Author Topic: This guy did most things right EXCEPT  (Read 17173 times)

jhartt3

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This guy did most things right EXCEPT
« on: March 18, 2014, 08:24:23 PM »
https://learn.bluebird.com/2014/02/how-i-paid-100000-off-my-mortgage-in-under-2-years/

terrible.  So the last 2 years you paid off 100k on a mortgage at less than 4% and you consider yourself responsible ... yep me too i gave up over 20% of what my dollars could have made in the interest of being frugal... 100k x 20% = 120k   paying off 100k of mortgage including inflation 105.5k.   man where did my new boat go ... i dunno you spent it on being terrible.  this is the equivalent of buying a depreciating asset.

uh oh i didnt compound that interest ... still a terrible decision

Market avg for home growth meets inflation.  so by investing your 100K in inflation you broke even. 

alternatively you could have invested in the market. 5.5% not counting inflation.   but wait you F.d yourself the lasst 2 years were the best 2 years since the market was founded. 

yes you cant predict the market but this article cant get any worse

IN THE BEST 2 YEARS OF THE MARKET SINCE ST. LOUIS INVENTED THE WAFFLE CONE AND SPARKED A REVOLUTION YOU DECIDED .....

I'LL HIDE IT UNDER MY BED.

Milspecstache

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Re: This guy did most things right EXCEPT
« Reply #1 on: March 18, 2014, 09:35:32 PM »
I actually applaud the guy.  To use Dave Ramsey's words, if you owned your own home, free and clear, would you take out a loan at x% and invest it in stocks?

I'd hope the answer would be no because the truth does exist that you are handing over ownership of your home to someone else.  I always admire people who own their own homes and don't have to worry about the next paycheck.  This guy has no debt!  What an awesome concept!

Dicey

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Re: This guy did most things right EXCEPT
« Reply #2 on: March 18, 2014, 10:50:27 PM »
What an awesome concept!

Actually, compound interest is an even more awesome concept. Prepaying a mortage at the expense of retirement savings is short-sighted indeed.

cdub

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Re: This guy did most things right EXCEPT
« Reply #3 on: March 18, 2014, 10:55:30 PM »
Uh no. Not short sighted at all. Reducing my monthly mandatory expenses by the amount of my mortgage payment would sure give me a whole hella lot of security and peace of mind.

Now... if this person only paid off his house and didn't invest at all for retirement then that wouldn't be good. But if he paid off his house while saving and maxing his 401k at the same time (as I am doing) then that is just dandy.

I'd rather not have any debt at all. Paying off my mortgage is first on my list.

wizlem

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Re: This guy did most things right EXCEPT
« Reply #4 on: March 18, 2014, 11:04:02 PM »
Give me a break. This ignorant rant is all based around market timing. It could easily turn out in reverse and the market could lose 20% in a given year. Guess you should berate anyone who rapidly paid off their house in 2007 as well. I mean why do that when you could have sold your house and used all that money for a downpayment on a even bigger better house since its an investment.

dragoncar

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Re: This guy did most things right EXCEPT
« Reply #5 on: March 18, 2014, 11:10:14 PM »
Guess you should berate anyone who rapidly paid off their house in 2007 as well.

Well that person would probably have come out behind, given the recent market gains.

This topic has been discussed before a lot, but I'll just say that I'm in the "liquid assets" camp.

Khan

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Re: This guy did most things right EXCEPT
« Reply #6 on: March 19, 2014, 01:01:52 AM »
Arguing over market returns vs "good debt" is like arguing over whether you'd like a Ferrari or a Lamborghini.

Think about it like this: this is a good problem to have. Whether you sleep better at night with no debt/liabilities to your name, or with tons of assets, can we say you're not in a good position?

quilter

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Re: This guy did most things right EXCEPT
« Reply #7 on: March 19, 2014, 04:40:06 AM »
You never know. We paid cash for our house two years ago right before the housing market turned here. It has appreciated over 30%. You never can predict housing or stock markets but you can lay your head on a pillow at night and sleep soundly with no debt. You have to spend much less with no mortgage payment enabling you to save more, or as this guy is thinking, switch to a lower paying free lance writing job.

There is no one size fits all.

