Author Topic: Buy house outright & live off dividends and retire ?  (Read 10902 times)

ariesonthecusp

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Buy house outright & live off dividends and retire ?
« on: June 29, 2012, 12:10:25 AM »
What do you all think of these two scenarios (feel free to rip them to shreds if they suck, but I wanted to know what you all thought).

So assuming you could get 5% a year in dividends from buying a diverse basket of stocks and you had no debt currently and no assets, would you do 1 or 2

1) Buy $700,000 worth of stock in various companies/index funds etc and pay rent to live somewhere but have $35K a year in income

2) Buy a $200,000 house outright in an area where housing prices are depressed (eg: Boca Raton, FL) and there are no state income taxes. And then use the remaining $500K to buy stocks for $25K in income. The house would be bought so that you'd essentially could retire living on $25K in a house you'd always have, but you wouldnt probably be able to sell it for a while or rent it out.

In both scenarios, you could reinvest the dividend proceeds if you didnt need the money also.
It seems like #2 is the better scenario, but feel free to add your thoughts .
« Last Edit: June 29, 2012, 12:15:55 AM by ariesonthecusp »

catalana

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Re: Buy house outright & live off dividends and retire ?
« Reply #1 on: June 29, 2012, 03:39:49 AM »
I would go for number 2 if you are staying somewhere long term.  If you plan to keep moving around, go for number 1.

The reason I would go for number 2 is that you will not experience rental inflation, thus inflation proofing an element of your lifestyle.  That assumes you can live on the $25k per annum.

GP

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Re: Buy house outright & live off dividends and retire ?
« Reply #2 on: June 29, 2012, 05:14:13 AM »
I am in (or approaching anyway) almost that exact scenario and I'm taking option 2.  I can live quite easily on 25K and whatever I pick up from some type or P/T work or freelancing or whatever.

 A factor you didn't mention is the cost to rent where you are, this can vary quite a lot from what I understand area to area. 

Shandi76

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Re: Buy house outright & live off dividends and retire ?
« Reply #3 on: June 29, 2012, 06:43:56 AM »
Do you have a partner? Are you likely to need to move for family or your partner's job? If you buy a house, would it be somewhere with a decent rental market?

My personal preference would be to buy a house, with the idea of renting it out if I did need to move in the future. (I'm actually in the process of doing this just now since my partner got a job 500 miles away.)

arebelspy

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Re: Buy house outright & live off dividends and retire ?
« Reply #4 on: June 29, 2012, 07:47:35 AM »
Obviously #1 assuming you don't actually want to settle down, but want to travel, move around, etc.

Now if you do want to settle and live there... neither.  Both options are inferior to SECRET OPTION 3!

Purchase a house, but put as little down as possible and get as big of a mortgage as possible*.  Invest the rest.

*this is assuming current historically low rates
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gecko10x

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Re: Buy house outright & live off dividends and retire ?
« Reply #5 on: June 29, 2012, 07:50:48 AM »
Haha, I like your thinking, Rebel!

ariesonthecusp

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Re: Buy house outright & live off dividends and retire ?
« Reply #6 on: June 29, 2012, 08:51:08 AM »
I have a fiancee and a son, but we're not sure where we want to live. I'm a little scared to be honest about buying a place in Florida since we may not like it and would be stuck there (unless its Miami Beach, where we lived before and both liked it). Perhaps renting is the best option for now. The $200K houses I was looking at wouldnt be very rentable. Rent in Florida varies greatly, but we would try to keep it under $2500/month, and ideally find something around $1500/month

A Rebel Spy: Why do say getting a huge mortgage with a little down is the best option ? Lets assume we got a $650K mortgage with very little down. We'd then be on the hook for a ~$3k mortgage every month. That would seem to eat highly into any investment income vs no mortgage with owning a house outright. Also, any dip in the percent return of dividends per year could cause you to lose the house potentially

Thanks
« Last Edit: June 29, 2012, 08:53:13 AM by ariesonthecusp »

