Author Topic: $1 million in investments vs. 500k home + 500k investments  (Read 9786 times)

nihilism122

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$1 million in investments vs. 500k home + 500k investments
« on: February 23, 2018, 08:58:21 AM »
What position would you rather be in financially and why?  $1 million in investments and renting or 500k in investments and own a 500k home? 

PDXTabs

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #1 on: February 23, 2018, 09:03:00 AM »
$1M in investments, hands down. Equities have a much better track record for creating wealth over the last 100 years. Also, I am free to live anywhere in the world with $1M invested. There are many places in the world I could live comfortably on a 2% withdrawal while waiting for the $1M to grow.

The only caveat might be if you wanted a golden visa. Lots of countries will sell you citizenship for a property investment of Ä350-500K.

2Birds1Stone

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #2 on: February 23, 2018, 11:37:51 AM »
I don't imagine a logical situation where the home makes any sense.

thd7t

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #3 on: February 23, 2018, 12:08:09 PM »
The home loses most of the time, because it's too much house for such a small amount of other savings, it costs a lot of money to maintain, it costs money to sell, it's not likely to appreciate as fast as a broad stock portfolio (index).

In most parts of the country, you can buy a pretty nice house for much less. In LCOL areas, you would probably have a nice house and $800k left.

You could make this make more sense by saying $500k of rental properties.  The return on rentals is more regular and tangible than stock returns and allows a different style of reinvestment that has lead a lot of people on this forum to success.

SwitchActiveDWG

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #4 on: February 23, 2018, 12:23:52 PM »
$1 million in investments. Home equity = investments total would not work for me.

hadabeardonce

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #5 on: February 23, 2018, 01:16:10 PM »
I've got a 449k(302k equity) condo + 176k(+75k pension) investments... it's alright. I bought the place so long ago(2004) that it's cheaper than renting a similar sized place in the same area(SF Bay Area) today.

Real estate doesn't typically grow as quickly elsewhere, but if my math is right(it's not) I've gotten a 36% return over 14 years...

449k - 147k = Current Value - Mortgage Balance = Equity
228k - 147k = Initial Cost - Mortgage Balance = Contribution
Equity - Contribution = Profit
Contribution / Profit = 36% ROI

(my math is wrong, lines should be in red ink)

Edited:
Quote
ROI = (Investment Revenue - Investment Cost) / Investment Cost
ROI =((Sales Price-Mort Bal)-(Initial Cost-Mort Bal))/(Initial Cost-Mort Bal)
272% =((449000-147000)-(228000-147000))/(228000-147000)

CAGR = (Ending Investment Value / Beginning Investment Value) ^ (1/# of Years)-1
4.96% = (449000 / 228000) ^ (1/14)-1

We like living in the area and we're still taking advantage of the higher wages here, so I kind of like the 500k home + 500k investments option. The stability of living in the same place is nice too.
« Last Edit: February 23, 2018, 03:44:23 PM by hadabeardonce »

boarder42

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #6 on: February 23, 2018, 01:21:50 PM »
i'd take 1MM invested - why would you take the other - even if i had the house i'd choose 1MM invested and the house financed.

i dont think there is a poster on this site who chooses the 500k + 500k house

terran

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #7 on: February 23, 2018, 01:30:22 PM »
Definitely the money. $500k is a lot of house in most of the country -- certainly anywhere I've lived.

thd7t

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #8 on: February 23, 2018, 01:42:46 PM »
I've got a 449k(302k equity) condo + 176k(+75k pension) investments... it's alright. I bought the place so long ago(2004) that it's cheaper than renting a similar sized place in the same area(SF Bay Area) today.

Real estate doesn't typically grow as quickly elsewhere, but if my math is right I've gotten a 36% return over 14 years...

449k - 147k = Current Value - Mortgage Balance = Equity
228k - 147k = Initial Cost - Mortgage Balance = Contribution
Equity - Contribution = Profit
Contribution / Profit = 36% ROI

We like living in the area and we're still taking advantage of the higher wages here, so I kind of like the 500k home + 500k investments option. The stability of living in the same place is nice too.
Nice way to break it down.  SF Bay area is pretty unusual in terms of home values and rental costs, but I like the analysis.  I am not sure I'm doing my math on your return right, but if that's your return over 14 years, you've compounded at 2.3% annually, which doesn't seem too good.  It may be that I'm not looking at your ROI calculation correctly.

ricgnzlzcr

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #9 on: February 23, 2018, 01:48:46 PM »
For myself personally, I'd take the paid off home and the $500k assuming I love the home and plan to be there long term. That diversifies me away from making too many investment mistakes.

