Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Is home ownership essential to ER?
Old 06-13-2013, 09:03 AM   #1
Recycles dryer sheets
Retire2013's Avatar
 
Join Date: Aug 2009
Location: Northern Virginia
Posts: 392
Is home ownership essential to ER?

Hello All,

I own my own home (paid off mortgage) and am in ER. My daughter is just starting her career and has been asking me some questions about ER. One question that she posed is whether owning her own home is a must in order to be able to ER at some point? I think owning may be a headache when she is still working and may need to relocate for work. Renting affords so much greater mobility as we all know.

What would you advise your son/daughter to do with respect to own versus rent if your DD or DS is interested in ER?

Please share your thoughts. Thank you so much for any and all opinions.

Have an amazing day!

Retire 2013
__________________

__________________
Formerly known as "Retire 2014" Due to aggressive saving and a lot of luck managed to get out at end of March 2013, hence, the name change :)
Retire2013 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-13-2013, 09:12 AM   #2
gone traveling
 
Join Date: May 2012
Location: Fairfax, VA
Posts: 211
My son is only 1, so I wouldn't advise him quite yet, but here is my opinion. Home ownership is simply one option when the math of ER is concerned.

The pro's include: permanent reduction of spending after mortgage is paid, increasing value of asset, potential for reverse mortgage, potential equity loans for whatever reasons.

The con's include one of the things that you listed: reduction in mobility.

If your daughter is early in her career, and thinks that there's a good chance that her job could change her location, it's probably not worth the hassle of buying. When buying a home, the main advantages come when you are able to really hunker down for a longer period of time.

ER is still about your investments outliving your spending. Teach your daughter to track and manage her spending and teach her the basics of investing. Home costs are just another expense/investment.
__________________

__________________
bo_knows is offline   Reply With Quote
Old 06-13-2013, 09:16 AM   #3
Thinks s/he gets paid by the post
Brett_Cameron's Avatar
 
Join Date: May 2011
Location: South Eastern USA
Posts: 1,010
Whether a person owns their home outright in ER is, IMHO, based on personal preference and the person's financial condition. One aspect is control of expenses. It is debatable if owning results in more or less control of housing expenses, depending on where you live, age of home (maintenance expenses), property taxes, cost of insurance and so forth.

From my perspective, I like to control my expenses. I have a home with a small mortgage that I do not intend to pay off early.

I would advise my children to buy and own if they are living where they want to retire. I do this just to let them have a little more subjective control of their expenses.
__________________
All that glitters is not gold. -G. Chaucer, W. Shakespeare
All that is gold does not glitter. -J.R.R. Tolkien
Brett_Cameron is offline   Reply With Quote
Old 06-13-2013, 09:21 AM   #4
Thinks s/he gets paid by the post
David1961's Avatar
 
Join Date: Jul 2007
Posts: 1,076
If I had a son/daughter, I'd advise them to LBYM and that home ownership is one factor when planning for ER, but is not an absolute necessity. Obviously, in ER, if you rent, you must consider rental costs in your living expense assumptions. If your house is paid for, you would consider things like property tax, repairs, etc.

One thing I would add is that even if you own a home, you still need to save and invest if you want to be able to ER. I think home ownership gives some people a false sense of security and they may think they don't need to worry as much about saving and investing prudently.
__________________
David1961 is offline   Reply With Quote
Old 06-13-2013, 10:10 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,287
I also think it makes a difference in the ratio of cost vs rent...


IOW, in Houston, housing costs are cheap.... rents are high... I would much rather buy than rent...

When I was in NYC, housing costs were very expensive, rents were very expensive.... but the ratio of the rent vs buying seemed to lean toward the rental... IOW, I would rather have rented than bought....


The other negative for owning is that a good number of people have to move to a 'retirement home' of some kind... the lady in the office next to me just said her father in law is being moved.... so they have to now sell his house and stuff...

But others just stay in their homes until they die....


Bottom line, there is not right answer....
__________________
Texas Proud is online now   Reply With Quote
Old 06-13-2013, 10:59 AM   #6
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,613
Quote:
Originally Posted by Texas Proud View Post
I also think it makes a difference in the ratio of cost vs rent...

IOW, in Houston, housing costs are cheap.... rents are high... I would much rather buy than rent...

