Author Topic: Is Home Ownership Antithetical to FI?  (Read 27039 times)

smedleyb

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Is Home Ownership Antithetical to FI?
« on: August 04, 2012, 05:27:32 AM »
Just got my school tax bill this week, and it's up another 4%.  The county tax bill in January should show a similar bump.

It got me thinking -- is home ownership antithetical to FI?

Take MMM's situation: 400K house, $2400 a year in taxes, say another $1200 in upkeep. 

What if that 400K was invested in a tax-free muni  fund yielding 5%?  That's 20K in income a year, including another $300 a month in increased cash flow from no taxes or upkeep.  Since there's just three of them, why not just rent a two bedroom apt for $1000 a month, and pocket the extra 12K a year?  No way real estate will appreciate at 3% a year (long term historical average is much less than that), so clearly home ownership is a financially inefficient means of sheltering your family vs renting.  And this is before we get into the fact that there are hundreds of posters lurking on these forums who have gotten their asses handed to them in the past 5-6 years on residential real estate, having lost 10's of thousands of dollars chasing the "American Dream".

And then there goes the roof, or the siding needs to be replaced, or the furnace just took a shit...

In addition, home ownership prevents millions from pulling up and moving in order to seek out better employment opportunities in other parts of the country; it's why I cringe every time I read or hear about a young professional who just plunked down all or most of their liquid assets to buy a home/condo.  These people are less likely to move to where the job's are as these "homes" function as metaphorical albatross around the necks of their future earnings potential.

I'm beginning to think home ownership has no place in a radical lifestyle focused solely on FI.  That it may be as much of a vanity thing as a fancy used car or a discounted vacation.  That it's just a glorified appliance designed to drain our investment dollars.

Thoughts?

« Last Edit: August 04, 2012, 05:30:23 AM by smedleyb »

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Re: Is Home Ownership Antithetical to FI?
« Reply #1 on: August 04, 2012, 06:23:25 AM »
Home ownership is somewhat innefficient when you think of earning a better return on your money. House prices should grow by inflation over time, which many investment choices can/should/will beat.

However, owning a house MUST be at least as good as renting a house. Otherwise, why would a landlord go through the hassle to earn such a lousy return? Rent must cover all costs of ownership plus some profit - this means ownership removes the need for profit and results in a lower cost.

In the end, the decision to own vs. rent isn't really a financial decision. It's a personal decision with a ton of factors at work.

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Re: Is Home Ownership Antithetical to FI?
« Reply #2 on: August 04, 2012, 06:55:39 AM »
You can't buy a $200,000 savings bond and transform it into a $400,000 savings bond with carpentry, while learning and having a great deal of fun in the process. I agree that it's still generally an expense rather than an investment, but you can build a lot of equity with sweat and elbow grease.

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Re: Is Home Ownership Antithetical to FI?
« Reply #3 on: August 04, 2012, 07:31:19 AM »
In addition, home ownership prevents millions from pulling up and moving in order to seek out better employment opportunities in other parts of the country; it's why I cringe every time I read or hear about a young professional who just plunked down all or most of their liquid assets to buy a home/condo.  These people are less likely to move to where the job's are as these "homes" function as metaphorical albatross around the necks of their future earnings potential.

I think this is often overlooked, and is one of the reasons I do not own a home now, due to the likelihood of moving to hunt for a higher salary. But this is more of an argument against home ownership while pursuing FI, not during FI, right?

smalllife

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Re: Is Home Ownership Antithetical to FI?
« Reply #4 on: August 04, 2012, 07:35:58 AM »
I think it depends on why you own a home.  It should never be looked at as an investment in the growing value sense.  However, I think the reduced cash flow post-mortgage can be seen as a sort of investment.   And a paid off house can be rented for profit even with a third party management system.  So it depends how quickly you can pay off the house and how much sweat equity is involved. 

Even if taxes get higher, it's a whole hellofa lot easier to come up with that cash than with the increase in rent prices.  I'd rather own the roof over my head than have $400,000 in the market.  If I own the house outright, even a minimum wage job can support me fairly easily.  You can't invest that sense of security.

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Re: Is Home Ownership Antithetical to FI?
« Reply #5 on: August 04, 2012, 11:11:56 AM »
You're switching the math. You can't compare owning a nice big house vs renting a minimum housing unit.

Like for like, so assuming you either rent or own what you want to spend on housing, there are several things a simple muni bond yield doesn't capture:
- inflation. Yield assumes an inflation rate. Owning is inflation proofed by definition.
- volatility is lower than the stock/bond market, so reduces risk, but isn't risk free itself either.
- the ability to be in control of where you spend most of your life. There is an instrinsic value for most people.
- allows access to cheap leverage. The deduction on mortgage interest is a tax on renting.
- if you own a rental, the income stream is local and has a lower correlation to the market, diversifying income streams, plus allowing tax benefits
- in a crunch, enables if required forced income to be taken by sweat equity or self managing/maintaining the property



But, many people  do spend way to much on housing and incorrectly see it as an investment,which it is not. You consume housing that you live in. But sometimes the best way to pay for it is via owning it.

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Re: Is Home Ownership Antithetical to FI?
« Reply #6 on: August 04, 2012, 01:31:27 PM »
Home ownership makes a  lot of sense for me.  I own a triplex as a primary residence that brings my housing costs to 740 a month vs. 1400-1600 to rent the same type of accommodation.   I also own two cash flow positive rental properties. 

The math you are using does not account for all the factors involved and the ability to spend time and effort finding the right property and fixing it up yourself.  In particular, it does not appear that you assign any value to principal paydown or the fact that, over time, your LEVERAGED dollars also appreciate.


smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #7 on: August 04, 2012, 01:31:33 PM »
You're switching the math. You can't compare owning a nice big house vs renting a minimum housing unit.

Like for like, so assuming you either rent or own what you want to spend on housing, there are several things a simple muni bond yield doesn't capture:
- inflation. Yield assumes an inflation rate. Owning is inflation proofed by definition.
- volatility is lower than the stock/bond market, so reduces risk, but isn't risk free itself either.
- the ability to be in control of where you spend most of your life. There is an instrinsic value for most people.
- allows access to cheap leverage. The deduction on mortgage interest is a tax on renting.
- if you own a rental, the income stream is local and has a lower correlation to the market, diversifying income streams, plus allowing tax benefits
- in a crunch, enables if required forced income to be taken by sweat equity or self managing/maintaining the property



But, many people  do spend way to much on housing and incorrectly see it as an investment,which it is not. You consume housing that you live in. But sometimes the best way to pay for it is via owning it.

I was actually looking at various apartments available in MMM's hometown in order to illustrate my point that one could just as easily find a unit for around $1000 that is clean, safe, and has all the basic amenities a 3 person household needs in order to life comfortably.  The idea of investing in munis was simply meant to illustrate how one can leverage the liquidity to achieve a positive cash flow after paying rent vs. having all that money tied up in equity (and the concomitant taxes, and repairs, and insurance, etc).