Logically, the right answer is likely taking the $1mil. But let's assume there was a 40% drawdown. Could you handle seeing your investment account drop to $600k without panicking? If you can then definitely go all investments. But for my quality of life, I'd prefer to know I owned my home outright and still had $300k in the bank after that drawdown.

I guess the answer, as with most things, is it depends.

somers515

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #10 on: February 23, 2018, 02:04:07 PM »
Interesting question!  The second option would be more tempting to me if it was $250k home + $750k invested.  I view owning my home as part of a diversification strategy of my overall financial position, almost like owning some bonds, but your 50/50 example would make me choose the $1 million in investments.  Hope that makes sense.

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #11 on: February 23, 2018, 02:08:40 PM »
For myself personally, I'd take the paid off home and the $500k assuming I love the home and plan to be there long term. That diversifies me away from making too many investment mistakes.


No it doesn't.  Because now half your net worth is in one investment.  That's the opposite of diversification. 

josh4trunks

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #12 on: February 23, 2018, 02:09:56 PM »
I've got a 449k(302k equity) condo + 176k(+75k pension) investments... it's alright. I bought the place so long ago(2004) that it's cheaper than renting a similar sized place in the same area(SF Bay Area) today.

Real estate doesn't typically grow as quickly elsewhere, but if my math is right I've gotten a 36% return over 14 years...

449k - 147k = Current Value - Mortgage Balance = Equity
228k - 147k = Initial Cost - Mortgage Balance = Contribution
Equity - Contribution = Profit
Contribution / Profit = 36% ROI

We like living in the area and we're still taking advantage of the higher wages here, so I kind of like the 500k home + 500k investments option. The stability of living in the same place is nice too.

Your ROI equation is backwards. According to your equation a higher Contribution (I), or lower Profit (R) would increase ROI, which is incorrect.
It should be $221K/$81K = 2.72, with a yearly ROI of 2.72 ^ (1/14) = 7.4%

Some points to consider.
- You likely paid interest on the mortgage, so if you factor that in your contribution would increase (I), lowering your ROI
- When prices increase, it always is better to leverage more. So a 20% downpayment (or possibly less) would increase ROI.

A 7.4% ROI seems great to me on a home you actually needed to live in/be close to work anyway. But that does not guarantee it will continue rising at that rate, at that rate your home will be worth $1.22M in 2032. But, on the flip side stocks could crash tomorrow (top is in).

robartsd

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #13 on: February 23, 2018, 02:15:05 PM »
Interesting question!  The second option would be more tempting to me if it was $250k home + $750k invested.  I view owning my home as part of a diversification strategy of my overall financial position, almost like owning some bonds, but your 50/50 example would make me choose the $1 million in investments.  Hope that makes sense.
I think I could FIRE with $750k invested while living in a $250k paid off house. This is actually pretty close to my actual target.

GuitarStv

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #14 on: February 23, 2018, 02:30:29 PM »
I don't imagine a logical situation where the home makes any sense.

My home has doubled in value over the past eight years, outpacing my other investments by a fair bit.

ricgnzlzcr

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #15 on: February 23, 2018, 02:37:53 PM »
For myself personally, I'd take the paid off home and the $500k assuming I love the home and plan to be there long term. That diversifies me away from making too many investment mistakes.


No it doesn't.  Because now half your net worth is in one investment.  That's the opposite of diversification.

When I mean diversification I meant emotionally. Am I worried about markets tanking when I know my home is paid off.

Should have been clearer.

hadabeardonce

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #16 on: February 23, 2018, 03:42:48 PM »
Nice way to break it down.  SF Bay area is pretty unusual in terms of home values and rental costs, but I like the analysis.  I am not sure I'm doing my math on your return right, but if that's your return over 14 years, you've compounded at 2.3% annually, which doesn't seem too good.  It may be that I'm not looking at your ROI calculation correctly.
Your ROI equation is backwards. According to your equation a higher Contribution (I), or lower Profit (R) would increase ROI, which is incorrect.
It should be $221K/$81K = 2.72, with a yearly ROI of 2.72 ^ (1/14) = 7.4%

Some points to consider.
- You likely paid interest on the mortgage, so if you factor that in your contribution would increase (I), lowering your ROI
- When prices increase, it always is better to leverage more. So a 20% downpayment (or possibly less) would increase ROI.

A 7.4% ROI seems great to me on a home you actually needed to live in/be close to work anyway. But that does not guarantee it will continue rising at that rate, at that rate your home will be worth $1.22M in 2032. But, on the flip side stocks could crash tomorrow (top is in).

