Author Topic: Can you be a FIRE renter?  (Read 5296 times)

jkitiara

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Can you be a FIRE renter?
« on: February 16, 2016, 03:00:22 PM »
I am fairly certain in the rent vs. own debate, my situation comes out on the rent side financially. I live in San Francisco (with a husband who is quite determined to stay here, and works in tech). Psychologically I am strongly in favor of buying (so sick of my landlady!) but that's a different question. So hypothetically say I was just going to decide to rent forever.

How can early retirement work if you are renting? I can't count on having the same rent 5 or 20 years from now. People get kicked out constantly in SF. I will never have rental income and can't even rent to roommates at most decent places.

I guess the numbers to buy might work if we are determined to stay in SF for the *really* long haul, but I can't see that far into the future. In the 10 year haul, it probably makes more sense to rent and invest extra cash in index funds. But I don't see how to become FIRE doing this. Rent is too unpredictable. I'm not even sure how to calculate a FIRE date for us until I sort of have an answer to what a housing expense would be.

Thoughts? I know the Bay area is a bitch for properties, and may be unique that way.

Jeremy E.

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Re: Can you be a FIRE renter?
« Reply #1 on: February 16, 2016, 03:05:17 PM »
If you kicked out just get another place, expect rent price to go up with inflation. JLCollinsNH is retired and he rents, he is one of millions. If renting makes more sense, then rent, unless owning a home is worth tacking on X months or years onto your working career, do you think that is worth it or not?

Jeremy E.

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Re: Can you be a FIRE renter?
« Reply #2 on: February 16, 2016, 03:09:01 PM »
Also if you aren't tied down to SF, you could move when you retire, and be able to retire much earlier in a low cost of living area. Maybe rent in SF, until you decide to retire and then buy in a LCOL area. There are lots of great bloggers that talk about geographic arbitrage, some go to low cost of living places in the U.S., some travel the world to low cost of living places like Mexico, Guatemala and Thailand.

jkitiara

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Re: Can you be a FIRE renter?
« Reply #3 on: February 16, 2016, 03:19:54 PM »
Perhaps I should clarify a bit if you don't know the SF renting scene: it's bananas. Rent for a similar place can literally be thousands more if you are kicked out of your current situation.

I'm not certain my hubby would be into moving outside of SF, even in retirement. He is not entirely mustachian, but has come around to a lot of things and makes a very good salary.

One of my ideas was to buy a place and after retirement perhaps rent it out short term to travel for a few months out of each year. The rent you could get on a house in SF right now could entirely fund a few months in a cheaper country. However, this means buying a house and having it paid off in order to be FIRE. Small houses in mediocre neighborhoods run $900k and above, easy.

Another Reader

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Re: Can you be a FIRE renter?
« Reply #4 on: February 16, 2016, 03:36:04 PM »
The real estate market is cyclical, even in San Francisco.  Continue to rent for now and save and invest until the market changes.  If you are sure you will live in San Francisco permanently, identify the neighborhoods and property types that appeal to you and wait.  Eventually what you want will go on sale, at a large discount to current prices.

Jeremy E.

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Re: Can you be a FIRE renter?
« Reply #5 on: February 16, 2016, 03:45:18 PM »
The real estate market is cyclical, even in San Francisco.  Continue to rent for now and save and invest until the market changes.  If you are sure you will live in San Francisco permanently, identify the neighborhoods and property types that appeal to you and wait.  Eventually what you want will go on sale, at a large discount to current prices.
Some places have been cheaper to rent at for decades, and the rent vs buy calculation always ends in favor of renting. I don't understand why the people renting these out don't sell and buy a better rental in a better area or invest the money, but I don't really understand it enough I suppose, maybe they are trying to make money from their property appreciating. that being said, if you get an eviction notice or whatever, or they don't want you to resign lease, that is when you can redo your rent vs buy calculation, but for now i'll reiterate,
If renting makes more sense, then rent, unless owning a home is worth tacking on X months or years onto your working career
Lastly I've heard some people say that buying a house in San Francisco is gambling as a San Francisco real estate crash has been predicted by some, I don't know much about it but I know I wouldn't buy a house there.
« Last Edit: February 16, 2016, 03:46:55 PM by Jeremy E. »

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Re: Can you be a FIRE renter?
« Reply #6 on: February 16, 2016, 03:56:03 PM »
When times are good in places like Manhattan and San Francisco, rent increases and property appreciation far outstrip inflation.  My Silicon Valley property has appreciated at a compound rate of just under seven percent over 27 years.  Manhattan appreciation compounded is probably higher over the same period.  Leverage enhances that return in many cases.

