Author Topic: House vs FIRE? (Australia)  (Read 3419 times)

Raven

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House vs FIRE? (Australia)
« on: January 11, 2016, 09:22:37 PM »
Hi all.  I'm an Australian so my apologies if any of my terminology or phrasing is out of the norm for the regular users of this forum.  Also, for the sake of this conversation Iím a single guy, as far as finances are concerned. 33 years old.
   
I like to think I've done quite well for myself over the past couple of years.  I've come from a background of being around $30k in debt with very little money sense.  Since then I've changed my attitude, budgeted hard and totally revamped how I view money and life in general (with a little help from blogs such as this one), debt free with cash in the bank.

These days I'm pretty dedicated.  I have done a lot of self reflection and embraced the concept of enjoying the beauty of the world among other things, as opposed to lavish expenditures to supply entertainment.  Every dollar is tracked and has a job, and Iím on a 60% savings rate each time I am paid (and looking to improve that further).  Itís empowering, life is thrilling because of the control I have over my finances, and itís a feeling I never want to lose.

Iíve started a small stock portfolio and I love the idea of generating enough passive income so I no longer have to work for a living.  Yíknow, the dream we all chase or have already achieved.

Having said that, since I have been a kid Iíve always wanted to buy a house.  I love the idea of having a space that is mine, and mine alone.  A sanctuary, if you will.  Itís only now Iím in a position where Iím earning and saving enough that getting together a deposit is a feasible option.  I estimate that it will take me approximately 2 more years to save what I would need, at my current rate.

So, Iím a bit conflicted.  Will buying a house set me back too far?  Will I be shooting myself in the foot regarding my FIRE aspirations?

Do I:
   ē   buy a house, pay it off as quickly as I can (in about 8-10 years, if I buy a conservative property) then resume the FIRE goal afterwards?
   ē   forget my dream of home ownership, continue to rent, invest hard and achieve FIRE in 10-12 years?
   ē   some kind of hybrid - buy a house, make regular repayments and invest the remainder of my spare funds?

Not really sure what answer I expect, as Iím just a stranger on the internet, and I know itís really up to me to decide what I want more, make a decision and go for it.   But I guess if thereís anyone out there whoís had a similar choice to make, Iíd like to hear your story and why you chose what you did.
« Last Edit: January 18, 2016, 11:29:48 PM by Raven »

GrowingTheGreen

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House vs FIRE?
« Reply #1 on: January 12, 2016, 07:03:58 AM »
I like option 1 or 3. 

Choosing between the two is a matter of personal choice. Some people prefer the safety and peace of mind not having a mortgage gives. Others say that over the long run, you'll make more money by investing your extra-payment money in the stock market, especially with today's low mortgage rates.

I do a blend. I put a little extra every month towards the mortgage and also have a taxable, non-retirement mutual fund that I contribute to regularly.

ooeei

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Re: House vs FIRE?
« Reply #2 on: January 12, 2016, 07:13:08 AM »
Well it comes down to what's worth it to you.  I suggest calculating approximately what the cost is to buy vs rent, and then figure out how much extra time you'll have to work to save that amount.  Obviously if you're somewhere houses cost $1,000,000 and renting only costs $400/month, you'd be crazy to buy.  If you're somewhere houses cost $100,000 and renting is $3000/month you'd be crazy to rent.  Your area is almost certainly somewhere in between, so you just need to figure out at what point it becomes worth it to you to jump into ownership.

neo von retorch

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Re: House vs FIRE?
« Reply #3 on: January 12, 2016, 08:54:37 AM »
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

While this calculator defaults to American numbers, you should be able to adjust it to fit your situation more closely.

Some things to keep in mind:
  • Don't buy more house than you need. It's easy to let my dream influence your purchasing decisions.
  • You're going to underestimate additional costs of a house. That's OK - as you continue to learn and grow, you can make smart choices here, too.
  • Houses come with steep transaction costs. As long as you stay put, for certain, really, for a long, long time, this doesn't have to hurt you too much.
  • Are you going to stay single? Will meeting someone change where you want to live, or what kind of house you'd want to own?
  • If owning a home is comparable in monthly cost (including your up front transaction costs spread over time) then it doesn't have to affect your FI date. The longer you stay put, the lower those transaction costs affect your average monthly cost. Seriously, don't buy a house unless you're really, really, really sure it's the location and structure you want to be tied to for a long, long, long time.
  • Some people can work some magic to make home buying a much smarter choice - sweat equity and all that, but don't budget for those things unless you've already done them in the past.
  • Commuting sucks. Is your current job amazing? Will you be there in three years? Five years? Ten years? How far might you have to travel if you change jobs?

urbanista

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Re: House vs FIRE?
« Reply #4 on: January 12, 2016, 03:48:46 PM »
An important point to consider is that under current rules, if you don't own a home, you are disadvantaged in your ability to get aged pension. From 2017, the separate assets test will cut out the pension fully at $823,000 for home owner couples and $1 million for non-home owning couples.


deborah

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Re: House vs FIRE?
« Reply #5 on: January 13, 2016, 05:10:30 AM »
There are quite a few differences between the Australian treatment of property in price, mortgage accounts, tax, retirement... and the US equivalent. Enough that it is impossible to compare.

