A lot of people dream about the day they finally finish paying off the mortgage. Free and clear, baby!
What might you be willing to pay to live in this house you already own? Economists refer to this concept of a mortgage-free living space having market value as “imputed rent.” Some countries even tax it.
Beyond being a fun topic at cocktail parties, for most people imputed rent has few real-world considerations… you pay off the house and you have more $$$ every month. Good times.
But for an early retiree with a tax-minimization hobby, the choice to pay rent or imputed rent has some interesting implications.
Rent vs Imputed Rent
Sometime in the future, we may find ourselves living the good life in sunny California… swimming pools, movie stars…
Despite being in the triple crosshairs of the California, United States, and ACA tax systems, we would likely find ourselves with nearly free health insurance and a low/zero tax burden. (So… about the same as now.)
However, this situation is far from robust – despite my best efforts, over time the percentage of our annual income from capital gains would grow, resulting in higher tax bills. (Several thousand dollars more.)
So what could we do to harden our low tax position? Of all crazy things… buy a house.
Choosing Imputed Rent
In my theoretical budget for life in California (~$70k/year), I had assumed rent of $2,500/month. In the Sacramento region (amongst others), houses that rent at this rate sell for $500k – $750k+.
This photo is a random example I found on Redfin… 4 bedroom, 2.5 bath, 2000 sq ft, 2 car garage, good schools, decent bike score (but still “car dependent”…)
Let’s say I traded $500,000 worth of stock for one of these houses.
Now, instead of receiving $10,000/year in dividends (2% of $500k) I get zero/nada/zilch. My taxable income has gone down significantly.
Additionally, instead of paying $30,000/year in rent, I pay $12,000/year in property taxes, maintenance, HOA dues, insurance, etc… that is $18,000/year of cash flow improvement. As such, my income needs have also gone down significantly, so I need to sell less stock / realize fewer capital gains.
With much lower income and expenses for the same quality of life, imputed rent makes our low tax lifestyle extremely solid. Total taxable income of less than 200% FPL (~$41k for family of 3) means nearly free health insurance and health care, and a total tax burden of zero or less than zero.
health insurance costs at 150% FPL – not too shabby
Here is a nice summary in table form:
| Rent | Imputed Rent | ||
|---|---|---|---|
| Cost of Living | $70k | $50k | |
| Income | $40k-$55k (200% - 266% FPL) | $30k-$40k (150% - 200% FPL) | |
| Dividends | $40k | $30k | |
| Stock sales (capital gains) | $30k ($0 - $15k) | $20k ($0 - $10k) | |
| Taxes & ACA premiums | $0-$3k | $2k refund - $1k | |
Lower cost of living, lower income, lower taxes, lower health insurance premiums… same quality of life…
But… is this actually a good idea?
Cost / Benefit
“Wow, that sounds really compelling. Buying a house sounds like a great idea!”
Naturally… Anything sounds good when the author is writing what you want to hear.
But let’s look at a few other numbers…
The 1% Rule of real estate investing is a good metric for assessing a property’s potential. Roughly, the monthly rent should meet or exceed 1% of the purchase price of a property, including upfront repairs. For a $500,000 property, rent should be $5,000+/month. Clearly, this property doesn’t pass the smell test, but people love being landlords. (See how to never pay taxes again with real estate.)
But this isn’t an investment property, this is our home, dammit! You can’t put a price on that.
Or can you? With a mortgage, the property would be cash flow negative relative to renting. Even with 20% down, mortgage payments and taxes exceed rental income. Now add maintenance, repairs, etc….
We would need more income as “owners.” Which kind of defeats the purpose of buying, no?
Or, maybe we’ll make it up on appreciation.
Paying cash for the house means no mortgage payment and the double benefit of fewer dividends / capital gains to support our cost of living. We’d have no income taxes and essentially free health insurance and care, saving us $2,000 per year plus or minus.
On the flip side, we would be trading $500k of growth on the stock market for possible price change in a property.
What does that look like for a K-12 time period?
Not so good, according to the NY Times rent vs buy calculator:
Maybe paying a thousand or two per year in taxes and health insurance premiums is not such a bad deal after all.
