“Wait, you paid HOW much over asking?” I asked, incredulous.
“$75,000,” said Joanna, my ex-coworker. Despite both being in the same field and working practically the same job, Joanna and I are about as opposite as they come. She thinks the more expensive something is, the better. Me? Not so much.
I blew out a sigh. In a heated market like Toronto, bidding wars were normal. So I shouldn’t have been surprised, but still…
“What? 8 other people wanted it! Anyway, we got a good price. 650K is very fair for this area.”
“Did you have a home inspection done at least?”
She let out a derisive laugh. “HA! NO. You can’t have ANY conditions. It’s a seller’s market. Duh.”
Uh-oh. I winced, flashing back to the “devil house” we saw in 2011. Spending more than half a million and NO home inspection? I would be terrified.
“You NEED to get into the housing market now. In 5 years, this house will be worth a million, and you’ll regret not buying…”
That was back in 2011. Flash forward five years.
Joanna was right. Her house is now worth a million…if she sells. And if you ignore the real-estate agent fees, lawyer fees, and maintenance costs.
So when I went for a visit after coming back from our world trip, I fully expected her to be insufferable.
But instead, this happened:
“Wow, the housing market’s been crazy in Toronto. How much is your house worth now?” I asked.
“I don’t want to talk about it,” she said, glaring at me.
Wait, hold on a second. Joanna, housing-nut and rent-hater, who’s been on my back for the last 5 years about how I’ve been “missing out”, DOESN’T want to brag about her house?! Something was up.
“Okay, so would you say renting or buying is better?” I asked, trying to get the “I told you so” juices flowing.
She sighed, clearly annoyed. “It depends. If you bought, you have to pay for all sorts of repairs. Like for instance, I had to fix the front and back porch recently and it was NOT cheap. When you’re a renter you don’t have to do any of that.”
“Interesting. So how much does maintenance cost?”
“How would I know?!” She said, exasperated. “You can look all this stuff up online! Why are you asking me so many questions!? Is this some kind of interrogation?” She threw up her hands, and barged out of the room, while I sat there in disbelief.
I couldn’t believe it. Who was this person and what did she do with Joanna? I mean, I always knew her as a glass half-empty type of person and she does like to complain, but never about the house. I had no idea what changed.
I decided to ask her husband, Tony, what was up.
Turns out, ever since they bought the house, there have been endless headaches.
- Their neighbor is an elderly lady in her 70s who keeps backing into their car.
- Joanna’s afraid to trim the branches in her own front yard because the neighbors might complain.
- The backyard landscaping, which had been a main selling point when they bought the house, was too expensive to maintain. Now it’s just a bunch of weeds and an empty pond.
- The window broke from a fallen icicle in the winter, setting them back $5000
- The front and back porches were falling apart and had to be replaced. Another $10-20K.
- Their fancy gas stove broke down and they had to buy a new one.
And those are costs outside the mortgage, insurance, property taxes, and land transfer taxes. It’s been a giant money sink, and even though it’s worth a million dollars, they can’t sell it because they need somewhere to live.
On the surface, Joanna’s finances and mine look similar. She has a million dollar house and I have a million dollar portfolio. But are they really the same? Is a million dollar house the same as a million dollar portfolio?
Well, let’s see:
|Millionaire Portfolio||Million Dollar House|
|Work-life Balance||Pays you not have to work anymore||Forces you to work, in order to pay off your mortgage, property taxes, insurance, maintenance.|
|Flexibility||Allows you the flexibility to live whereever you want||Ties you to one location. Because you are forced to continue working, you have to stay in that city, regardless of cost of living.|
|Stability||By renting, you run the risk of having to move if the landlord doesn’t want to rent it out anymore||Buying a house lets you stay in one area and not have to move|
|Market Timing||Using long term investing, indexing, and rebalancing, you don’t need to time the market. Simply rebalance periodically, and as long as your withdrawal rate is 4%* or less, you win.||You have to figure out when to sell. If you sell too early, you miss out on further gains. If you don’t get out in a falling market, you will be screwed.|
|Cost||If you stick to low-cost index ETFs, your investment fees will be only 0.1 to 0.2% of your assets. Trading fees are around $20-50/year depending on your brokerage and how often you rebalance. Minuscule, compared to the cost of owning a home.||On top of property taxes (>1% in most cases), you also have to pay mortgage, maintenance, insurance, real-estate agent fees when you sell, lawyer fees, land transfer taxes, etc. And if your house goes up in value, so does your property taxes!|
|Diversification||Diversified across multiple assets like bonds, ETFs, REITs, preferred shares, etc||All your money is locked in one asset: a home|
Of the 6 factors above, the ONLY one where housing beats the portfolio is stability. A house lets you stay in one spot without having to move. So you’d better hope you have good neighbors…otherwise, you might end up stuck there for a long time, against your will, since you need to stay for at least 5 years to build enough equity to offset the real-estate agent fees, land transfer tax, etc of buying and selling. Also, if you’ve ever tried to sell a house after a bunch of frat boys move in next door, you’ll know what I mean.
And if you look at the other 5 factors, you will see that the million-dollar house doesn’t give you work-life balance, allows you very little flexibility, requires you to market time, costs you a lot of money, and is NOT diversified.
The most frustrating thing is that even if the house goes up in value, all that equity is locked up in the house, doing NOTHING for you until you sell. You can’t take off a brick to pay your bills. You can’t stop paying for the upkeep of the house. All you can do is continue feeding it and hope that it’ll pay off one day.
And once you’ve decided to sell, when do you do it? What if the value goes up higher? What if it plummets? Should you get out now? This is why market timing sucks. You have no idea what you’re supposed to do.
And in the meantime, you’re stuck in your job, working longer and longer hours, so that most of your hard-earned money can go straight into your insatiable house. Every year, you’re stuck paying property taxes (which you have no control over), maintenance, and insurance.
A million dollar portfolio, on the other hand, PAYs you to own it. And since investment income is taxed more favorably than earned income, you actually pay much LESS taxes than the employee with the million-dollar house.
And yet, Canadians are still borrowing their brains out to own homes. In fact, our debt to earnings ratio is now 165%…a whole 18% HIGHER than the ratio of the Americans right before the 2008 housing crash.
Even though the S&P 500 has returned 1000% over 25 years, while houses have only returned 247%, people ignore this fact and continue buying homes. Because home ownership is a cult. Because “renting is for losers” and “renting is throwing your money away.”
Well, you know what? Home ownership is throwing your life away. Yup, that’s right. I said it.
Because even though our debt levels are higher than in 2008, I don’t believe there will be a housing crash. Here in Canada, you can’t just walk way from your debts since there is no such thing as “no recourse loans.” So if housing prices dip below what you owe on your mortgage, you can’t just walk away. If you attempt to foreclose, you will be sued to all HELL and your credit will be screwed. So you can’t even rent a place afterwards. You HAVE to continue working to pay off that debt. So home owners will continue working and being miserable as they work well into their 70s, paying off their houses.
Like Joanna. She should be living the dream, but like other homeowners, she got into the market, only to be disappointed. Instead of selling her million dollar house, she’s too entrenched in the lifestyle to realize the gains, and too busy worrying about following the herd and keeping up with the Joneses. So instead, she spends all her time stressing out about her neighbours and working long hours to pay for the broken window, the worn-out porch, the landscaping in the backyard. Because she can’t sell part of the house to pay for them. It’s all or nothing. And she’ll never sell and go back to renting.
So I have to wonder. Is Joanna really living in a million dollar house? Or a million dollar prison?
*see 4% rule
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