Yeah, I messed up my calculation and it's certainly a more complicated formula to get the right answer when you include interest paid. This is the best I could put together with 5 minutes worth of Googling:

ROI = (Investment Revenue - Investment Cost) / Investment Cost
ROI =((Sales Price-Mort Bal)-(Initial Cost-Mort Bal))/(Initial Cost-Mort Bal)
272% =((449000-147000)-(228000-147000))/(228000-147000)

CAGR = (Ending Investment Value / Beginning Investment Value) ^ (1/# of Years)-1
CAGR = (2018 Home Value / 2004 Home Value) ^ (1/14 of Years)-1
4.96% = (449000 / 228000) ^ (1/14)-1

CAGR = (Equity / Mortgage Paid) ^ (1/14 of Years)-1
9.86% = (302000 / 81000) ^ (1/14)-1


https://www.myaccountingcourse.com/financial-ratios/return-on-investment
https://www.myaccountingcourse.com/financial-ratios/cagr

Here's VTSAX over the same time period, but I didn't have all 81k to start out with...

http://quotes.morningstar.com/chart/fund/chart.action?t=VTSAX&region=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A11%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00L83%22%2C%22type%22%3A%22FO%22%2C%22region%22%3A%22USA%22%2C%22name%22%3A%22XNAS%3AVTSAX%22%2C%22qsType%22%3A%22USA%3AVTSAX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%24FOCA%24LB%24%24%7CLarge%20Blend%7CCA%5DFO%22%2C%22XIUSA04G92%7CS%26P%20500%20TR%20USD%7CXI%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2212%2F01%2F2004%22%2C%22endDay%22%3A%2202%2F22%2F2018%22%2C%22chartWidth%22%3A955%7D

8.50% = (31,313.88 / 10,000) ^ (1/14)-1

So I'm currently beating the market?
« Last Edit: February 23, 2018, 03:54:59 PM by hadabeardonce »

dougules

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #17 on: February 23, 2018, 03:49:27 PM »
You left out one huge detail in this; what is the rent?  That makes the determination. 

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html


blinx7

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #18 on: February 23, 2018, 05:21:31 PM »

There could be circumstances where the home works.  If one were a high-income earner supporting a family in a high COL area, for example, given current market valuations for stocks, a risk of a rising interest rate environment for bonds, the need for family stability, etc., $500k and a forever home doesn't sound too bad.

I'd still choose the $1 million.

Change that to $2 million or $1.5 million and a $500k house, though, I think I would go the other way. 

Carrie

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #19 on: February 23, 2018, 09:25:03 PM »
I'm going to go with $800k investments and $200k paid off house, even though that's not one of the choices. Our allocation isn't quite to that ratio yet, but I'd feel about ready to fire at that point.

Dicey

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #20 on: February 23, 2018, 11:38:08 PM »
What position would you rather be in financially and why?  $1 million in investments and renting or 500k in investments and own a 500k home?
Can I chose any age I want? I'll take age 25 and all in investments, please.

Just for fun recently, I looked back at all the properties I've owned and put them into an inflation calculator. Most have done fine, two did spectacularly well. But the very first property I wanted to buy was a new-build condo in Diamond Bar, CA. Not only would it have barely kept pace with inflation, It was (in retrospect) ugly as sin, plus there were HOA fees. My parents talked me out of it (I wasn't using their money) and I'm glad my pig-headed self listened.

josh4trunks

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #21 on: February 24, 2018, 01:47:13 AM »
Nice way to break it down.  SF Bay area is pretty unusual in terms of home values and rental costs, but I like the analysis.  I am not sure I'm doing my math on your return right, but if that's your return over 14 years, you've compounded at 2.3% annually, which doesn't seem too good.  It may be that I'm not looking at your ROI calculation correctly.
Your ROI equation is backwards. According to your equation a higher Contribution (I), or lower Profit (R) would increase ROI, which is incorrect.
It should be $221K/$81K = 2.72, with a yearly ROI of 2.72 ^ (1/14) = 7.4%

Some points to consider.
- You likely paid interest on the mortgage, so if you factor that in your contribution would increase (I), lowering your ROI
- When prices increase, it always is better to leverage more. So a 20% downpayment (or possibly less) would increase ROI.

A 7.4% ROI seems great to me on a home you actually needed to live in/be close to work anyway. But that does not guarantee it will continue rising at that rate, at that rate your home will be worth $1.22M in 2032. But, on the flip side stocks could crash tomorrow (top is in).