(Due to leverage, the calculator gives a slight buy recommendation for the 20% down option at current market rents… assuming getting $500k in cash for the upfront purchase is a zero tax event.)
Summary
In any progressive tax system such as the US Federal, California State, and ACA health insurance subsidy systems, lower incomes will result in lower taxes and lower health insurance premiums.
One option to have the same quality of life with much lower income/expenses is to have a fully paid for (mortgage free) home. Money invested in a house would mean fewer dividends and (potentially) reduced monthly cash flow. As one example, our annual cost of living could be lower by $20,000 per year, which would reduce our annual tax and health insurance premium bill by about $2,000.
However, this is not without cost – purchasing a $500k property instead of renting it at $2,500/month would INCREASE long-term costs by $1,000/month.
Math over emotions. In this round of rent vs imputed rent, the winner is…. rent.
Related: Renters For Life.
Not to mention continued flexibility because…..who knows?! :)
This is the main thing… it seems insane to hard commit to a living space for the long term without living there first.
Your posts raises some great points regarding buy vs renting. Unfortunately, you are not using the correct “ownership model” so your comparison is not entirely complete/accurate. Touch base with me and I can walk you through the proper ownership model and then you can compare it to rent and I suspect your conclusions may change.
Please continue
We have always been homeowners for our 40 years of marriage, but it was likely not to our benefit. Until we moved 9 years ago we lived in NY, which has never seen a homeowner they did not want to soak. Plus we lived in an area that did not have much price appreciation so we never benefitted from that, either.
The likelihood is that in our current situation (large home in a more sparsely populated area) we will never have the appreciation we would have liked, but the taxes on homeowners is incredibly low. And the initial cost per sqft of home is very low, so it is a much better deal than most areas of the country. That being said we would prefer at this stage of our lives to be homeless, renting and traveling the country, and perhaps having an RV or small home for a somewhat permanent place to call home for part of the year.
Bottom line with this – even though we have been lifelong homeowners I would prefer we had been renters. Our net worth would be even higher and we wouldn’t have a large house filled with “stuff” we’ll have get rid off. Best of luck with your decision but I think you have already made the wise choice.
Hi Chucky, I’m really impressed with how honest your comment is. Most blog posts like this devolve into a battle where homeowners and renters battle it out to determine who is right (if that even means anything). I really appreciate the fact that you are able to look at your own life, your own decisions and think critically. I’m sure owning a home for 40 years wasn’t all bad and there were likely some benefits to your situation, but the fact that you can look back on that and say “you know it may have been better the other way” is really thoughtful.
I myself am a renter but am always running the numbers to see if buying would make more sense. It’s tough because after almost 10 years of renting I really do pine for some more space and a yard in which to grow the giant garden of my dreams. However, the numbers don’t lie and in my market (near boston) homes are simply unnafordable / over priced given the age and state of repair of said homes.
That being said I look often at making a big move to the south or west, even though I can’t stand their politics you can’t deny the low cost of housing and the utility that would impart in enabling a low cost lifestyle.
Rafael, I can feel your pain. I am sure MA and the Boston area in particular are about as bad as NY is in confiscating as much as they can from homeowners. I wouldn’t want to own there if I was you, even though home ownership would allow you more flexibility.
We moved South but we are conservative in most areas, and liberal in some (which is probably the case with most people in this country, whether one leans more to the Right or Left). If I am being honest those of a more liberal bent will likely not be happy. Yes, many of the largest cities tend to be blue, but they are vastly outnumbered by the voters on the Right. Many NYers and others that have emigrated from liberal abodes that they agreed with have moved back due to this reality. Not trying to dissuade you from moving, just pointing out the reality currently.
Best of luck with your decision as well, my friend.
Or you could get a duplex in a nice area like we did. Our cost of living decreased significantly since we moved. Having a renter to help pay 1/2 the property tax, mortgage, insurance, maintenance, and utilities makes a big difference.
It can be tough to find a nice duplex in a good area, though.
A duplex or 4-plex does change the numbers. I once made an offer on a 7-plex (6 1 bedrooms and 1 2,000 sq. ft 3 bedroom penthouse.)
