Reaching your number vs. owning a home

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jeffyscott
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Re: Reaching your number vs. owning a home

Post by jeffyscott »

nigel_ht wrote: Sat Oct 16, 2021 8:29 am
jeffyscott wrote: Sat Oct 16, 2021 8:20 am
willthrill81 wrote: Fri Oct 15, 2021 9:46 pm
KlangFool wrote: Fri Oct 15, 2021 9:20 pm willthrill81,

1) Except folks buy more houses versus when they are renting.
Many do, but that is not an inherent aspect of home ownership. We own our home outright, and it's a 3/2 home with 1,200 sq. ft.
I think this is one of the main sources of these homeownership debates, it's what people actually do vs. what they could do. Many (most?) people do buy more house than what they would rent. So one group wants to compare things like median rent to median buy, which results in something like comparing the cost of renting an 800 SF two bedroom apartment to buying a 2000 SF single family home. And the other group wants to compare like properties, so either buying the 2000 SF house compared to renting a 2000 SF house or else buying a modest 2 bedroom condo compared to renting the 2 bedroom apartment.

The other big factor is that some of us live where buying might cost 10-15 times the annual rent for an equivalent home and others where it might be 20x+.

My single son had co-workers telling him "you should buy a house, instead of renting...financial advantages, etc..." and he's thinking "yeah, no, I pay $525 per month in rent, house would cost $$$...". I told him that at least part of the problem is comparing renting a 1 bedroom apartment to buying a 3 bedroom house, if there were a place you could buy that was more equivalent to what you are renting, then the comparison might look better, but you can't really buy a 1 bedroom apartment that is equivalent to your rental in that area. But then it turned out you could buy a 1 bedroom condo for about $50-60K (the condos were actually more equivalent to places that rented for $700+ at the time, but were as close as possible to being equivalent to his rental) and, after a financial analysis he bought one for cash.

So the comparison here was paying out $525 per month vs. a one time payment of $50K and about $300 per month in condo fees, taxes, and estimated maintenance. The initial return on his investment of $50K was 5.4%, based on the $225 per month difference. The condo actually had some added amenities that he'd have been willing to pay about $100 per month for, so accounting for that boosts the return to 7.8%. If it is assumed that the condo, rent, and his monthly costs would all rise at the same rate, does that mean his ongoing return remains 5.4% (or 7.8%, including the value of added amenities)?

Of course, this analysis would look quite different if, as many do, he went from his rental apartment to a single family home. One of the cheaper houses in that area would have cost maybe $150K, plus maybe $350-400 per month in taxes and maintenance. It also would look different if he lived where an equivalent condo would cost $150K+.
Well, if you can buy a condo for $50K that’s not bad even with a $300 condo fee, taxes, etc assuming it’s not in a terrible part of town.
There are really no terrible parts of the small city that it is in. We were surprised to run across these condos, they are just a few blocks from where he was renting. I actually worked nearby and, during my lunchtime walks, was noting apartment bindings with underground parking as that was something he was hoping to find and move to. I'd seen the buildings many times and had assumed they were rentals. After I discovered that they were condos, we looked them up and found that there were 1 bed, 600 SF ones selling at those prices 5 years ago. They are now back up to selling at, typically, about $85K, condo fees and taxes are up about $50 per month, rents appear to be up by about 15-20% in the area.
code dreamer
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Re: Reaching your number vs. owning a home

Post by code dreamer »

etfan wrote: Fri Oct 15, 2021 8:44 am 1- If a person has to prioritize between reaching their number and owning a home, which one should be the priority?

2- If it seems that both just can't be done and one must choose between the two, what is the better choice?

Using a big portion of your investments to buy a house is going to reduce the growth rate of your portfolio and it may lose a lot of value in the house. Your net worth may never recover.

On the other hand, houses aren't getting any cheaper. It's possible that one may never be able to buy a house if the prices keep increasing because the math may never go in your favor at this rate.
My thoughts to OP's questions are:
  • If you plan on staying in that area for 3 or more years then owning makes more sense. If you plan to move or anticipate moving in the next couple of years, then renting.
  • Avoid falling into the following trap: Happy to rent a 2BR apartment 1000 sq. ft but choosing a 4BR 3500+ sq ft home to buy. If you can live in a 2BR apartment, then look to buy a 2BR 1000 sq ft condo.
  • If you are in a HCOL and are concerned on a large downpayment to reach 20%, two of my suggestions would be:
    • Choose the lowest down payment and pay PMI.
    • My personal favorite: If thats not something that agrees with your personality on paying PMI, then consider the 20% downpayment in your mind as your overall portfolios fixed investment and just increase the remaining portfolio's equity exposure. If you already have a 100% equity exposure, then choose investments that are leveraged slightly to make it up for the 20% downpayment. In the end, most of the financial decisions are psychological, hence changing the attitude towards the downpayment may help.
ChinchillaWhiplash
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Re: Reaching your number vs. owning a home

Post by ChinchillaWhiplash »

I would say invest. Leaves you with more options later. Paid off house = tied up $s that might be hard to sell. Taxable brokerage account with assets = $ any time you want or need it. Makes the most sense if you have a low interest rate mortgage. If you make enough with your investments at retirement time you can pay off your mortgage or pay it down a large chunk and do a refi.
muffins14
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Re: Reaching your number vs. owning a home

Post by muffins14 »

Lots of strongly held opinions here.

Personally I’m aiming to get near my number first, but he would consider buying. Goal is to be near my number by 45, then consider buying a condo / co-op.

I’m aligned with Nigel’s take generally.

In NYC, I’m assuming an apartment we would want would be around $1.5M. A $300k down payment currently seems less efficient than keeping the money fully invested at 100% equity. For my portfolio growth, this seems good to avoid for now, especially when I think that common charges or “big” maintenance issues could come up when owning an apartment in NYC, but as a renter I have a pretty low cost.

I’d rather get to about $2M liquid before dropping $300k on owning, and I don’t think you can put down less than 20% if it means you have like a $1.3M mortgage, right?
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etfan
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Re: Reaching your number vs. owning a home

Post by etfan »

code dreamer wrote: Sat Oct 16, 2021 9:23 am .... then consider the 20% downpayment in your mind as your overall portfolios fixed investment and just increase the remaining portfolio's equity exposure.
I wonder how common it is to consider your house equity as part of your fixed investment allocation. It doesn't seem to serve the same purpose. You can't rebalance using your house equity, for example.
muffins14
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Re: Reaching your number vs. owning a home

Post by muffins14 »

Cash out refinance and buy stocks? Seems misguided but possible
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Marseille07
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Re: Reaching your number vs. owning a home

Post by Marseille07 »

etfan wrote: Sat Oct 16, 2021 10:32 am
code dreamer wrote: Sat Oct 16, 2021 9:23 am .... then consider the 20% downpayment in your mind as your overall portfolios fixed investment and just increase the remaining portfolio's equity exposure.
I wonder how common it is to consider your house equity as part of your fixed investment allocation. It doesn't seem to serve the same purpose. You can't rebalance using your house equity, for example.
That's a wrong question. "Reaching your number" involves your expenses. It's irrelevant whether you count the down / home equity as part of your AA or not.