Yeah, I messed up my calculation and it's certainly a more complicated formula to get the right answer when you include interest paid. This is the best I could put together with 5 minutes worth of Googling:

ROI = (Investment Revenue - Investment Cost) / Investment Cost
ROI =((Sales Price-Mort Bal)-(Initial Cost-Mort Bal))/(Initial Cost-Mort Bal)
272% =((449000-147000)-(228000-147000))/(228000-147000)

CAGR = (Ending Investment Value / Beginning Investment Value) ^ (1/# of Years)-1
CAGR = (2018 Home Value / 2004 Home Value) ^ (1/14 of Years)-1
4.96% = (449000 / 228000) ^ (1/14)-1

CAGR = (Equity / Mortgage Paid) ^ (1/14 of Years)-1
9.86% = (302000 / 81000) ^ (1/14)-1


https://www.myaccountingcourse.com/financial-ratios/return-on-investment
https://www.myaccountingcourse.com/financial-ratios/cagr

Here's VTSAX over the same time period, but I didn't have all 81k to start out with...

http://quotes.morningstar.com/chart/fund/chart.action?t=VTSAX&region=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A11%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00L83%22%2C%22type%22%3A%22FO%22%2C%22region%22%3A%22USA%22%2C%22name%22%3A%22XNAS%3AVTSAX%22%2C%22qsType%22%3A%22USA%3AVTSAX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%24FOCA%24LB%24%24%7CLarge%20Blend%7CCA%5DFO%22%2C%22XIUSA04G92%7CS%26P%20500%20TR%20USD%7CXI%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2212%2F01%2F2004%22%2C%22endDay%22%3A%2202%2F22%2F2018%22%2C%22chartWidth%22%3A955%7D

8.50% = (31,313.88 / 10,000) ^ (1/14)-1

So I'm currently beating the market?

It's funny how there are so many ways to look at the same numbers, and many do seem to have a valid use case.
I'd say the you are beating the market up to this point (without interest factored in), since 9.86%>8.50%. But, you took on additional risk then if you invested 81K into the market because you took a loan out which leveraged your downpayment. The 4.96% in a way better represents the risk involved, since it includes the full purchase price you were ultimately liable for.

If you did have the 81K starting out (which you didn't), and leveraged it 5X into the stock market, you would have $1.269M, though I don't know anyone who would give you this (5X) loan for anything other than for a home in US/Canada; maybe a business loan?.

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #22 on: February 24, 2018, 04:13:50 AM »
Because my entire family lives in this relatively recently high cost of living area (we got in when things were cheap!) where the rents are now well over my PITI for less space, I'd go with the second option.

lexde

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #23 on: February 24, 2018, 06:33:07 AM »
I’m 27, so all in investments for sure. I can find cheap rent and be completely happy on that!


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Unity

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #24 on: February 24, 2018, 08:41:07 AM »
Well my dream home is actually a small but modern ~550sq ft house so I would buy that with solar panels and energy storage first. I would then plan out living on around $12k a year and the rest would be some combination of investing and donation.

Here is a screenshot of the type of home layout I would like. I never added the entrance door but all internal doors would be electric sliding doors with sensors. I might switch out the fridge for something like the Dometic CFX-95DZUS Dual Zone Portable Electric Refrigerator/Freezer to lower my energy use even more!

500K for a house is WAY more then I would want to spend so I would invest the entire 1mil and rent the cheapest acceptable place I can plus get a job to start off.
« Last Edit: February 24, 2018, 08:46:28 AM by Unity »

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #25 on: February 24, 2018, 09:02:13 AM »
Interesting question!  The second option would be more tempting to me if it was $250k home + $750k invested.  I view owning my home as part of a diversification strategy of my overall financial position, almost like owning some bonds, but your 50/50 example would make me choose the $1 million in investments.  Hope that makes sense.

I'm going to go with $800k investments and $200k paid off house, even though that's not one of the choices. Our allocation isn't quite to that ratio yet, but I'd feel about ready to fire at that point.

Agree with both the above posts that more in investments and less in property would be preferable for me. I live in a HCOL area though so my ideal allocation for $1mill would probably look more like $650k investments and $350k in home (and even that amount would only be enough buy me a small apartment). But overall, even if I just go with the hypothetical situation of the original question, in either of the scenarios I'd be retired so you know... I'll take either one!

As some others have mentioned, cost of rent is also important when weighing this up. The other thing is tenant rights, how much freedom and protection one has as a tenant, some countries do this better than others. One of the things I would like to do in future is to foster pets and it having a place of my own makes that easier. I like the flexibility of renting but it also has its restrictions. Likewise owning offers certain perks but also downsides. Depends on where I'm at in my life.

MrThatsDifferent

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #26 on: February 24, 2018, 10:51:28 AM »
Well, this is sobering. When I started my MMM journey I worked out that owning a house wasnít for me and didnít make sense. I was going all in with index funds. But, I canít get my partner to do the same. Now, Iíve been thing this exact 500 home + 500 investment scenario which 95% of you would be against. So really, I should stick to my original plan! But where we live, both the rents and home prices are extraordinary high. Iím honestly torn and canít decide what to do anymore.