But along those lines:

inflation. Yield assumes an inflation rate. Owning is inflation proofed by definition.

And owning is vulnerable to deflation.  Ask the millions of homeowners under water for proof.

volatility is lower than the stock/bond market, so reduces risk, but isn't risk free itself either.

With many housing markets down 50-60% over the past 5 years, I think this statement is just false.

the ability to be in control of where you spend most of your life. There is an instrinsic value for most people.

What you perceive as control, I think of -- in many cases -- as people being "stuck."  I think this "intrinsic value" you refer to is a myth manufactured by mortgage lenders and real estate agents. 

allows access to cheap leverage. The deduction on mortgage interest is a tax on renting.

My bank is willing to loan me money cheaply if I put up liquid investments like bonds as collateral; munis have the added advantage of being income tax free, so tax benefit accrue to both sides of the aisle.

The last two points seem to be talking about rental properties, which are different animals in my eyes.

I'm just leaning more and more to the idea that a home -- okay, scratch that term, it's just a house, a structure -- is a financial trap/money-pit for most people, feeding the multi-trillion dollar housing industry, not vehicles which allow everyday mustachians to achieve their dreams of FI via the accumulation of investments in order to generate a sufficient passive income stream to support ER.

I'm even wondering if there is not a slight contradiction in attempting to prove the foolishness of excessive consumerism (such as buying pricey cars, clothes, and vacations) while living in a structure which locks in roughly 40% of your net worth (MMM's situation; it's much worse for most, closer to 80-90%), pays you nothing (and like the scenario I painted in the original post, costs you money), seems rather large and excessive vs. your basic needs, and which ultimately -- over a long enough timeline -- crumbles and disintegrates like a car, plasma TV, or any other consumer "appliance," even if there is real value in the land (which, unless we're talking about beach front lot in Orange or Suffolk county, represents a mere fraction of the overall "value" of the property).

And if one derives great psychological pleasure from having a rather large, beautiful home and seeks to rationalize the purchase based on that, then how does one differentiate that feeling from the pleasure one gets from buying a Lexus, Louis Vuitton hand bag, or spending a week at the Grand Floridian in Disney World?  I mean, isn't it ultimately a difference in degree, rather than a difference in kind?

Is house ownership the last bastion of consumerist excess?   

 




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Re: Is Home Ownership Antithetical to FI?
« Reply #8 on: August 04, 2012, 01:38:27 PM »
It got me thinking -- is home ownership antithetical to FI?

I think you may have priorities reversed.  I seek FI in order to derive greater enjoyment from life (and ongoing security in that enjoyment, etc).  Owning a house & land is a large part of that enjoyment. 

Quote
Since there's just three of them, why not just rent a two bedroom apt for $1000 a month, and pocket the extra 12K a year?

Because I don't want to live in a two bedroom apartment.  Why not carry the idea to its logical conclusion?  Who needs an apartment?  Why not live out of the back of your car?  Indeed, who needs a car?  Get a shopping cart and live on the streets. 

Quote
In addition, home ownership prevents millions from pulling up and moving in order to seek out better employment opportunities in other parts of the country;

If that's what you value.  Myself, I live where I live because that's where I want to live.

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Re: Is Home Ownership Antithetical to FI?
« Reply #9 on: August 04, 2012, 01:44:50 PM »
I was actually looking at various apartments available in MMM's hometown in order to illustrate my point that one could just as easily find a unit for around $1000 that is clean, safe, and has all the basic amenities a 3 person household needs in order to life comfortably.

I think we may have greatly differing ideas on just what is needed for a comfortable life.  I doubt those apartments have gardens, space for fruit & shade trees, room for the dogs (or kids, if I had them) to play...

Oddly enough, $1K is about what I pay for mortgage, taxes, and insurance, though it's a different market.

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Re: Is Home Ownership Antithetical to FI?
« Reply #10 on: August 04, 2012, 01:45:25 PM »
I think in the end it is a personal choice as well.  I get a whole lot of enjoyment from owning my home and dislike renting. 

It happens to work out great for me but I am willing to take on the risk of deflation because the past seems to indicate overall a pattern of appreciation if you are willing to stay invested 7-10 years and the benefits outweigh the risk for me.

It is kind of like eating.  You can cut your costs by eating lentils and rice and for some that is just fine.  I myself enjoy quality food and creative cooking a lot.  I'd forgo travel and other discretionary spending before I would limit my diet to an extreme. 

Cars seem to be important to some folks.  I couldn't care less and drive a 1998 Toyota Tercel happily although I could afford any fancy car on the market. 

smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #11 on: August 04, 2012, 01:46:28 PM »
You can't buy a $200,000 savings bond and transform it into a $400,000 savings bond with carpentry, while learning and having a great deal of fun in the process. I agree that it's still generally an expense rather than an investment, but you can build a lot of equity with sweat and elbow grease.

But you could invest the positive cash flow from my original scenario so that in about a 12-14 years or so you've doubled your 200K liquid investment, and instead of spending all that time "building equity with sweat and elbow grease, " you're out there improving your earning potential, or playing with your children, or just relaxing with a good book.   One man's fun is another man's work, and vice versa.   

   






smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #12 on: August 04, 2012, 01:53:09 PM »
Quote
Since there's just three of them, why not just rent a two bedroom apt for $1000 a month, and pocket the extra 12K a year?

Because I don't want to live in a two bedroom apartment.  Why not carry the idea to its logical conclusion?  Who needs an apartment?  Why not live out of the back of your car?  Indeed, who needs a car?  Get a shopping cart and live on the streets. 

Logical conclusion, or argumentative hyperbole?


smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #13 on: August 04, 2012, 01:56:54 PM »
Home ownership makes a  lot of sense for me. I own a triplex as a primary residence that brings my housing costs to 740 a month vs. 1400-1600 to rent the same type of accommodation.   I also own two cash flow positive rental properties. 

The math you are using does not account for all the factors involved and the ability to spend time and effort finding the right property and fixing it up yourself.  In particular, it does not appear that you assign any value to principal paydown or the fact that, over time, your LEVERAGED dollars also appreciate.

Good for you.  I mean, I think this approach is more in accordance with radical mustachianism than buying a single family residence.  It's what I did too for years until I fell for the siren song of individual home ownership. 

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Re: Is Home Ownership Antithetical to FI?
« Reply #14 on: August 04, 2012, 02:33:01 PM »
The math is actually really simple, and it completely depends on the price to rent ratio in your location.

Run the numbers.

Sometimes it makes more sense to buy, and you'd be putting cash into the pocket of your landlord if you rented.   In these cases, your rent covers all the landlord's expenses (including property tax, insurance, all repairs, mortgage costs, etc.) and gives them extra cash flow.  That is a bad deal for you.   You are paying for them to own that home (especially if they have a mortgage you're paying down for them).  It would be silly to rent right now in Vegas if you're staying even for a few years and have the means to do so.