You really need to consider the expenses of 2 scenarios like:
a) 2M portfolio no house
b) 1.5M portfolio + 500K house

and pick whichever is higher (or you can make a selection and eliminate the other).
Random Walker
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Re: Reaching your number vs. owning a home

Post by Random Walker »

etfan wrote: Sat Oct 16, 2021 10:32 am
code dreamer wrote: Sat Oct 16, 2021 9:23 am .... then consider the 20% downpayment in your mind as your overall portfolios fixed investment and just increase the remaining portfolio's equity exposure.
I wonder how common it is to consider your house equity as part of your fixed investment allocation. It doesn't seem to serve the same purpose. You can't rebalance using your house equity, for example.
In my 40’s with a mortgage and starting to cool off the investment portfolio from 100% equities, I started to compare the bond rates to my mortgage rate. I started to believe that it was better to pay off the higher rate mortgage than invest in the lower rate bonds. That resulted in me paying off the mortgage as rapidly as possible. A nice side effect of that that I’ve discovered since paying off the mortgage is that owning the home free and clear helps create the psychological fortitude to tolerate a more aggressive AA.

Dave
59Gibson
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Re: Reaching your number vs. owning a home

Post by 59Gibson »

Random Walker wrote: Sat Oct 16, 2021 10:54 am
etfan wrote: Sat Oct 16, 2021 10:32 am
code dreamer wrote: Sat Oct 16, 2021 9:23 am .... then consider the 20% downpayment in your mind as your overall portfolios fixed investment and just increase the remaining portfolio's equity exposure.
I wonder how common it is to consider your house equity as part of your fixed investment allocation. It doesn't seem to serve the same purpose. You can't rebalance using your house equity, for example.
In my 40’s with a mortgage and starting to cool off the investment portfolio from 100% equities, I started to compare the bond rates to my mortgage rate. I started to believe that it was better to pay off the higher rate mortgage than invest in the lower rate bonds. That resulted in me paying off the mortgage as rapidly as possible. A nice side effect of that that I’ve discovered since paying off the mortgage is that owning the home free and clear helps create the psychological fortitude to tolerate a more aggressive AA.

Dave
This is similar to how I look at it. Wife and I recently bought a house and decided to pay cash. I'm 46 and it's about 15% of our NW. It has psychological benefits for us..lower expenses, not so concerned if mkt drops, reduces the amount I need in cash to swan. On paper a mortgage and the effects of inflation, mkt returns should outperform long term, the key word is Should. Our portfolio is 43X and it felt right to take some out of our "paper assets".
Last edited by 59Gibson on Sat Oct 16, 2021 11:38 am, edited 1 time in total.
Jack&Warren disciple
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Re: Reaching your number vs. owning a home

Post by Jack&Warren disciple »

WhiteMaxima wrote: Fri Oct 15, 2021 3:43 pm You will only need 20% down to own a house. 30 year fix mortgage is around 2.75-3.0%. So you can reach your number and own a house at the same time.
That worked for me, minimal up front cash and invest the rest in equities. I did this over 33 years, starting when I was in my 20's and 30's, with 1/2 dozen properties now my net worth is 75% real estate/25% stocks. Is it a lot of work to self manage the properties over 33 years? (still going!), YOU BETCHA! Is it expensive to replace HVAC systems, roofs, (yesterdays dishwasher install was $1450), etc, deal with tenant turnover and toilets and cleaning up after others, YES! Am I handy as heck, you betcha!

Does it give me piece of mind as I enter my mid 50's, yup! In essence the cash flow is like receiving bond payments, I think life insurance companies invest alot in real estate from the cash they receive today and after 20 to 30 years use it to pay annuitants. Real Estate is a long term investment!

In my 20's, I would buy a house, live in it, rent it out and buy another. I have to go now and power wash some concrete stairs as prospective tenants like clean units...
nigel_ht
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Re: Reaching your number vs. owning a home

Post by nigel_ht »

Marseille07 wrote: Sat Oct 16, 2021 10:35 am
etfan wrote: Sat Oct 16, 2021 10:32 am
code dreamer wrote: Sat Oct 16, 2021 9:23 am .... then consider the 20% downpayment in your mind as your overall portfolios fixed investment and just increase the remaining portfolio's equity exposure.
I wonder how common it is to consider your house equity as part of your fixed investment allocation. It doesn't seem to serve the same purpose. You can't rebalance using your house equity, for example.
That's a wrong question. "Reaching your number" involves your expenses. It's irrelevant whether you count the down / home equity as part of your AA or not.

You really need to consider the expenses of 2 scenarios like:
a) 2M portfolio no house
b) 1.5M portfolio + 500K house

and pick whichever is higher (or you can make a selection and eliminate the other).
It depends whether you would have a $1.5M portfolio after investing in a $500K house…my argument has been that the net worth of the renter is higher but that’s only been true the last decade or so when FIRE has become more popular.

It’s a two step process to FIRE…1) earn enough to save a lot. 2) Save a lot to earn even more in the stock market.

Whether my kids can replicate this in the next decade I don’t know. It depends on the market…

Either way, if they can get the “earn a lot and save a lot” part down right, things should work out financially better for them than it did for me which is the most you can hope for as a parent.
nigel_ht
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Re: Reaching your number vs. owning a home

Post by nigel_ht »

Jack&Warren disciple wrote: Sat Oct 16, 2021 11:32 am Is it a lot of work to self manage the properties over 33 years? (still going!), YOU BETCHA!

Does it give me piece of mind as I enter my mid 50's, yup!
If you don’t have the required income from your primary job ($100K+) then this is the path to go…the hope is that with the right job, even if it leads to burn out, allows you to save your first million if you are frugal.

I have piece of mind as well in my mid 50s with the inverse ratio (75% NW in securities, 25% in RE)…and I suspect it was a lot less work to achieve.
BogleFan510
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Re: Reaching your number vs. owning a home

Post by BogleFan510 »

redundant
Last edited by BogleFan510 on Sat Oct 16, 2021 12:11 pm, edited 1 time in total.
coffeeblack
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Re: Reaching your number vs. owning a home

Post by coffeeblack »

etfan wrote: Fri Oct 15, 2021 8:44 am 1- If a person has to prioritize between reaching their number and owning a home, which one should be the priority?

2- If it seems that both just can't be done and one must choose between the two, what is the better choice?

Using a big portion of your investments to buy a house is going to reduce the growth rate of your portfolio and it may lose a lot of value in the house. Your net worth may never recover.

On the other hand, houses aren't getting any cheaper. It's possible that one may never be able to buy a house if the prices keep increasing because the math may never go in your favor at this rate.
So have you added rent to you number?

House prices are going up but so are rent prices. Your mortgage will a fixed cost and once it's payed off you have to a smaller amount for maintenance and taxes. Rent just keeps going up and you have to adjust for that in your number.
There are advantages to renting like never having to worry about maintenance and taxes but I'm not sure if the trade off is better.
If you don't buy a house you still have to set money aside from your net worth for rent.
Marseille07
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Re: Reaching your number vs. owning a home

Post by Marseille07 »

nigel_ht wrote: Sat Oct 16, 2021 11:36 am It depends whether you would have a $1.5M portfolio after investing in a $500K house…my argument has been that the net worth of the renter is higher but that’s only been true the last decade or so when FIRE has become more popular.

It’s a two step process to FIRE…1) earn enough to save a lot. 2) Save a lot to earn even more in the stock market.

Whether my kids can replicate this in the next decade I don’t know. It depends on the market…

Either way, if they can get the “earn a lot and save a lot” part down right, things should work out financially better for them than it did for me which is the most you can hope for as a parent.
You're right. A better approach is to assume some rent per month (like 2000/mo) vs a house (a 500K house purchased all cash upon retirement) and calculate expenses for both cases.