When I was in NYC, housing costs were very expensive, rents were very expensive.... but the ratio of the rent vs buying seemed to lean toward the rental... IOW, I would rather have rented than bought....
Using a strictly financial analysis, one way to look at it is to look at the ratio of annual rent to home prices in various regions and metro areas.

I've tended to notice that in high cost of living areas, the annual rental costs as a percentage of the home's value is significantly lower than in lower cost of living areas. In a place like NYC or the SF Bay Area, for example, a $500K home may cost $2000 a month (4.8% of purchase price per year). In some cheaper cities a similar home may sell for $150K and the rental is still around $1000 per month (8% of purchase price per year).

Since *most* retirees would gravitate toward lower cost of living areas (not all, some value living in particular regions highly enough to willingly pay more), that would *tend* to lean towards buying. But even then there are personal comfort factors. Some people don't want to be saddled with the financial responsibility of major repairs and property taxes, and some folks don't want to be tied to a home if they decide they want to live in a different home or leave the area entirely.

(This isn't intended to stoke the flames of the old "rent or buy" debate, one which has no single right answer for all people. It's just an observation that the balance tips more toward "buy" in areas with lower housing prices and more towards "rent" in high-cost areas.)
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-13-2013, 11:08 AM   #7
Thinks s/he gets paid by the post
Onward's Avatar
 
Join Date: Jul 2009
Posts: 1,667
My personal experience: everything about home ownership, and issues related to it, worked against my ER and against my sanity.

Selling the house and renting is what finally made my ER feasible, even with the likely increase in rents over time.

I would advise a young person to rent, keep life simple and flexible, and invest all spare $$ in securities.
__________________
And if I claim to be a wise man, it surely means that I don't know.
Onward is offline   Reply With Quote
Old 06-13-2013, 11:21 AM   #8
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,613
Quote:
Originally Posted by Onward View Post
My personal experience: everything about home ownership, and issues related to it, worked against my ER and against my sanity.

Selling the house and renting is what finally made my ER feasible, even with the likely increase in rents over time.

I would advise a young person to rent, keep life simple and flexible, and invest all spare $$ in securities.
This, of course, is a personal and subjective thing. Nothing wrong with that, but none of us can pretend to know the priorities and desires of others. I wouldn't try to steer anyone toward buying or renting (I'm not a cheerleader either way), but I think we can provide some financial input (objective numbers rather than subjective emotions; the latter differ for all of us).

I think it's fine and good to point out some of the subjective considerations that vary from person to person, but primarily to make sure a person facing this decision knows what to think about and evaluates their *own* temperament (I'm not going to do it for them!) in a well-informed way -- not to suggest to them that *my* preference should be theirs as well.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-13-2013, 11:22 AM   #9
Moderator
rodi's Avatar
 
Join Date: Apr 2012
Location: San Diego
Posts: 8,817
Forget the ER part of the equation - it doesn't make sense to purchase a house unless you plan to be in it long haul. (Greater than 7-10 years). The transaction costs (transfer taxes, broker fees, escrow fees, points, etc.) all add up... and tend to be sunk costs unless you amortize them over a long enough period.

As far as rent/own in ER... That's determined by the housing market, personal comfort level with having an illiquid asset locking you to a location, etc.

My personal comfort level has us paying off the mortgage concurrent with DH's retirement next January. But we plan to be here for the very long haul. No plans to downsize, relocate, etc. That said - at one point we discussed doing an expat thing... and we would have rented... but we decided travel vs relocation fit our comfort level better.
__________________
rodi is offline   Reply With Quote
Old 06-13-2013, 11:22 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,193
Traditionally, building up equity through mortgage payments has been the only savings that many people have had. Downsizing in retirement and tapping that equity supplemented the pension and SS.

Someone looking to ER will hopefully have more savings discipline and don't need to do this "forced savings".

The 2000s have also shown us that a house isn't guaranteed to be an appreciated asset. Heck, the late 80s showed that to me too.