Sometimes it makes sense to rent, and your landlord is subsidizing your living.  In this case, your rent doesn't cover all of the expenses.  It would be silly to buy (from an investment perspective) in SF or NY right now.

Home ownership can be an emotional thing, as Jamessqf points out.  But if you treat it purely as a numbers thing towards reaching FI, then whether or not homeownership makes sense depends entirely on your local real estate market.

Within the next 10 years I am planning on being a renter while owning 20+ homes.  Do it smart with the numbers, don't blanket statement that homeownership is always good or always bad.
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smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #15 on: August 04, 2012, 02:44:02 PM »
The math is actually really simple, and it completely depends on the price to rent ratio in your location.

Run the numbers.

Sometimes it makes more sense to buy, and you'd be putting cash into the pocket of your landlord if you rented.   In these cases, your rent covers all the landlord's expenses (including property tax, insurance, all repairs, mortgage costs, etc.) and gives them extra cash flow.  That is a bad deal for you.   You are paying for them to own that home (especially if they have a mortgage you're paying down for them).  It would be silly to rent right now in Vegas if you're staying even for a few years and have the means to do so.

Sometimes it makes sense to rent, and your landlord is subsidizing your living.  In this case, your rent doesn't cover all of the expenses.  It would be silly to buy (from an investment perspective) in SF or NY right now.

Home ownership can be an emotional thing, as Jamessqf points out.  But if you treat it purely as a numbers thing towards reaching FI, then whether or not homeownership makes sense depends entirely on your local real estate market.

Within the next 10 years I am planning on being a renter while owning 20+ homes.  Do it smart with the numbers, don't blanket statement that homeownership is always good or always bad.

Numbers only capture a part of the picture.  A young professional who buys because the numbers work may become discouraged from looking elsewhere for work because "I own this house and don't want to lose money by selling it so soon after I bought it."  I need more than two hands to count the number of people I know in this predicament.

Second, there is an entire mythology surrounding home ownership that connects the "American Dream" to owning a single family residence, and given that the majority of people in this country have virtually all their assets tied up in their home, while having little else, suggests to me an more insidious logic at work here.

I'm not making blanket statements -- hence the questioning nature of my posts.  But "it's quite simple, run the numbers" does seem like a blanket statement, don't you think?

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Re: Is Home Ownership Antithetical to FI?
« Reply #16 on: August 04, 2012, 03:45:41 PM »
Yes, if you need flexibility you may not want to purchase.

Yes, many purchase based on a dream of homeownership, and make it emotional.  That has nothing to do with logic, insidious or otherwise.

My point is that it's very straightforward from an FI side.  Making a logical, purely financial decision on homeownership is straightforward.

Some may still decide to buy (or not) regardless of that.  But the OP post was comparing renting to owning as part of your FI portfolio.  In that case, run the numbers.
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Re: Is Home Ownership Antithetical to FI?
« Reply #17 on: August 04, 2012, 05:00:29 PM »
I strongly agree.  Run the numbers.  This has an element of personal choice but if you are wanting to be sure that it makes financial sense this is a decision with a bottom line.  There are a number of calculators out there for rent vs. buy - I think the NY Times has one for the US (I'm in Canada) but it can be a purely logical numbers decision.

The only real variable is market ups and downs and if you can't ride those out then it, like other types of investments, becomes higher risk.

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Re: Is Home Ownership Antithetical to FI?
« Reply #18 on: August 04, 2012, 05:43:13 PM »
Running the numbers is essential,but these models remain assumption dependent- let's not forget that - and there are a lot of values outside these models to consider in the decision to buy.

SmedleyB, agree with most of your comment.

But if you have a big stash, owning is preferred I think. But then only moderately.

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Re: Is Home Ownership Antithetical to FI?
« Reply #19 on: August 04, 2012, 06:46:40 PM »
It depends on your time horizon. Well before the housing bubble began to grow, one could reasonably expect to break even if they bought a decent home, in a decent neighborhood, and held it for 5 years. They could also reasonably expect their home to double in value if held for 10-15 years.

If you are confident you will stay in one place for at least 10 years, owning makes the most FI "Cents". If you are prepared to be a landlord in the event you have to move down the road then owning still makes "Cents".

But if you are young and mobile, renting is your best option until you settle into one area.

There is an argument to be made that real estate and interest rates are a bargain today but we just don't know when this crazy economy wil ever get back to "normal".

 

 

smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #20 on: August 04, 2012, 07:42:19 PM »
Yes, if you need flexibility you may not want to purchase.

Yes, many purchase based on a dream of homeownership, and make it emotional.  That has nothing to do with logic, insidious or otherwise.

My point is that it's very straightforward from an FI side.  Making a logical, purely financial decision on homeownership is straightforward.

Some may still decide to buy (or not) regardless of that.  But the OP post was comparing renting to owning as part of your FI portfolio.  In that case, run the numbers.

I'd love to be a fly on your wall in the future:

"So, hey Rebel, nice apartment.  Ever think of buying a house?"

"Uh, yeah, I own twenty." lol!

I guess I see a little more nuance to the question than you do.  I agree there is a clear math component to the equation, but I don't think the numbers capture the entire picture.  Like you I envision myself renting in the future; I'm not sure if your's is a lifestyle or economic choice (maybe a little of both), but the flexibility to move around the globe and having time to do what I love (reading, writing, exploring) rather than home maintenance appeals to me. 


smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #21 on: August 04, 2012, 07:51:18 PM »
It depends on your time horizon. Well before the housing bubble began to grow, one could reasonably expect to break even if they bought a decent home, in a decent neighborhood, and held it for 5 years. They could also reasonably expect their home to double in value if held for 10-15 years.

If you are confident you will stay in one place for at least 10 years, owning makes the most FI "Cents". If you are prepared to be a landlord in the event you have to move down the road then owning still makes "Cents".

But if you are young and mobile, renting is your best option until you settle into one area.

There is an argument to be made that real estate and interest rates are a bargain today but we just don't know when this crazy economy wil ever get back to "normal".

Just think:  homeowner tax credit; billions for loan modifications; ridiculously low interest rates; and in the end, what did all that achieve for the residential real estate market?  Price stabilization at depressed levels!

We get back to normal the day the government lets the free market be "free" (which I don't see happening anytime soon). 

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Re: Is Home Ownership Antithetical to FI?
« Reply #22 on: August 04, 2012, 08:19:38 PM »
I think as Arebelspy stated that it depends on your area.  Here on the east coast houses are cheaper.  I paid 101500 for 1300 sq feet and now that the mortgage is paid off taxes and insurance together are 95 dollars a month.  The house would rent for about 850 dollars a month.  Basically barring anything breaking I pay 95 dollars a month to have shelter not counting gas and I could rent it if i have selling problems.  I think I could of done better if I was closer to work but I didnt really think of that until finding this site.  Having such low housing costs have made early retirement a lot more realistic.
« Last Edit: August 04, 2012, 08:23:16 PM by sowantere »

smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #23 on: August 04, 2012, 08:33:27 PM »
I think as Arebspy stated that it depends on your area.  Here on the east coast houses are cheaper.  I paid 101500 for 1300 sq feet and now that the mortgage is paid off taxes and insurance together are 95 dollars a month.  The house would rent for about 850 dollars a month.  Basically barring anything breaking I pay 95 dollars a month to have shelter not counting gas and I could rent it if i have selling problems.  I think I could of done better if I was closer to work but I didnt really think of that until finding this site.  Having such low housing costs have made early retirement a lot more realistic.

