses though. You can enjoy a house the moment you move in, even if you are carrying debt at the time.
There is an interesting theme that I’ve noted from reading different financial bloggers who, like you, have achieved FI at a young age: they all kept housing costs very low. Rootofgood owns a modest house. Same with MMM (even down sized, because he was too fancypants). Others, like you and gocurrycracker, are content to rent on the cheap. The list could go on.
All of these FI bloggers are exceptionally good at suppressing the natural human instinct to own an objectively nice home. Most people couldn’t be content living in a modest 1 bedroom apartment while making a 6 figure income. Kudos to you!
I accept that I’m making a trade off by living in a nicer house. Yes, I’ll work longer, but as a lifestyle choice, it’s worth it to me to be in nicer surroundings. Maybe someday, once the kids are gone, it won’t be worth it and I’ll move into something smaller and not as nice. But probably not.
The lesson, whether you’re renting or buying, is that if you want to be FI at a really young age it’s critical to keep housing costs low and invest the difference.
I’m so glad I’m not alone in trying to dissuade people from signing up for a lifetime of debt on an overvalued home. There is so much societal pressure to buy (not to mention from family and friends). I’m going to try to do a study on how much of a premium we pay for homes vs. renting because of stigma alone.
The thing that really gets me is that no one is really talking about the effect that rising interest rates will have on our bubble-icious home prices. It’s so easy to get in on $600k house when it only costs you $2,500/month – but what happens when interest rates increase just 2 percent? ANSWER: Home prices have to drop 20% to cost the same monthly amount.
So true. People keep blaming foreign buyers for the heated Toronto and Vancouver markets, but in reality abnormally low interest rates are to blame. What happens when the party stops? So glad I no longer have to care about which way the housing market goes.
If someone is going through the buy/rent decision process I would like to share a few points:
1) UK housing market is a bit different and very location-dependent. I moved to a much cheaper area by design.
2) Property taxes are different in the UK. There’s Stamp Duty (now called Stamp Duty Land Tax) which is only paid when you purchase. Then there’s council tax which depends on size of house but on average is probably about £1,200 a year.
3) If buying consider the possibility of rent-a-room. We have a four bedroom, four bathroom home, and one large bedroom is self-contained with it’s own bathroom etc. It’s easy to AirBnB it. This can easilyt bring in enough to pay half the mortgage.
4) I once made the mistake of being over-invested in property – it was something of a saga. On my next purchase I invested less than 40% of net worth in a house. I have about 40% in a mix of bonds/gilts/equities (roughly 50:50 due to my age). I hold far too much cash at around 20% but I sleep well at now, and am able to take advantage of any market downturns.
5) I understand the pros and cons but for me and my partner owning our home makes sense. As a remote worker I did the whole travel thing for years, was a PT, and have lived in various countries. We don’t travel as much these days but do escape abroad now and then.
6) Location is important – especially commute. We chose a location where partner can walk to work in less than ten minutes. I still work from home (although considering early retirement – it’s not been a priority as I regularly take mini-retirements of six months or so).
7) We bought new build. Having done the whole buy, renovate, trade up scenario many times before I did not want to do that this time. You pay a premium, but we got a really modern designed, very energy efficient home, with flexible living, and no work to do!
8) We share the mortgage, which is just less than we were paying rent. I have passive income from a side hustle that covers my share.
9) If a house purchase goes wrong and you have maybe 80% / 90% of your net worth in a home then you are in DEEP shit. I’ve known people who have their entire net worth in a home that they can’t sell due to the fact they are on a flood area now, and no one can buy because banks won’t lend on a property than can no longer get insurance. Frightening. Others have been affected by landslip or heave, or other issues which makes it impossible to sell. The only option in some cases is to hand back the keys, lose your equity and walk away. This is still the exception but if you are the exception it’s not nice…
Look, I know that she is your mum, but that kind of ‘black and white’ attitude when you told her you were a millionaire really makes me angry!
It’s alright for that generation, buying a house was easy…I live in London and once upon a time houses were cheap, not so now, the area where I used to live and was raised is so expensive now the locals can no longer afford to live there…it is the place where wealthy people live or people with such huge mortgages that they cannot afford to stop working.
I have heard a number of critics to your approach, and what they don’t seem to understand is that you have chosen to spend your time living your life, not killing yourself to pay for something that is over inflated in price due to market forces.
If I was earning £1,000 per year and a house in London was £1 I would buy one, it’s as simple as that, but I’m not going to attempt to get on the housing ladder if I have to kill myself to do it…life is way too short. I’m aiming to retire in 3 years, I don’t own a house either, my friends and family think I am mad but I don’t care. I just want to sit on a beach somewhere and plan my next move…Good for you…and me, in 3 years.
Nice write up! to each their own, and we should all follow our dreams. While Canadian house prices are crazy expensive, there are some red deer homes for sale that are worth looking into. It’s nice to have something you can call a home. 🙂
Just found this site, we are retired and live your lifestyle (or do you live ours?). Your comments on renting resonated with me. Neighbors hate when we move in(renters) and hate when we leave. You are correct, if you are a good renter, landlords hate for you to leave. In this day and age, you can rent anything, anywhere. Our only indulgence is expensive wine.
haha, looks like we’re lifestyle twins 🙂 I’m currently renting a new condo in Thailand with pool for $600 USD. Such is the difficult life of a renter 🙂
What do you think about the idea of owning an investment property which breaks even or cash flows slightly and using a heloc pull the mortgage interest payments out, to save on the tax and reinvest in etfs each month? It’s tricky to find any cheaper loan than a mortgage, especially considering the property may appreciate.
Hi! I know this is an old article but I really enjoy reading it. This site gives me an eye opener before making a big financial commitment. By the way, what are your thoughts on building your own house? I’m about to inherit a land in SE Asia I’m thinking about it might be a good financial move to build instead of renting a smaller house or an apartment. We will stay there for minimum of five years and if things didn’t work out well we might sell it and go back to the USA.