BTDretire

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #27 on: February 24, 2018, 01:00:52 PM »
Some Excel user needs to make a spreadsheet with this scenario.
Rent home, put $1M into market grow at Y%.
$500k tied up in a house, plus $500k in the market. Plus Rent payment invested each month.
Own House, $500k grows at x%, Market $500k grows at Y% and monthly investment grows at Z%.
$100k tied up in house, Plus $900K in market, no monthly investment because it goes to house payment.

Calculate ending value of all three scenarios. See which one wins.
I'm think most years, the more in the market the better.

Variables:
Rent
House inflation rate
Interest rate on house, run first 7 years and you can basically ignore principal increase. (Interest payment used to calculate payment)
Market growth rate

 I'm tired thinking about it.

Radagast

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #28 on: February 24, 2018, 03:04:30 PM »
As a first approximation, a house needs about 3% of its value every year in taxes, maintenance, and utilities. Meanwhile, an investment portfolio will allow a 4% safe withdrawal rate.

Good luck with $15k annual house expenses on $20k annual income.

https://taxfoundation.org/how-high-are-property-taxes-your-state/

Wow. There are some high property taxes out there. Lets just say homeownership takes lots of money and this just doesn't work.
« Last Edit: February 24, 2018, 03:53:55 PM by Radagast »

Radagast

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #29 on: February 24, 2018, 04:18:44 PM »
Actually I'm making a new rule of thumb. It takes an investment account equal in value to a single family residence to pay for it's upkeep. If you have a 500k house and 500k investments, all of your investments will be required to maintain and heat the house. You'll have to show some numbers if you want to believe otherwise.

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #30 on: February 24, 2018, 09:01:12 PM »
Doesnít this really depend on property taxes and maintenance? If yours are 1%, add in 0.5% for insurance, estimate 1% per year on average for maintenance. That means a house will cost 2.5% of its price each year even after it is paid for. So a $500,000 house is going to cost about $12,500 per year.

Iím a renter, but Iíd be interested in hearing a homeowner weigh in on the costs of keeping up an expensive home.

iluvzbeach

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #31 on: February 24, 2018, 09:45:50 PM »
We live in a $500K house that we own free & clear. Our property taxes were $3300 last year and our homeowners insurance was $450 for the year. We need less than 100K in investments to cover those annual costs and at some point weíll need roughly the same to cover forecasted maintenance expenses. Newer home, very low maintenance expenses now, but that wonít always be the case. We live in the PNW.

Radagast

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #32 on: February 24, 2018, 10:08:09 PM »
Doesn’t this really depend on property taxes and maintenance? If yours are 1%, add in 0.5% for insurance, estimate 1% per year on average for maintenance. That means a house will cost 2.5% of its price each year even after it is paid for. So a $500,000 house is going to cost about $12,500 per year.

I’m a renter, but I’d be interested in hearing a homeowner weigh in on the costs of keeping up an expensive home.
Yup it totally depends on the specfic property. I am including things like utilities because it presumably in general takes more water and energy to light, heat, and prettify a larger nicer home. Greater pressure to maintain landscape/exterior and a greater likelihood for HOA fees. I have a $210k home which is not in the same range, but it is costing me about 3% for barebones utilities, taxes, maintenance, and insurance, and my property taxes are absurdly low, like 0.3%. No replacements of big things like roof or water heater. I have to imagine that 4% is pretty typical.
« Last Edit: February 24, 2018, 10:28:20 PM by Radagast »

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #33 on: February 25, 2018, 01:54:04 AM »
1M in investments would be more flexible so that. At my current age and time in life, I would rather not be tied down by a house

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #34 on: February 25, 2018, 06:25:02 AM »
Around here, taxes on a $500k house are ~$12-15k easily, upwards of $20k in the better towns.

For maintenance about 1% of the home values annually is a good rule of thumb to amortize large costs that come up every decade or two.

Then you have the utilities and insurance.

The remaining $500k provides you with roughly $20k/yr in income......which doesn't jive with me over having $40k/yr and the ability to travel/rent/not be tied down.

VaCPA

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #35 on: February 25, 2018, 07:00:37 AM »

There could be circumstances where the home works.  If one were a high-income earner supporting a family in a high COL area, for example, given current market valuations for stocks, a risk of a rising interest rate environment for bonds, the need for family stability, etc., $500k and a forever home doesn't sound too bad.

I'd still choose the $1 million.

Change that to $2 million or $1.5 million and a $500k house, though, I think I would go the other way.

Stability(e.g. not having to move your kids if you don't want to) is one of the biggest advantages of home ownership, although it's non-financial. If you're counting that then the house scenario looks better. From a purely financial perspective I think equities trounce real estate over the long term, and I say that as a proud homeowner.