Mr. Collins had the unfortunate problem of buying in a market that did not appreciate much after he bought.  I consider his advice to be helpful in slow markets but irrelevant to the most competitive markets in the world.

Having said that, entry price matters.  Wait until property is on sale if you want to own in a highly competitive market.

Jeremy E.

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Re: Can you be a FIRE renter?
« Reply #7 on: February 16, 2016, 04:09:44 PM »
When times are good in places like Manhattan and San Francisco, rent increases and property appreciation far outstrip inflation.  My Silicon Valley property has appreciated at a compound rate of just under seven percent over 27 years.  Manhattan appreciation compounded is probably higher over the same period.  Leverage enhances that return in many cases.

Mr. Collins had the unfortunate problem of buying in a market that did not appreciate much after he bought.  I consider his advice to be helpful in slow markets but irrelevant to the most competitive markets in the world.

Having said that, entry price matters.  Wait until property is on sale if you want to own in a highly competitive market.
Well sir, real estate prices have on average grown at the rate of inflation, something I believe Mr. Collins references in one of his articles. Some places might outpace inflation, while some places might do worse than inflation.

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Re: Can you be a FIRE renter?
« Reply #8 on: February 16, 2016, 04:57:37 PM »
My guess is there is a curve, maybe close to that famous bell, for average appreciation.  I live in an area that's to the far right of the curve.  This area is always in demand.  Prices do drop, but in the recent mortgage crisis the drop was much less than, say, Las Vegas or Phoenix.  Prices here have not only recovered, they have gone well beyond the highs of 2006-2007.

I would not buy rentals here for cash flow, but the local real estate can be a darn good investment when prices take a hit.  When the Chinese pull out and the current tech mania collapses, buying a house to live in will likely be a good investment, based on local appreciation history since at least WWII.

Jeremy E.

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Re: Can you be a FIRE renter?
« Reply #9 on: February 16, 2016, 05:46:41 PM »
My guess is there is a curve, maybe close to that famous bell, for average appreciation.  I live in an area that's to the far right of the curve.  This area is always in demand.  Prices do drop, but in the recent mortgage crisis the drop was much less than, say, Las Vegas or Phoenix.  Prices here have not only recovered, they have gone well beyond the highs of 2006-2007.

I would not buy rentals here for cash flow, but the local real estate can be a darn good investment when prices take a hit.  When the Chinese pull out and the current tech mania collapses, buying a house to live in will likely be a good investment, based on local appreciation history since at least WWII.
Personally, I would only invest in real estate as a primary residence that is a better deal than renting, or as a house I can turn into a rental and make a lot of profit(like 10+% return on investment after all expenses). But to each his own.

jkitiara

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Re: Can you be a FIRE renter?
« Reply #10 on: February 16, 2016, 06:46:27 PM »
So what I'm hearing is "time the market". Ok fine.

How does one calculate time to FI with that highly variable variable hanging overhead?

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Re: Can you be a FIRE renter?
« Reply #11 on: February 16, 2016, 07:07:29 PM »
It's not as easy because of the moving real estate target.  The window of buying opportunity could come in two years or ten.  In your shoes, I would continue to max out savings and paper investments.  Perhaps invest in rentals outside of California if that interests you and you are willing to do the necessary homework.   Yes, it will frustrate you to to be able to calculate an exact FIRE date, but a lot of FIRE dates others have calculated will not turn out to be accurate because things change.

In addition, your situation could change.  You and DH may not like the San Francisco of ten years from now.  Industries could shift, DH's employment could become less lucrative.  In the meantime, you are building up a solid asset base and will have more options available to you as time goes on.

