Rent versus Buy

[W2R]

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Originally Posted by Khan "That which does not kill us, makes us stronger." -Nietzsche

Enough, I'm strong enough already!!! I must be the strongest woman in the universe by now.

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Originally Posted by Khan "Life is what happens while you're busy making other plans." -John Lennon

So true. I've been pretty busy making ER plans, so I guess it's about time. (shudder)

[mathjak107]

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Originally Posted by donheff Those two sentence seem to conflict. If the house is worth a hundred million you can take out one heck of a reverse mortgage. You could live forever in that house with no other assets and still live like a Saudi prince. So what if the payments are subtracted from your net worth? So are withdrawals from a portfolio. Bottom line - ever dollar in assets is a dollar in assets.

the people who would take a reverse mortgage do so because they need the cash. up front cost for a reverse mortgage are brutal. a 74 year old woman with a 300,000 home taking a 180,000 loan which is max for a reverse mortgage would pay as much as 30,000 in up front costs. that would leave most in a real pickle right off the bat.
but getting back to the origional question about counting the house in your net worth, taking a loan against your home merely subtracts off the equity of the home so the fact that you can borrow up to 180,000 means you should really subtract 180,000 in value off the house value in your calculation if that was your ultimate goal.

[Purron]

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Originally Posted by Khan "Life is what happens while you're busy making other plans." -John Lennon

I love this quote Khan. Always been a big Lennon fan.

[JB]

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Originally Posted by MillionaireMommyNextDoor 1) Do you rent or own? 2) If you own, have you paid off your mortgage? 3) Do you count your home into your net worth equation? 4) Does your home figure into your financial plans during retirement?

1) Currently Rent - moved in 01, sold old home in 03, then prices skyrocketed. We like our rental and a comparable purchase would cost 41x annual rent.

2) When I owned I payed off the mortgage as soon as I accumulated a large enough portfolio where my bond assets were paying less than what I was paying to borrow.

For many folks buying works out well because it forces them to accumulate an asset (the house), and they would not otherwise have the discipline to save.

Welcome to the forum MMND.

[ladelfina]

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for an asset to count as an "investment" it must be able to provide cash flow. Any asset that does not provide cash flow is a cost.

Retire@40.. are you 40? are you retired? (sorry if I admit to not taking the time to investigate)..

As has been explored already in many posts here: implicit "cash flow" comes from NOT having to pay rent. Rent MAY be inferior at times, but what renting brings one may also be inferior.

Personal housing (to me) is an asset class unto itself.. one that precludes me -largely- from having to WORRY about other asset classes. My accounts can go to near zero and as long as I can somehow come up with prop.taxes this baby is MINE. Try that with most any other kind of investment.

My old house in the US was definitely an investment, though I did not intend it as such. I just knew that buying into that neighborhood would not do me wrong. Nor did it. I would not be sorry to've kept holding that property to this day nor into the future, notwithstanding the general downturn; its proximity to the city center is and was key. I sorely regret not hanging onto it, but didn't want the hassles of overseas prop. mgmt. So be it.

NOW, what I have traded for.. is "a castle" (sez my mom).. and not nearly as liquid an "investment" (Italians mainly and Europeans generally do not change houses easily as do Americans). I may have made a mistake, but it will be seen what rich Italians or foreigners may want to pay tomorrow for a no-need-of-restructuring stone villa with 3/4 acre of land <15 minutes from the A1 (major) h'way, halfway btw. Rome and Florence. Who knows? I only know it could be worse.

Anyway.. if I hold shares of CITI.. what? Even If I were to have 100,000 shares.. will they let me camp out/sleep rough in one of their many atria in NYC, London, Dublin?? in the kiosk of one of their ATMs in Dubuque or Dakka?

No.

Here, however, I freely camp out in MY atrium. You are all welcome to come pitch a tent and see the Milky Way free of charge, weather permitting.

Another small aspect for you to re-assess, retire@40:

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if you buy a stock to hold forever and never sell it until you die, then it is a cost.