Roland of Gilead

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Re: This guy did most things right EXCEPT
« Reply #8 on: March 19, 2014, 05:43:23 AM »
If you had paid off your house prior to 2008 just think of all of the cheap stocks you could have purchased each month in 2008-2010 with that $1500 payment you didn't have to make! 

nereo

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Re: This guy did most things right EXCEPT
« Reply #9 on: March 19, 2014, 05:55:26 AM »
https://learn.bluebird.com/2014/02/how-i-paid-100000-off-my-mortgage-in-under-2-years/


I'm not going to fault someone for wanting to pay down debt faster, even if on average the market beats his interest rate.  In fact, there have been 10 year periods when real-adjusted returns have been slightly negative. They're rare; the market has beaten inflation 88% of the time over 10 year spans and averages over 9% in real-adjusted returns, but they happen.

Also, Canada's mortgage system is a bit different than the US.  He stated he had a fixed five-year term.  In Canada, after the fixed term ends it resets for another term (it's like an ARM, only instead of adjusting annually his adjusts every five years).  The historical average for mortgage rates is closer to 6%.  By paying down a lot now he's hedging against a likely increase in his mortgage in a few years.

He made a conservative but responsible decision. 

arebelspy

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Re: This guy did most things right EXCEPT
« Reply #10 on: March 19, 2014, 07:32:05 AM »
I actually applaud the guy.  To use Dave Ramsey's words, if you owned your own home, free and clear, would you take out a loan at x% and invest it in stocks?

Hell yeah I would!

I own several homes free and clear, and would mortgage the hell out of them at today's rates if I could (alas, I already have too many mortgages).

Nords DID do this.

I'd hope the answer would be no because the truth does exist that you are handing over ownership of your home to someone else.

Well no, that's not true.  That's not true at all.

https://learn.bluebird.com/2014/02/how-i-paid-100000-off-my-mortgage-in-under-2-years/


I'm not going to fault someone for wanting to pay down debt faster, even if on average the market beats his interest rate.  In fact, there have been 10 year periods when real-adjusted returns have been slightly negative. They're rare; the market has beaten inflation 88% of the time over 10 year spans and averages over 9% in real-adjusted returns, but they happen.

Also, Canada's mortgage system is a bit different than the US.  He stated he had a fixed five-year term.  In Canada, after the fixed term ends it resets for another term (it's like an ARM, only instead of adjusting annually his adjusts every five years).  The historical average for mortgage rates is closer to 6%.  By paying down a lot now he's hedging against a likely increase in his mortgage in a few years.

He made a conservative but responsible decision. 

Excellent post!  I agree with all of this.

It's not the best decision math-wise, but I can't fault someone for doing it.
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skunkfunk

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Re: This guy did most things right EXCEPT
« Reply #11 on: March 19, 2014, 09:26:51 AM »

It's not the best decision math-wise, but I can't fault someone for doing it.

There is real value in reducing uncertainty. You may not have as much on average doing it that way, but you will reduce the likelihood of catastrophic failure by paying down debt rather than investing in a potentially volatile market. You can, mathematically speaking, make a case for doing it this way, especially in the short term.

seattlecyclone

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Re: This guy did most things right EXCEPT
« Reply #12 on: March 19, 2014, 09:39:33 AM »

It's not the best decision math-wise, but I can't fault someone for doing it.

There is real value in reducing uncertainty. You may not have as much on average doing it that way, but you will reduce the likelihood of catastrophic failure by paying down debt rather than investing in a potentially volatile market. You can, mathematically speaking, make a case for doing it this way, especially in the short term.

Indeed. You'll increase your average expected wealth by investing in the market instead of paying off your mortgage, especially with today's low interest rates. However you'll reduce your standard deviation of expected wealth by paying off the mortgage, and you'll also have a smaller set of required monthly expenditures when your mortgage is gone. The upside is lower that way, but the downside of an unexpected job loss or macroeconomic decline can also be muted somewhat. They're both valid choices. The right one for you depends on your risk tolerance.

Prairie Stash

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Re: This guy did most things right EXCEPT
« Reply #13 on: March 19, 2014, 10:08:19 AM »
I di a similar thing, started paying down in 2007 though, when my mortgage was at 5%.

Canada mortgages are different.  No mortgage interest deduction. Fixed terms , so every few years you get a new rate.  With the prospect of an increased rate in 3 years the guy is hedging against increasing rates. it's pretty likely rates will be rising someday, he doesn't have a choice in 2-3 years but to get a higher rate loan. If it comes in at 6% is it smart then?

