Renting (maybe permanently) after FIRE?

[aja8888]

I have owned houses in these states:

Connecticut
Michigan
Connecticut (again)
California (2 houses, one rental property)
Texas (3 houses, one rental property)

Currently, I live alone (widower) in a small 4 bedroom home. Thinking back through all of this, I sold most of these homes for a bit more than I paid for them including what I had in them. The rentals were great due to location and timing. The last rental is now my daughter's house and it's about doubled in value. As far as getting rich on any of this real estate, it didn't happen for me. Two properties were sold during a divorce in 1992 and the rest had expenses (A/C, roofs, other costly maintenance, etc) which offset any large increase in house value.

Throw in property taxes, insurance costs, etc, and I would be happy seeing a "get even" situation overall. But we had a family home throughout our adult lives!

My next place will be an apartment.

 

[Diogenes]

In general, I don't think a house is an investment if one is living in it as a primary residence. It does not pay interest like a bond or a dividend like a stock. It does not produce anything. I view it more like an item that generally keeps up with inflation.

Berkshire Hathaway doesn't pay a dividend, and yet, it's an awesome investment. My favorite kind of stock, is the stock that pays zero dividends; it's the most tax-efficient. Similarly, gold doesn't pay a dividend either. Seems to have been doing well lately, no?

The crux of our dilemma is thinking about cash flow vs. capital gains. My current rental arrangement is fantastic for cash flow, because it's so inexpensive, so low-maintenance and so wonderful in terms of efficiency (utilities, cleaning, etc.). But it foregoes the capital gains opportunity of owning a piece of a VHCOL area, where housing price growth trounced everything except for US large-cap stocks. Every month, as a renter I'm richer than if I were an owner, because of PITI costs and maintenance and so on. But every month, I fall behind in terms of capital gains.

My daily driver is a small modest Japanese sports car, built in 1991. The engine occasionally misfires, and the interior is trashed. It's uncomfortable and not particularly efficient either. The acceleration was already modest in 1991. Today, it struggles to keep up with soccer-moms in highway traffic. But it's rising in value! Not by huge amounts, but it's something. Yes, I "consume" the car's value by daily driving it, but it's also an investment, in the sense that if I throw it on Craigslist now, it would fetch more money, than what I paid for it in 2019. Who in their right mind thinks of a car as an investment? Yet here we are.

 

[FLSUnFIRE]

With a normal definition of produce, I disagree.

There may be a benefit to a house, but it does not produce anything.

Yes, strictly speaking it does not "produce" anything hence the "imputed."* If I were to rent out my current place to a tenant and collect rent would you consider it to be be "producing" rent to me; and if I then used that rent money to rent my own identical residence would I somehow be considered to have earned more than if I lived in the home I owned ? Net result is the same in that I own a property and the value it spits out provides me with an abode. -Ignoring the tax due on the realized income and other frictional costs that make this hypothetical but plausible scenario less optimal than just owning the residence. From a financial analysis perspective, increasing income or decreasing expenses has the same impact on the bottom line.

*In some instances (fortunately not imputed rent on self-occupied real estate) the IRS taxes imputed income (often in the scenario of interest free loans but it could also be below market value rent or other compensation).

 

[Fermion]

Another way to think of owning vs renting is if you invested the money you would have used to buy a house and then used the proceeds from that investment to pay for your rent, you would increase your MAGI. This could cause a loss of ACA subsidy or higher tax on SS income or other factors.

$500,000 taxable would throw off $25,000 a year in a 5% bond which might pay for similar rental but your MAGI would increase by $25,000.

 

[NomDeER]

Financially, it depends on circumstances whether it will make sense to rent.

But, there are considerations other than money when deciding whether to rent. As some have pointed out renting makes maintenance much easier. Yes, you can hire people, but that can be a hassle (and cost money). It can be easier to travel if you have an apartment. I've met several people in my apartment complex who are older and decided they didn't want to be homeowners anymore. They don't regret it.

It also can be easier to rent if you aren't sure where you are going to live and want some flexibility. This flexibility can involve not only uncertainly about what state or city you want to live in, but also how big you want your place to be, who you want to live with, etc.

I live in a large apartment complex. I had neighbors who moved in after retiring and moving to a new state. They rented a fairly sizeable one-bedroom apartment. But, they then decided that they wanted another bedroom so family could visit them more easily and affordably, so they moved across the hall to a two-bedroom apartment. Then, one of their children moved to town. They decided it would be more affordable (and easier for the grandparents to help with the grandkids) if they all lived together. So, they moved into a three bedroom townhouse in the same apartment complex. This all would have been much more complicated if they owned their home.