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #36 on: February 25, 2018, 08:36:49 AM »
We live in a $500K house that we own free & clear. Our property taxes were $3300 last year and our homeowners insurance was $450 for the year. We need less than 100K in investments to cover those annual costs and at some point weíll need roughly the same to cover forecasted maintenance expenses. Newer home, very low maintenance expenses now, but that wonít always be the case. We live in the PNW.
Sounds like a great place to live. Maybe my 27 year old view is rose colored, because in the last decade stocks have risen while interest is low, but i think that it nearly is always more optimal to never have a house paid of. You 500K home could have been refinanced to 20% down, and the money invested to give you an average return of $27K per year (assuming 6.8% growth). Last year would have earned you more like $100K though some years you would lose (tax loss harvesting time!).

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #37 on: February 25, 2018, 08:49:44 AM »
As a first approximation, a house needs about 3% of its value every year in taxes, maintenance, and utilities. Meanwhile, an investment portfolio will allow a 4% safe withdrawal rate.

Good luck with $15k annual house expenses on $20k annual income.

Umm . . . you're making the same mistake with this rule of thumb that is so commonly made when people are retiring.  Things do not scale up as a percentage.  You don't need 80% of what you were making when working to retire, and you don't need 3% of the value of an expensive house each year in maintenance and taxes.  Often a house is valuable because of location, not because it's a mansion.  A small house in a great location doesn't cost more to maintain or in utilities than a small house in a crappy location.  Taxes are location dependent.  Here in Toronto for example, we've got high property values and low taxes.

Case in point:
Our house was most recently valued at 680k.  According do your rule of thumb I am paying 20,400$ each year . . . except I'm actually paying:

3,200 taxes
1-5,000 maintenance
3,600 utilities
--------
7,800 - 11,800$

We also have solar panels on our roof (something we wouldn't have been allowed to do if renting) that pay us about 2600 - 3000$ a year.

So net costs are somewhere around 4,800 - 9,200$ each year . . . or from less than a quarter to less than half of what your rule of thumb predicts.

FINate

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #38 on: February 25, 2018, 09:18:09 AM »
We bought our house 15 years ago for about 500k. Over this period we've paid about 100k in property taxes and have put about another 100k into maintenance/improvements. Ballpark estimate* in our HCOL area is that it would have cost us about $3500/month to rent something similar over the years, so the imputed rent value for us is about $630k. Add it all up and our initial purchase has produced about 4% compounding return. A little better than inflation for a house that has doubled in value.

There is one tax advantage here worth pointing out, especially for ERs: Imputed rent (what you save by not having to rent) is kinda like income that is not taxed. Or rather, it's income you don't need to earn if you own outright. Depending on your tax and rent situation, if you don't need to earn tens of thousands of dollars to pay rent then you can save quite a bit in taxes off the top. Oh, and another tax benefit in the US: We can cash out and take 500k of capital gains tax free because we've live here 2 or more years of the last five.

IMO - If you're going to put down roots in a place for 10 years or more and you want the intangible benefits of ownership (making it your own space) then a house is probably ok. But don't go nuts, go for value and low maintenance. And don't expect it to make you rich. Best case scenario is you break about even.

*Don't have great data for this, but it's my best guess. The results change a lot as this number goes up or down, so take with a grain of salt.
« Last Edit: February 25, 2018, 09:24:18 AM by FINate »

meghan88

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #39 on: February 25, 2018, 09:40:13 AM »
IMO - If you're going to put down roots in a place for 10 years or more and you want the intangible benefits of ownership (making it your own space) then a house is probably ok. But don't go nuts, go for value and low maintenance. And don't expect it to make you rich. Best case scenario is you break about even.

*Don't have great data for this, but it's my best guess. The results change a lot as this number goes up or down, so take with a grain of salt.

Totally agree.  When you own, you can put more heart and soul into renovating/decorating.  Worthwhile if you're planning to stay there for a while.  Not very worthwhile if you plan on moving around a lot.

The costs associated with buying and selling can be prohibitive.  You could get a real "lemon" of a house, and (by way of example) we've owned two in a row.  Our latest nightmare is a brand new condo with loads of defects from a bad build and bad HVAC and other system installs, even though the builder and developer had stellar reputations.  Our nightmare before that was a gorgeous old century home with loads of oak woodwork and leaded glass, and loads of poor renovations that were hiding all kinds of nasty things behind the walls.

But when renting, you could get turfed out of a place you love, for various reasons and with varying amounts of notice depending on the jurisdiction.

The original question is interesting indeed, and I think it all depends on a huge variety of factors.  There are pros and cons to both buying and renting.

The only common "con" might be shitty neighbours.  But when you're renting, you're less emotionally invested and therefore more free to move.

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #40 on: February 26, 2018, 07:19:26 AM »
The Rate of Return on Everything thread in the real estate forum might be interesting reading. Also the 120pp-ish "Rate of Return on Everything" working paper itself is really interesting reading.