Next, in Canada our houses are worth a lot more, rentals are riskier.  My 900 sq. ft bungalow is valued at $300K, rent would be about $1900/month (it can be converted to have a basement suite, bonus).  Most people here wouldn't jump on that. I know I could buy Vegas properties, seems risky to buy out of country (I'm not familiar with the rules or the market). Basically I'm not keen on rentals, given the property valuations.

griffin

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Re: This guy did most things right EXCEPT
« Reply #14 on: March 19, 2014, 12:43:44 PM »
He states pretty clearly that his primary goal was to be debt free.
Quote
If all goes according to plan, I will be mortgage-free by age 31. For me, that means the weight of the world will be lifted off my shoulders
Would you bear the weight of the world for a better rate of return? I'm not so sure I would. Placing one's mental health over money seems to be pretty much exactly what MMM advocates.

nereo

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Re: This guy did most things right EXCEPT
« Reply #15 on: March 19, 2014, 01:10:35 PM »
He states pretty clearly that his primary goal was to be debt free.
Quote
If all goes according to plan, I will be mortgage-free by age 31. For me, that means the weight of the world will be lifted off my shoulders
Would you bear the weight of the world for a better rate of return? I'm not so sure I would. Placing one's mental health over money seems to be pretty much exactly what MMM advocates.

I would add he also states he is putting an additional $6k annually into savings, he bikes to work, he doesn't have a cell phone or cable, and he has a freelance job (writing) that he can do anywhere and anytime.  His pay is somewhere between $68k-78k plus $18k from his renters.  At $90k/year he savings rate is ~ 62% of his total income.  Sounds fairly mustachian overall.

The only thing I don't understand is why his 'next goal' is "retiring early at age 55" (his words, emphasis mine).  He is currently 27, so he's estimating 28 more years until retirement.  I'd reckon he could reach FI well before he's 40.

Cassie

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Re: This guy did most things right EXCEPT
« Reply #16 on: March 19, 2014, 02:12:14 PM »
This guy is awesome! Also you can lose alot of $ in real estate investing and the stock market-we did! Not everyone wins.  Paying off your primary home is a guaranteed return.

James

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Re: This guy did most things right EXCEPT
« Reply #17 on: March 19, 2014, 02:32:49 PM »
Really? Some people here want to beat this guy up for paying off his house? Wow...

I can see the point of investing rather than paying off a mortgage. I think that is better. Lets agree that for most people in his shoes the financially superior plan would be to invest the money instead.

BUT, the best plan on paper isn't always best for every person. What he did is not foolish or wrong or poor for his financial health, it simply might not be the absolute BEST he could have done.

It's like berating someone because they sold their big SUV and purchased a gar getting 33mpg instead of 38mpg. Yes, we can agree that higher mpg is better, but maybe we should celebrate the good along with pointing out the better... especially when the average so damn bad...

arebelspy

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Re: This guy did most things right EXCEPT
« Reply #18 on: March 19, 2014, 02:37:55 PM »
Really? Some people here want to beat this guy up for paying off his house? Wow...

I can see the point of investing rather than paying off a mortgage. I think that is better. Lets agree that for most people in his shoes the financially superior plan would be to invest the money instead.

BUT, the best plan on paper isn't always best for every person. What he did is not foolish or wrong or poor for his financial health, it simply might not be the absolute BEST he could have done.

It's like berating someone because they sold their big SUV and purchased a gar getting 33mpg instead of 38mpg. Yes, we can agree that higher mpg is better, but maybe we should celebrate the good along with pointing out the better... especially when the average so damn bad...

Agreed, and well said.  IMO, nereo put it best.