Kriegsspiel

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Re: Buy house outright & live off dividends and retire ?
« Reply #7 on: June 29, 2012, 08:53:06 AM »
How much are property taxes in those places where you're looking to buy a house?

ariesonthecusp

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Re: Buy house outright & live off dividends and retire ?
« Reply #8 on: June 29, 2012, 08:56:13 AM »
Property taxes were between $6000 to $8000 a year depending on the house. But remember, Florida has no state income tax, so you'd only pay capital gains for federal on any dividend earnings (currently at 15%)

grantmeaname

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Re: Buy house outright & live off dividends and retire ?
« Reply #9 on: June 29, 2012, 09:23:44 AM »
A Rebel Spy: Why do say getting a huge mortgage with a little down is the best option ? Lets assume we got a $650K mortgage with very little down. We'd then be on the hook for a ~$3k mortgage every month. That would seem to eat highly into any investment income vs no mortgage with owning a house outright. Also, any dip in the percent return of dividends per year could cause you to lose the house potentially
Borrowing money at 3% is cheaper than getting it for free after you consider the mortgage interest deduction and inflation. If you borrow more and invest the difference, even in TIPS, you come out ahead. That said, it doesn't mean buying more house is a good idea, because then you've got a concomitant increase in your housing costs. Does that make sense?

JohnGalt

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Re: Buy house outright & live off dividends and retire ?
« Reply #10 on: June 29, 2012, 09:27:22 AM »
I have a fiancee and a son, but we're not sure where we want to live. I'm a little scared to be honest about buying a place in Florida since we may not like it and would be stuck there (unless its Miami Beach, where we lived before and both liked it). Perhaps renting is the best option for now. The $200K houses I was looking at wouldnt be very rentable. Rent in Florida varies greatly, but we would try to keep it under $2500/month, and ideally find something around $1500/month

A Rebel Spy: Why do say getting a huge mortgage with a little down is the best option ? Lets assume we got a $650K mortgage with very little down. We'd then be on the hook for a ~$3k mortgage every month. That would seem to eat highly into any investment income vs no mortgage with owning a house outright. Also, any dip in the percent return of dividends per year could cause you to lose the house potentially

Thanks

Arebelspy is assuming that you can get enough of a return investing the money you would have used to pay for the house to beat the interest rate on the mortgage - thus using that money to both pay for the house and produce a little additional income. 

It's probably mathematically the best option - but, since it involves leverage, is also probably the riskiest. 

Personally - I would suggest that you rent for at least a year if you're moving to a new area before purchasing.  Especially if you think it would be difficult to sell should you regret the move.

arebelspy

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Re: Buy house outright & live off dividends and retire ?
« Reply #11 on: June 29, 2012, 10:07:38 AM »
Arebelspy is assuming that you can get enough of a return investing the money you would have used to pay for the house to beat the interest rate on the mortgage

I'm not assuming that; it was a premise granted in the OP.

But yes, Galt and Grant are right, if you're getting a higher return from your dividends than your mortgage interest rate is, you should invest the money and have the mortgage.  Given the 5% dividends assumed in the OP, and today's low interest rates (combined with mortgage interest deduction), you end up ahead by getting a mortgage and paying some interest to do so.

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Re: Buy house outright & live off dividends and retire ?
« Reply #12 on: June 29, 2012, 10:25:52 AM »
I have a fiancee and a son, but we're not sure where we want to live. I'm a little scared to be honest about buying a place in Florida since we may not like it and would be stuck there (unless its Miami Beach, where we lived before and both liked it). Perhaps renting is the best option for now. The $200K houses I was looking at wouldnt be very rentable. Rent in Florida varies greatly, but we would try to keep it under $2500/month, and ideally find something around $1500/month

A Rebel Spy: Why do say getting a huge mortgage with a little down is the best option ? Lets assume we got a $650K mortgage with very little down. We'd then be on the hook for a ~$3k mortgage every month. That would seem to eat highly into any investment income vs no mortgage with owning a house outright. Also, any dip in the percent return of dividends per year could cause you to lose the house potentially

