Good points, all. Yes, the 20% goal is very aggressive, especially in cities and suburbs where most jobs are. The point is “don’t buy too much house” if you want to have any kind of financial freedom.
Looking back I think 20% is good to aim for. I think we might have got to 25% for a few months, but no more than that. It is important to not have too much of your income tied up in housing costs be it rent or mortgage. They’re not flexible enough
My personal experience is that I have definitely saved by being a homeowner and not a renter. I have gone through a 40-year period of homeownership and had the advantages of tax deductions (in the US), predictable expenses, and growing equity in my home. Of course the 2008 housing bubble that burst put a dent into some of my gains, but when I compare to what it would have cost me to rent over that same period of time, my opinions agree with Erith’s opinions of it being really beneficial.
I do think there is a mind shift today among millennials with good reason. Housing is less affordable in the lower price points than it was when I was in my 20’s. The owning of a home and raising a family in your 20’s is not as much of a priority as it was in my generation (Baby Boomer). Renting gives you a much more flexible way of relocating for employment, and with the job market the way it is today that’s almost a necessity. My conclusion therefore is that things have changed and that renting for many is a better option at least in the beginning of one’s adult experience.
How do you feel about loans that allow you to put down less than 20% (ie VA/FHA loans) with no PMI?
I absolutely agree. Things have moved on. Were I 21 now as opposed to 61, I might have a different take, however, if I felt I was likely to stay in the same area for 10 years, I would probably still buy. It is very much dependent on personal circumstances.
Not sure of the US specifics around that, but my take on a 95/100% loan, is that you need to have a plan to clear the debt sooner rather than later.
The beauty (or curse?) of this topic is that we will never run out of material because if we assume that capital markets and the real estate market are close to efficient, the median household should be roughly indifferent between renting and buying.
Some of us will always be leaning more towards buying: high marginal taxes and tax incentives from mortgage interest deduction, living in an area with high rental yields, etc.
And others will always prefer to rent: folks who plan to move frequently, who live in the big metro areas with low rental yields, etc.
Gwen, it may be ok on a house hack (your strategy, right?) to use the low money down deals. I had $0 of my own cash invested when I bought a quadplex, lived in one unit, and rented the other 3. The rent paid for my mortgage and then some. And I have since moved out and it is a great cash flowing rental.
I love rental investments, so all of you rent-first people with huge net worth are the best tenants I can imagine! Come rent my houses!!
I’d be all over that Gwen. Especially with no PMI.
I think the only home you should buy is your “forever home”. Looking back, we probably should have rented our starter home as we were only there for about 5 years, so if anything it was probably not worth it when you factor in maintenance costs etc. I thought we lived in our forever home until my wife got a job offer from MS in Seattle. This was back in 2011 when housing prices were still very depressed. We listed our home in the Midwest, but we could not sell it without practically giving it away, so we rented it. Luckily housing prices were way down in the Seattle suburbs so we bought a house there to get into a certain school district for my son. We ended up moving back a few years later (wife became homesick), sold the Seattle house for a nice profit and moved back to our old house. So, with a little luck and timing, home ownership can work out even in the short run. I think we will downsize to a smaller home in retirement. Renting will not make sense since we can pay cash and do not intend to move.
Thanks Joe. I think your experience pretty much matches my expectations. It was great you could rent your house in the MidWest, while you were in Seattle, which was a great blend of the rent v buy option, which says, even if you have bought and can’t sell, you still have options.
As for retirement, I’m still on the fence whether I am better with the money invested and pay the rent off the investment income, or buy. My problem is slightly different, if I buy a small apartment, it is likely to cost me more than my larger house is worth. My husband tells me - lets just stay where we are. I certainly don’t want to invest more capital in a home just now.
In my opinion, neither option is inherently smart or dumb. Both renting and buying have their advantages like In buying you eliminate the expense of housing once you paid the mortgage off while in renting You don’t have to pay for repairs, maintenance, or other issues that come up.Eventually you will have to play with the numbers or use a simple rent vs buy calculator to notice the attractiveness of renting or buying and how it varies with the mortgage rate or the rate of expected appreciation on the property.