Unless it pays a dividend.

To me,
Stock dividend = money to live on.
House paid for outright = freedom from vagaries of market rent and random (land)lords.

This is a bad thing?


Answers:
1.) Own
2.) Yes
3.) Yes, to an extent
4.) Yes, to an extent

The "extent" is the difference between our current home size/value and the lower limit of a future 'livable' home size/value for us.


Retire@ 40: I really tried, but could not comprehend, your distinction between "a 'cost' asset" and "an 'investment' asset".

To me, a cost is a cost; an asset is an asset. A house has cost aspects and investment aspects .. but so do most all other assets. A mere house is less impegnative than a Van Gogh. Wanna buy a 'Banksy' for £200,000? Wanna try and INSURE it?

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I must be the strongest woman in the universe by now.

W2R: ayuh!

[cute fuzzy bunny]

Hey L...you get it!!!!!

[mathjak107]

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Originally Posted by ladelfina Retire@40.. are you 40? are you retired? (sorry if I admit to not taking the time to investigate).. As has been explored already in many posts here: implicit "cash flow" comes from NOT having to pay rent. Rent MAY be inferior at times, but what renting brings one may also be inferior. Personal housing (to me) is an asset class unto itself.. one that precludes me -largely- from having to WORRY about other asset classes. My accounts can go to near zero and as long as I can somehow come up with prop.taxes this baby is MINE. Try that with most any other kind of investment. My old house in the US was definitely an investment, though I did not intend it as such. I just knew that buying into that neighborhood would not do me wrong. Nor did it. I would not be sorry to've kept holding that property to this day nor into the future, notwithstanding the general downturn; its proximity to the city center is and was key. I sorely regret not hanging onto it, but didn't want the hassles of overseas prop. mgmt. So be it. NOW, what I have traded for.. is "a castle" (sez my mom).. and not nearly as liquid an "investment" (Italians mainly and Europeans generally do not change houses easily as do Americans). I may have made a mistake, but it will be seen what rich Italians or foreigners may want to pay tomorrow for a no-need-of-restructuring stone villa with 3/4 acre of land <15 minutes from the A1 (major) h'way, halfway btw. Rome and Florence. Who knows? I only know it could be worse. Anyway.. if I hold shares of CITI.. what? Even If I were to have 100,000 shares.. will they let me camp out/sleep rough in one of their many atria in NYC, London, Dublin?? in the kiosk of one of their ATMs in Dubuque or Dakka? No. Here, however, I freely camp out in MY atrium. You are all welcome to come pitch a tent and see the Milky Way free of charge, weather permitting. Another small aspect for you to re-assess, retire@40: Unless it pays a dividend. To me, Stock dividend = money to live on. House paid for outright = freedom from vagaries of market rent and random (land)lords. This is a bad thing? Answers: 1.) Own 2.) Yes 3.) Yes, to an extent 4.) Yes, to an extent The "extent" is the difference between our current home size/value and the lower limit of a future 'livable' home size/value for us. Retire@ 40: I really tried, but could not comprehend, your distinction between "a 'cost' asset" and "an 'investment' asset". To me, a cost is a cost; an asset is an asset. A house has cost aspects and investment aspects .. but so do most all other assets. A mere house is less impegnative than a Van Gogh. Wanna buy a 'Banksy' for £200,000? Wanna try and INSURE it? W2R: ayuh!

you can say the same thing about a car, as long as you can make the payments its yours and as long as you own it the cash flow comes from not leasing a car . while all that may be true i still wouldnt count the car for figuring net worth for retirement purposes. it may count on a balance sheet for figuring expenses but other than that i dont see the point of counting it and i say the same thing about my house

[FinanceDude]

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Originally Posted by mathjak107 you can say the same thing about a car, as long as you can make the payments its yours and as long as you own it the cash flow comes from not leasing a car . while all that may be true i still wouldnt count the car for figuring net worth for retirement purposes. it may count on a balance sheet for figuring expenses but other than that i dont see the point of counting it and i say the same thing about my house

One big caveat....a CAR is a DEPRECIATING asset, and a HOUSE is an APPRECIATING asset.........but in the end I agree...........