Thanks
He didn't mean to buy more house, he meant to buy the same amount of house but finance as much of it as possible, thus keeping more of your dollars in your possession, earning higher returns than your mortgage interest, and coming out with much more money in the bank because you up your money where it is most productive.

arebelspy

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Re: Buy house outright & live off dividends and retire ?
« Reply #13 on: June 29, 2012, 10:40:52 AM »
Exactly.  And the more you have tied up in the house (equity) the greater your chance of losing it versus having all that money liquid.
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mechanic baird

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Re: Buy house outright & live off dividends and retire ?
« Reply #14 on: June 29, 2012, 10:59:12 AM »
Arebelspy is assuming that you can get enough of a return investing the money you would have used to pay for the house to beat the interest rate on the mortgage

I'm not assuming that; it was a premise granted in the OP.

But yes, Galt and Grant are right, if you're getting a higher return from your dividends than your mortgage interest rate is, you should invest the money and have the mortgage.  Given the 5% dividends assumed in the OP, and today's low interest rates (combined with mortgage interest deduction), you end up ahead by getting a mortgage and paying some interest to do so.
I am doing exactly that now. My mortgage is at 4.125% and my average dividend is around 6% not counting appreciation on the assets, so I am not gonna pay my mortgage like I originally thought I would do...  it's been pretty nice lately..

Dicey

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Re: Buy house outright & live off dividends and retire ?
« Reply #15 on: June 29, 2012, 11:05:15 AM »
Hi ariesonthecusp! How old are you? Not a personal question in an invasive sort of way, just that it will impact my thoughts on your question. A range is fine if you'd prefer.

grantmeaname

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Re: Buy house outright & live off dividends and retire ?
« Reply #16 on: June 29, 2012, 11:13:54 AM »

Dicey

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Re: Buy house outright & live off dividends and retire ?
« Reply #17 on: June 29, 2012, 11:49:47 AM »
Duh. Thanks, Grant. Too much multi-tasking this morning. Trying to clear off the decks before a much-needed vacation.

So in response to aresonthecusp: first and foremost, congratulations on amassing such a tidy sum so early on! If you have that much this soon, what would happen if you kept on with what you're doing for just a little while longer? Your margins seem just a little close for comfort right now, when you consider the long term effects of inflation. It seems it would take less effort to amass a chunk more now for the security it would provide for the rest of your life.

Don't get me wrong, if I had what you have at your age, I'd be clearing off my desk permanently today. I'd buy a foreclosed house somewhere really inexpensive for 50-75k and spend my newfound free time fixing it up to rent. And then I'd do it again, rinse, and repeat.

I think both of your choices have merit, but I am firmly in the long mortgage with low fixed rate interest camp. You have more control if you own (even partially, no especially partially) your own home. You also have the power of leverage, plus tax advantages. Based on what you've achieved thus far, whatever you decide will be a good enough decision. It doesn't have to be perfect. Here's a favorite quote: "Retiring too early is a mistake you can recover from. Too late and there is no recovery."

arebelspy

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Re: Buy house outright & live off dividends and retire ?
« Reply #18 on: June 29, 2012, 12:01:51 PM »
I am doing exactly that now. My mortgage is at 4.125% and my average dividend is around 6% not counting appreciation on the assets, so I am not gonna pay my mortgage like I originally thought I would do...  it's been pretty nice lately..

Right.  And imagine when interest rates rise and CDs start paying 5, 6, 7, 8% or more.  Won't it be great to have liquid assets generating free interest while paying 3% on that money (via your mortgage)?  Who the heck wants to pay down a 3% mortgage when you could earn 5+% virtually risk-free (if and when interest rates rise).  Definitely a good time to lock in low rates.
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JohnGalt

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Re: Buy house outright & live off dividends and retire ?
« Reply #19 on: June 29, 2012, 02:23:04 PM »
I am doing exactly that now. My mortgage is at 4.125% and my average dividend is around 6% not counting appreciation on the assets, so I am not gonna pay my mortgage like I originally thought I would do...  it's been pretty nice lately..