Bottom line, I think home ownership doesn't have much bearing on ER. In some situations one might be better than the other financially. I think a bigger part of the rent vs. own decision has to do with your lifestyle. If you want to be more mobile or don't want to worry about maintenance, rent. If you plan to settle down, like to do improvement projects, etc, buy.
__________________
RunningBum is offline   Reply With Quote
Old 06-13-2013, 11:27 AM   #11
Recycles dryer sheets
 
Join Date: Oct 2007
Location: San Diego
Posts: 283
The other option is to buy a house, and if she needs to move away from it, rent it out. It will diversify her holdings by having real estate, and when paid off, it can be a source of income even if she doesn't live there.

However, I would only do this in certain locations where rents are expensive, and houses are cheap.
__________________
Office Space
Bob Porter: Looks like you've been missing a lot of work lately.
Peter Gibbons: I wouldn't say I've been *missing* it, Bob.
meekie is offline   Reply With Quote
Old 06-13-2013, 11:29 AM   #12
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,613
Quote:
Originally Posted by meekie View Post
The other option is to buy a house, and if she needs to move away from it, rent it out. It will diversify her holdings by having real estate, and when paid off, it can be a source of income even if she doesn't live there.

However, I would only do this in certain locations where rents are expensive, and houses are cheap.
I'd also add that in this case you probably need to factor in the cost of a property manager (if you move far away from your rental), and determine if the cash flow still makes sense to keep it as opposed to selling it.

If I'm living four hours away, I don't want to have to drive over there to confirm there is a problem and then fix a leaky pipe, even if I was handy. I've never done it before, but I've heard that being an absentee landlord without a property manager really sucks beyond belief. If I couldn't cash flow it with a property manager in that case, I'm personally selling it.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-13-2013, 11:32 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,193
Quote:
Originally Posted by rodi View Post
Forget the ER part of the equation - it doesn't make sense to purchase a house unless you plan to be in it long haul. (Greater than 7-10 years). The transaction costs (transfer taxes, broker fees, escrow fees, points, etc.) all add up... and tend to be sunk costs unless you amortize them over a long enough period.
The recap time really depends on the area. I worked out rent vs. buy when I knew I would be spending only about 5 more years in Austin, after a couple years of renting. Rents weren't that cheap and housing where I was looking was reasonable, and I calculated that buying would be better. I was lucky that the Austin market didn't drop until after I sold, and the stock market was pretty flat, so I actually came out well ahead. In other areas, it could take a lot longer to recover those costs.
__________________
RunningBum is offline   Reply With Quote
Old 06-13-2013, 11:42 AM   #14
Thinks s/he gets paid by the post
jollystomper's Avatar
 
Join Date: Apr 2012
Posts: 1,364
I do not see home ownership as essential for ER, for reasons already stated. In fact it might be dangerous since many folks saw homes as an "investment" instead of as a plce to live. An ER plan of "the house will appreciate enough so that we can sell it and live off of the proceeds" was a sad mistake. As was also said, it is more of a lifestyle choice.
__________________
Current target FIRE date: Under negotiation, can happen anytime.
jollystomper is offline   Reply With Quote
Old 06-13-2013, 11:46 AM   #15
Thinks s/he gets paid by the post
nash031's Avatar
 
Join Date: Jun 2013
Location: Coronado
Posts: 1,488
Quote:
Originally Posted by rodi View Post
Forget the ER part of the equation - it doesn't make sense to purchase a house unless you plan to be in it long haul. (Greater than 7-10 years). The transaction costs (transfer taxes, broker fees, escrow fees, points, etc.) all add up... and tend to be sunk costs unless you amortize them over a long enough period.

As far as rent/own in ER... That's determined by the housing market, personal comfort level with having an illiquid asset locking you to a location, etc.
I currently "own" my third home, and consider it a part of my FIRE plan in that we were able to "time the market" and buy at a relatively low cost when value has risen even over the paltry two years that we've owned it. We now have quite a bit of equity in the home due to paying down loans and increased value estimates, and the value is projected to continue rising at about 6%/year over the course of the next several years. So, you CAN own homes for shorter periods, and you CAN use it as part of a FIRE plan, but there is also a lot of risk over the short term:
- My first property, purchased with zero down payment, gained 50% in two years, and I took $60,000 in profit, which I then directly applied to...
- My second property, which LOST roughly 12% over two years, costing me $30,000.

So, over the four years of ownership, I "made" $30,000 in the simple terms (this does not include taxes, interest, etc., but also doesn't account for the income tax benefits...) bottom line, I still "made money" over four years with 0 money down thanks to my VA benefit.