We have mortgage offset accounts. We have stamp duty. We have insane prices in all capital cities. We have no tax on capital gains for your PPOR. And Urbanista had talked about the pension implications.

Buying a house and paying extra money into your offset account is a strategy that means you can have no interest if your offset has the total left to pay, but also means you can use that money at a moment's notice. It is the ideal spot for your emergency money, and effectively means you are getting an untaxed income from the money in your offset account of your mortgage interest + your marginal tax rate, which is hard to beat. SO in Australia, it is more sensible to "pay off the mortgage" than it is in the US.

Stamp duty means you need to keep a house for a while once you have bought it. Exchanging it for a new one just means that you have thrown away a lot of money. Make sure that if you buy a house, you are in stable circumstances, and aren't going to move soon.

The lack of capital gains on your PPOR means that people often buy a house, live in it for a while and then rent it out. Not sure about this space now, as there have been some recent changes, like banks reviewing all of their investment loans and charging more interest if it is an investment than otherwise (I think there has been some legislation that caused this change).

Retire-Canada

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Re: House vs FIRE?
« Reply #6 on: January 13, 2016, 07:21:57 AM »
If you are single and highly motivated [as evidenced by 60% savings rate] I think you are in the category of people that could try something more radical. Camper in the back of your truck and live rent free bumping your savings rate way up. Something like that.

I have had houses at various points in my life [currently own one w/ mortgage] and at other points I rented or lived in the margins [large closet at work for a year!]. Honestly The house or nice apartment never added anything to my life that I cared about as much as my freedom.

The one benefit with a standard living space is it's easier to get laid.

If I could go back in time I would be living in a camper on my truck for a few years and I would be FIRE now.

It all comes down to how important FIRE is vs. a house or whatever alternatives you come up with. There is no wrong answer as long as you've worked through the options.

CindyBS

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Re: House vs FIRE?
« Reply #7 on: January 18, 2016, 02:58:08 PM »
Have you considered purchasing a duplex and living in one half while your tenant in the other half pays most of the mortgage? 


deborah

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Re: House vs FIRE?
« Reply #8 on: January 18, 2016, 03:09:44 PM »
Again, a duplex doesn't work as well in Australia. The interest you pay on an investment loan is deducted from your tax - but it has to only be for an investment. If it was partly your PPOR, it doesn't count.

alsoknownasDean

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Re: House vs FIRE?
« Reply #9 on: January 18, 2016, 07:04:42 PM »
Do you plan on staying where you are post-FIRE?

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HappierAtHome

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Re: House vs FIRE? Australia
« Reply #10 on: January 18, 2016, 08:42:00 PM »
If you put Australia in your thread title (which I've taken the liberty of doing with my reply), you'll get many more responses specific to Aus :-)

I know the dilemma you're facing; buying a house (and a 'forever home' at that) was the right choice for me but probably wasn't the optimal move financially. Maybe share more details about the rough price of places you're looking at, how much you earn, how long you'd be likely to live in one house?

Raven

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Re: House vs FIRE?
« Reply #11 on: January 21, 2016, 11:27:52 PM »
Thanks all for the responses.  I've amended the title to include Australia.

Quote from: neogodless
Are you going to stay single? Will meeting someone change where you want to live, or what kind of house you'd want to own?

Well, technically speaking I'm not single.  But financially I am, if that makes sense.  We've discussed it at length and my "worst case scenario" so to speak is that I buy this alone in my name and she legally becomes my tenant, cheaply, allowing to keep saving her own money.  That's the scenario I'm planning for, and if it changes financially, then it's a nice bonus. 
To answer your question properly, nothing that will happen to me in the future (job, having a family, etc) will change my decision about location or size.  I've got something very specific in mind that allows for future family expansion if it happens, social group proximity, and minimal work commute.

Quote from: neogodless
If owning a home is comparable in monthly cost (including your up front transaction costs spread over time) then it doesn't have to affect your FI date. The longer you stay put, the lower those transaction costs affect your average monthly cost. Seriously, don't buy a house unless you're really, really, really sure it's the location and structure you want to be tied to for a long, long, long time.

It will definitely affect my FI date, unfortunately.  I described 60% in the OP, perhaps incorrectly.  The vast majority of that 60% being put away each pay goes into the "house deposit" bucket.  Once I purchase said house and I'm making repayments, my savings rate will probably go down to about 20%, as a rough estimate.  But I haven't taken rental income from subletting a room into account, or any contributions made by someone living with me, which is likely to happen.