So the "numbers" might look like:
a) renting 2000/mo: 60K/year of expenses x 25 = 1.5M
b) buying a 500K house upon retirement: 40K/year of expenses x 25 = 1M, plus 500K to buy a house all cash upon retirement

In this example, the total would be the same; but it might not be.
Drxgs
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Re: Reaching your number vs. owning a home

Post by Drxgs »

Admiral wrote: Sat Oct 16, 2021 7:02 am
Drxgs wrote: Fri Oct 15, 2021 9:52 pm Investments are assets. They create wealth. Your residence is a liability. It incurs expenses. If wealth is your goal, then maximize your assets and reduce your liabilities.

In my experience, most home owners I know do the exact opposite. That is, they buy a lot more house than they need, which significantly increases their expenses and reduces their ability to invest in wealth generating assets.

With that said, most renters I know aren’t doing any better.
Hold on now. A home is not an asset? Even when owned free and clear? If I have $500k in cash and buy a home with it, my assets don't fall to zero. They remain the same.

Whether or not a home is a good investment is another story. An investment may gain or lose value. But it is still an asset. When you hold a mortgage, that is a liability. But the value of the home minus the mortgage is an asset. A home (even a mortgaged one) can also create "wealth" in the sense of imputed rent. You're saving what you would be spending otherwise.
What I’m trying to point out is that a primary residence is not a very good wealth generating asset. If wealth, or hitting your number, is what you’re after, then you’re likely better off investing the $500,000 rather than buying a house with it.

You’re correct that the paid off house generates wealth by eliminating rent. One could also say that a paid off porsche generates wealth by eliminating lease payments. It’s nice to own a home and it’s nice to own a porsche, but are those the kind of assets you want to own if wealth generation is your goal?

For a large portion of Americans, homes are a luxury purchase and not an investment. We buy more house than we need, locking up a large portion of our wealth into appreciation, which once realized, is often traded in for an even bigger house.

With some exceptions, I believe that there are better ways to maximize your wealth than buying a primary residence.
Jack&Warren disciple
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Re: Reaching your number vs. owning a home

Post by Jack&Warren disciple »

nigel_ht wrote: Sat Oct 16, 2021 11:45 am
Jack&Warren disciple wrote: Sat Oct 16, 2021 11:32 am Is it a lot of work to self manage the properties over 33 years? (still going!), YOU BETCHA!

Does it give me piece of mind as I enter my mid 50's, yup!
If you don’t have the required income from your primary job ($100K+) then this is the path to go…the hope is that with the right job, even if it leads to burn out, allows you to save your first million if you are frugal.

I have piece of mind as well in my mid 50s with the inverse ratio (75% NW in securities, 25% in RE)…and I suspect it was a lot less work to achieve.
HeHee! ;-)! I think the majority of wealth creation in the US is through stocks, real estate, owing your own business, having a professional degree, and a good work ethic. Of course after many years, sprinkled with a little luck!
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willthrill81
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Re: Reaching your number vs. owning a home

Post by willthrill81 »

Drxgs wrote: Sat Oct 16, 2021 2:15 pm
Admiral wrote: Sat Oct 16, 2021 7:02 am
Drxgs wrote: Fri Oct 15, 2021 9:52 pm Investments are assets. They create wealth. Your residence is a liability. It incurs expenses. If wealth is your goal, then maximize your assets and reduce your liabilities.

In my experience, most home owners I know do the exact opposite. That is, they buy a lot more house than they need, which significantly increases their expenses and reduces their ability to invest in wealth generating assets.

With that said, most renters I know aren’t doing any better.
Hold on now. A home is not an asset? Even when owned free and clear? If I have $500k in cash and buy a home with it, my assets don't fall to zero. They remain the same.

Whether or not a home is a good investment is another story. An investment may gain or lose value. But it is still an asset. When you hold a mortgage, that is a liability. But the value of the home minus the mortgage is an asset. A home (even a mortgaged one) can also create "wealth" in the sense of imputed rent. You're saving what you would be spending otherwise.
What I’m trying to point out is that a primary residence is not a very good wealth generating asset. If wealth, or hitting your number, is what you’re after, then you’re likely better off investing the $500,000 rather than buying a house with it.

You’re correct that the paid off house generates wealth by eliminating rent. One could also say that a paid off porsche generates wealth by eliminating lease payments. It’s nice to own a home and it’s nice to own a porsche, but are those the kind of assets you want to own if wealth generation is your goal?

For a large portion of Americans, homes are a luxury purchase and not an investment. We buy more house than we need, locking up a large portion of our wealth into appreciation, which once realized, is often traded in for an even bigger house.

With some exceptions, I believe that there are better ways to maximize your wealth than buying a primary residence.
You have to live somewhere, so unless you live with family or friends, it's a given that you must have some type of housing. You may or may not need a vehicle, but you certainly don't need a Porsche. That's a false analogy.

The question comes down to whether renting or owning leads to a better financial outcome, and that decision is greatly dependent on many factors and assumptions. The NYT calculator is an excellent tool to help you analyze these factors in your situation.

In our situation, owning our home provides us with at least a 4% real return (after accounting for all expenses and based on the current market value) vs. renting an equivalent home in the same neighborhood. That's a good asset. Whether you want to view it as 'wealth generating' or 'expense reducing' is a matter of semantics that doesn't really improve understanding of the situation.
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marcopolo
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Re: Reaching your number vs. owning a home

Post by marcopolo »

Marseille07 wrote: Sat Oct 16, 2021 11:59 am
nigel_ht wrote: Sat Oct 16, 2021 11:36 am It depends whether you would have a $1.5M portfolio after investing in a $500K house…my argument has been that the net worth of the renter is higher but that’s only been true the last decade or so when FIRE has become more popular.

It’s a two step process to FIRE…1) earn enough to save a lot. 2) Save a lot to earn even more in the stock market.

Whether my kids can replicate this in the next decade I don’t know. It depends on the market…

Either way, if they can get the “earn a lot and save a lot” part down right, things should work out financially better for them than it did for me which is the most you can hope for as a parent.
You're right. A better approach is to assume some rent per month (like 2000/mo) vs a house (a 500K house purchased all cash upon retirement) and calculate expenses for both cases.

So the "numbers" might look like:
a) renting 2000/mo: 60K/year of expenses x 25 = 1.5M
b) buying a 500K house upon retirement: 40K/year of expenses x 25 = 1M, plus 500K to buy a house all cash upon retirement

In this example, the total would be the same; but it might not be.
This is part of the problem with some of the discussion here. People either forget that they have to pay rent with the money they "saved" from not buying the house, or claim they will save the "difference". The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?

If you search "typical rent to hone value", you see recommendation that landlords charge between 0.8% to 1.1% of the home value per month. Even if you take the lower percentage, that $500k house is NOT renting for $2000/mo, it is more like $4000/mo. So, after paying that rent, what surplus are you saving?

The only way renting builds more wealth is if you are getting a discount off fair market value rent (not likely sustainable), you take on more risk and get lucky, or you downgrade your housing when renting relative to buying.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Marseille07
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Re: Reaching your number vs. owning a home

Post by Marseille07 »

marcopolo wrote: Sat Oct 16, 2021 2:36 pm
Marseille07 wrote: Sat Oct 16, 2021 11:59 am
nigel_ht wrote: Sat Oct 16, 2021 11:36 am It depends whether you would have a $1.5M portfolio after investing in a $500K house…my argument has been that the net worth of the renter is higher but that’s only been true the last decade or so when FIRE has become more popular.

It’s a two step process to FIRE…1) earn enough to save a lot. 2) Save a lot to earn even more in the stock market.