Note: this is not a SMART plan at all. I got out before the bubble truly burst, which is why I was able to walk away with anything resembling a profit.

THAT said, I disagree somewhat with your first point that the reason not to do it is to avoid all the fees associated with home purchases because there are ways to minimize and almost avoid them altogether. If you're able to go in strong with a good down payment and pre-approved mortgage (or just cash, ideally), you can often negotiate the seller to pay a lot of the closing costs. We paid less than $500 in total fees on our most recent home purchase. Escrow balances and HOA "account values" are refunded upon resale, so there's not as much loss there as it might appear (excepting, of course, the opportunity cost of investing those monies elsewhere for however long you own the home). if you can find a seller willing to pick up those costs. One way to do that is to find a "corporate" seller who is just looking to lock in their profit, and can often choke down a small percentage of their profits in fronting your closing costs just so they can sell and free up the money.

Complicated math involved, but overall I agree that short-term home purchasing is absolutely not a good way to fund ER, and based on my experiences both positive and negative, I would put a 5-year minimum on home ownership (market-dependent). If you CAN sell in a seller's market (and then rent, move to another market, or find a good deal), that's the way to go, but that is sometimes much easier said than done.
__________________
nash031 is offline   Reply With Quote
Old 06-13-2013, 12:01 PM   #16
Moderator Emeritus
Bestwifeever's Avatar
 
Join Date: Sep 2007
Posts: 16,375
We don't have a mortgage but our property tax and home maintenance costs would probably fund most of an apartment rental. So for us it's six of one, half dozen of the other, in terms of expenses.

OTOH our house/the land it sits on has appreciated in value so when it comes time to sell, there would be a nice little profit for the kids.
__________________
“Would you like an adventure now, or would you like to have your tea first?” J.M. Barrie, Peter Pan
Bestwifeever is offline   Reply With Quote
Old 06-13-2013, 12:35 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 1,152
Easy. Home ownership has nothing to do with ER.

I have been happily early retired for 6 years, still have never owned my own home. I only bought my first ever refrigerator a year ago. . . before it was always included with the place . . .

I like living light and uncluttered . . . the totality of the value of the tangible, physical items that I own are just a few tenths of a percent of my net worth. Everything else is invested in a range of investments all the way from inflation protected Treasury products to an index fund of emerging market stocks.
__________________
kramer is offline   Reply With Quote
Old 06-13-2013, 05:39 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by kramer View Post
Easy. Home ownership has nothing to do with ER.

I have been happily early retired for 6 years, still have never owned my own home. I only bought my first ever refrigerator a year ago. . . before it was always included with the place . . .

I like living light and uncluttered . . . the totality of the value of the tangible, physical items that I own are just a few tenths of a percent of my net worth. Everything else is invested in a range of investments all the way from inflation protected Treasury products to an index fund of emerging market stocks.
+1

We've owned for 39 years of our 41 year marriage. We're long time FIRE'd. I can't say that home ownership helped us significantly in acheiving FIRE.

Our present home of 33 years represents less than 10% of our total net worth. During the years we were raising the family, it was likely the cheapest way to go as we needed the space and we did almost all upkeep, upgrades and outdoor maintenance ourselves (like a part time job). Other times, like now, it seems like we could rent a nice apartment (2 bedroom, indoor parking for one car, adult building) for less than the property taxes, opportunity cost, charges for lawn service, charges for decorating service, etc., that we now use.

Unless homes begin to appreciate in value rapidly, I don't view this place as an investment. Overall, it's been a good place for us to live but financially not a big help in achieving FIRE.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 06-13-2013, 05:43 PM   #19
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
To answer the OP's question, I do not believe home ownership is essential for FIRE. What is essential is to live below one's means. If home ownership or cost of renting is below your means, then that's fine.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 06-13-2013, 05:45 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by Bestwifeever View Post
We don't have a mortgage but our property tax and home maintenance costs would probably fund most of an apartment rental. So for us it's six of one, half dozen of the other, in terms of expenses.
Don't forget to add in the opportunity cost of the money you have tied up in the house. Even at a modest 3%/yr, the value of a nice home would generate some significant bux towards paying rent...
__________________

__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 06:39 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.