Quote from: neogodless
Commuting sucks. Is your current job amazing? Will you be there in three years? Five years? Ten years? How far might you have to travel if you change jobs?

I've been at my current job for 10 years so far with no plans to move on.  If anything I'd buy a bit closer (currently it's a 20 minute drive).  If all goes well the house I buy would be close enough to my current job, but also close to public transport covering me to get into Melbourne city if I have to.
[/quote]

Raven

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Re: House vs FIRE?
« Reply #12 on: January 21, 2016, 11:29:21 PM »
Quote from: urbanista
An important point to consider is that under current rules, if you don't own a home, you are disadvantaged in your ability to get aged pension. From 2017, the separate assets test will cut out the pension fully at $823,000 for home owner couples and $1 million for non-home owning couples.

Thanks, I was not aware of this.  How is "couple" defined?  From my own knowledge I believe married and de facto are treated the same?

Raven

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Re: House vs FIRE?
« Reply #13 on: January 21, 2016, 11:33:55 PM »
Quote from: deborah
Buying a house and paying extra money into your offset account is a strategy that means you can have no interest if your offset has the total left to pay, but also means you can use that money at a moment's notice. It is the ideal spot for your emergency money, and effectively means you are getting an untaxed income from the money in your offset account of your mortgage interest + your marginal tax rate, which is hard to beat. SO in Australia, it is more sensible to "pay off the mortgage" than it is in the US.

This is definitely my plan.  Get an offset account and put every dollar I can scrape together into it, forgetting about the usual online savings account.  I'm disciplined enough to not spend it, and if I can get to 100% offset in 5-10 years then I'll leave it there as my emergency fund and move onto other strategies.

Quote from: deborah
Stamp duty means you need to keep a house for a while once you have bought it. Exchanging it for a new one just means that you have thrown away a lot of money. Make sure that if you buy a house, you are in stable circumstances, and aren't going to move soon.

I do plan to be as stable as can be before anything happens, you're right, thanks for the tip.  I'm not interested in property from an investment perspective (my interest lies heavily in stocks) and I'm not the sort of person to move around a lot.  I'm a traditional settler type. ;)

Raven

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Re: House vs FIRE?
« Reply #14 on: January 21, 2016, 11:35:55 PM »
Quote from: alsoknownasDean
Do you plan on staying where you are post-FIRE?
Yes.  My life-goal (if I can say I have one) is to get a place I'm happy with and focus on other things.  Something would have to go drastically wrong for me to move, or sell.  Buying a house and subsequently paying it off would allow me to get the monkey off my back, so to speak.  I can then put all my money into FIRE.

urbanista

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Re: House vs FIRE? (Australia)
« Reply #15 on: January 21, 2016, 11:37:40 PM »
Married and de facto are treated the same.

Since you are sure that your requirements for location and size are not going to change, I say, buy a house. Australian retirement system heavily biased to home ownership. I don't see this changing any time soon.

faramund

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Re: House vs FIRE? (Australia)
« Reply #16 on: January 21, 2016, 11:45:18 PM »
Depending on your risk appetite, as your house increases in value, and you pay off your mortgage, you can take out a second loan on the extra equity in your house, and invest it.

This could change your financial analysis, and remember the interest you pay on investments, is a tax deduction.

Playing with Fire UK

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Re: House vs FIRE? (Australia)
« Reply #17 on: January 22, 2016, 03:47:44 AM »
I think you need to re-examine your thoughts of House vs FIRE.

Depending on the market/tax/rent/purchase price/interest/etc owning a house can be an asset in FIRE, because you don't need to pay rent (there are plenty of discussions and arguements on this forum about the merits of each, and I'm not trying to start another here; but owning or renting more home than you can afford is never good).

I would suggest running a spreadsheet or cFiresim to see what the actual impact of owning a home would be on your FIRE plans; and then adjust for different market growth, house price growth and interest rates.The choices you make for rent and house purchase price/rent received will make a difference - renting a room and living alone in your mortgaged house doesn't make for a fair comparison.  I don't think the choice you make on buying now or renting forever will have as much impact on your FIRE plans as you suggest in the OP.

Based on you saying you have a dream to own a house and are interested in stocks, I would lean towards suggesting buying a house (enough house, not a giant house), paying the minimum mortgage for as long as the interest is reasonable, and then investing the rest in stocks. If this feels wrong to you then do something else.

happy

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Re: House vs FIRE? (Australia)
« Reply #18 on: January 22, 2016, 04:33:12 AM »
Sounds like you want a House.  Some of us are House people. Thats Ok,  as long as you are prepared that buying a house in a capital city most certainly will delay FIRE.
If you want the most bang for your buck try to buy a fixerupperer in a good location.
I like to direct my savings to 50% mortgage and 50% investment (in my case straight into super coz I'm old), rather than sequentially.

edit:typo
« Last Edit: January 23, 2016, 04:18:57 AM by happy »