He made a conservative, but still good choice.
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genselecus

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Re: This guy did most things right EXCEPT
« Reply #19 on: March 19, 2014, 05:19:42 PM »
What I find interesting about a "problem" like this is that as an investor, you have to decide where to invest your assets and weigh the expected rates of return with the risk associated with each asset. Real estate carries some expected return and some expected risk, investing in stocks carries its own return and risk. With this guy "investing" in his mortgage, he's guaranteeing a fixed return with zero risk. In an investment portfolio, that can be a pretty powerful and awesome thing. A challenge I see is that he's now got the majority of his assets invested in real estate (this is my interpretation, I'm not sure how his assets are allocated). I'm of the mind that if I've got a major debt, I would want to pay it down ASAP, but there's also a risk with having 80% of your assets in a single, localized asset (local real estate). The calculating investor would pay down a mortgage and invest in stocks at the same time, with some predetermined breakdown based on risk acceptance. I'm not sure I would qualify as a calculating investor.

nereo

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Re: This guy did most things right EXCEPT
« Reply #20 on: March 19, 2014, 05:28:09 PM »
With this guy "investing" in his mortgage, he's guaranteeing a fixed return with zero risk.
While I agree with much of what you've said, I've never encountered a zero-risk investment.  A home is not zero-risk.  Ever been to Detroit?

dragoncar

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Re: This guy did most things right EXCEPT
« Reply #21 on: March 19, 2014, 05:39:58 PM »
With this guy "investing" in his mortgage, he's guaranteeing a fixed return with zero risk.
While I agree with much of what you've said, I've never encountered a zero-risk investment.  A home is not zero-risk.  Ever been to Detroit?

A house is not zero risk, but paying down a mortgage is close to zero risk (unless you are hoping to default later)

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Re: This guy did most things right EXCEPT
« Reply #22 on: March 19, 2014, 05:51:51 PM »
With this guy "investing" in his mortgage, he's guaranteeing a fixed return with zero risk.
While I agree with much of what you've said, I've never encountered a zero-risk investment.  A home is not zero-risk.  Ever been to Detroit?

Yeah but we could cite extreme outliers with any kind of situation. How many people in 09 lost the job just as the market tanked, and ended up selling investments at the bottom to keep the roof over their head? (granted they should have been mustachians with a really nice cushion - but the typical person just isn't, i bet some wished the house was paid off)

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Re: This guy did most things right EXCEPT
« Reply #23 on: March 19, 2014, 07:05:36 PM »

It's not the best decision math-wise, but I can't fault someone for doing it.

There is real value in reducing uncertainty. You may not have as much on average doing it that way, but you will reduce the likelihood of catastrophic failure by paying down debt rather than investing in a potentially volatile market. You can, mathematically speaking, make a case for doing it this way, especially in the short term.

Indeed. You'll increase your average expected wealth by investing in the market instead of paying off your mortgage, especially with today's low interest rates. However you'll reduce your standard deviation of expected wealth by paying off the mortgage, and you'll also have a smaller set of required monthly expenditures when your mortgage is gone. The upside is lower that way, but the downside of an unexpected job loss or macroeconomic decline can also be muted somewhat. They're both valid choices. The right one for you depends on your risk tolerance.

The bold bit isn't clear to me. By paying off the mortgage early, you have a smaller investment window. Wouldn't that imply greater volatility relative to the balance of the investment account?

MrCash

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Re: This guy did most things right EXCEPT
« Reply #24 on: March 19, 2014, 07:14:05 PM »
I plan on buying my entire first house in cash.  I think having zero debt is a very sensible decision.

jhartt3

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Re: This guy did most things right EXCEPT
« Reply #25 on: March 19, 2014, 07:36:29 PM »
this definitely sparked controversy.  IMO paying cash for a house at today's rates is a larger risk than putting it in an index fund. 

MrCash

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Re: This guy did most things right EXCEPT
« Reply #26 on: March 19, 2014, 07:55:07 PM »
this definitely sparked controversy.  IMO paying cash for a house at today's rates is a larger risk than putting it in an index fund.

Why so?

Having a paid off house hedges you from declining real estate markets and the market in general.  Plus if the economy is doing poorly or you get laid off, you don't have to worry about keeping up with a mortgage.

nereo

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Re: This guy did most things right EXCEPT
« Reply #27 on: March 19, 2014, 07:56:39 PM »

A house is not zero risk, but paying down a mortgage is close to zero risk (unless you are hoping to default later)
I'm not sure I follow.  If you use money to pay down a mortgage and the value of the house goes down, your net worth goes down.  Default and/or bankruptcy are always an option (unpleasant and to be avoided if at all possible), as are cases of eminent domain.   So are assistance programs for underwater homeowners, and tax breaks for mortgage payments (at least in the US), which won't apply if you've already bought the house.  Finally, there's divorce: if you own a house outright its considered an asset - if it's applied towards, say, reducing debt or paying for an education, that's much harder to claim in a later divorce.   There is always risk.  This is a safe play, but it's not risk free.

jhartt3

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Re: This guy did most things right EXCEPT
« Reply #28 on: March 19, 2014, 08:26:38 PM »
If you pay off your house with all your money. Get laid off now you don't have any liquid assets that can be tapped. Using a paid off house to " hedge " against declining real estate isn't a hedge you now just own a depreciating asset. I mean this is an ultra simple math equation.