But now, my interest level in being a landlord in any capacity is low. I don’t think you could pay me enough.
Just hire a rental agency. For usually 10% they handle background checks, collecting deposit and rent, etc.
Or… not.
Wow, this post came at the PERFECT time for us! We live in a super expensive part of California –Santa Monica — where both rent and purchase prices are very high, and recently decided to downsize from a 3-bedroom to a 2-bedroom. We were able to find a good place to rent for $3000 a month, whereas buying a similar place would cost around $900,000. As much as we would one day like to own our own place, we just felt like there was no way to financially justify such a big mortgage (along with high property taxes and HOA fees!). We’re fine renting, and according to the 1% rule, the imputed rent on our place would be $9000 a month, which makes $3000 seem like a bargain. And now, seeing you run the numbers and decide you would pass up buying even a $500,000 place and pay $2500 in rent instead, we definitely know we made the right decision. Thanks so much for the detailed breakdown, and the reassurance you provide to us long-term renters. Rents might seem high in Santa Monica, but compared to purchase prices they definitely aren’t!
–Adam
I used to live in that area and spent a lot of time in Santa Monica. It’s a little slice of heaven if you don’t need to drive.
I also rented.
At the end of the day what housing is available in your target area when you move comes into play. When we moved to our present location about 4 years ago there were very few rentals available at any price point and we didn’t find any SFH rentals. We ended up buying not because it was our first choice but because we found a semi-suitable place that we could close on quickly.
This is also a factor in choosing where we live.
At first you had me a bit freaked out about a new rent vs buy argument. :) I’d agree with other comments that the major thing that sways me in the direction of rent vs buy is flexibility. I’m flighty, so even a five year future timeline is dicey. And what with the political situations, climate changes (water issues in CA) and other questions, it feels good to have options to move to greener pastures as it were if the need or desire arises.
Same… add increasing forest fires, longer burn seasons, and smoke pollution, and renting sounds even better.
What about Sequence of Return Risk? I’m no fan of owning but I went to the Personal Capital Retirement Planner and ran rent vs buy cases – only an 86% chance that I don’t run out of money before I die if I’m renting at $2000/mo, 94% chance of success buying a $400,000 house (I included property tax, insurance, and maintenance expenses for owning a home btw). This is a BIG difference and I think this is a lot more important than a few thousand here or there. Owning a home lets you clamp down on your expenses during recessions so you don’t have to sell stock at a loss thus preserving your portfolio for the long term.
Imputed rent can help with sequence of returns risk – withdrawing less from a smaller portfolio. This is more true with a SFH vs a condo, since you have more control of the costs, and more true with a newer home than one with a 30-year-old roof, as you can defer maintenance to a more financially convenient time in the future (which might have greater long-term costs.)
Other things also help with sequence of return risk… saving more/spending less than 4%, other income, flexibility to go to Thailand for a year / drastically cut costs in the short term, etc…
This isn’t saving a few thousand here and there. This is determining the fundamental withdrawal structure.
Implicit in the NYT numbers you ran was a 9% investment return, which seems a bit rich. Your rent vs buy decision is obviously highly sensitive to that assumption (as well as the rental growth rate assumption).
I find the most compelling argument to own a home during an early retirement, as you clearly illustrated, is to avoid medicaid (138% FPL) and ACA (400% FPL) cliffs.
With 5 kids, 138% of FPL is $52,523 and 400% of FPL is $152,240. Without a mortgage or healthcare expenses our annual spend is easily below $52k.
I found this MMM thread to be fascinating: https://forum.mrmoneymustache.com/welcome-to-the-forum/why-keep-income-above-medicaid-limits/msg2069953/#msg2069953.
On the topic of relocation, you may find Big Ern’s recent post on the topic to be interesting (https://earlyretirementnow.com/2018/12/03/we-just-bought-a-house/). I love the tax arbitrage of living on the WA side of Portland.
7% real. Not so rich.
We’ll have no issues with the Medicaid cliff just from dividend income. Although at 200% FPL, in California Jr would be on Medicaid… it’s about the best insurance you can get.