The Rebel don't mince words, and there is definitely a purely mathematical component to the question which eliminates the grey areas.

Congrats on paying off your house, BTW.  Here in NY state where I live, that same house would cost me $350 a month in just taxes and insurance, but the rent paid would be substantially similar to the $850 you tossed out there.   If you figure 100K in liquidity earning 5K a year, the scale between renting and owning a 100K house in my area is very balanced.   When you start looking at homes 150K and higher, the taxes alone push the scale in favor of renting; and when you have home like mine which is probably worth twice that (and I'm as far away from NY city as you can get), it feels like you're just working to pay the tax man ($800 a month to put an exact figure on it).

I guess my perception of the rent vs. own debate is definitely skewed by my state's property tax rate. 

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Re: Is Home Ownership Antithetical to FI?
« Reply #24 on: August 04, 2012, 11:04:01 PM »
Quote
Since there's just three of them, why not just rent a two bedroom apt for $1000 a month, and pocket the extra 12K a year?

Because I don't want to live in a two bedroom apartment.  Why not carry the idea to its logical conclusion?  Who needs an apartment?  Why not live out of the back of your car?  Indeed, who needs a car?  Get a shopping cart and live on the streets. 

Logical conclusion, or argumentative hyperbole?

Logical conclusion.  What's the point of achieving FI, if not to be able to live the way you want to live?  So maybe you are OK with the idea of living in an apartment, or a car, or on the streets.  I've done all of these, and much prefer living in a house, with land.  Or maybe I should reverse the priorities: it's the land that matters to me, the house is just a convenience.

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Re: Is Home Ownership Antithetical to FI?
« Reply #25 on: August 05, 2012, 01:52:21 AM »
I wanted my kid to grow up in a house I own.  Just like I wanted to be married before I had (adopted) him.  Don't know if either decision matters financially, but I think both are good for a sense of his (and our whole family's) emotional security.
   He'll probably move out in the next 2 years.  Our plan is to buy a few more houses (buying a couple as owner-occupied) to eventually (after a year of living in them)rent them out. Then we will move into an RV, and rent a space.  Around here nice spots can be had for $350-400 a month including electricity, water, sewer, trash. (I pay $200 + for those utilities in my house now.)  Of course, you still have to buy the RV.
Where I live I think this makes the most financial and lifestyle sense.
Heidi

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Re: Is Home Ownership Antithetical to FI?
« Reply #26 on: August 05, 2012, 08:47:43 AM »
Quote
Since there's just three of them, why not just rent a two bedroom apt for $1000 a month, and pocket the extra 12K a year?

Because I don't want to live in a two bedroom apartment.  Why not carry the idea to its logical conclusion?  Who needs an apartment?  Why not live out of the back of your car?  Indeed, who needs a car?  Get a shopping cart and live on the streets. 

Logical conclusion, or argumentative hyperbole?

Logical conclusion.  What's the point of achieving FI, if not to be able to live the way you want to live?  So maybe you are OK with the idea of living in an apartment, or a car, or on the streets.  I've done all of these, and much prefer living in a house, with land.  Or maybe I should reverse the priorities: it's the land that matters to me, the house is just a convenience.

Come on, you're being silly. It's no different than the following conversation:
A) Why do you as a single person spend $300 per month on groceries heavy on meat and organic products?
B) Why don't I eat nothing but rice and beans, or dumpster dive, or better yet starve to death!

MMM spends a lot of money on his house and he acknowledges it. It's nearly half of his true spending of $43k ($27k + 4% of $400k).

I live in a reasonably low cost area and rent an average sized apartment for $500. If I bought even a fairly modest home, I'd expect ownership costs to double my rent (even after it's paid off, in the form of opportunity cost). Personally I don't see why so many people, particularly singles, are willing to spend large amounts on housing. With a family it makes more sense. 

ETA: Owning could still be good for a single person if you buy a fixer upper and do most of the work yourself and are able and willing to do most of your own home maintenance. That's not me.
« Last Edit: August 05, 2012, 09:11:34 AM by mcneally »

arebelspy

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Re: Is Home Ownership Antithetical to FI?
« Reply #27 on: August 05, 2012, 09:11:19 AM »
I guess my perception of the rent vs. own debate is definitely skewed by my state's property tax rate.

Right, and that's one component of the math part of it.

But even if you were renting (and in your same area, or in another area with high property tax), if you were in a place with high rent to price ratios, you would still be paying that property tax, via a high rent (you'd pay it for your landlord).  If you were in a place with low rent to price ratios (and still that high property tax), you wouldn't be paying it.

It's just one factor to run in that math calculation.

(And I will say that - in theory - property prices should be slightly lower in a place with high property tax.  Most people look at what payment they can afford, which means PITI .. if the taxes component is larger, the principal part must necessarily be smaller. So it could, at least mostly, even out.)

As you (and others) pointed out, it's more than just a math decision.  Some want to "own" the roof over their heads.  Some, like Jamessqf, want the land.  Others want the flexibility of renting.

Certainly emotions can play a role.

But as far as the OP question of which is better financially (investing it and renting versus owning) and the question in the title, about Home Ownership relating to FI ... it's all about the numbers, not emotions. 

I'd say that - in general - it's better to buy right now due to the historically low interest rates and low housing market.  That's not true of all areas though, so run the numbers for your area.
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Re: Is Home Ownership Antithetical to FI?
« Reply #28 on: August 05, 2012, 09:14:03 AM »
If I was in the US I would definitely be looking to buy properties right now in areas which have already experienced deflation.  I was looking at Phoenix anyway but, being a Canadian, the rules are too restrictive for me and I don't want to deal with the taxes.

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Re: Is Home Ownership Antithetical to FI?
« Reply #29 on: August 05, 2012, 09:16:17 AM »
Quote
MMM spends a lot of money on his house and he acknowledges it. It's nearly half of his true spending of $43k ($27k + 4% of $400k).

Could you explain how MMM's budget is really $43K? Where does that 4% come from - are you pretending he pays as much tax as you for the sake of argument? Based on his 2011 budget I don't get what that is based on - unless you're factoring in opportunity costs into the budget? (Which to me doesn't seem like a reasonable way to calculate total spending.)

If he really spent $43K, that would blow my mind, as it would mean my family is just as frugal as they are. But that just doesn't seem possible, so i assume I'm missing something.

mcneally

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Re: Is Home Ownership Antithetical to FI?
« Reply #30 on: August 05, 2012, 09:22:56 AM »
Quote
MMM spends a lot of money on his house and he acknowledges it. It's nearly half of his true spending of $43k ($27k + 4% of $400k).