Whether my kids can replicate this in the next decade I don’t know. It depends on the market…

Either way, if they can get the “earn a lot and save a lot” part down right, things should work out financially better for them than it did for me which is the most you can hope for as a parent.
You're right. A better approach is to assume some rent per month (like 2000/mo) vs a house (a 500K house purchased all cash upon retirement) and calculate expenses for both cases.

So the "numbers" might look like:
a) renting 2000/mo: 60K/year of expenses x 25 = 1.5M
b) buying a 500K house upon retirement: 40K/year of expenses x 25 = 1M, plus 500K to buy a house all cash upon retirement

In this example, the total would be the same; but it might not be.
This is part of the problem with some of the discussion here. People either forget that they have to pay rent with the money they "saved" from not buying the house, or claim they will save the "difference". The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?

If you search "typical rent to hone value", you see recommendation that landlords charge between 0.8% to 1.1% of the home value per month. Even if you take the lower percentage, that $500k house is NOT renting for $2000/mo, it is more like $4000/mo. So, after paying that rent, what surplus are you saving?

The only way renting builds more wealth is if you are getting a discount off fair market value rent (not likely sustainable), you take on more risk and get lucky, or you downgrade your housing when renting relative to buying.
Well, to be clear the 2000/mo rent vs a 500K house is estimating someone's retirement expenses, not today. The housing units don't even have to be the same; it's conceivable for someone to be fine with a $2000/mo apartment, but if they were to buy a SFH then they would have to dish out 500K ($4000/mo if rented out) because they don't want a condo / townhouse, for example. I'm actually in this camp - totally fine with a cheap rental, but if I were to buy an RE, I want a SFH not a condo / townhouse.

At the end of the day, one should pick the highest number as "the number" so they have an option to choose a cheaper plan later.
Last edited by Marseille07 on Sat Oct 16, 2021 2:47 pm, edited 1 time in total.
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willthrill81
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Re: Reaching your number vs. owning a home

Post by willthrill81 »

marcopolo wrote: Sat Oct 16, 2021 2:36 pm
Marseille07 wrote: Sat Oct 16, 2021 11:59 am
nigel_ht wrote: Sat Oct 16, 2021 11:36 am It depends whether you would have a $1.5M portfolio after investing in a $500K house…my argument has been that the net worth of the renter is higher but that’s only been true the last decade or so when FIRE has become more popular.

It’s a two step process to FIRE…1) earn enough to save a lot. 2) Save a lot to earn even more in the stock market.

Whether my kids can replicate this in the next decade I don’t know. It depends on the market…

Either way, if they can get the “earn a lot and save a lot” part down right, things should work out financially better for them than it did for me which is the most you can hope for as a parent.
You're right. A better approach is to assume some rent per month (like 2000/mo) vs a house (a 500K house purchased all cash upon retirement) and calculate expenses for both cases.

So the "numbers" might look like:
a) renting 2000/mo: 60K/year of expenses x 25 = 1.5M
b) buying a 500K house upon retirement: 40K/year of expenses x 25 = 1M, plus 500K to buy a house all cash upon retirement

In this example, the total would be the same; but it might not be.
This is part of the problem with some of the discussion here. People either forget that they have to pay rent with the money they "saved" from not buying the house, or claim they will save the "difference". The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?

If you search "typical rent to hone value", you see recommendation that landlords charge between 0.8% to 1.1% of the home value per month. Even if you take the lower percentage, that $500k house is NOT renting for $2000/mo, it is more like $4000/mo. So, after paying that rent, what surplus are you saving?

The only way renting builds more wealth is if you are getting a discount off fair market value rent (not likely sustainable), you take on more risk and get lucky, or you downgrade your housing when renting relative to buying.
Excellent point.
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Re: Reaching your number vs. owning a home

Post by marcopolo »

Marseille07 wrote: Sat Oct 16, 2021 2:45 pm
marcopolo wrote: Sat Oct 16, 2021 2:36 pm
Marseille07 wrote: Sat Oct 16, 2021 11:59 am
nigel_ht wrote: Sat Oct 16, 2021 11:36 am It depends whether you would have a $1.5M portfolio after investing in a $500K house…my argument has been that the net worth of the renter is higher but that’s only been true the last decade or so when FIRE has become more popular.

It’s a two step process to FIRE…1) earn enough to save a lot. 2) Save a lot to earn even more in the stock market.

Whether my kids can replicate this in the next decade I don’t know. It depends on the market…

Either way, if they can get the “earn a lot and save a lot” part down right, things should work out financially better for them than it did for me which is the most you can hope for as a parent.
You're right. A better approach is to assume some rent per month (like 2000/mo) vs a house (a 500K house purchased all cash upon retirement) and calculate expenses for both cases.

So the "numbers" might look like:
a) renting 2000/mo: 60K/year of expenses x 25 = 1.5M
b) buying a 500K house upon retirement: 40K/year of expenses x 25 = 1M, plus 500K to buy a house all cash upon retirement

In this example, the total would be the same; but it might not be.
This is part of the problem with some of the discussion here. People either forget that they have to pay rent with the money they "saved" from not buying the house, or claim they will save the "difference". The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?

If you search "typical rent to hone value", you see recommendation that landlords charge between 0.8% to 1.1% of the home value per month. Even if you take the lower percentage, that $500k house is NOT renting for $2000/mo, it is more like $4000/mo. So, after paying that rent, what surplus are you saving?

The only way renting builds more wealth is if you are getting a discount off fair market value rent (not likely sustainable), you take on more risk and get lucky, or you downgrade your housing when renting relative to buying.
Well, to be clear the 2000/mo rent vs a 500K house is estimating someone's retirement expenses, not today. The housing units don't even have to be the same; it's conceivable for someone to be fine with a $2000/mo apartment, but if they were to buy a SFH then they would have to dish out 500K ($4000/mo if rented out) because they don't want a condo / townhouse, for example. I'm actually in this camp - totally fine with a cheap rental, but if I were to buy an RE, I want a SFH not a condo / townhouse.

At the end of the day, one should pick the highest number as "the number" so they have an option to choose a cheaper plan later.
I think I said that above, right?
If you are willing to live in a less costly place, then you can save more. That has absolutely nothing to do with the rent vs. buy decision, but rather lifestyle choices.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Reaching your number vs. owning a home

Post by KlangFool »

marcopolo wrote: Sat Oct 16, 2021 2:36 pm
The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?
marcopolo,

I disagreed. Real estate is local. In my area, the house's price crash from 2004/2005 high and did not recover until 2019. It goes in cycles.

I bought my house with PITI 20% to 30% lowered than renting several years ago.

It is possible in certain areas. We can count on "House Poor" folks crash and burn to subsidize renting for a long time.

<<The landlords are not discounting your rent.>>

It is wrong to assume that all landlords make money. And, we have no idea when the landlords bought the house. In a housing cycle, the landlord could bought houses at the bottom and still make good money with current market rent.

The whole basis of your thought process is that the house price could only go up. That is not true in some cases. It goes in cycles.

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Re: Reaching your number vs. owning a home

Post by Marseille07 »

marcopolo wrote: Sat Oct 16, 2021 2:51 pm I think I said that above, right?
If you are willing to live in a less costly place, then you can save more. That has absolutely nothing to do with the rent vs. buy decision, but rather lifestyle choices.
Yeah, this whole thread is about estimating their "number" depending on various housing scenarios. It was never about rent vs buy, and I am not sure why some posters went there.
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Re: Reaching your number vs. owning a home

Post by Drxgs »

willthrill81 wrote: Sat Oct 16, 2021 2:22 pm
Drxgs wrote: Sat Oct 16, 2021 2:15 pm
Admiral wrote: Sat Oct 16, 2021 7:02 am
Drxgs wrote: Fri Oct 15, 2021 9:52 pm Investments are assets. They create wealth. Your residence is a liability. It incurs expenses. If wealth is your goal, then maximize your assets and reduce your liabilities.