 

[Koolau]

I does produce something... a place to live (imputed rent). Certainly a place to reside is an expense which one can meet by renting and investing the principal or purchasing with the principal. I just did a back of envelope and my imputed rent is a 6.9% return on my purchase price* (net of ownership costs and equal to the lowest rent** in my community) which is tax-free, low-risk, and inflation adjusted as I don't have to pay more when rents/property values rise (homestead in FL so no huge property tax spikes). Of course, there could be a gain on the market value as well that would boost the overall return if I sell.

*Using my purchase price; at current market valuations (assuming making the decision today, the imputed rent would be 5.6%).
**Using the highest rent in my community (a furnished unit more updated but 25% smaller) would imply an imputed return of 9.6% on the current market value.

All that said, I don't personally consider my home value as part of my portfolio... sort of an off-balance sheet hedge/safety net. SHTF I can sell and move to a LCOL situation or use it to fund a few years of LTC.

Yes, this is pretty much the way I look at my primary residence. I think of the condo's value in terms of back-up (like you mentioned as for instance LTC payments.)

 

[imjustawarrior]

Yes, strictly speaking it does not "produce" anything hence the "imputed."* If I were to rent out my current place to a tenant and collect rent would you consider it to be be "producing" rent to me; and if I then used that rent money to rent my own identical residence would I somehow be considered to have earned more than if I lived in the home I owned ? Net result is the same in that I own a property and the value it spits out provides me with an abode. -Ignoring the tax due on the realized income and other frictional costs that make this hypothetical but plausible scenario less optimal than just owning the residence. From a financial analysis perspective, increasing income or decreasing expenses has the same impact on the bottom line.

*In some instances (fortunately not imputed rent on self-occupied real estate) the IRS taxes imputed income (often in the scenario of interest free loans but it could also be below market value rent or other compensation).

My OP on this thread was about a primary residence not being an investment. Are you arguing that a primary residence is an investment? I'm not sure what you are trying to accomplish. You tell me it does produce something, then you agree that it doesn't produce something, then you try to convince me it does produce something. I'm okay if you think it produces something. I'm okay if you like to use an imputed rent model. Different people have different ways of looking at things.

 

[indiajust]

rent/buy with psychology

I came across a site reference that might address the psychology inside the choice. I score in the mid 30's, thus some of my bias toward renting.

 

[Harris4crna]

We have lived in Switzerland for 15 years now and have rented the same lakeside apartment since. Rent is stabilized in Switzerland, where 61% of us rent (78% in Geneva) because buildable land is scarce and buying is extremely expensive. We have paid the same monthly rent for 15 years and will likely do so into the future.** We consider it to be a good deal. We would never be able to afford to buy our apartment in this location, even if it were for sale.

Given that I am over 65, to buy an apartment (or a house) would require a minimum down payment of 35%, taken from our income producing assets. It's not economically viable for us. We are very happy renting--we don't have to worry about building maintenance and insurance, household appliances, heating, water, real estate taxes, etc.

** Landlords may only increase rents when they pay for substantial renovations in the apartment (not the building or common areas), or when the interest rates increase above a certain rate. Interest rates in this very stable economy are currently 0.50% and averaged only 0.62% during 2000-2025. It's a renter's paradise compared to many other countries.

This looks very pleasing. I've moved with the military for the past 25 years. The wife and I both have pensions that can afford renting. May follow your lead.

 

[COcheesehead]

Argh renting sucks. There I said it. We rented for a year while in transition prior to retiring. It was horrible. The noise, the transient neighbors, parking. So much being temporary. People don’t want to engage, maybe that’s a benefit to some, but not us. Not making it your nest. It just seems like you are living in someone else’s house. Rents go up, mortgages do not.
I don’t view my house as an investment or part of my retirement plan, but I do view it as part of my life plan. There will come a day when it will be sold and that value will be part of our late year’s spending or at the very least part of our estate that goes to charity. We don’t need the house value to fund anything, but I am glad we have the equity.
If a house is too much, hire someone to help.

 

[marko]

Argh renting sucks. There I said it. We rented for a year while in transition prior to retiring. It was horrible. The noise, the transient neighbors, parking. So much being temporary. People don’t want to engage, maybe that’s a benefit to some, but not us. Not making it your nest. It just seems like you are living in someone else’s house. Rents go up, mortgages do not.
If a house is too much, hire someone to help.

I tend to agree in general, but see my post #27. A lot might depend upon where and how much you're paying.

When we rented in France, it was a $1.5 million dollar apartment (company was paying, thankfully). The neighbors were deadly quiet--never really saw anybody--and parking was reserved. (One neighbor did invite us to a fantastic cocktail party once, though)

For us, although we own our homes in the US, there was a certain wonderful freedom in just locking the door and leaving for a few weeks at a time with no worries.