Avg price increase in houses over time is typically right around inflation. Avg market gains over time are 5-6% better than inflation. 

Sooo not accounting for mortgage tax breaks etc. 5% -3% = 2% more ROI. assuming a 3% interest rate. speculating in the market or housing is possible and you can win but just using historical avgs you end up behind

Though neither option is bad. If you feel like a mortgage is the weight of the world. And you lose sleep at night have high blood pressure and stress about it pay it off. Also invest your money in bonds BC the market will drop like it did in 2008 again. 

MrCash

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Re: This guy did most things right EXCEPT
« Reply #29 on: March 19, 2014, 08:53:21 PM »
If you pay off your house with all your money. Get laid off now you don't have any liquid assets that can be tapped. Using a paid off house to " hedge " against declining real estate isn't a hedge you now just own a depreciating asset. I mean this is an ultra simple math equation.

Just because I pay off a house, doesn't mean I won't have extra cash reserves for emergencies.

It's a hedge against declining real estate because you are not leveraged as you would be in a mortgage.  You can't be underwater in a paid off house.

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Re: This guy did most things right EXCEPT
« Reply #30 on: March 19, 2014, 08:55:35 PM »
The only thing I don't understand is why his 'next goal' is "retiring early at age 55" (his words, emphasis mine).  He is currently 27, so he's estimating 28 more years until retirement.  I'd reckon he could reach FI well before he's 40.

Maybe he doesn't realize that 55 is not actually early.  The fact that it is possible to retire at age 40 is something that most people can't even comprehend as it's not anywhere close to mainstream.  Someone should introduce him to MMM. 

arebelspy

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Re: This guy did most things right EXCEPT
« Reply #31 on: March 19, 2014, 08:56:05 PM »
this definitely sparked controversy.  IMO paying cash for a house at today's rates is a larger risk than putting it in an index fund.

Why so?

I agree that it's almost crazy to buy a house in cash today if you have the ability to finance due to our rates - a mortgage at today's low rate is an AMAZING inflation hedge.

The Secret Power Within Your Mortgage is worth reading if you want more info.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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MrCash

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Re: This guy did most things right EXCEPT
« Reply #32 on: March 19, 2014, 09:01:44 PM »
this definitely sparked controversy.  IMO paying cash for a house at today's rates is a larger risk than putting it in an index fund.

Why so?

I agree that it's almost crazy to buy a house in cash today if you have the ability to finance due to our rates - a mortgage at today's low rate is an AMAZING inflation hedge.

The Secret Power Within Your Mortgage is worth reading if you want more info.

I'll check it out.  Hopefully they have it at my library.

arebelspy

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Re: This guy did most things right EXCEPT
« Reply #33 on: March 19, 2014, 09:03:53 PM »
The only thing I don't understand is why his 'next goal' is "retiring early at age 55" (his words, emphasis mine).  He is currently 27, so he's estimating 28 more years until retirement.  I'd reckon he could reach FI well before he's 40.

Maybe he doesn't realize that 55 is not actually early.  The fact that it is possible to retire at age 40 is something that most people can't even comprehend as it's not anywhere close to mainstream.  Someone should introduce him to MMM.

55 is early retirement compared with 65.  Our perspective here is just skewed.  Most people would consider 55 an "early retirement."

If he was introduced to the MMM site though, he'd ER far earlier than that.  I'm sure it's just never occurred to him.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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MrCash

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Re: This guy did most things right EXCEPT
« Reply #34 on: March 19, 2014, 09:09:11 PM »
The only thing I don't understand is why his 'next goal' is "retiring early at age 55" (his words, emphasis mine).  He is currently 27, so he's estimating 28 more years until retirement.  I'd reckon he could reach FI well before he's 40.