In my experience, most home owners I know do the exact opposite. That is, they buy a lot more house than they need, which significantly increases their expenses and reduces their ability to invest in wealth generating assets.

With that said, most renters I know aren’t doing any better.
Hold on now. A home is not an asset? Even when owned free and clear? If I have $500k in cash and buy a home with it, my assets don't fall to zero. They remain the same.

Whether or not a home is a good investment is another story. An investment may gain or lose value. But it is still an asset. When you hold a mortgage, that is a liability. But the value of the home minus the mortgage is an asset. A home (even a mortgaged one) can also create "wealth" in the sense of imputed rent. You're saving what you would be spending otherwise.
What I’m trying to point out is that a primary residence is not a very good wealth generating asset. If wealth, or hitting your number, is what you’re after, then you’re likely better off investing the $500,000 rather than buying a house with it.

You’re correct that the paid off house generates wealth by eliminating rent. One could also say that a paid off porsche generates wealth by eliminating lease payments. It’s nice to own a home and it’s nice to own a porsche, but are those the kind of assets you want to own if wealth generation is your goal?

For a large portion of Americans, homes are a luxury purchase and not an investment. We buy more house than we need, locking up a large portion of our wealth into appreciation, which once realized, is often traded in for an even bigger house.

With some exceptions, I believe that there are better ways to maximize your wealth than buying a primary residence.
You have to live somewhere, so unless you live with family or friends, it's a given that you must have some type of housing. You may or may not need a vehicle, but you certainly don't need a Porsche. That's a false analogy.

The question comes down to whether renting or owning leads to a better financial outcome, and that decision is greatly dependent on many factors and assumptions. The NYT calculator is an excellent tool to help you analyze these factors in your situation.

In our situation, owning our home provides us with at least a 4% real return (after accounting for all expenses and based on the current market value) vs. renting an equivalent home in the same neighborhood. That's a good asset. Whether you want to view it as 'wealth generating' or 'expense reducing' is a matter of semantics that doesn't really improve understanding of the situation.
It is true that no one needs a Porsche. One could also argue against the need of a 2,300 sq ft home, yet that is the average home size in the US.

A primary residence can be a good investment. In theory, one of the best ways to invest $500,000 could be buying a multifamily residence with good cashflow and living in one of the units.

In my experience, most people don’t do that. Instead, they tend to buy more house than they rent, or sell their homes to buy bigger homes. Even among the Boglehead community, I seldom see someone seeking advice on downsizing.

Just sharing my observations.
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Re: Reaching your number vs. owning a home

Post by willthrill81 »

Drxgs wrote: Sat Oct 16, 2021 2:55 pm
willthrill81 wrote: Sat Oct 16, 2021 2:22 pm
Drxgs wrote: Sat Oct 16, 2021 2:15 pm
Admiral wrote: Sat Oct 16, 2021 7:02 am
Drxgs wrote: Fri Oct 15, 2021 9:52 pm Investments are assets. They create wealth. Your residence is a liability. It incurs expenses. If wealth is your goal, then maximize your assets and reduce your liabilities.

In my experience, most home owners I know do the exact opposite. That is, they buy a lot more house than they need, which significantly increases their expenses and reduces their ability to invest in wealth generating assets.

With that said, most renters I know aren’t doing any better.
Hold on now. A home is not an asset? Even when owned free and clear? If I have $500k in cash and buy a home with it, my assets don't fall to zero. They remain the same.

Whether or not a home is a good investment is another story. An investment may gain or lose value. But it is still an asset. When you hold a mortgage, that is a liability. But the value of the home minus the mortgage is an asset. A home (even a mortgaged one) can also create "wealth" in the sense of imputed rent. You're saving what you would be spending otherwise.
What I’m trying to point out is that a primary residence is not a very good wealth generating asset. If wealth, or hitting your number, is what you’re after, then you’re likely better off investing the $500,000 rather than buying a house with it.

You’re correct that the paid off house generates wealth by eliminating rent. One could also say that a paid off porsche generates wealth by eliminating lease payments. It’s nice to own a home and it’s nice to own a porsche, but are those the kind of assets you want to own if wealth generation is your goal?

For a large portion of Americans, homes are a luxury purchase and not an investment. We buy more house than we need, locking up a large portion of our wealth into appreciation, which once realized, is often traded in for an even bigger house.

With some exceptions, I believe that there are better ways to maximize your wealth than buying a primary residence.
You have to live somewhere, so unless you live with family or friends, it's a given that you must have some type of housing. You may or may not need a vehicle, but you certainly don't need a Porsche. That's a false analogy.

The question comes down to whether renting or owning leads to a better financial outcome, and that decision is greatly dependent on many factors and assumptions. The NYT calculator is an excellent tool to help you analyze these factors in your situation.

In our situation, owning our home provides us with at least a 4% real return (after accounting for all expenses and based on the current market value) vs. renting an equivalent home in the same neighborhood. That's a good asset. Whether you want to view it as 'wealth generating' or 'expense reducing' is a matter of semantics that doesn't really improve understanding of the situation.
It is true that no one needs a Porsche. One could also argue against the need of a 2,300 sq ft home, yet that is the average home size in the US.

A primary residence can be a good investment. In theory, one of the best ways to invest $500,000 could be buying a multifamily residence with good cashflow and living in one of the units.

In my experience, most people don’t do that. Instead, they tend to buy more house than they rent, or sell their homes to buy bigger homes. Even among the Boglehead community, I seldom see someone seeking advice on downsizing.

Just sharing my observations.
Speaking for myself, I have repeatedly stated on the forum that Americans' consumption of housing is largely responsible for the complaints about 'houses are too expensive'. The ratio of the square footage of the median newly built home to the median household size has doubled since 1970 (i.e., 500 sq. ft./person to over 1,000 today). The three of us live in a 1,200 sq. ft. home, so we're well under even the 1970 ratio and are happy as clams with it. Actually, we would be fine with a house under 1,000 sq. ft., but it would actually be more costly to purchase since it would have to be custom built in our area.
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Re: Reaching your number vs. owning a home

Post by marcopolo »

KlangFool wrote: Sat Oct 16, 2021 2:51 pm
marcopolo wrote: Sat Oct 16, 2021 2:36 pm
The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?
marcopolo,

I disagreed. Real estate is local. In my area, the house's price crash from 2004/2005 high and did not recover until 2019. It goes in cycles.

I bought my house with PITI 20% to 30% lowered than renting several years ago.

It is possible in certain areas. We can count on "House Poor" folks crash and burn to subsidize renting for a long time.

<<The landlords are not discounting your rent.>>

It is wrong to assume that all landlords make money. And, we have no idea when the landlords bought the house. In a housing cycle, the landlord could bought houses at the bottom and still make good money with current market rent.

The whole basis of your thought process is that the house price could only go up. That is not true in some cases. It goes in cycles.

KlangFool
I have made no assumptions about housing prices, only that rent and home prices roughly track each other. Can there be temporary dislocations? sure. But, that type of arbitrage situation can not persist. The market will fix that.
The people saying renting saves you money are assuming that is the normal state of things, or at least they can find such dislocations for extended periods of time.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Reaching your number vs. owning a home

Post by Jack&Warren disciple »

etfan wrote: Fri Oct 15, 2021 8:44 am 1- If a person has to prioritize between reaching their number and owning a home, which one should be the priority?