We stay just above the medi-cal line for us – and our son is on medi-cal. Can’t beat the price but the choice of doctors/dentists and opticians is real thin. We’ve found a decent primary care but the only dental and optical are sketchy places – they’re grimy and hard sell. That said the price is right.
My brother’s on Medi-cal in sacramento and getting to see a cardiologist(not fun anyhow) is quite ahem difficult. Very slow referral process and lots of delays in testing appointments. He pays for his dentist – couldn’t find one he was willing to go see on denti-cal.
Thanks! The price is right, as you say. I wouldn’t choose to be below the medical line myself, but just on the right side of it is a pretty sweet spot.
As always, I enjoy the window into your thought process. Thanks!
It’s a dark place
Just wondering do you also recommend renting if someone doesn’t have savings earning money? Just thinking of my grown kids who have young families and their situations. Thanks!
The only recommendation I would make is to use the NYT rent/buy calc and figure out the details for your own situation. As for us, we are renters for life.
thank you so much that is a really great website I hadn’t heard of before!!!
Love this post. Such a great analysis and parts of it are applicable to me and my family.
We currently happily rent a SFH in our HCOL fancy-walkable DC suburb. As dual professionals who have been renting the same house >6 years now, everyone thinks we are crazy. But this choice has allowed us to stash a lot of cash.
In FIRE, we are tentatively planning for a move to a MCOL area near family and had set a $500k budget, plan to buy a house for cash. But I’ve always wondered if that makes the most sense, or if we’d be better off continuing to be renters – given the flexibility and freedom from maintenance/headaches it gives us.
Your analysis doesn’t perfectly match our situation since we’re headed forwards “fatFIRE” with annual spending in the $150-200k range and not counting on any ACA subsidies. I guess we need to do a more detailed analysis at our location in the progressive tax system.
GCC’s analysis is of a family on the opposite side of the ACA cliff (i.e. well under the cliff), so choosing between renting and buying is just an optimization on a more or less continuous curve. It will be the same for those like you who FatFIRE. For some families, that extra $18k to $30k or whatnot could easily be the difference between being falling over the ACA cliff, or not.
Your target situation is more of a traditional rent vs buy analysis with fixed insurance costs.
What makes the most sense can be what makes you happiest. Best financially isn’t necessarily the same as best quality of life. I think this is one of the best luxuries of being FI.
In our 25 years of marriage, we have rented and owned from coast to coast. I’m not the financial person in the family. But we agreed that we didn’t think it was worth renting if the rent was the same as or more than the mortgage for a home. Granted, we didn’t run lots of numbers on other factors like closing costs or interest, but we do avoid PMI. Anyways, we like the fact that we don’t hear couples fighting over money or having cops coming to the apartment next to us or a boyfriend trying to kick down the door to girlfriend’s place anymore. We like peace and quiet and are willing to pay for that. Plus, we’re pretty stable now with jobs, so the (adult) kids know where their home is and we all live peacefully together. I can’t put a price on that. Our home has doubled in value as well, so our net worth has also increased.
I don’t begrudge anyone’s decision either way. We all have our reasons for doing one thing or another. Good Luck with your decision and finding the perfect place in beautiful California.
Renting doesn’t require you have shared walls or crappy neighbors. One of the best things about selling my house was I got away from the people who lived next door.
Have you settle down on Sacramento if/when you plan to move to California? If so, have you already shared the reasons why Sacramento would become one day your new home in California?
We have started on a full time nomadic journey to explore the world but foresee ourselves landing somewhere where cost of living / air quality / water quality would let us live a happy and long life. Since we are current California resident (and part of our family lives here) we might consider settling down here in a few years.
No, we haven’t made a final decision.
This was our list of criteria.
My spouse and I have been renting an apartment in San Francisco for well over a decade. Due to rent control, our constant-dollar rent has actually gone up less than inflation, and throughout this time we’ve been paying far less than we would have been for a mortgage and property taxes. On the other hand, friends of ours who bought have seen massive gains; the average home price in the city is now around $1.5 million. I sometimes wish that we had bought, but on the other hand the money we didn’t spend on mortgage has done well in the market. Of course, if we wanted to move to a nicer or larger place now, our rent would increase significantly….