Maybe he doesn't realize that 55 is not actually early.  The fact that it is possible to retire at age 40 is something that most people can't even comprehend as it's not anywhere close to mainstream.  Someone should introduce him to MMM.

55 is early retirement compared with 65.  Our perspective here is just skewed.  Most people would consider 55 an "early retirement."

If he was introduced to the MMM site though, he'd ER far earlier than that.  I'm sure it's just never occurred to him.

I know it didn't for me.  MMM was the one who introduced me to this whole line of thinking.  And it has definitely skewed my perspective since then.  Even the thought of working for 10 years almost feels too long sometimes.

arebelspy

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Re: This guy did most things right EXCEPT
« Reply #35 on: March 19, 2014, 09:11:37 PM »
It's a hedge against declining real estate because you are not leveraged as you would be in a mortgage.  You can't be underwater in a paid off house.

So?  Who cares about underwater?  There is no mortgage call as there is with margin.  Price of the house affects you just as little if you have a mortgage as if you have cash, if you're planning to stay there.  Paying cash is not a hedge against declining real estate.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

MrCash

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Re: This guy did most things right EXCEPT
« Reply #36 on: March 19, 2014, 09:16:39 PM »
It's a hedge against declining real estate because you are not leveraged as you would be in a mortgage.  You can't be underwater in a paid off house.

So?  Who cares about underwater?  There is no mortgage call as there is with margin.  Price of the house affects you just as little if you have a mortgage as if you have cash, if you're planning to stay there.  Paying cash is not a hedge against declining real estate.

Correct, but it can restrict your options.  It can inhibit you from selling if you were to lose your job and needed to move elsewhere.

arebelspy

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Re: This guy did most things right EXCEPT
« Reply #37 on: March 19, 2014, 09:22:16 PM »
Besides the Secret Power of Your Mortgage book MrCash (which your library likely won't have, it's pretty niche), read these two threads:
http://www.mrmoneymustache.com/forum/ask-a-mustachian/pay-off-house-before-early-retirement/

http://www.mrmoneymustache.com/forum/journals/keith's-journal/msg13015/?topicseen#msg13015

Especially the second one, in which I do maths to show a case where it'd be vastly inferior to save up to buy a house cash, rather than paying a mortgage for a bit.

That poster is also anti-debt and wanting to save up cash for a house.  If he does that, he'll own the house free and clear (at purchase) in about 4.5 years.   If instead he gets a mortgage and pays off the mortgage as fast as possible, he'll own the house free and clear in just over 4 years.  He will get to enjoy the house longer in the meantime, and own it free and clear with no mortgage 5 months earlier, thus he'll end up with an extra nearly $18,000 in his pocket.  Uhh, no brainer, even if you're anti-debt.

I'd say keep the mortgage (and do a 30 year amortization), but if you hate debt, it's still way better to get the mortgage at times.

It all depends on the rent vs. buy scenarios in your local market.

I know buying a house in cash is your "thing," "MrCash," but you may want to rethink it.  :)

How about buying with a mortgage, but paying it off with cash ASAP?  ;)
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arebelspy

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Re: This guy did most things right EXCEPT
« Reply #38 on: March 19, 2014, 09:24:42 PM »
It's a hedge against declining real estate because you are not leveraged as you would be in a mortgage.  You can't be underwater in a paid off house.

So?  Who cares about underwater?  There is no mortgage call as there is with margin.  Price of the house affects you just as little if you have a mortgage as if you have cash, if you're planning to stay there.  Paying cash is not a hedge against declining real estate.

Correct, but it can restrict your options.  It can inhibit you from selling if you were to lose your job and needed to move elsewhere.

Well that's not true.  Cause if you had the cash liquid, you could just pay the "underwater" part at closing.  Either way, if you don't want to short sale you'll be out that money.

Scenario 1: You have 150k, buy the house in cash.  Price drops to 100k.  You sell for 100k.  You end up with 100k in your pocket, having lost 50.  You move due to job.

Scenario 2: You have 150k, buy the house with a mortgage (put down, say 25k or whatever).  You have 125k left liquid.  Price drops to 100k.  You're underwater 25k.  You go to sell and have to pay that extra 25k out of your liquid funds.  You end up with 100k in your pocket, having lost 50.