2- If it seems that both just can't be done and one must choose between the two, what is the better choice?

Using a big portion of your investments to buy a house is going to reduce the growth rate of your portfolio and it may lose a lot of value in the house. Your net worth may never recover.

On the other hand, houses aren't getting any cheaper. It's possible that one may never be able to buy a house if the prices keep increasing because the math may never go in your favor at this rate.
If "your number" is Net Worth, I believe with a minimal down payment (you can purchase a home with as little as 3% cash down) and the leverage with a mortgage (97%), you would earn 100% on your down payment (cash on cash return) if the house appreciated 3% year over year. Wouldn't that make your personal balance sheet's net worth superior, even if you earned the stock market average return of 8% to 10%?

If "your number" is based purely on a cash on cash basis (i.e., 100% cash down today/0% mortgage), I think the 8% to 10% average annual return on vti or a stock index fund is superior.

As many on the board have stated, there are tremendous and often overriding non financial reasons to do buy v rent that are hard if not impossible to quantify...
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Re: Reaching your number vs. owning a home

Post by KlangFool »

marcopolo wrote: Sat Oct 16, 2021 3:17 pm
I have made no assumptions about housing prices, only that rent and home prices roughly track each other. Can there be temporary dislocations? sure. But, that type of arbitrage situation can not persist. The market will fix that.
The people saying renting saves you money are assuming that is the normal state of things, or at least they can find such dislocations for extended periods of time.
marcopolo,

I do not need the situation to persist. I just need to buy the house and lowered my housing expense permanently when it happened. This is the best form of "market timing". Only buy a house when the imputed rent pays for the house.

The reverse is true too. If someone pays for the house at the market peak, aka someone that bought houses in my areas during 2004/2005, the pain is long lasting too.

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Re: Reaching your number vs. owning a home

Post by carminered2019 »

[ That resulted in me paying off the mortgage as rapidly as possible. A nice side effect of that that I’ve discovered since paying off the mortgage is that owning the home free and clear helps create the psychological fortitude to tolerate a more aggressive AA.

Dave
[/quote]

This should be the advice more often then age in bonds + plus a mortgage.
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Re: Reaching your number vs. owning a home

Post by Jimsad »

MiddleOfTheRoad wrote: Fri Oct 15, 2021 10:16 am You need to answer for yourself why you invest, and what the money is ultimately for. What will make you happy? Is owning a home one of your major milestone? There are consequences and perks to each answer, and you are risking something with either choice. Life is not risk free. Make sure you know the risk and can accept it, i.e do your due diligence. Making a conscious choice will minimize regrets.
Believe it or not, some people regret not stretching a little further while young to get a little more house too. On BH, the house-poor crowd is louder. 🤣
+1
When we built our house in 2013, it was 50% of our net worth but my wife really wanted a nice house before the kids went off to college in a few years
We stretched then to build a house and very happy with our decision
The house is 15% of our net worth right now
We were fortunate and worked out well for us but we were in our prime earning years then which helped a lot
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Re: Reaching your number vs. owning a home

Post by Drxgs »

carminered2019 wrote: Sat Oct 16, 2021 4:09 pm [ That resulted in me paying off the mortgage as rapidly as possible. A nice side effect of that that I’ve discovered since paying off the mortgage is that owning the home free and clear helps create the psychological fortitude to tolerate a more aggressive AA.

Dave
This should be the advice more often then age in bonds + plus a mortgage.
[/quote]

One could argue that not owning a home creates psychological fortitude by providing the geographical freedom to pursue optimal employment or other wealth generating venues and therefore be more aggressive with your AA. While it is true that one could sell the home and relocate, many homeowners who lost their jobs in 2008 found it difficult to do just that.
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Re: Reaching your number vs. owning a home

Post by nigel_ht »

marcopolo wrote: Sat Oct 16, 2021 2:36 pm
This is part of the problem with some of the discussion here. People either forget that they have to pay rent with the money they "saved" from not buying the house, or claim they will save the "difference". The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?
There is a time to break even for home ownership.

First you have the costs of buying. Somewhere between 1-5%. I could look at my recent HUD-1 but it wasn’t $0.

There is also the down payment that is no longer generating gains from the market but instead is part of the equity of the house.

Then to get out of the house is another 5-6% commissions plus closing.

But the big thing is most folks buy more house than they would rent for various reasons. When I buy rental property I use very different criteria than I would use if I expected to live there.

If you buy a home vs a property you have to live with whatever issues it has or face the various costs for selling it and buying a different place.

Whereas a rental property, for both renter and owner, is just a place with no emotional attachment and/or commitment to stay long term.

Sub-optimal location? Meh, it’s just for a year or two. Bad schools? Don’t care, I don’t have kids yet. Too small? I can rent a bigger place with my girlfriend next year.

Renting allows you to be completely unemotional about where you live and tailor it for your immediate needs and finances.

Completely different when buying even a starter home.
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Re: Reaching your number vs. owning a home

Post by marcopolo »

nigel_ht wrote: Sat Oct 16, 2021 4:38 pm
marcopolo wrote: Sat Oct 16, 2021 2:36 pm
This is part of the problem with some of the discussion here. People either forget that they have to pay rent with the money they "saved" from not buying the house, or claim they will save the "difference". The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?
There is a time to break even for home ownership.

First you have the costs of buying. Somewhere between 1-5%. I could look at my recent HUD-1 but it wasn’t $0.

There is also the down payment that is no longer generating gains from the market but instead is part of the equity of the house.

Then to get out of the house is another 5-6% commissions plus closing.

But the big thing is most folks buy more house than they would rent for various reasons. When I buy rental property I use very different criteria than I would use if I expected to live there.

If you buy a home vs a property you have to live with whatever issues it has or face the various costs for selling it and buying a different place.

Whereas a rental property, for both renter and owner, is just a place with no emotional attachment and/or commitment to stay long term.

Sub-optimal location? Meh, it’s just for a year or two. Bad schools? Don’t care, I don’t have kids yet. Too small? I can rent a bigger place with my girlfriend next year.

Renting allows you to be completely unemotional about where you live and tailor it for your immediate needs and finances.

Completely different when buying even a starter home.
Ok. I don't disagree with any of that. But, that is a very different discussion.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Reaching your number vs. owning a home

Post by 59Gibson »

nigel_ht wrote: Sat Oct 16, 2021 4:38 pm
marcopolo wrote: Sat Oct 16, 2021 2:36 pm
This is part of the problem with some of the discussion here. People either forget that they have to pay rent with the money they "saved" from not buying the house, or claim they will save the "difference". The only way there is a "difference" is if you live in a less expensive rental. The landlords are not discounting your rent. So, how can there be a surplus to save?
There is a time to break even for home ownership.

First you have the costs of buying. Somewhere between 1-5%. I could look at my recent HUD-1 but it wasn’t $0.

There is also the down payment that is no longer generating gains from the market but instead is part of the equity of the house.

Then to get out of the house is another 5-6% commissions plus closing.

But the big thing is most folks buy more house than they would rent for various reasons. When I buy rental property I use very different criteria than I would use if I expected to live there.

If you buy a home vs a property you have to live with whatever issues it has or face the various costs for selling it and buying a different place.

Whereas a rental property, for both renter and owner, is just a place with no emotional attachment and/or commitment to stay long term.

Sub-optimal location? Meh, it’s just for a year or two. Bad schools? Don’t care, I don’t have kids yet. Too small? I can rent a bigger place with my girlfriend next year.