A year or so ago there was a story of a single guy who rented a SF studio, and now he, his wife, and their daughter still live there because they can’t afford to move elsewhere. I would like to see SF tear down the painted ladies and build some more towers…
I think of it like this: would I rather own a home near Netflix, Google, Facebook, etc… or own the stock of those companies?
I’d rather do both:)
I agree that the NIMBYism of California and the lack of political will to change zoning and decrease land use fees is really disheartening. I wouldn’t be surprised if Sacramento slows down on building and rents increase at a faster rate than they have been with California’s insane laws, even with the heat, smog, and flood risk.
To me, California traffic and crowding (Sacramento has plenty of both) would only be worth it on the coast, with perfect weather. Hope you find the perfect place.
The key words being “I” and “rather” :)
Yup:)
Love the NYT rent vs buy calculator. We actually came out slightly ahead by buying, much to my surprise.
Do you have a list of places you would love to live that you wouldn’t mind sharing?
Sure. But as you point out, we all have different tastes and needs.
I like rainy weather, tolerate the cold, hate severe heat, and can’t tolerate air pollution. I don’t mind working a bit to afford certain areas and I don’t mind living in a duplex and landlording; my list obviously reflects my personal preferences and is thus presumably useless to anyone else.
In no particular order-SF, parts of the East Bay, both Portlands, NYC, West LA, San Diego, Santa Cruz, San Clemente/coastal OC, Breckenridge, Boulder, London UK, Bristol UK, Vancouver BC, Santa Fe, maybe Albuquerque…there are more, but those probably top the list.
Anywhere stickier than NYC, hotter than LA, very smoggy, or completely flat is out, negating Sacramento, Salt Lake City, Austin, Chicago, and DC, among others.
Will enjoy hearing where you land!
I fully acknowledge the caveat, I was just looking for context on your distaste for Sacramento. This helps, thanks!
I hadn’t really heard of San Clemente so took a look on Zillow. The first house for sale looks nice at $25 million.
I’m a big fan of Bristol (to visit.) I’ve consumed many a hard cider in Bristol.
There are rentals in San Clemente for 2k for a 2 bedroom apartment, although I agree a community with 25 mm houses is probably insane. But ahhh the coast….
Other places I’d consider include Boise (maybe too hot), Bozeman, cheaper areas in OC, Vancouver WA, Wenatchee WA, Antigua GT, maybe Denver, Oaxaca, and the Oaxacan coast.
We’ve made the imputed rent choice :) But the numbers are different in Raleigh. Our $225k house spits out imputed rent of ~$1700/month (both are guesses as both have gone up a lot recently). We only pay about $300-400/mo in taxes, insurance, maintenance, etc so it’s more like a $16000 per year imputed rent payment on a $225k paid off house. That’s 7.1% yield on cash and it’s totally tax free.
On top of that real estate tends to keep up with inflation and on average it eeks out a slightly positive real return. And that’s tax free CGs till you sell, at which point at least $500k for MFJ will be tax free too. YMMV based on real estate values and rent values wherever you choose to live. But you’re definitely right to do the math! I’d probably rent if I moved to CA right now too.
I might purchase if we were moving to NC.(“Might.”)
The NYT rent/buy calc does include tax-free gain on sale
Just when I was beginning to think, “if anyone could convince me buying a house was a good finacial move it would of course be GCC”…
…the math continued. ;)
One of these days I will defeat math.
Today is not that day.
Are you accounting for CA state income taxes? It looks like CA taxes cap gains as regular income (as does my current state). We end up with a much larger state tax liability than federal. I am fine with that on the whole but it is a real expense.
I am, yes. See here and here.
short version: California income tax on $40k is ~$100/year.
Whenever I think of buying I think how nice it is to be lazy and have the landlord do the repairs.
Everyone I know and work with says “you’re just throwing your money away by renting”. Then all I hear about is one thing after another with repairs, renovations, etc.