Could you explain how MMM's budget is really $43K? Where does that 4% come from - are you pretending he pays as much tax as you for the sake of argument? Based on his 2011 budget I don't get what that is based on - unless you're factoring in opportunity costs into the budget? (Which to me doesn't seem like a reasonable way to calculate total spending.)


Yes, I am talking about opportunity cost. I think not doing so would be an unreasonably way of talking about spending. That's why in the 4% article MMM said his lifestyle could be had for around $1 million, rather than $675k ($27k divided by 4%).

arebelspy

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Re: Is Home Ownership Antithetical to FI?
« Reply #31 on: August 05, 2012, 09:27:55 AM »
Quote
MMM spends a lot of money on his house and he acknowledges it. It's nearly half of his true spending of $43k ($27k + 4% of $400k).

Could you explain how MMM's budget is really $43K? Where does that 4% come from - are you pretending he pays as much tax as you for the sake of argument? Based on his 2011 budget I don't get what that is based on - unless you're factoring in opportunity costs into the budget? (Which to me doesn't seem like a reasonable way to calculate total spending.)

If he really spent $43K, that would blow my mind, as it would mean my family is just as frugal as they are. But that just doesn't seem possible, so i assume I'm missing something.

He has a paid for home, which costs $400k.

If he instead invested that 400k at a 4% SWR, that'd be 16k/yr, or 1,333.33 per month.

Let's say I retired with a portfolio of 1.2 million, no paid for house.  I could use 800k of that 1.2MM to generate 32,000 for living expenses, and the other 400k to generate 16k for housing.  I then pay for a mortgage or rent with that 16k.

OR I buy a house for 400k, now my portfolio is only 800k total, still generates that 32k living expenses, but eliminates my need to pay housing (ignoring taxes and insurance, we can pretend in both scenarios they come out of the 32k).

Either way, if you count your budget and it has a housing expense or it doesn't - to compare apples to apples you'd want to do what mcneally did and count what that money invested in your housing could be returning you - because that return you're giving up is essentially what you are paying for housing, thus part of your budget (though an invisible part).
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Re: Is Home Ownership Antithetical to FI?
« Reply #32 on: August 05, 2012, 12:51:47 PM »
Come on, you're being silly. It's no different than the following conversation:
A) Why do you as a single person spend $300 per month on groceries heavy on meat and organic products?
B) Why don't I eat nothing but rice and beans, or dumpster dive, or better yet starve to death!

It's not being silly, it's using a reductio ad absurdum to force examination of the initial premise.  There are two conflicting goals here: to eat nutritious and reasonably tasty food, and to reduce food spending.  So why don't you eat nothing but rice & beans, stretched out with whatever you can easily obtain by dumpster-diving? 

Quote
I live in a reasonably low cost area and rent an average sized apartment for $500. If I bought even a fairly modest home, I'd expect ownership costs to double my rent (even after it's paid off, in the form of opportunity cost). Personally I don't see why so many people, particularly singles, are willing to spend large amounts on housing.

The numbers are a bit different here: I pay less in mortgage &c than it would cost to rent a similar place.  The key, though, is similar.  There are really two separate questions here.  First, what kind of housing do you want?  Do you want (as I do) an acreage with trees & gardens?  Would you prefer an apartment that's essentially a place to sleep?  Or could you be content with a cardboard box in an alley somewhere?  Only when you've answered this question can you really address the question of whether it's cheaper to buy or rent. 

(Of course there are other factors, such as flexibility in moving.)

Once you've decided on a given quality, though, I don't see how (in general - market distortions may create particular local condidions) it would be cheaper to rent than buy.  If you rent, the landlord must pay the same mortgage, taxes, upkeep, &c, and add his profit on top.

PaulM12345

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Re: Is Home Ownership Antithetical to FI?
« Reply #33 on: August 05, 2012, 01:42:55 PM »
Thanks for the explanation, Rebel. That makes sense and, while probably very basic, I hadn't really looked at things that way. Owning a house, once you've paid it off, is not "free". Too bad, that was an essential part of my self-justification for home buying! But really, the stability of home ownership makes up for the the loss in potential investment income.

I know people are often warning not to buy a home as an investment (unless it's for rental purposes), but is it logical to think of having a paid off home as a form of investment diversification? The "return" on a home (saved rent) is stable and independent of the stock market fluctuations. Whereas if I rented and put my $400K in the market along with all my other investments, my stash would be allocated less diversely and thus be more vulnerable.

From this perspective, home ownership isn't antithetical to FI, even if it costs somewhat more (to bring things back to the topic of this thread).

mcneally

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Re: Is Home Ownership Antithetical to FI?
« Reply #34 on: August 05, 2012, 01:48:38 PM »
Housing is a personal choice based on your goals and preferences like anything else. The OP is pointing out that some people, for an example we're all familiar with- MMM, spend a lot of (sometimes hidden) money on housing. Others- OP and myself- find such housing costs extravagant.

I spend far more on driving than most people in this forum, and as a result, I don't expect to be FI for another 14 years. If someone wants to point out to me that I spend a lot of money on driving, I'm going to respond with "Yes, I do spend a lot on driving. Given my particular situation and preferences (housing is more expensive near work, most friends live near my apartment, family is all out of state) the costs are worth it to me at the moment." I'm not going to say "Why don't I just never leave my apartment then!"


Once you've decided on a given quality, though, I don't see how (in general - market distortions may create particular local condidions) it would be cheaper to rent than buy.  If you rent, the landlord must pay the same mortgage, taxes, upkeep, &c, and add his profit on top.

My thoughts are on renting an apartment rather than buying a house. If the benefits of a single family home are worth the cost to you (along with the advantages and disadvantages of ownership), buying a house for the long term will usually be a better deal than renting a similar house for the long term.

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Re: Is Home Ownership Antithetical to FI?
« Reply #35 on: August 05, 2012, 01:54:46 PM »
Come on, you're being silly. It's no different than the following conversation:
A) Why do you as a single person spend $300 per month on groceries heavy on meat and organic products?
B) Why don't I eat nothing but rice and beans, or dumpster dive, or better yet starve to death!

It's not being silly, it's using a reductio ad absurdum to force examination of the initial premise. There are two conflicting goals here: to eat nutritious and reasonably tasty food, and to reduce food spending.  So why don't you eat nothing but rice & beans, stretched out with whatever you can easily obtain by dumpster-diving? 

Quote
I live in a reasonably low cost area and rent an average sized apartment for $500. If I bought even a fairly modest home, I'd expect ownership costs to double my rent (even after it's paid off, in the form of opportunity cost). Personally I don't see why so many people, particularly singles, are willing to spend large amounts on housing.

