High Savings Rate vs. Home Ownership

[blue_ruin17]

Would you rather have a 50% savings rate for 15 years but have to pay rent and build no home equity in that period, and having to continue sacrificing cashflow to rent payments into the future;

OR

Would you prefer to have only a 25% savings rate and a 15 year mortgage, but have a paid off home at that end of that period and liberated cashflow, at the expense of significantly less savings.

[Mark Leavy]

How comfortable are you with a non-diversified portfolio?
Your proposal sounds like more than 50% of your assets will be in ONE piece of real-estate for many years.

That is a risky portfolio.

If you manage to convince yourself otherwise, then it is because you are factoring in quality of life decisions that are important to you. That is fine, but you need to face those decisions squarely - and no investment board can advise you.

Except maybe this one... which seems to have a high number of folks who have figured out life

[Tyler]

IMHO, if the difference between renting and buying in your area is truly 25% of your income then buying is probably a bad deal. Now if you can find a less expensive home where payments are close to rents and you can maintain a 50% savings rate while accumulating equity, that could make a lot of sense.

BTW, this is a great resource for the rent vs. buy topic: http://www.nytimes.com/interactive/busi ... ulator.php

[blue_ruin17]

IMHO, if the difference between renting and buying in your area is truly 25% of your income then buying is probably a bad deal. Now if you can find a less expensive home where payments are close to rents and you can maintain a 50% savings rate while accumulating equity, that could make a lot of sense.

BTW, this is a great resource for the rent vs. buy topic: http://www.nytimes.com/interactive/busi ... ulator.php

It's more a decision between living on base (I'm I'm the army), where rent is *very* cheap compared to the civilian market, or allocating a much larger chunk of my income towards a house which I would own free and clear in 15 years.

I guess there is something attractive I find about the possibility of eliminating "rent" from my monthly cashflow liability. For me, the equity in a home is just a bonus, and I don't view it as an "investment". It's that extra cashflow once the mortgage is paid off that I find attractive

But then I think about just how quickly my PP can snowball if I plow 50% of my income into it, and how much cashflow *that* would throw off.

I've used a lot of calculators and crunched a lot of numbers, but a definitive answer never pops out at me.

That's why I posted this thread: I want to know what those here who have chose one path or the other feel about their decisions.

For those who own their homes or are I'm the process of paying down a mortgage, how do you feel about your decision? And for those who choose to rent, why did you choose not to follow the standard "wisdom" of getting into homeownership?

[whatchamacallit]

If you are in the Army and frugal with saving discipline. I would definitely rent.

The way buying would get you ahead is through leverage which is also risk.

I bought finally for family stability and feel like I paid a premium for it.

Thank you for your service.

[ochotona]

How comfortable are you with a non-diversified portfolio?
Your proposal sounds like more than 50% of your assets will be in ONE piece of real-estate for many years.

That is a risky portfolio.

If you manage to convince yourself otherwise, then it is because you are factoring in quality of life decisions that are important to you.

The non-diversification thing is the deal killer for me. We own our home, but it's 1/8 of our net worth.

Non-diversification is not an academic abstraction.

When you are old, and you need money to live on... will you be able to extract the value out of the home that you put in? All I hear is questions about the inputs. Tell me about the outputs. Tell me about the go-to-cash scenario in fourty years.

There are so many risks to getting value out of your house. If it's your sole big asset, you could really be screwed. I'm afraid my mother-in-law is trapped in her falling-to-pieces property in the most expensive County in the USA... Fairfax County, VA. It was a nice home, 41 years ago. Divorce, disability, and it's a wreck. I consider it a tear-down. She doesn't think so. The market will decide. But if the market disappears for even tear-downs because of recession or something, she'll be an indigent 80-something in Fairfax County, impoverished in a sea of wealth. I can foresee property taxes not being paid, and the house being seized by the County.

You cannot eat your house.

[Pointedstick]

I guess there is something attractive I find about the possibility of eliminating "rent" from my monthly cashflow liability.

In truth, your housing costs won't diminish as much as you think. You'll be on the hook for property taxes, and homeowner's insurance is more than renter's insurance. Utilities will be more due to the larger size of the house compared to an apartment (and maybe Uncle Sam pays for the utility bills for the on-base housing?). Maintenance and home improvement will be constant expenses as things break and you feel the need up upgrade lousy things. And every house has some big impending expense that's being concealed from you. The water heater and furnace may need replacement in a year or two. Same for the roof. The water pipes might be about to leak into a wall and attract termites and mold. Perhaps the foundation is settling. You need to prepare and budget for those kinds of things. If you couldn't come up with $10k to drop into the house at short notice, renting might be preferable.