The scenarios end up the exact same.  If anything having the extra liquidity will benefit you.  Paying cash in no way will "save" you money if real estate drops, it just locks you into the loss.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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MrCash

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Re: This guy did most things right EXCEPT
« Reply #39 on: March 19, 2014, 09:41:47 PM »
Besides the Secret Power of Your Mortgage book MrCash (which your library likely won't have, it's pretty niche), read these two threads:
http://www.mrmoneymustache.com/forum/ask-a-mustachian/pay-off-house-before-early-retirement/

http://www.mrmoneymustache.com/forum/journals/keith's-journal/msg13015/?topicseen#msg13015

Especially the second one, in which I do maths to show a case where it'd be vastly inferior to save up to buy a house cash, rather than paying a mortgage for a bit.

That poster is also anti-debt and wanting to save up cash for a house.  If he does that, he'll own the house free and clear (at purchase) in about 4.5 years.   If instead he gets a mortgage and pays off the mortgage as fast as possible, he'll own the house free and clear in just over 4 years.  He will get to enjoy the house longer in the meantime, and own it free and clear with no mortgage 5 months earlier, thus he'll end up with an extra nearly $18,000 in his pocket.  Uhh, no brainer, even if you're anti-debt.

I'd say keep the mortgage (and do a 30 year amortization), but if you hate debt, it's still way better to get the mortgage at times.

It all depends on the rent vs. buy scenarios in your local market.

I know buying a house in cash is your "thing," "MrCash," but you may want to rethink it.  :)

How about buying with a mortgage, but paying it off with cash ASAP?  ;)

Well, there are a few details that you aren't taking into consideration.  For one, you get an advantage when buying and could very possibly get a discount from the listed price.  Cash also avoids the risk of low appraisals that might interrupt the mortgage process.  You also have considerably lower closing costs:  you don't have to pay a bank attorney for a mortgage, you don't have to put real estate taxes in excrow or pay mortgage application fees, loan origination fees and other charges, no multiple appraisal requirements, and title insurance will drop.

You also have to account for the fact that you won't have to pay for maintenance of a house and property taxes while saving up and you will pay less in utilities as well.

http://www.forbes.com/sites/morganbrennan/2011/11/16/the-benefits-of-buying-a-home-with-cash/

http://www.realtor.com/home-finance/homebuyer-information/advantages-to-buying-a-home-with-all-cash.aspx

arebelspy

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Re: This guy did most things right EXCEPT
« Reply #40 on: March 19, 2014, 11:00:41 PM »
I mean, I have rebuttals to all of that, but it doesn't sound like your mind is too open to it.  Best of luck to you.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Tyler

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Re: This guy did most things right EXCEPT
« Reply #41 on: March 19, 2014, 11:06:20 PM »
Really? Some people here want to beat this guy up for paying off his house? Wow...

Seriously.  Berating someone for making a responsible financial decision just because you would have personally tried to squeeze out more profit just seems kinda petty.

BTW, most people also seem to be missing that he has a 5-year mortgage, not a 30-year.  That changes the payoff/investment calculus quite a bit.  The kid has planned this since before he even bought the house at 29.  I'm impressed.

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Re: This guy did most things right EXCEPT
« Reply #42 on: March 19, 2014, 11:36:09 PM »

A house is not zero risk, but paying down a mortgage is close to zero risk (unless you are hoping to default later)
I'm not sure I follow.  If you use money to pay down a mortgage and the value of the house goes down, your net worth goes down.

This is true whether or not your pay down your mortgage.  It is the house that is risky, not paying off a loan for that house.  Unless you plan not to pay your loan, you will earn a guaranteed return  by paying it early.  The only "risks" are those inherent in property ownership.

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Re: This guy did most things right EXCEPT
« Reply #43 on: March 19, 2014, 11:45:03 PM »
I mean, I have rebuttals to all of that, but it doesn't sound like your mind is too open to it.  Best of luck to you.

I'm definitely listening and I want to hear what you have to say.  I just pointed out things that you didn't take into consideration in your post to Keith.  All of which have financial implications that will affect the math of the situation.  That doesn't mean I'm close minded.  In fact, I really like discussions like this so that I can fully examine all of the angles and possible shortcomings.