If you don't time the real estate market, you will spend a much higher percentage of income on your housing over time and less will be available to invest elsewhere.  You won't get the level of appreciation over your ownership that someone that buys low will.  it is more likely you could find yourselves underwater and needing to sell.  Buy when it makes sense to buy.  And in my opinion in this market buying does not make sense.

CanuckExpat

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Re: Can you be a FIRE renter?
« Reply #12 on: February 16, 2016, 07:58:22 PM »
If you are in SF, don't you have relatively strong rent control protection, at least if you are content with not changing where you live?

An apartment you like, with strong rent control, gives you a lot of the certainty and positives that you would get from purchasing:  known costs, protection from run away housing costs. The only thing you would miss is upside gain on appreciation, but you also don't get the downside risk if housing prices plummet.

cchrissyy

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Re: Can you be a FIRE renter?
« Reply #13 on: February 16, 2016, 09:13:27 PM »
if you were going to rent "forever", then although there would be fluctuations along the way, you could expect rent to rise with inflation and your investments to do the same or better. 

Also, if you want equity or price appreciation, or if you want your investment income to be tied to the rise of rents, then part of your investment strategy could be to own rental housing.  Not in SF but in a city where the prices make sense.

Also, the beauty of renting is the flexibility to never pay for more housing than you need, and to move to new places when you want, many of which should be cheaper than SF. Of course you don't know today what city you may prefer at age 60, but you can be fairly confident it will be below your SF budget.

jkitiara

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Re: Can you be a FIRE renter?
« Reply #14 on: February 17, 2016, 01:46:02 PM »
If you are in SF, don't you have relatively strong rent control protection, at least if you are content with not changing where you live?

Theoretically, yes. But much has been made lately about a lot of loopholes to get around those laws. I believe the place I'm in now should be rent controlled under the law, but last October landlady raised rent more than was legal (by just a little) and "made" us sign a new lease, which I also don't believe we have to do. We should be month to month. If she does this again this year, I'm going to want to fight it, but my DH is a more sensitive type who doesn't want to make things "uncomfortable". It's just a two unit place with us and her. This year when I tried to push back against the rent increase, she said, well there are a lot of people who would pay a lot more.

She can't legally kick us out, but it could get nasty. I'd be happy to give her the finger and say tough, follow the law, but if it got touchy DH would want to move out immediately. He's too soft hearted to deal with confrontation.

So you see my motivation for continuing a rent vs own debate. I have a lot of psychological factors to consider!

CanuckExpat

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Re: Can you be a FIRE renter?
« Reply #15 on: February 17, 2016, 02:40:22 PM »
If you are in SF, don't you have relatively strong rent control protection, at least if you are content with not changing where you live?
Theoretically, yes. But much has been made lately about a lot of loopholes to get around those laws.

Don't most of those loopholes involve the tenant being paid a lump-sum of cash to be "bought out" of their lease?

Sure, it can be a sob story if you are 70, have only social security, have been paying $200 a month since the 70s, and want to continue living in the city where the lump sum is large but not going to cover the new rents for a long time. But if you are young, FIRE and flexible then even in the worst case where you get bought out of a rent controlled apartment, it could be a nice chunk of money to start a new adventure.

I'm not really familiar with SF rent control other than what I've read in the news, so take everything I say with a grain of salt.

She can't legally kick us out, but it could get nasty. I'd be happy to give her the finger and say tough, follow the law, but if it got touchy DH would want to move out immediately. He's too soft hearted to deal with confrontation.

So you see my motivation for continuing a rent vs own debate. I have a lot of psychological factors to consider!

I feel you about the psychological factors; I'd have a tough time with an uncooperative landlord as well, even if I wanted to stick to my guns.

I think the Bogleheads article on Owning vs renting put's it nicely:
"There is no definitive answer for owning vs. renting a home. There can be a financial answer as to whether it is cheaper to buy or rent. However, other considerations such as emotional, environmental, and flexibility can sometimes outweigh decisions that may not be financially justified."