BTW, I would in the past have argued for the point that you ought to, for financial reasons at least, load up on equities. But I think one can now make a really strong case for having a big housing investment in your portfolio for the reasons discussed in the thread and then elaborated on in the working paper.

I admit it, this thought is probably subconsciously influenced by a strong sense that we're looking at below-average equity returns for at least a little while due to the high valuations...

But mostly this thought stems from the low correlation between housing and equities. The latest research indicates that housing delivers returns very similar to equities and that the returns from equities and housing show little correlation.

https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/

FINate

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #41 on: February 26, 2018, 09:49:36 AM »
The Rate of Return on Everything thread in the real estate forum might be interesting reading. Also the 120pp-ish "Rate of Return on Everything" working paper itself is really interesting reading.

BTW, I would in the past have argued for the point that you ought to, for financial reasons at least, load up on equities. But I think one can now make a really strong case for having a big housing investment in your portfolio for the reasons discussed in the thread and then elaborated on in the working paper.

I admit it, this thought is probably subconsciously influenced by a strong sense that we're looking at below-average equity returns for at least a little while due to the high valuations...

But mostly this thought stems from the low correlation between housing and equities. The latest research indicates that housing delivers returns very similar to equities and that the returns from equities and housing show little correlation.

https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/

Interesting thread and paper. I'm getting ready to sell a chuck of RE (too much exposure to a single location) and have been debating with myself about where to invest the proceeds, looking more seriously at a housing ETF now. So thanks for sharing.

I certainly have not had ~7% annual returns on my primary residence. Admittedly this is anecdotal and includes the period of the housing bust. Yet RE values in my area have had exceptional growth in recent years and yet, when I do the math I never get to more than about 4% annual return. On p. 38 of the paper it says they don't include taxes in their calculations, which would account for about 1% of the diffrence. Some of the remaining difference could be because we bought a lemon (shoddy construction needing large repairs) and some pre-MMM remodels.  The takeaway for me is diversified un-leveraged RE is like magic pixie dust, but as an individual investor it's difficult (nigh impossible?) to achieve in practice.

SeattleCPA

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #42 on: February 26, 2018, 06:23:33 PM »
The takeaway for me is diversified un-leveraged RE is like magic pixie dust, but as an individual investor it's difficult (nigh impossible?) to achieve in practice.

I agree with the magic pixie dust label... and also the apparent challenge of getting the magic to work right.

Radagast

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #43 on: February 26, 2018, 07:08:07 PM »
Umm . . . you're making the same mistake with this rule of thumb that is so commonly made when people are retiring.  Things do not scale up as a percentage.  You don't need 80% of what you were making when working to retire, and you don't need 3% of the value of an expensive house each year in maintenance and taxes.  Often a house is valuable because of location, not because it's a mansion.  A small house in a great location doesn't cost more to maintain or in utilities than a small house in a crappy location.  Taxes are location dependent.  Here in Toronto for example, we've got high property values and low taxes.

Case in point:
Our house was most recently valued at 680k.  According do your rule of thumb I am paying 20,400$ each year . . . except I'm actually paying:

3,200 taxes
1-5,000 maintenance
3,600 utilities
--------
7,800 - 11,800$

We also have solar panels on our roof (something we wouldn't have been allowed to do if renting) that pay us about 2600 - 3000$ a year. OK. And mine is a duplex that pays me 9000$ a year. These both go on income/investments side, not expenses side.

So net costs are somewhere around 4,800 - 9,200$ each year . . . or from less than a quarter to less than half of what your rule of thumb predicts. What are your expenses as % of what you actually paid?
For now, if anyone asks I will say that as a first estimate you need an investment portfolio equal to the $ you pay for your house to pay for your ongoing house expenses. Once you have actual numbers you will, of course, use those.

Radagast

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #44 on: February 26, 2018, 07:13:50 PM »
The Rate of Return on Everything thread in the real estate forum might be interesting reading. Also the 120pp-ish "Rate of Return on Everything" working paper itself is really interesting reading.

BTW, I would in the past have argued for the point that you ought to, for financial reasons at least, load up on equities. But I think one can now make a really strong case for having a big housing investment in your portfolio for the reasons discussed in the thread and then elaborated on in the working paper.

I admit it, this thought is probably subconsciously influenced by a strong sense that we're looking at below-average equity returns for at least a little while due to the high valuations...

But mostly this thought stems from the low correlation between housing and equities. The latest research indicates that housing delivers returns very similar to equities and that the returns from equities and housing show little correlation.

https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/
Nice link (I already read that thread, but I didn't say anything there.) If it was a question of 50/50 stocks and rental properties I would tend to agree, but 50/50 stocks and personal McMansion just won't work from a cash flow perspective.

aspiringnomad

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #45 on: February 26, 2018, 07:58:36 PM »
$1 million in investments, no question.