Even if buying was mathematically more advantageous (It usually isn’t), the headache of owning is so much worse. I’d rather pay much more and rent but that’s just me…
Nobody ever accidentally remodels the kitchen in a rental.
I sincerely hope you reconsider. If you apply immediate term math, like you did above, you would rarely have bought in California in the past 40 years. Your $1000 of monthly savings from renting would look pennywise pound foolish.
You already discovered our dirty little secret that California is actually one of the best states in the country to retire rich. That also applies to owning real estate long term because of the prop 13 cap on property taxes and because the “progressive“ agenda always ends up making housing more expensive.
I’ll reconsider. Please convince me with numbers.
I’m not sure I follow the analysis.
500k home -> opportunity cost of 20k of safe withdrawal as per the 4% rule.
2500/month rent -> $30,000 per year, requiring $750,000 worth of assets as per 4% rule.
So to rent you need 750k invested to pay rent, but buying the same house costs 500k.
Then you need another 150k to pay for taxes and maybe another 100k to pay for maintenance. So at 4% it’s close to a wash.
The NYT calculator uses 7%, but that seems like an invalid comparison given that long term expected returns are so much higher than SWR by definition.
If you drop your SWR then buying gets more attractive. And as you note the maintenance costs can be managed to avoid SRR. California housing prices have tended to increase faster than inflation, and taxes are not inflation adjusted so buying gives you a strong edge there.
Finally, if you’re planning on managing sequence of returns risk via additional income, having a lower baseline expenditure level makes it easier to drop your withdrawal rate via small amounts of income.
Renting does not seem like a clear win.
It’s a personal issue for me as I bought a house in California in 2013, which has of course worked out spectacularly. I probably wouldn’t buy it today, but renting doesn’t seem very compelling in this market either.
Love the blog and the example you’ve set!
Good observation. That $500k * 4% = $20k (the exact reduction in our theoretical CA budget) is by design. Withdrawal rate before/after is the same.
With a different house/market/price, withdrawal rate before/after might be different. It might even increase.
With a budget of 1% of home value allocated to maintenance/repairs (per NYT calc) if the market tanked immediately after purchase, the homeowner could choose to NOT spend <=$5k/year until the market recovers. (In theory. As these things go, that likely means spending more than $5k later.)Maybe this house purchase follows mainstream guidelines of having 20-30% of net worth in home value, so around $2 million total. If spending at 4%, so $60k/year from $1.5 million portfolio post-purchase, this reduces total spending by ~8% to 3.67%. Is that the difference between success and failure? (In the worst historical example, no.)
On the other hand, if $500k is a smaller percentage of net worth and spending is already much less than 4%… then being able to ignore the termites for a year (or five) is less significant.
As an example, if net worth was $2.5KK then a $500k home purchase is 20% of net worth. With the same post-purchase spending as before ($60k, now 2.4%) then deferring maintenance reduces wr to 2.2%. Both spending levels are less than history ever required, so…
In short, I wouldn’t personally choose homeownership as a robust solution to improve srr, although it is often cited as a benefit of buying. I’d lean more towards buying a lower value home relative to net worth.
As for the other considerations, change any one or more variables in the NYT calculator (Prop 13, different investment or property value growth rates, etc…) and you’ll get different results. Predicting the future is… challenging, so go for a big obvious win (e.g. $1000/month.)
In broad brush strokes: renting is best for the short term, owning for the long term; the middle term being around 5 years – in most locations.
I really love your analysis here, and the window into that ‘dark place’ that is your mind.
I’m sure I’m biased because I’ve lived in Sacramento my whole life, but it’s a great place to raise a family. It’s not a big city, but it’s not small either. The food scene has improved greatly over the past decade. I don’t see traffic being a huge deal, especially if you’re not driving to and from work during rush hour.
GCC: Can you update the post with the NYT calculator with a 20% payment? After factoring in things like interest rates that recently dropped, lowering the 1% maintenance cost, and considering Jack Boogle’s prediction that stocks will perform worse over the next decade can really alter the math to swing the other way, and using leverage. I think it’s pretty close.