Also, remember Rule #2:  Attack an argument, not a person.

arebelspy

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Re: This guy did most things right EXCEPT
« Reply #44 on: March 19, 2014, 11:55:21 PM »
I don't see what I wrote as an attack in any way, just an observation, and I certainly didn't mean it as one.  My apologies if you took it that way.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

MrCash

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Re: This guy did most things right EXCEPT
« Reply #45 on: March 19, 2014, 11:59:46 PM »
I don't see what I wrote as an attack in any way, just an observation, and I certainly didn't mean it as one.  My apologies if you took it that way.

No worries, no offense taken.  It just seemed like a dismissal of the argument based on the idea that I was close minded rather than refuting the argument itself.  But I would like your thoughts on the matter.
« Last Edit: March 20, 2014, 12:01:53 AM by MrCash »

nereo

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Re: This guy did most things right EXCEPT
« Reply #46 on: March 20, 2014, 05:17:25 AM »
The only thing I don't understand is why his 'next goal' is "retiring early at age 55" (his words, emphasis mine).  He is currently 27, so he's estimating 28 more years until retirement.  I'd reckon he could reach FI well before he's 40.

Maybe he doesn't realize that 55 is not actually early.  The fact that it is possible to retire at age 40 is something that most people can't even comprehend as it's not anywhere close to mainstream.  Someone should introduce him to MMM.

Funny you should mention it - I actually followed the article and sent him (Sean Cooper) and email, letting him know that his article had generated a lot of discussion and inviting him into the forum.  No response so far - maybe he'll pop in sometime.  I think this guy has a good groundwork to be a mustachian, and with a few adjustments could be FI/FIRE in less than 10 years. Good for him.

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Re: This guy did most things right EXCEPT
« Reply #47 on: March 20, 2014, 06:53:26 AM »
Yes to the comments above.  I too was going to "Retire Early at 55"  that was my goal.  Maybe i could make 50 work.  So 2 years ago i made a very unmustacian decision.  I decided to buy my first boat instead of maxing out my 401k that year.  I had decided i'm young i only live once.  I will have piles of money by the time i'm 50 or even 55 at 55 i would have wealth that would last generations.  So i bought the boat.  Then i ran across this site.  And i now know the simple math behind early retirement and the strategies i can implement to get us there.  We now max out our 401k's and IRAs and hopefully in 2 years will be maxing out HSA's and retiring by 40 is now my goal. 

And yes i'm keeping the boat.  otherwise.  35 could be in the picture.  haha

Prairie Stash

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Re: This guy did most things right EXCEPT
« Reply #48 on: March 20, 2014, 08:53:59 AM »
If you pay off your house with all your money. Get laid off now you don't have any liquid assets that can be tapped. Using a paid off house to " hedge " against declining real estate isn't a hedge you now just own a depreciating asset. I mean this is an ultra simple math equation.

Avg price increase in houses over time is typically right around inflation. Avg market gains over time are 5-6% better than inflation. 

Sooo not accounting for mortgage tax breaks etc. 5% -3% = 2% more ROI. assuming a 3% interest rate. speculating in the market or housing is possible and you can win but just using historical avgs you end up behind

Though neither option is bad. If you feel like a mortgage is the weight of the world. And you lose sleep at night have high blood pressure and stress about it pay it off. Also invest your money in bonds BC the market will drop like it did in 2008 again.
There is no mortgage tax breaks in Canada. 5%=5%. You can't apply American math outside America.

Also, every 5 years his rate changes, again Canadian not American rules.  So he might have a 3% rate today, at the end of his 5 year term he'll likely have higher (depends when interest rates climb). It's a scary thought, what if I pay the minimum and in 3 years my payments jump $200/month? For normal people that's a legitimate concern.

I know this is an predominantly American site, sometimes though the location of the problem does matter. Most tips are universal, which is why I think this is a great forum.

Tyler

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Re: This guy did most things right EXCEPT
« Reply #49 on: March 20, 2014, 08:54:45 AM »
I think this guy has a good groundwork to be a mustachian, and with a few adjustments could be FI/FIRE in less than 10 years. Good for him.

By his numbers, he'll have a net worth somewhere around $600k, no debt, and rental income that covers all his household expenses by the time he's 31.  By the definition around here he's on pace to be FI even before MMM pulled it off.  And he accomplished this with a primary job that pays less than $50k a year.  He should be facepunching us, not the other way around.  ;)