@MicheleCooper90. You are absolutely right. For me the key question is the expected appreciation of the property. The end value of the asset is the main differentiator. Buying wins because of the appreciation of the property. However in a stagnant or dropping housing market, it does not take long for rental to win.
So maybe we should all start to think more flexibly about our housing, just as we are now more flexible in our employment. One answer is maybe no longer right for our whole lifetime. I am now seriously considering renting, having been an owner for 40 years, but if I do, I may well start owing again in later years.
Great question @Erith.
I think there are a few elements to this question.
So you buy somewhere to live, pay off the mortgage, and from that point your cashflow should significantly improve as you have minimal ownership costs. Now whatever happens (providing you can cover the insurance and maintenance costs) you’ve got somewhere to live for the rest of your life, and your kids have somewhere to inherit.
Renting is a great lifestyle choice… while you are still able to seek out employment if needed to pay for the roof over your head. If the stockmarket gods have a tantrum, or your local market decide to copy Greece (or Spain or Iceland), then that might put a big dent in safe withdrawal rates or passive income streams that are relied upon to pay the landlord. An inconvenience if this occurs in your 30s, a very big deal if it happens when you are in your 80s.
Owning a property, even in a potentially inflated market, can be a useful tool for furthering your investment portfolio and offsetting the opportunity cost issue. Debt recycling is an approach that lets you apply accumulated equity in your own residence to use as a deposit on investment properties, or pursue other investment options.
@Slow_Dad, I agree. We’ve always followed the 1) and 3) principles, but now I am wondering whether there might be value in number 2), as I enter retirement and have started wondering where we want to spend our retirement, at least for a year or two…
I don’t think there is a simple answer for you as each country is different. Having lived and worked in the UK there are very fewer opportunities to create tax offsets to make it attractive to purchase investment properties, especially in London. In fact the rent we were paying in London was comparable to loan repayments however we would have needed to put a 20% deposit on the property, which is why you probably worked out it would be better to buy.
In Australia there are tax offsets available making it a bit more attractive however you will still require a deposit (for all the Australians on this forum I don’t want to get into a discussion about Negative Gearing. The UK doesn’t have negative gearing and housing affordability is a massive problem and taxes are high), and you can rent a nice property for far less than what your monthly repayments would be. Although you may be missing out on Capital Growth you need to be disciplined enough to take the difference between repayments and rent and use this to invest in other income producing assets. A lot of people don’t do this, they think they have some excess cash so they spend it. I know a number of people that purchase an investment property and choose to rent for a number of years while they get their mortgage to a point where it is feasible to now live in the property and be able to afford the monthly repayments.
I don’t own a personal property at the moment and am comfortable renting a nice home in a great suburb at far less than what the mortgage would be. Any excess funds I have are put into other investments.
I suppose it really comes down to what your strategy is.
If you feel that you don’t want to maintain a property in your older age have you considered some of the developments built specifically for people 55 years and over where maintenance is included in your yearly fees? This gives you the benefit of capital growth and a more carefree lifestyle, however you may be up for some higher annual fees than usual rates and taxes and you will only be able to sell to other over 55’s.
Well said @Enzo
Funnily enough I was researching this very point last week to reassess some of my own thinking:
I recently ran this analysis too. It’s important to factor in the down payment into your investment portfolio that you are comparing the purchase decision too. Take a look at the post below. I included an Excel file there that you may be able to leverage.
For me, buying has been great, but many years in, my house now needs a total revamp.However, we have decided to leave it to the next owner!
We pay a huge amount more per sq ft, than you do in the US, and NZ (Can’t comment on Australia) My son has just built his own house on land outside Christchurch NZ, for about half of our costs. I am a reader on the @Mrs.Groovy blog, and they report their proposed costs for their current new build, at about half of a UK build.
However you cut the costs in the UK, buying works unless you want flexibility to move every few years, or you are like us, considering releasing capital tied up in bricks and mortar, buying works!