Buying also gives the added stability of living in the same place. For example, I’m currently renting, but the owner of my residence wants to sell the property and has given me a notice to vacate. If one of the reasons you’ve picked your location is for the school and you move out of the neighborhood, your child might have to switch schools.
“It’s pretty close.”
If it isn’t “holy f#^K buying is hands down the obvious win by a HUGE margin” then I will rent.
I’ve owned for the past 20 years and paid off my mortgage in 2012 when I got nervous from the stock market dipping just as layoffs at work seemed likely. While not having the mortgage gives peace of mind, it’s clear I’d have been better off financially to have taken advantage of historically low interest rates below 3% for a 15 year loan and kept that money invested from 2012-2019 that turned out to be good years in the market. (Of course it could have gone the other way.)
But more importantly, I am terrible at owning real estate. I don’t want to keep up with maintenance, take on remodeling projects, or deal with replacing the roof. As a result, our houses get run down and we don’t make money when we sell Because of this, and blog posts like this, I don’t intend to own again. I want all these problems to be someone else’s problems and I want the flexibility to move around if we want. Point is, there are more than financial considerations as to whether owning is right for everyone and people need to consider those as well.
From the reddit fire community comes a new app. See what the numbers say. https://www.rentvsbuy.app/
It says the same as the NYT calculator.
Very analytical post. I like it. There’s always going to be numbers to crunch and opportunity costs with everything we do. Like you pointed out, it’s important to really analyze the big decisions because there’s big consequences/opportunities.
In an earlier post you mentioned moving some assets into bonds, with the justification of “why gamble if you’ve already won” (or something along the lines). I wonder if the same reasoning could be applied here. If you’ve reached FI and can buy, why not lock in the housing aspect to avoid potentially getting priced out of your forever neighborhood / town?
Could buying a house be a substitute for holding bonds? You mentioned monthly cash needed would be lower, so the stability of bonds is perhaps no longer needed. And the rent vs buy calculation would change since bonds have lower returns than stocks.
How do you qualify for a rental without (self) employment income? All rental applications I’ve seen state upfront that you won’t be considered unless your earn ~3x the monthly rent.
Finally, how do you deal with large rent increases in an appreciating neighborhood, or 30-60 days notice to vacate? Looking for a new place with a deadline isn’t fun and neither is moving. Children limit you to just a few neighborhoods, and SFH rentals within the same school district are not always available on short notice.
I would love to rent when hitting FI, but don’t see how.
Thank you
Bonds (often) move inversely to equities and can be sold in part to rebalance a portfolio. If you expect one house in one location would behave similarly, and you could sell a portion of it, then it could be a substitute for bonds.
You may be focusing on and amplifying perceived negatives?
If you can buy a house in cash now, then you can buy a house in cash 10 years from now.
Don’t want to move? Sign a multi-year lease
Don’t have job or SE income? Show a balance statement with $1 million in assets.
It sounds like you may prefer to buy. If so, do it… lock in the housing aspect. Money is really only for one thing, doing what you want.
If one lived in the frugal midwest, does a house make slightly more economic sense compared to the coasts? What about a house in a low-cost area AND a state with no income tax?
I ran the numbers for these scenarios in the state of Michigan, and suprise suprise renting still won out. But the difference was a lot closer, even with both rent and housing prices being drastically lower than California…
The price to rent ratio is an important factor.
The general inflection point seems to be around 15:1.
Places exist where monthly rent is higher than mortgage payment/maintenance/taxes/etc…
We rent in Languedoc region, south of France and pay only 600 euros a month for a furnished, two bed townhouse that includes utilities. France has a fantastic agreement with the USA if you are only living on retirement income or didvidends then you don’t pay taxes. You pay 8% social charges after about 16,000 euros of income for a couple so if you live on 35,000 euros a year it’s only about a 1000 euros a year for 70% healthcare and usually visiting a doctor is about 25 euros…I would never go back to living in CA or buying a house when you get a deal like this.
Your situation sounds amazing
Sounds heavenly
This should be taught in high school – I had my mathiness all wrong. Thanks for sharing this perspective – and the numbers on rent and this fancy new imputed rent thing.