[retire@40]

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Originally Posted by FinanceDude One big caveat....a CAR is a DEPRECIATING asset, and a HOUSE is an APPRECIATING asset.........but in the end I agree...........

Generally speaking you are correct, although the opposite may be true in some cases.

But in the end, I also agree.

In any case, a spent dollar that will not generate future proceeds in one way or another is a cost.

This notion that other people make about getting some benefit from the asset is all fine and dandy, but it's only the beneficial use of dollars already spent.

[rgarling]

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Originally Posted by retire@40 In any case, a spent dollar that will not generate future proceeds in one way or another is a cost. This notion that other people make about getting some benefit from the asset is all fine and dandy, but it's only the beneficial use of dollars already spent.

I have been trying to follow your arguments, but can't really tell which side of the fence you are on.

I think your statements above are true only when something depreciates in value as you use it. In that case, you have indeed traded your money for some beneficial use. HOWEVER, if for whatever reason, you sell at a higher price, then there is no "spending". In the case of home ownership, there is a good chance that the investment aspects will overwhelm the spending aspects in time.

It doesn't seem like a good idea to ignore the investment aspects of home ownership and pretend that the entire cashflow is an expense.

[donheff]

We always have the same argument and none of us can resist participating even though we probably all realize that we are arguing different things. The problem may come from the OP's question #3 "Do you count your home into your net worth equation?" As if there is an argument in the financial community about what "net worth" is. Your house counts, the current value of your car counts, your furniture counts, your coin collection counts, ... Otherwise you are not describing net worth, you are describing something else.

Most of this disucussion is about another topic - something like, "what assets do you consider in evaluating your ER readiness and in what way?" Or maybe OP should have asked on #3 something like, "If you own a home do you view it as a source of cash during retirement?"

[retire@40]

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Originally Posted by rgarling I have been trying to follow your arguments, but can't really tell which side of the fence you are on. I think your statements above are true only when something depreciates in value as you use it. In that case, you have indeed traded your money for some beneficial use. HOWEVER, if for whatever reason, you sell at a higher price, then there is no "spending". In the case of home ownership, there is a good chance that the investment aspects will overwhelm the spending aspects in time. It doesn't seem like a good idea to ignore the investment aspects of home ownership and pretend that the entire cashflow is an expense.

True if you plan on extracting in dollar form the value of that home at some point in the future. The people on here that say they do not include the value of their home for purposes of retirement assets are not planning on extracting any dollars from that home.

I know plenty of people who say their home is the last home they ever planning on buying and they would never consider doing a reverse mortgage or renting it out.

In this case, what difference would it make in their retirement if their house is worth more than they paid for it?

[retire@40]

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Originally Posted by donheff We always have the same argument and none of us can resist participating even though we probably all realize that we are arguing different things. The problem may come from the OP's question #3 "Do you count your home into your net worth equation?" As if there is an argument in the financial community about what "net worth" is. Your house counts, the current value of your car counts, your furniture counts, your coin collection counts, ... Otherwise you are not describing net worth, you are describing something else. Most of this disucussion is about another topic - something like, "what assets do you consider in evaluating your ER readiness and in what way?" Or maybe OP should have asked on #3 something like, "If you own a home do you view it as a source of cash during retirement?"

Most of us know the definition of net worth, and it includes everything you say. It's a straightforward definition.

When I see a question like the OP asked, I view it to mean what you say in your second paragraph.

[rgarling]

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Originally Posted by retire@40 True if you plan on extracting in dollar form the value of that home at some point in the future. The people on here that say they do not include the value of their home for purposes of retirement assets are not planning on extracting any dollars from that home. ... In this case, what difference would it make in their retirement if their house is worth more than they paid for it?

Thanks retire@40 and donheff. I didn't have the perspective I needed (single digit post count).