 

[COcheesehead]

I tend to agree in general, but see my post #27. A lot might depend upon where and how much you're paying.

When we rented in France, it was a $1.5 million dollar apartment (company was paying, thankfully). The neighbors were deadly quiet--never really saw anybody--and parking was reserved. We eventually gathered that our building was mostly a place that really wealthy people used only when they were in town, but lived elsewhere. (One neighbor did invite us to a fantastic cocktail party once, though)

For us, although we own our homes in the US, there was a certain wonderful freedom in just locking the door and leaving for a few weeks at a time with no worries.

The lock and leave angle was something we set out to do with our current house. The landscaping is all xeriscaped so little yard work other than making sure the drip system is on. We have camera security inside and out. Packages are easily redirected to the local UPS or FedEx store.
With a house I can also turn off the water. I know too many people whose homes have been damaged by water events.
I am glad renting works for you, but I will shoot myself before having to do it again and we had a “nice’ rental with a garage, pool, workout space etc in a great part of town.

 

[marko]

The lock and leave angle was something we set out to do with our current house. The landscaping is all xeriscaped so little yard work other than making sure the drip system is on. We have camera security inside and out. Packages are easily redirected to the local UPS or FedEx store.
With a house I can also turn off the water. I know too many people whose homes have been damaged by water events.
I am glad renting works for you, but I will shoot myself before having to do it again and we had a “nice’ rental with a garage, pool, workout space etc in a great part of town.

Agree on turning off the water...had a few close calls myself. Just dumb luck that I was home when that toilet fitting let go!

But renting only "worked" for me until the company stopped paying the exorbitant rent and then let me go. As noted, we own both our homes here in the US.

 

[Koolau]

Agree on turning off the water...had a few close calls myself. Just dumb luck that I was home when that toilet fitting let go!

But renting only "worked" for me until the company stopped paying the exorbitant rent and then let me go. As noted, we own both our homes here in the US.

We own one and rent the other. Best (and worst) of both worlds I guess you could say.

 

[imbatman]

I think it depends on the rental situation (ex. while a big apartment block is the "norm" there are lots of standalone rental units without the neighbor problems) and the housing/ taxation environment where you live. I was paying almost $9K a year in property tax and $3K a year in homeowner's insurance......that can buy a hell of a lot of rent.....not to mention if your home is a lot bigger than you need and you can reduce heating / electric bills too. Then you have the whole option to take home equity and get good returns on that currently stuck pile of funds that would otherwise not be generating an income stream. Plus no home maintenance costs.

Anyhow, I wouldn't be buying a house in this overheated market with high mortgage rates, so I think right now and in the right state and with the right personal financial situation, it could make a lot of sense.

 

[COcheesehead]

If you own your home outright, it’s relatively dead money. You earn what the RE market gives you. If you have a mortgage, it’s a different story. You get RE market returns, but you earn on equity. So if you have a $1,000,000 house with $500,000 in equity and the market goes up 10%, you earn $100,000. Which is 10% on house value, but 20% on equity. Plus if you were fortunate to initiate a loan or refinance when rates were low, you are likely living in the house for free. What we earn on the money we would use to pay off the house pays the mortgage, the property tax, the HOA, the insurance and six months of groceries.

 

[marko]

I think it depends on the rental situation (ex. while a big apartment block is the "norm" there are lots of standalone rental units without the neighbor problems) and the housing/ taxation environment where you live. I was paying almost $9K a year in property tax and $3K a year in homeowner's insurance......that can buy a hell of a lot of rent.....

Unless you live in a high rent area like Boston where rents start at about $3000+ a month for anything remotely decent.

Before he moved to Chicago my nephew was paying $2,000 but you wouldn't want to live there.

 

[imbatman]

If you own your home outright, it’s relatively dead money. You earn what the RE market gives you. If you have a mortgage, it’s a different story. You get RE market returns, but you earn on equity. So if you have a $1,000,000 house with $500,000 in equity and the market goes up 10%, you earn $100,000. Which is 10% on house value, but 20% on equity. Plus if you were fortunate to initiate a loan or refinance when rates were low, you are likely living in the house for free. What we earn on the money we would use to pay off the house pays the mortgage, the property tax, the HOA, the insurance and six months of groceries.

That's a good point I hadn't considered (getting nice gains on lower financing costs). But definitely based on the extraordinary recent housing market and would require continued housing market gains. Anyhow, no one knows where it is going but some good data of how it has been going (since 1992) here: US House Prices Growth | Economic Indicators | CEIC

 

[COcheesehead]

That's a good point I hadn't considered. But definitely based on the extraordinary recent housing market and would require continued housing market gains. Anyhow, no one knows where it is going but some good data here US House Prices Growth | Economic Indicators | CEIC

I don’t focus on my house as an investment so the returns are a nice to have, not a need to have. I do, however, make a strategic decision to not pay off the house as long as I have as low of a rate as I do. The numbers just work so well to keep those funds outside of the house equity.