The numbers are a bit different here: I pay less in mortgage &c than it would cost to rent a similar place.  The key, though, is similar.  There are really two separate questions here.  First, what kind of housing do you want?  Do you want (as I do) an acreage with trees & gardens?  Would you prefer an apartment that's essentially a place to sleep?  Or could you be content with a cardboard box in an alley somewhere?  Only when you've answered this question can you really address the question of whether it's cheaper to buy or rent. 

(Of course there are other factors, such as flexibility in moving.)

Once you've decided on a given quality, though, I don't see how (in general - market distortions may create particular local condidions) it would be cheaper to rent than buy.  If you rent, the landlord must pay the same mortgage, taxes, upkeep, &c, and add his profit on top.

Reductio is a fallacy, and like all fallacies it's function is to kill rational debate, not function as a catalyst for further discussion. 

Secondly, your analysis of why owning is always cheaper than renting I think relies of the presupposition that everyone rents single family homes from landlords who all have 80% mortgages on their properties, which is obviously false.

mcneally

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Re: Is Home Ownership Antithetical to FI?
« Reply #36 on: August 05, 2012, 02:25:20 PM »
Reductio ad absurdum is technically not a fallacy but generally used poorly and only serves to get the opponent to make what should be a fairly obvious qualification.

a) Spend less on housing.
b) You mean spending nothing on housing?
a) No, that would be stupid. Spend a reasonable amount. How about 30% less if you want a hard figure.
b) OK.

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Re: Is Home Ownership Antithetical to FI?
« Reply #37 on: August 05, 2012, 02:44:14 PM »
Reductio ad absurdum is technically not a fallacy but generally used poorly and only serves to get the opponent to make what should be a fairly obvious qualification.

a) Spend less on housing.
b) You mean spending nothing on housing?
a) No, that would be stupid. Spend a reasonable amount. How about 30% less if you want a hard figure.
b) OK.

I meant to say in this context the reductio is definitely being used fallaciously.   


James

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Re: Is Home Ownership Antithetical to FI?
« Reply #38 on: August 05, 2012, 03:37:51 PM »
I'm beginning to think home ownership has no place in a radical lifestyle focused solely on FI.

Thankfully neither I nor MMM are "in a radical lifestyle focused solely on FI".

OWHL

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Re: Is Home Ownership Antithetical to FI?
« Reply #39 on: August 05, 2012, 03:58:53 PM »
Can anyone give me the criteria list for "run the numbers?" Everyone keeps alluding to checking the "numbers," emotions, situation, etc. What are the categories that will help us decide if owning is better than renting? Are they necessary ones or only sufficient?

Could financial gain resulting from owning property be a mere bi-product of our misguided foundation of beliefs? In other words, why must we own a home? I would have reason to believe that the response "purely for financial gain" is not the intention, but something ontological, metaphysical, behavioral, etc. 

There is no more room today to say that our survival depends on staying in one place because our food and shelter is here. So why shun the Nomads in this era?

I'm beginning to think home ownership has no place in a radical lifestyle focused solely on FI.

Thankfully neither I nor MMM are "in a radical lifestyle focused solely on FI".

That depends on what is meant by the statement, "radical lifestyle focused solely on FI."
One may have reason to believe MMM is focused solely on FI (by always watching the numbers) causing such a lifestyle to be dubbed "radical." This may all be relative, unless it is shown that owning a home does more harm than good (without the financial numbers since they are only secondary qualities).

arebelspy

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Re: Is Home Ownership Antithetical to FI?
« Reply #40 on: August 05, 2012, 04:40:13 PM »
Can anyone give me the criteria list for "run the numbers?" Everyone keeps alluding to checking the "numbers," emotions, situation, etc. What are the categories that will help us decide if owning is better than renting?

Speaking strictly from a financial standpoint, check out the various buy versus rent calculators out there.

Here's an article from two days ago that talks about why it's better to buy than rent in most places right now. 

www.njherald.com/story/19176674/in-most-of-us-buying-beats-renting-after-only-three-years

Quote
All possible costs associated with buying and renting were incorporated into the analysis, including down payment, mortgage and rental payments, transaction costs, property taxes, utilities, maintenance costs, tax deductions and opportunity costs, while adjusting for inflation and forecasted home value and rental price appreciation.

My tenants often pay me 1000 rent on a place with PITI of 400/mo.  I guarantee it wouldn't cost them 7,200/year in maintenance (I know because I pay the maintenance).

In my city, the break even point is 1.7 years.  That is, if you are going to live there for two years, it's better to buy (even factoring in all buying and selling costs).  You'll save money over renting.  And every year over that, obviously, is more money you save.

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totoro

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Re: Is Home Ownership Antithetical to FI?
« Reply #41 on: August 05, 2012, 04:57:39 PM »
Here is a calculator that also factors in lost opportunity costs: http://www.nytimes.com/interactive/business/buy-rent-calculator.html

smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #42 on: August 05, 2012, 05:02:26 PM »
Can anyone give me the criteria list for "run the numbers?" Everyone keeps alluding to checking the "numbers," emotions, situation, etc. What are the categories that will help us decide if owning is better than renting?

Speaking strictly from a financial standpoint, check out the various buy versus rent calculators out there.

Here's an article from two days ago that talks about why it's better to buy than rent in most places right now. 

www.njherald.com/story/19176674/in-most-of-us-buying-beats-renting-after-only-three-years

Quote
All possible costs associated with buying and renting were incorporated into the analysis, including down payment, mortgage and rental payments, transaction costs, property taxes, utilities, maintenance costs, tax deductions and opportunity costs, while adjusting for inflation and forecasted home value and rental price appreciation.

My tenants often pay me 1000 rent on a place with PITI of 400/mo.  I guarantee it wouldn't cost them 7,200/year in maintenance (I know because I pay the maintenance).

In my city, the break even point is 1.7 years.  That is, if you are going to live there for two years, it's better to buy (even factoring in all buying and selling costs).  You'll save money over renting.  And every year over that, obviously, is more money you save.

I bet anything the Zillow study is based on the idea that property values have "bottomed" and will rise gradually over the intermediate term (my guess is 2% a year).

Which, mind you, is a highly speculative assumption...

edit:  Okay, got the PDF of the study.  Conditions of buyer:

-- 20% down, 3.56 on a 30 years mortgage (how many people fit this criteria); 5% home appreciation the first year! plus 2% appreciation each year after.

Come on...





« Last Edit: August 05, 2012, 05:08:01 PM by smedleyb »

James

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Re: Is Home Ownership Antithetical to FI?
« Reply #43 on: August 05, 2012, 05:58:17 PM »
Thankfully neither I nor MMM are "in a radical lifestyle focused solely on FI".

That depends on what is meant by the statement, "radical lifestyle focused solely on FI."
One may have reason to believe MMM is focused solely on FI (by always watching the numbers) causing such a lifestyle to be dubbed "radical." This may all be relative, unless it is shown that owning a home does more harm than good (without the financial numbers since they are only secondary qualities).