Renting allows you to be completely unemotional about where you live and tailor it for your immediate needs and finances.

Completely different when buying even a starter home.
All true. If folks separated themselves emotionally when purchasing, it would eliminate many issues down the road. Today's culture makes this very difficult, Realtors know this, they love to play on the emotional strings. They start off by replacing the word house with home, 2 very diff words with different connotations. To me its only a structure with a bunch lumber, wires, drywall, pipes, roof etc. I may decide to make it home, but right now it's only a house.
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Re: Reaching your number vs. owning a home

Post by Garco »

I think this is a false choice. Millions of people who reached their number owned their homes. It's not a race against time. It's what happens over time.

In my case it was easy: I never had a "number" until I got one. What I had was an excellent education, a very good career and a family. My family needed to be fed, housed, cared for (medical care), and educated. I had a career with just two employers between 1971 and my retirement in 2014. It all evolved, from an initial annual salary of ~$14K to my last salary of ~190K. We didn't move around much, and we owned just one home, which we purchased for $40K in 1977 ($10K down and $30K mortgage). It's not big, but it was perfect for what turned into a family of 4 and is now (according to Zillow) worth $250K.

Without having a number, our net invested funds -- not including real estate -- are >$3 million. That's our number because that's what we have. Our kids have very good jobs. We have our health.
Last edited by Garco on Sat Oct 16, 2021 5:26 pm, edited 3 times in total.
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Re: Reaching your number vs. owning a home

Post by nigel_ht »

marcopolo wrote: Sat Oct 16, 2021 4:43 pm
Ok. I don't disagree with any of that. But, that is a very different discussion.
I think it’s part of the same discussion because it’s easier to dispassionately buy VTI but harder to dispassionately buy a home.

That and you still have the issue of a largish down payment if you want to do 20%.
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Re: Reaching your number vs. owning a home

Post by KlangFool »

nigel_ht wrote: Sat Oct 16, 2021 4:38 pm
When I buy rental property I use very different criteria than I would use if I expected to live there.
nigel_ht,

And, what is there to stop someone from using the rental financial criteria to decide whether to buy or rent a house?

Keep the emotional part as to where to live. But, use the rental financial calculation to decide whether to rent or buy.

This is the WHOLE POINT of only buy a house when the PITI is at least 20% to 30% lowered than market rent. If the real estate investors/landlords can buy and rent out to make money, it is a good deal!

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Re: Reaching your number vs. owning a home

Post by KlangFool »

Garco wrote: Sat Oct 16, 2021 5:03 pm I think this is a false choice. Millions of people who reached their number owned their homes. It's not a race against time. It's what happens over time.

In my case it was easy: I never had a "number" until I got one. What I had was an excellent education, a very good career and a family. My family needed to be fed, housed, cared for (medical care), and educated. I had a career with just two employers between 1971 and my retirement in 2014. It all evolved, from an initial annual salary of ~$14K to my last salary of ~190K. We didn't move around much, and we owned just one home, which we purchased for $40K in 1977. It's not big, but it was perfect for what turned into a family of 4 and is now (according to Zillow) worth $250K.

Without having a number, our net invested funds -- not including real estate -- are >$3 million. That's our number because that's what we have. Our kids have very good jobs. We have our health.
Garco,

That means your house's price is less than 3 times your gross household income. The current rule of thumb is 3 times to 3.5 times or more. That is the difference.

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Re: Reaching your number vs. owning a home

Post by sandan »

-I don't think I can reach my number till I own a home again. By "own", I mean outright.
-The practical consideration for owing is better cash flow management -> qualifying for ACA subsidies and keeping income taxes low.

Personally, none of this really matters to me till I'm about 50 (when I will be more reluctant to move, when my mom will need more help from me, and when "safe withdrawal rate" calculators become practical.)
Kinkajou82
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Re: Reaching your number vs. owning a home

Post by Kinkajou82 »

I think owning a home or not is a decision and calculation BEFORE coming up with a number. Basically, I don't agree with the formulation of the thread title.

In order to come up with a "number" to reach, you must first forecast your housing costs. If you own a home, it'll be property taxes and insurance and maintenance (plus mortgage if you don't plan to have it paid off by "retirement"), and if you rent it's simply your rental costs and rental insurance.

And of course, you have to make your own individual judgement call on owning vs. renting. This will probably take into effect your local housing market's dynamics, your lifestyle choices (sq. ft., number of rooms), where you choose to live or retire, PLUS your emotional balancing of the risks of being tied down to one geographic location and committing to 15-30 years of predictable but ongoing debt payments and being responsible for repairs VERSUS the risks of having your landlord unilaterally increase rent on you or otherwise forcing you to find new (possibly more expensive) lodging on the open market.

Whether you choose renting or owning, there can be good reasons to go either way as a valid choice but that comes BEFORE you formulate a number.

Then once you've forecast the housing costs based on your choices and circumstances, THEN you have a number to reach.

And if the number is too high, then you might need to go back and re-examine your forecast retirement budget, which may or may not mean re-evaluating your housing plan.
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willthrill81
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Re: Reaching your number vs. owning a home

Post by willthrill81 »

muffins14 wrote: Sat Oct 16, 2021 10:24 am I’m aligned with Nigel’s take generally.

In NYC...
It makes sense that you agree with Nigel that renting is better if you live in NYC. It's been said numerous times in the thread that renting is often superior in HCOL areas.
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WhiteMaxima
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Re: Reaching your number vs. owning a home

Post by WhiteMaxima »

It takes a lot displine to reach your financial goal and owing your own home. You would need to calculate how much your house and how much % of saving you would need to reach your financial goal which I assume to have ample amount for your retirement. You don't need a big mansion to live and nor a 10 mil dollar retirement account to have a comfortable retirement. For two working couple family, it is not unreachable goal. Live within your means and humble life is the key. Save early and invest in a diversified portfolio and you will get there before 60s.
secondopinion
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Re: Reaching your number vs. owning a home

Post by secondopinion »

KlangFool wrote: Sat Oct 16, 2021 5:06 pm
nigel_ht wrote: Sat Oct 16, 2021 4:38 pm
When I buy rental property I use very different criteria than I would use if I expected to live there.
nigel_ht,

And, what is there to stop someone from using the rental financial criteria to decide whether to buy or rent a house?

Keep the emotional part as to where to live. But, use the rental financial calculation to decide whether to rent or buy.

This is the WHOLE POINT of only buy a house when the PITI is at least 20% to 30% lowered than market rent. If the real estate investors/landlords can buy and rent out to make money, it is a good deal!

KlangFool
That is precisely on the money. If they can make money, then you are getting a good house for the money.
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halfnine
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Re: Reaching your number vs. owning a home

Post by halfnine »

willthrill81 wrote: Sat Oct 16, 2021 3:02 pm ...The three of us live in a 1,200 sq. ft. home, so we're well under even the 1970 ratio and are happy as clams with it. Actually, we would be fine with a house under 1,000 sq. ft., but it would actually be more costly to purchase since it would have to be custom built in our area...
As a family we have lived in 800, 950, 1200 and 1300 sq ft homes. I'd label them as criminally small, manageable, enjoyable, splendid. We wouldn't want anything bigger than 1300 but going back to sub 1000 isn't on our radar. At least not outside of Asia where standard houses are better designed for living with a smaller footprint. My general point though is I wouldn't necessarily assume one could shift from 1200 to 1000 just because 1200 might feel plenty big. It is a very substantial difference. Obviously, if you have already spent years as a family living in sub 1000 perfectly happily you can ignore.
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Re: Reaching your number vs. owning a home

Post by nigel_ht »

secondopinion wrote: Sun Oct 17, 2021 12:03 am
KlangFool wrote: Sat Oct 16, 2021 5:06 pm
nigel_ht wrote: Sat Oct 16, 2021 4:38 pm
When I buy rental property I use very different criteria than I would use if I expected to live there.
nigel_ht,

And, what is there to stop someone from using the rental financial criteria to decide whether to buy or rent a house?