Right.  And imagine when interest rates rise and CDs start paying 5, 6, 7, 8% or more.  Won't it be great to have liquid assets generating free interest while paying 3% on that money (via your mortgage)?  Who the heck wants to pay down a 3% mortgage when you could earn 5+% virtually risk-free (if and when interest rates rise).  Definitely a good time to lock in low rates.

This thinking was a big part of me buying the house I'm in now a couple years ago.  The math still makes sense, but I will say that making sure you either want to stay in that location or can rent out the house if you don't should be an important factor.  Next year, I will be happily going back to renting as, at this point in my life, I've found that mobility and flexibility is more important than taking advantage of today's interest rates.  Though, I may do both if I decide to hang onto the house and lease it out. 

ariesonthecusp

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Re: Buy house outright & live off dividends and retire ?
« Reply #20 on: June 29, 2012, 02:59:08 PM »
Rebel Spy: Can interest rates really rise with the level of debt the US has ? I remember reading that each 3/4 of 1% increase in the interest rate for the US adds $100 billion more to the national debt. Can you imagine the US's obligations if we go from where we're at to 4% ? Not saying it wont happen, but something will have to give.

Do you rebalance your portfolio when the market is up or down also ?

Diance C: Thanks , I'm trying to move in the next 2-3 months to lower my monthly expenses. I certainly dont feel like I'm living a lifestyle of someone who spends $8k a month, so it needs to change. I'd love to do the cheap foreclosure route, but I need to research more on how to do that.

I think putting most of my money into the market to earn dividends may be the best route for now. I figure if I can get even 4% a year on $700K, thats almost $30k a year, and then I can work only if I want to.

arebelspy

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Re: Buy house outright & live off dividends and retire ?
« Reply #21 on: June 29, 2012, 03:13:48 PM »
Rebel Spy: Can interest rates really rise with the level of debt the US has ? I remember reading that each 3/4 of 1% increase in the interest rate for the US adds $100 billion more to the national debt. Can you imagine the US's obligations if we go from where we're at to 4% ? Not saying it wont happen, but something will have to give.

Absolutely.  Feds can print monies and inflation hits, rates rise.  We're paying back our debts (fixed) with U.S. dollars.

Do you rebalance your portfolio when the market is up or down also ?

Yes, you rebalance whenever your AA is out of whack. Whether that's because one part gained a bunch from the market being up (so selling that part high) or because one part lose a lot from the market being down (so selling other parts high and buying that low).
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Dicey

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Re: Buy house outright & live off dividends and retire ?
« Reply #22 on: June 29, 2012, 07:36:43 PM »

I'd love to do the cheap foreclosure route, but I need to research more on how to do that.

I think putting most of my money into the market to earn dividends may be the best route for now. I figure if I can get even 4% a year on $700K, thats almost $30k a year, and then I can work only if I want to.

As far as the foreclosure route: if houses are cheap where you are and you're fairly certain that's where you want to put down roots, I'd consider paying cash for a structurally sound foreclosure that has good rental potential at below-market price. I'd then move into it, fix it up and get a first mortgage while it's owner occupied, as those are the best rates. Once the house was finished, financed and cash restored to 'stache,  I'd start looking for a second property. Rent the first one out, move into the second one, repeat process. For maximum leverage, you want to borrow as much as you and the properties can easily support now, while interest rates are low. Someday, your grandkids (or your friend's grandkids) will look at you in awe and shake their heads when they hear what your mortgage rates are. At the other end, if the tax law hasn't changed by then, you can move back into them one by one and sell them off gradually, earning a tax-free profit (after accounting for depreciation). Very mustachian.

As for putting most of your money into the markets, it's not really a great idea to have everything in the stock market. Balance is as critically important as rebalancing. If that last sentence was not clear, please consider keeping your job and continue saving and learning until it is. You don't want to lose a huge chunk of your hard-won nest egg if when the market hits the next dip on the roller coaster. And there is always a next one.

menorman

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Re: Buy house outright & live off dividends and retire ?
« Reply #23 on: June 29, 2012, 11:25:19 PM »
What do you all think of these two scenarios (feel free to rip them to shreds if they suck, but I wanted to know what you all thought).