I do not believe MMM considers his lifestyle to be "radical", he has said owning his house is an extra that they enjoy and chose to have despite the added expense.  I don't think FI is his sole concern.  I am open to being convinced by MMM or yourself, what I gave was simply my opinion based on having read all of his posts.  But if I'm wrong it wouldn't be the first time...  :)

arebelspy

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Re: Is Home Ownership Antithetical to FI?
« Reply #44 on: August 05, 2012, 08:16:35 PM »

I bet anything the Zillow study is based on the idea that property values have "bottomed" and will rise gradually over the intermediate term (my guess is 2% a year).

Which, mind you, is a highly speculative assumption...

edit:  Okay, got the PDF of the study.  Conditions of buyer:

-- 20% down, 3.56 on a 30 years mortgage (how many people fit this criteria); 5% home appreciation the first year! plus 2% appreciation each year after.

Come on...

Thus why I say to run your own numbers?

The NYT buy/rent calc makes it easy to put in your assumptions (say.. 0% appreciation, if that's your thing).

Even changing those numbers only slightly changes your break even time.  I'm still betting many areas it's worth it to buy, just based on the low purchase prices and low mortgage rates.

(Again, YMMV based on area, emotions, flexibility needed, etc.)
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Re: Is Home Ownership Antithetical to FI?
« Reply #45 on: August 05, 2012, 11:40:22 PM »
Reductio ad absurdum is technically not a fallacy but generally used poorly and only serves to get the opponent to make what should be a fairly obvious qualification.

a) Spend less on housing.
b) You mean spending nothing on housing?
a) No, that would be stupid. Spend a reasonable amount. How about 30% less if you want a hard figure.
b) OK.

Why is spending nothing on housing stupid?  If all you care about is minimizing living costs in order to save more, it seems like a pretty sensible alternative.  There was a time in my life (doing itinerant construction work) when living out of my car made sense for me, financially and otherwise.  There've been other times when having a couple of roommates in an apartment made sense.  Then it made sense to buy a condo (did pretty well out of it, too).

You're still putting the cart before the horse.  You need to decide how you want to live first, then how to attain it.  If you are the sort of person who can be content in a small apartment, or who likes to move frequently, then home ownership is probably not for you.  If you think of home ownership as an investment, then it may or may not make sense depending on the numbers of your particular situation.  There are, however, a lot of us for whom it's a goal in itself.

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Re: Is Home Ownership Antithetical to FI?
« Reply #46 on: August 06, 2012, 04:29:16 AM »
One argument against buying is this:

I'll personalize it.  A 65 year old baby boomer just argued to me and my wife that we should buy a house because "it's the best time in history to buy."  And the counterargument that sprung to my mind was just to evaluate his own success with owning.  (I didn't say this out loud, just thought it.)

He has been making mortgage payments for most of his life.  Maybe a few years of renting here and there, but mostly mortgage payments over the past 40 years or so.  The longest mortgages are 30 years.  And nominal housing prices have soared over this period.  So in theory, most people his age should own their house outright by now.  But no.  In fact, he just refinanced his current house, in which he has about 10-15% equity, into a new 30-year mortgage, on which he will be paying until he is 95! 

Somehow, the power of "owning" did not work for him.  And he is far from alone.  The average % of equity people have in their houses is very small compared to history.  Now, he has his own issues, and we can blame a lot of this on general baby boomer profligacy and we can also blame a lot of this on the big housing bubble. 

But, the facts are quite shocking.  If ownership is such a good deal, 40 years of payments and a tailwind of huge nominal appreciation of house prices over the past 4 decades should have made it incredibly easy for people to own their houses outright.  And yet millions and millions of people who benefitted from these tailwinds and made huge payments over very long periods of time did not benefit.  And that's before considering the opportunity cost.  If they could have saved just $100 a month by renting instead of owning, and invested that over the last 40 years, they'd all be millionaires. 

So, what went wrong?  I think several things: 

1) these bad outcomes are from situations where people borrow from banks.  Buying outright saves tons of money in interest payments to banks.  If you buy a $200,000 with a mortgage and pay it over 30 years, even with 20% down, you could easily pay twice the purchase price in payments (even more in previous higher interest rate eras).  So, even with the opportunity cost, buying outright could be great, but borrowing money you couldn't save and paying a lifetime of interest to a bank creates a big headwind for any "investment."

2) The housing bubble obviously hurt people.   Most people who bought anything between 2003-2008 have seen significant losses in equity.

3) The trade up mentality.  If over a lifetime people continued to reinvest housing gains in bigger and bigger houses, they never got the benefit of paying off that first house and living rent free in it.  They would argue that they captured their investment benefits in a steadily rising lifestyle in successively bigger and better houses.  Which is somewhat true.  But the problem is that it means that many people who "owned" all along still effectively became new leveraged buyers of big houses in recent (high-priced) years.

4) The way mortgages amortize.  The principal paydown is backloaded.  In the first 10 years of a 30-year mortgage, owning and renting are similar.  Both people are "throwing money away" either on rent or on interest.  In the last 10 years o.f a 30-year mortgage, a lot of the payment really does build equity.  But if people move after 7 years on average, they never get to the sweet spot of principal repayment.  They just rent from banks instead of landlords

5) Transaction costs.  Buying and selling houses enriches the real estate industry.  The math looks great for owning if you hold for a long time.  But if the typical person moves houses every 7 years, it means that they pay 7% of the asset value 4 times during the life of a typical 30 year mortgage or maybe 6 times over a typical working/homeowning life.  So that's 28% to 42% of the total value of the house lost to real estate agent commissions.  If house prices are going up, those percentages look even higher as a percent of the original purchase prices.  And if houses are mortgaged, those percentages look even higher as a percent of the equity in the house.  (Example:  20% down, hold for 5 years, pay down principle a bit so you now have 27% equity, sell after 5 years, pay 7% of total value of house, 100% of your principle paydown is GONE--paid to the real-estate agent.)

So, we've got a big historical experiment we can look at.  Decades of nominal house price appreciation and declining mortgage rates have left society as a whole with a lower % of equity than we started with.  Many people made a killing in real estate, but many did not.  Just being an average person, buying a house, moving every seven years, listening to advice from real estate agents, etc....and the reality of homeownership was less good than the promise. 

So, it seems to me that average owning is not such a great deal.  Real-estate law, taxation, industry structure, etc. all adds up to a big system.  And those systems were not designed to enrich the little guy who had no hand in setting them up.  Banks, governments, and real-estate agents made a ton of money, and they did it at homeowner expense.