Keep the emotional part as to where to live. But, use the rental financial calculation to decide whether to rent or buy.

This is the WHOLE POINT of only buy a house when the PITI is at least 20% to 30% lowered than market rent. If the real estate investors/landlords can buy and rent out to make money, it is a good deal!

KlangFool
That is precisely on the money. If they can make money, then you are getting a good house for the money.
It doesn’t solve the issue of a house being too big or too small or poorly located for immediate needs which will change over time.

Early career wanting to FIRE is still better off renting.

Married with kids? Already retired? Know you’re going to stay in the same city for another 5-10 years? Yah, go buy a house.

Single, trying to maximize income and save 50%+ of net? Buy VT/VTI.
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Re: Reaching your number vs. owning a home

Post by KlangFool »

nigel_ht wrote: Sun Oct 17, 2021 7:52 am
secondopinion wrote: Sun Oct 17, 2021 12:03 am
KlangFool wrote: Sat Oct 16, 2021 5:06 pm
nigel_ht wrote: Sat Oct 16, 2021 4:38 pm
When I buy rental property I use very different criteria than I would use if I expected to live there.
nigel_ht,

And, what is there to stop someone from using the rental financial criteria to decide whether to buy or rent a house?

Keep the emotional part as to where to live. But, use the rental financial calculation to decide whether to rent or buy.

This is the WHOLE POINT of only buy a house when the PITI is at least 20% to 30% lowered than market rent. If the real estate investors/landlords can buy and rent out to make money, it is a good deal!

KlangFool
That is precisely on the money. If they can make money, then you are getting a good house for the money.
It doesn’t solve the issue of a house being too big or too small or poorly located for immediate needs which will change over time.

Early career wanting to FIRE is still better off renting.

Married with kids? Already retired? Know you’re going to stay in the same city for another 5-10 years? Yah, go buy a house.

Single, trying to maximize income and save 50%+ of net? Buy VT/VTI.
<< It doesn’t solve the issue of a house being too big or too small or poorly located for immediate needs which will change over time.>>

This has to do with where you want to live. We separate this from whether you should buy or rent.

A) Pick where you want to live.

B) Decide the house that you want to live.

C) Buy only if it is a good deal. Or else, rent the same house.

The PROBLEM with most folks is they do not follow this process. They buy more houses. Then, justifying their decision in buying the house by the market rent. However, they would NEVER rent the same house.

KlangFool
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Admiral
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Re: Reaching your number vs. owning a home

Post by Admiral »

nigel_ht wrote: Sun Oct 17, 2021 7:52 am
secondopinion wrote: Sun Oct 17, 2021 12:03 am
KlangFool wrote: Sat Oct 16, 2021 5:06 pm
nigel_ht wrote: Sat Oct 16, 2021 4:38 pm
When I buy rental property I use very different criteria than I would use if I expected to live there.
nigel_ht,

And, what is there to stop someone from using the rental financial criteria to decide whether to buy or rent a house?

Keep the emotional part as to where to live. But, use the rental financial calculation to decide whether to rent or buy.

This is the WHOLE POINT of only buy a house when the PITI is at least 20% to 30% lowered than market rent. If the real estate investors/landlords can buy and rent out to make money, it is a good deal!

KlangFool
That is precisely on the money. If they can make money, then you are getting a good house for the money.
It doesn’t solve the issue of a house being too big or too small or poorly located for immediate needs which will change over time.

Early career wanting to FIRE is still better off renting.

Married with kids? Already retired? Know you’re going to stay in the same city for another 5-10 years? Yah, go buy a house.

Single, trying to maximize income and save 50%+ of net? Buy VT/VTI.
I don't think many Bhs would argue with you that a single person who does not intend to get married and absolutely will not have children AND wants to retire young will likely be better off financially if they rent. There are other factors in life, however, than those that are strictly financial. Quality of life/lifestyle. Type of available jobs. Being close to family (whether by choice or necessity.)

If you're willing to arbitrage your housing costs by moving to Mexico or Southeast Asia in order to maintain some arbitrary fixed savings goal (50%, more) then yes, don't buy a house. Don't get married. Don't have children. Don't plan to see your parents frequently.

The point is that is a very specific and unusual set of circumstances that apply to almost nobody.

Anyone can FIRE if they are willing to live in a tent and eat beans. Most don't aspire to that lifestyle. All you have to do is add a spouse to this equation and it can fall apart very, very quickly. And kids? Forget it. People with kids usually don't pick up and move to Vietnam when their rent goes up 10%.
nigel_ht
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Re: Reaching your number vs. owning a home

Post by nigel_ht »

Admiral wrote: Sun Oct 17, 2021 8:36 am
I don't think many Bhs would argue with you that a single person who does not intend to get married and absolutely will not have children AND wants to retire young will likely be better off financially if they rent. There are other factors in life, however, than those that are strictly financial. Quality of life/lifestyle. Type of available jobs. Being close to family (whether by choice or necessity.)
Quality of Life: Retired - able to pursue any passion career.

Type of Available Jobs: All since income no longer matters

Being close to Family: frequent flyer miles
If you're willing to arbitrage your housing costs by moving to Mexico or Southeast Asia in order to maintain some arbitrary fixed savings goal (50%, more) then yes, don't buy a house. Don't get married. Don't have children. Don't plan to see your parents frequently.
My expectation of seeing my kids after graduation is limited even if they are just a half mile away.

You can have be married with kids and FIRE.

You can arbitrage your housing costs by moving to a LCOL state if going overseas isn’t desired.
The point is that is a very specific and unusual set of circumstances that apply to almost nobody.
Yes, being FIRE by 40 is a very small set of folks.

So what? Bogleheads are a very small set of folks.
Anyone can FIRE if they are willing to live in a tent and eat beans. Most don't aspire to that lifestyle. All you have to do is add a spouse to this equation and it can fall apart very, very quickly. And kids? Forget it. People with kids usually don't pick up and move to Vietnam when their rent goes up 10%.
Well if the kids manage to land a FAANG job, which many of their contemporaries have, then we’re looking $100K+ base + RSU with a FIRE goal of $3M.

Thats $90K at 3% WR. Doesn’t sound like tent and bean eating lifestyle to me even with kids unless you think most of America is homeless.

Even if they don’t hit $3M because they don’t work FAANG and only save $30K a year that’s still fine. We can afford to match their savings if they are trying hard to become FI. $60K a year for 18 years (22 until 40) is still over $1M in base savings.

Money doesn’t buy happiness but it does buy freedom.

To try be FI by 40 rather than FI by 50 as most BHs suggest is a difference of degree rather than kind.
coachd50
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Re: Reaching your number vs. owning a home

Post by coachd50 »

This has been such a curious thread. From a rather vague original and apparently poorly phrased post, that doesn't seem to consider housing costs when reaching "your number", to numerous back and forth side discussions that seem to make many apples to oranges comparisons (renting an 800sq ft place vs buying a 2000sq ft place) to posts that don't seem to consider the localized nature of real estate, to several posts which don't seem to consider the personal aspect of financial decisions...

Just curious.
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