I personally went the homeownership route because I'm married with two children and I wanted the homeownership lifestyle (stability, long-term neighbors, good schools, low crime, etc.). I saved 55% of my income and bought a modest fixer-upper in cash. At the time when I did it, the house was about 1/3 of my net worth. Even with property taxes, utilities, and home improvement expenses I was able to increase my savings rate to about 70% and very rapidly replenished the money I used to buy the house. It was worth it for me and I don't regret the decision.

[sophie]

In your situation, taking advantage of cheap rent seems like a no-brainer, financially. A different in carrying cost of 25% of your income is huge. The home's appreciation would have to do better than the investments you'll plow that 25% into, and that's by no means certain even if you invest very conservatively.

Also, if you're in the service, you're likely to be moved around a lot, and a house would be an albatross unless you intend to turn it into a rental when you leave. You really only want to buy a home if you are confident you'll be living in it for at least 5-7 years.

[Libertarian666]

I would have absolutely no hesitation in renting in your situation. As several people have pointed out, residential housing is a highly leveraged, non-diversified asset.

And I say this even though I "own" (with a mortgage) my house, because my situation is not the same as yours.

[LC475]

High Savings Rate or Home Ownership?

Do both. Buy an affordable home. Commonly known as: a mobile home.

[blue_ruin17]

Some thoughts and musings:

• It is easy to trick yourself into considerably inflating your housing expenses (as a percentage of your income) by convincing yourself that its an "investment"; buying is probably more efficient for building net-worth than renting, but only if relative housing expenses are controlled.
  
  Inflating housing expenses from 15-20% of your budget (renting affordably) to 30-35% (buying more 'house' because its an "investment") is not optimal, as it is sacrificing 10-15% of cash-flow that could otherwise be invested in the superior returns likely expected from the HBPP.
• Buying a house probably will lead to having to buy a lot of STUFF; more space means more furniture, more decor, more appliances, more tools, more, more, MORE! This is a hidden significant "cost" of home-ownership.
• Rent expenses are certain and predictable. Home-ownership expenses are infamously variable and unpredictable. Having significant liquid assets built-up first is advisable; this runs counter to the conventional wisdom of "building wealth through home-ownership" as early as possible. I believe the opposite may be the optimal approach.
• Home-ownership is a lifestyle, not a passive investment. It is similar to running a small business. It is not a turn-key investment solution, like the HBPP.
• Renting is not psychologically gratifying; home-ownership, when built upon a solid financial bedrock, is likely much more satisfying and rewarding, particularly in the latter stages of life where stability and a sense of permanence may be highly valued.
• OTOH, renting is supremely flexible. At anytime a renter can put their possessions in storage and take-off to travel the world, using their 'rent money' to finance a good chunk of the travel expenses,
• Unfortunately, you never really own the land that your house rests on. You rent it from the state. Home-ownership presents the risk of becoming a significant tax liability in the future if the government decide to squeeze capital from home-owners.

Ultimately, I think Harry Browne got it right when he said that a house is a consumer product, not an investment. Over time, this particular consumer product has proven to hold equity value very well, compared to most consumer products, and in that sense home-ownership can prove to be a sensible, advantageous decision. But its not an "investment". Its a lifestyle decision that happens to have significant financial implications.

The decision to own a home, in my opinion, should be totally and completely insulated from investment related considerations. If owning a home will mean having to cut your savings rate by more than 10%, you're probably making a poor financial decision; maybe a great, justifiable lifestyle decision, but a poor financial move.

[l82start]

Some thoughts and musings:



[*]Buying a house probably will lead to having to buy a lot of STUFF; more space means more furniture, more decor, more appliances, more tools, more, more, MORE! This is a hidden significant "cost" of home-ownership.

the above reminded me of this https://www.youtube.com/watch?v=MvgN5gCuLac

"other peoples stuff is shit your shit is stuff"
George Carlin

[blue_ruin17]

That's a great summary!

Minor quibble here:

Rent expenses are certain and predictable. Home-ownership expenses are infamously variable and unpredictable. Having significant liquid assets built-up first is advisable; this runs counter to the conventional wisdom of "building wealth through home-ownership" as early as possible. I believe the opposite may be the optimal approach.

In some regions, rent can rise quickly. In some cases, home ownership can protect somewhat against rising rents. I say somewhat, because property values and thus property taxes can rise quickly as well, unless there are increase caps in place.

I suppose you could say that the renter is vulnerable to inflation, while a homeowner is likely to benefit from it.

But then again, a homeowner is susceptible to deflation, while the renter would benefit.

Different risk profiles which must be taken into consideration, whichever decision is made.