Obviously owning can be great, but I would argue that it has to be done very well to pay off.  Maybe it should include:
* Getting a below market price from a motivated seller
* Buying at "a good time" when prices are not too inflated
* Buying without a mortgage, or with a very low-cost mortgage (maybe now IS a good time for that)
* Buying to own for the long-term.  Either staying put or being fully prepared to rent out a place rather than letting real-estate transactions eat your gain
* Buy and sell without an agent?  Unless the agent can add value greater than his or her fee.
* Negotiating down the realtor % fee
* etc.

champion

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Re: Is Home Ownership Antithetical to FI?
« Reply #47 on: August 06, 2012, 04:32:39 AM »
One thought for the discussion:

One interesting dynamic is that apartments are often rented and free-standing houses are often owned.  This can sometimes mean that for those who want to live in a free-standing house it can be more of a "buyers' market" for renters than for buyers.  In other words, there will be more competition to buy a for-sale house than to rent a house.  So if I want to live in a 4 bedroom house in a good school district, almost everyone who wants to live there will be "the buying type."  That means that if a few home-owners need to rent their places out, for example because they are moving and having trouble doing a short sale, or holding out for hoped-for price increases before buying, I will be one of the few possible renters.  I don't know if any of this is true, but I think it could be.  Even as the economy and culture have shifted and fewer people are blindly dedicated to owning, I think owning is still the dominant preference for families, suburbanites, etc.  And maybe being the contrarian in those markets could yield benefits because I'd be one of few potential renters and those who suddenly need to be landlords would have to compete for my business.  (and maybe buying an urban apartment where there's a strong culture of young professionals renting could have similar contrarian buyer benefits) 

What do you guys think about this?  Does this make any sense?  Anyone do well renting the type of houses that are often owned?  Anyone do well buying apartments to rent to young urban professionals?

Mr Mark

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Re: Is Home Ownership Antithetical to FI?
« Reply #48 on: August 06, 2012, 07:06:24 AM »
One argument against buying is this:

I'll personalize it.  A 65 year old baby boomer just argued to me and my wife that we should buy a house because "it's the best time in history to buy."  And the counterargument that sprung to my mind was just to evaluate his own success with owning.  (I didn't say this out loud, just thought it.)

He has been making mortgage payments for most of his life.  Maybe a few years of renting here and there, but mostly mortgage payments over the past 40 years or so.  The longest mortgages are 30 years.  And nominal housing prices have soared over this period.  So in theory, most people his age should own their house outright by now.  But no.  In fact, he just refinanced his current house, in which he has about 10-15% equity, into a new 30-year mortgage, on which he will be paying until he is 95! 

Somehow, the power of "owning" did not work for him.  And he is far from alone.  The average % of equity people have in their houses is very small compared to history.  Now, he has his own issues, and we can blame a lot of this on general baby boomer profligacy and we can also blame a lot of this on the big housing bubble. 

But, the facts are quite shocking.  If ownership is such a good deal, 40 years of payments and a tailwind of huge nominal appreciation of house prices over the past 4 decades should have made it incredibly easy for people to own their houses outright.  And yet millions and millions of people who benefitted from these tailwinds and made huge payments over very long periods of time did not benefit.  And that's before considering the opportunity cost.  If they could have saved just $100 a month by renting instead of owning, and invested that over the last 40 years, they'd all be millionaires. 

So, what went wrong?  I think several things: 

1) these bad outcomes are from situations where people borrow from banks.  Buying outright saves tons of money in interest payments to banks.  If you buy a $200,000 with a mortgage and pay it over 30 years, even with 20% down, you could easily pay twice the purchase price in payments (even more in previous higher interest rate eras).  So, even with the opportunity cost, buying outright could be great, but borrowing money you couldn't save and paying a lifetime of interest to a bank creates a big headwind for any "investment."

2) The housing bubble obviously hurt people.   Most people who bought anything between 2003-2008 have seen significant losses in equity.

3) The trade up mentality.  If over a lifetime people continued to reinvest housing gains in bigger and bigger houses, they never got the benefit of paying off that first house and living rent free in it.  They would argue that they captured their investment benefits in a steadily rising lifestyle in successively bigger and better houses.  Which is somewhat true.  But the problem is that it means that many people who "owned" all along still effectively became new leveraged buyers of big houses in recent (high-priced) years.

4) The way mortgages amortize.  The principal paydown is backloaded.  In the first 10 years of a 30-year mortgage, owning and renting are similar.  Both people are "throwing money away" either on rent or on interest.  In the last 10 years o.f a 30-year mortgage, a lot of the payment really does build equity.  But if people move after 7 years on average, they never get to the sweet spot of principal repayment.  They just rent from banks instead of landlords

5) Transaction costs.  Buying and selling houses enriches the real estate industry.  The math looks great for owning if you hold for a long time.  But if the typical person moves houses every 7 years, it means that they pay 7% of the asset value 4 times during the life of a typical 30 year mortgage or maybe 6 times over a typical working/homeowning life.  So that's 28% to 42% of the total value of the house lost to real estate agent commissions.  If house prices are going up, those percentages look even higher as a percent of the original purchase prices.  And if houses are mortgaged, those percentages look even higher as a percent of the equity in the house.  (Example:  20% down, hold for 5 years, pay down principle a bit so you now have 27% equity, sell after 5 years, pay 7% of total value of house, 100% of your principle paydown is GONE--paid to the real-estate agent.)

So, we've got a big historical experiment we can look at.  Decades of nominal house price appreciation and declining mortgage rates have left society as a whole with a lower % of equity than we started with.  Many people made a killing in real estate, but many did not.  Just being an average person, buying a house, moving every seven years, listening to advice from real estate agents, etc....and the reality of homeownership was less good than the promise. 

So, it seems to me that average owning is not such a great deal.  Real-estate law, taxation, industry structure, etc. all adds up to a big system.  And those systems were not designed to enrich the little guy who had no hand in setting them up.  Banks, governments, and real-estate agents made a ton of money, and they did it at homeowner expense.

Obviously owning can be great, but I would argue that it has to be done very well to pay off.  Maybe it should include:
* Getting a below market price from a motivated seller
* Buying at "a good time" when prices are not too inflated
* Buying without a mortgage, or with a very low-cost mortgage (maybe now IS a good time for that)
* Buying to own for the long-term.  Either staying put or being fully prepared to rent out a place rather than letting real-estate transactions eat your gain
* Buy and sell without an agent?  Unless the agent can add value greater than his or her fee.
* Negotiating down the realtor % fee
* etc.

Great post. Your observations are spot on - most people consume more housing than they can afford, encouraged by the system (tax deductible interest payments),HELOCs, and keep withdrawing any equity for other consumption.

Getting a 30yr mortgage at 3% is incredible (almost free money given expected inflation),but only if you have offsetting investments elsewhere!

Unfortunately our whole system is built on continuous growing consumption. Most people will never reach FI. They will remain hamsters on a wheel, paying for the car, the cable, the Mac mansion, the credit cards,etc.

smedleyb

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Re: Is Home Ownership Antithetical to FI?
« Reply #49 on: August 06, 2012, 07:29:30 AM »
So, it seems to me that average owning is not such a great deal.  Real-estate law, taxation, industry structure, etc. all adds up to a big system.  And those systems were not designed to enrich the little guy who had no hand in setting them up.  Banks, governments, and real-estate agents made a ton of money, and they did it at homeowner expense.

Great post Champion.  And this passage gets to the heart of the matter, IMO.