SeattleCPA

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #46 on: February 26, 2018, 08:02:38 PM »
The Rate of Return on Everything thread in the real estate forum might be interesting reading. Also the 120pp-ish "Rate of Return on Everything" working paper itself is really interesting reading.

BTW, I would in the past have argued for the point that you ought to, for financial reasons at least, load up on equities. But I think one can now make a really strong case for having a big housing investment in your portfolio for the reasons discussed in the thread and then elaborated on in the working paper.

I admit it, this thought is probably subconsciously influenced by a strong sense that we're looking at below-average equity returns for at least a little while due to the high valuations...

But mostly this thought stems from the low correlation between housing and equities. The latest research indicates that housing delivers returns very similar to equities and that the returns from equities and housing show little correlation.

https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/
Nice link (I already read that thread, but I didn't say anything there.) If it was a question of 50/50 stocks and rental properties I would tend to agree, but 50/50 stocks and personal McMansion just won't work from a cash flow perspective.

Totally agree with your point about a McMansion... If you do this, even if the appreciation is good, you'll spend "too much" on your "rent."

But I also think some housing choice that is reasonable probably works pretty well.

aspiringnomad

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #47 on: February 26, 2018, 08:24:59 PM »
The Rate of Return on Everything thread in the real estate forum might be interesting reading. Also the 120pp-ish "Rate of Return on Everything" working paper itself is really interesting reading.

BTW, I would in the past have argued for the point that you ought to, for financial reasons at least, load up on equities. But I think one can now make a really strong case for having a big housing investment in your portfolio for the reasons discussed in the thread and then elaborated on in the working paper.

I admit it, this thought is probably subconsciously influenced by a strong sense that we're looking at below-average equity returns for at least a little while due to the high valuations...

But mostly this thought stems from the low correlation between housing and equities. The latest research indicates that housing delivers returns very similar to equities and that the returns from equities and housing show little correlation.

https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/
Nice link (I already read that thread, but I didn't say anything there.) If it was a question of 50/50 stocks and rental properties I would tend to agree, but 50/50 stocks and personal McMansion just won't work from a cash flow perspective.

Totally agree with your point about a McMansion... If you do this, even if the appreciation is good, you'll spend "too much" on your "rent."

But I also think some housing choice that is reasonable probably works pretty well.

Don't want to rehash what might be in the other thread, but housing as a relatively uncorrelated investment is a reasonable option but you bear greater risk in owning illiquid assets in particular locations and it's far less passive than owning index funds (unless you're willing to eat into your returns by paying a management company). In exchange for that added risk and hassle you get similar returns when averaged out over 150 years and pretty significantly lower returns when looking specifically at the US over the past couple generations. Yes, you also get less volatility, but an early retiree should not be overly concerned about market swings, except for a few years after retirement when it's likely easiest to return to the workforce should you be bitten by a historically bad sequence of returns.

I say this despite having a rental property that has so far turned into a very lucrative investment because I bought a foreclosure in an up-and-coming neighborhood. I keep track of my ratio of investable assets to real estate equity, IA/RE. While I like it when any part of my net worth goes up, I "root" for the IA/RE ratio to go up every month. I personally prefer my net worth to be weighted towards owning thousands of diverse companies across the world rather than towards owning a couple of houses in currently desirable areas.

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #48 on: February 27, 2018, 10:57:09 AM »
Well, this is sobering. When I started my MMM journey I worked out that owning a house wasnít for me and didnít make sense. I was going all in with index funds. But, I canít get my partner to do the same. Now, Iíve been thing this exact 500 home + 500 investment scenario which 95% of you would be against. So really, I should stick to my original plan! But where we live, both the rents and home prices are extraordinary high. Iím honestly torn and canít decide what to do anymore.

you have a 3rd option not proposed - 900k and a 500k house with a 400k mortgage which is the best of all worlds if it makes more sense to buy than rent that is.

MrThatsDifferent

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Re: $1 million in investments vs. 500k home + 500k investments
« Reply #49 on: February 27, 2018, 12:53:21 PM »
Well, this is sobering. When I started my MMM journey I worked out that owning a house wasnít for me and didnít make sense. I was going all in with index funds. But, I canít get my partner to do the same. Now, Iíve been thing this exact 500 home + 500 investment scenario which 95% of you would be against. So really, I should stick to my original plan! But where we live, both the rents and home prices are extraordinary high. Iím honestly torn and canít decide what to do anymore.

you have a 3rd option not proposed - 900k and a 500k house with a 400k mortgage which is the best of all worlds if it makes more sense to buy than rent that is.

Yes, youíre right and this is closer to what I have in mind now.