I'm not sure I support rent-control from a policy perspective, but if I was looking to rent long term, I would not be opposed at all to taking advantage of it if I could find it :)

onlykelsey

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Re: Can you be a FIRE renter?
« Reply #16 on: February 17, 2016, 02:51:52 PM »
I bought a (small, non-luxurious) place in Manhattan, that I will probably outgrow in five years (bought two years ago) in part to hedge against this.  If my family expands or I want to relocate, I'll rent.  If the rental market goes crazy high in NYC, I'll rent this place out and find something smaller (or in another city) and pocket the difference.  I like having the psychological foothold.

As much as Silicon Valley and Manhattan have equally crazy rental markets, I wouldn't necessarily bet on Silicon Valley not being in a bubble.  It's not a diversified enough area yet, I think.

Bicycle_B

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Re: Can you be a FIRE renter?
« Reply #17 on: March 04, 2016, 12:48:17 PM »
I don't know if anyone has a definitive answer.  Here's one idea:  Use the current market rent as the basis for your expected retirement spending, not the below-market rent of whatever good deal you have.  Determine your total cost, multiply by 25 (see the post on the 4% safe withdrawal rate). 

Example:  $15k current rent, $20k market price for renting similar place, $20k other expenses.  Total current cost of living is $35k but you budget $40k for retirement.  That way when you have to move, you can pay market rent.  $40k x 25 = $1 million stash needed to retire.  Expect to increase income, expenses, savings amount and stash target proportional to inflation.

It's true that with rent such a large portion, the possibility that rent inflation will outpace wage inflation is a risk.  But as other commenters pointed out, you can move to another city when you retire.  Whether you add an additional amount to your target stash to compensate for rent increases above general inflation depends on how much you want to ensure your ability to live in the Bay Area.  How much fudge factor to add for that is a judgment call.  But the calculation above gives you a starting point; fill in your own numbers.

fishnfool

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Re: Can you be a FIRE renter?
« Reply #18 on: March 04, 2016, 06:07:31 PM »
I'm not sure how anyone can afford the rents around SF even while working? I was in Tiburon this past weekend, a starter home there $1.5M. Rentals $6k per mo. Just crazy!!!

SF is a great city but unless you're making $200k plus a year I don't see how anyone could save for retirement or buy a house.

jkitiara

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Re: Can you be a FIRE renter?
« Reply #19 on: March 08, 2016, 11:17:39 AM »
My point was that actually, I'm not sure how anyone can either! My husband and I make $150k a year together and are aggressively saving for a house and I'm still not sure we can do it. Or really, we CAN do it, but I'm not sure we should.

Current rent on our 2 bedroom in a medium (read, not fancy, but not crummy) neighborhood on the very edge of the city is $2900.

Yes that is the right number of zeros.

That $6k rent must be for a very large, very nice house with a yard and such. Tiburon is kind of a fancy pants area too.

dinkhelpneeded

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Re: Can you be a FIRE renter?
« Reply #20 on: March 08, 2016, 11:52:00 AM »
Here is what we did - and yes its extreme, especially since my husband would never leave the bay area either. This is a systemic problem with bay area in that people move here, love it and want to stay, and cant make enough $ to buy.

Moved into a tiny studio in a shitty area (this involves convincing your husband - I had to as well)
Save every penny and meet friends outside socially, i.e. never home for those few years if you worry about saving face.
Find a way to make more income - switch jobs, ask for s sign on bonus.
Buy a home with an in law unit or basement so you get some rental income to help with mortgage (but still have separate entrances)
Be realistic about your home purchase or decide to move to a LCOL area

A realtor once told me buy the nicest dump you can find for your money (in bay area) in a few years you will be glad you did (no matter which way the market swings) and that has rung true for us.

Good luck!

onlykelsey

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Re: Can you be a FIRE renter?
« Reply #21 on: March 08, 2016, 11:53:39 AM »
Quote
A realtor once told me buy the nicest dump you can find for your money (in bay area) in a few years you will be glad you did (no matter which way the market swings) and that has rung true for us.

That's what I did in Manhattan.  It's 11 feet wide but I have equity and can upgrade if I want to.

Matumba

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Re: Can you be a FIRE renter?
« Reply #22 on: March 08, 2016, 12:39:01 PM »
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