So assuming you could get 5% a year in dividends from buying a diverse basket of stocks and you had no debt currently and no assets, would you do 1 or 2

1) Buy $700,000 worth of stock in various companies/index funds etc and pay rent to live somewhere but have $35K a year in income

2) Buy a $200,000 house outright in an area where housing prices are depressed (eg: Boca Raton, FL) and there are no state income taxes. And then use the remaining $500K to buy stocks for $25K in income. The house would be bought so that you'd essentially could retire living on $25K in a house you'd always have, but you wouldnt probably be able to sell it for a while or rent it out.

In both scenarios, you could reinvest the dividend proceeds if you didnt need the money also.
It seems like #2 is the better scenario, but feel free to add your thoughts .
I'd go for option 2, even if planning to move in a relatively short amount of time. By renting out the vacated house, it should be able to cover rent in a new place. Then, as long as one lives a bit below their investment income, they should still find a decent firehose of cash showing up in short order.

grantmeaname

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Re: Buy house outright & live off dividends and retire ?
« Reply #24 on: July 02, 2012, 06:40:53 AM »
I'd go for option 2, even if planning to move in a relatively short amount of time. By renting out the vacated house, it should be able to cover rent in a new place. Then, as long as one lives a bit below their investment income, they should still find a decent firehose of cash showing up in short order.
But option 2 is only best if that rental income is more than the appreciation that would be realized by investing it, after paying yourself to manage it, maintenance, repairs, tax and insurance... if not, it would be better to add that $500k to the portfolio. Considering how significant those costs are when combined, it might not be the best choice even if the proceeds could pay your rent.
« Last Edit: July 02, 2012, 09:36:41 AM by grantmeaname »

arebelspy

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Re: Buy house outright & live off dividends and retire ?
« Reply #25 on: July 02, 2012, 08:48:29 AM »
But option 2 is only best if that rental income is more than the appreciation that would be realized by investing it, after paying yourself to manage it, maintenance, repairs, tax and insurance... if not, it would be better to add that $500k to the portfolio. Considering how significant those costs are when combined, it might not be the best choice even if the proceeds could pay your rent.

I'm assuming you're addressing menorman's post, since the OP's option two said nothing about renting out a house.

And you're absolutely right, but - IMO - I think now is a time in the real estate cycle where it is likely the returns from a rental property could outweigh investment returns, even factoring in all those things.  That won't always be the case, and it often isn't.  But for the next few years, it may be possible to get real estate that will outperform paper.

(And I make this post not because it's news to you, or anything you don't realize, but for others reading the thread who might not.)
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Re: Buy house outright & live off dividends and retire ?
« Reply #26 on: July 02, 2012, 09:37:07 AM »
Yeah, I can see how that might be unclear. Fixed it.

travelbug

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Re: Buy house outright & live off dividends and retire ?
« Reply #27 on: July 02, 2012, 08:27:27 PM »
Hi
If you are moving to a new place I would certainly rent a house before buying. It will allow you time to explore and research areas properly.
Also after 12 months or so you will have a good idea of how much COL is in that area and whether you can afford to live there permanently.
Also, if you WANT to stay there, or you may wish to move again.
Good luck OP.
C

arebelspy

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Re: Buy house outright & live off dividends and retire ?
« Reply #28 on: July 02, 2012, 08:52:27 PM »
Personally - I would suggest that you rent for at least a year if you're moving to a new area before purchasing.  Especially if you think it would be difficult to sell should you regret the move.

Hi
If you are moving to a new place I would certainly rent a house before buying. It will allow you time to explore and research areas properly.
Also after 12 months or so you will have a good idea of how much COL is in that area and whether you can afford to live there permanently.
Also, if you WANT to stay there, or you may wish to move again.
Good luck OP.
C

Agree with both of these.  Rent for a year, get to know the local real estate market, learn which parts of town are good and bad, give yourself plenty of time to find a good place and know you want to stay there.
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