[haha]

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Originally Posted by donheff We always have the same argument and none of us can resist participating even though we probably all realize that we are arguing different things. The problem may come from the OP's question #3 "Do you count your home into your net worth equation?" As if there is an argument in the financial community about what "net worth" is. Your house counts, the current value of your car counts, your furniture counts, your coin collection counts, ... Otherwise you are not describing net worth, you are describing something else. Most of this disucussion is about another topic - something like, "what assets do you consider in evaluating your ER readiness and in what way?" Or maybe OP should have asked on #3 something like, "If you own a home do you view it as a source of cash during retirement?"

Well said, donheff. That is why this topic is always popular, like all the other topics that require no data, no analysis, only opinions.

We all have opinions, don't we?

But if anyone really cares whether a house is an asset in the net worth statement, or if the offsetting mortgage is a libility on the net worth statement, just go ask a banker.

In fact, whether something appreciates or depreciates has nothing to do with whether it is an asset. You might buy a rare stamp for $25,000. It is an asset; whether it is a source of future profit or loss remains to be seen, but while you are in doubt it is an asset.

Ha

[free4now]

Haha is of course correct. The term net worth is generally understood to include all assets including your home equity. Whether to include it in your SWR calculations is of course a different matter... most seem to prefer to leave it out of the calculation.As a practical matter people don't include their home in SWR calculations because the SWR studies were done assuming you are invested in stocks (and/or bonds) but not real estate.

[mathjak107]

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Originally Posted by FinanceDude One big caveat....a CAR is a DEPRECIATING asset, and a HOUSE is an APPRECIATING asset.........but in the end I agree...........

better tell all those gto and chevy ss owners that

[cute fuzzy bunny]

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Originally Posted by free4now As a practical matter people don't include their home in SWR calculations because the SWR studies were done assuming you are invested in stocks (and/or bonds) but not real estate.

Okay, so lets lay this to rest once and for all?

You run out of money. You've living in a house that you own.

Do you sell the house and buy a smaller one, sell the house and rent, or sit down in the living room with an "I surrender" sign taped to your forehead and do nothing?

Right. You dont do that 3rd thing.

So in short, its part of your assets that are part of your financial plan and should your primary plan fail, it becomes your backup plan.

Of course, if you're renting in the first place, a total market failure leading to a zeroed or severely depleted portfolio leaves you without that handy backup plan.

Heres another curveball. Lets say excluding the prospect of taking options #1 and/or #2 above results in an investing strategy thats riskier overall and has a higher failure rate than one thats less risky, has a higher success rate, but involves using the capital in the primary residence as a backup plan.

Which is the better strategy?

At this point I'm just waiting for someone to tell me i'm being immoral for using my primary residence in this manner.

[mathjak107]

we drifted to far from the origional question i think. i think we got to into the various ways of selling off pieces of your home (reverse mortgages) later on if one chooses. at that point the house can go back into the equation as a reverse mortgage is actually like selling off bits and pieces at a time to the bank.. the answer is until that time ,the house has no value other than a place to live in my calculations for anything other than the value of things i bought.

[free4now]

In hopes of laying this to rest, there are many different ways that people calculate how many assets they have:

1. Net worth. This word has a well established meaning that includes homes, land, mortgages, cars, clothing, and toys.

2. Retirement assets that can generate income. Stocks and bonds definitely go in this category. I like the idea of including the value of your land (an appreciating asset) but not the home structure (a depreciating asset).

3. Retirement assets that will generate income like SWR studies predict. Stocks and bonds definitely are in. Homes probably aren't, since their prices fluctuate in fundamentally different ways from the stocks and bonds that the SWR studies considered.

4. Assets that depreciate and therefore cannot sustainably generate income over long periods of time. Cars, clothing, toys, and maybe home structures. Not land.

5. Assets that are useful to consider in retirement planning. This includes EVERYTHING: Stocks, bonds, homes, clothing, toys, etc. Some assets will increase your ability to spend, and other assets will soak up some of your ability to spend via maintenance costs. Some will do both, like a home structure+land.

See, it's not WHETHER to include the home it's WHERE to include it.