 

[aja8888]

If you own your home outright, it’s relatively dead money. You earn what the RE market gives you. If you have a mortgage, it’s a different story. You get RE market returns, but you earn on equity. So if you have a $1,000,000 house with $500,000 in equity and the market goes up 10%, you earn $100,000. Which is 10% on house value, but 20% on equity. Plus if you were fortunate to initiate a loan or refinance when rates were low, you are likely living in the house for free. What we earn on the money we would use to pay off the house pays the mortgage, the property tax, the HOA, the insurance and six months of groceries.

This is all good unless housing prices are declining, like they are now. Over the long term, RE is a bet on staying up with inflation after all costs are in, otherwise, selling or buying is a timing event. I got stuck with TWO California homes in 1990 when my DW at the time went nuts and filed for divorce. I lost hundreds of thousands of dollars on those nice homes in Thousand Oaks I was forced to sell in the down market I think I lost more than the expensive lawyers charged! (LOL).

 

[brett]

I believe that it very much depends on your personal situation and desires, and on the market where you happen to live.

We owned all of our lives. After retiring we sold, traveled, and came home a year later with the intention of buying a downsized property.

We did not buy when we returned. The real estate market in our city was in the toilet. We left home equity in the market during the year we traveled and during the four years after we returned home.

We also changed our minds about the type of home we planned to buy and what we purchased after those five years.

Our home equity earned far more in the market than it otherwise would have in a home in our area. The plus....we got to experience the rental environment and we did in fact like it.

That does not even count the significant decrease in operating costs of a rental condo vs our own home.

So,,,in my view it depends. There is no one size fits all.

 

[Markola]

That's a good point I hadn't considered (getting nice gains on lower financing costs). But definitely based on the extraordinary recent housing market and would require continued housing market gains. Anyhow, no one knows where it is going but some good data of how it has been going (since 1992) here: US House Prices Growth | Economic Indicators | CEIC

Just some quick, simplistic math on our place, where we’ve lived 10 years: Zillow says our house is worth $600,000. Zillow+ some calculating help from an AI shows that this very house’s CAGR has been 3.86 annually since we’ve owned it, or +$1,930/month. Our principal and interest on our 3.625% mortgage is about $1,600.

So, yeah, the monthly compounding growth in market value is now more than paying for the monthly P&I, and I guess it’s currently taking a $330 bite out of $1,200/month escrow payments (our taxes are absurd). I know, I know, BELIEVE ME, that’s just the beginning of the expenses of owning, and any benefit is deferred, but COCheesehead made me feel better about it.

 

[COcheesehead]

This is all good unless housing prices are declining, like they are now. Over the long term, RE is a bet on staying up with inflation after all costs are in, otherwise, selling or buying is a timing event. I got stuck with TWO California homes in 1990 when my DW at the time went nuts and filed for divorce. I lost hundreds of thousands of dollars on those nice homes in Thousand Oaks I was forced to sell in the down market I think I lost more than the expensive lawyers charged! (LOL).

Read my reply in post 119. RE appreciation isn’t necessarily my goal.

 

[COcheesehead]

Just some quick, simplistic math on our place, where we’ve lived 10 years: Zillow says our house is worth $600,000. Zillow+ some calculating help from an AI shows that this very house’s CAGR has been 3.86 annually since we’ve owned it, or +$1,930/month. Our principal and interest on our 3.625% mortgage is about $1,600.

So, yeah, the monthly compounding growth in market value is now more than paying for the monthly P&I, and I guess it’s currently taking a $330 bite out of $1,200/month escrow payments (our taxes are absurd). I know, I know, BELIEVE ME, that’s just the beginning of the expenses of owning, and any benefit is deferred, but COCheesehead made me feel better about it.

We owe about $450,000 on a $1.2m ish house. The $450,000 we would use to pay it off earns about 7% tax free in muni CEFs. So that generates $31,500 in interest, tax free per year. Our mortgage costs us $24,000, taxes $3000, insurance $1000, HOA $500. That leaves $4000 to apply to other expenses. I have an annual contract on systems maintenance of $300. I caulk and touch up once a year. I have a plant die in the yard about once a year. No yard to maintain it’s all xeriscaped. So yearly maintenance is less than a grand easily. It works for us.

 

[pacergal]

We discuss this almost every year--lol. We are happy in our home, it is small enough to take care of at this point. DH hopes tasty here for the rest of his life. We will probably start paying for lawn care and housekeeping sometime in the next few years.
I could see myself possibly selling and moving to a smaller rental if I lived by myself in the future.