“I figure if I have my health, can pay the rent and I have my friends,
I call it ‘content'”
The shared narrative goes something like this.
Get a good job.
Find your soulmate.
Buy a house together.
That’s a cool dream, but a reality check on that path is one must understand that the numbers rarely support buying your own home as a good financial decision. Basically, it’s almost always better to rent.
Let’s imagine you own a nice 3 bedroom house, in a good neighbourhood, in a good market. You plan on paying off that mortgage of $350,000 over 25 years. On 6% floating you will pay $676,124 for that place that is only worth $350k. Contrast that with renting the same house for 25 years. If you rented the same home for 25 years you will likely pay between $17,500 pa ($437,500 over 25 years) to $24,500 pa ($612,500 over 25 years). That is a straight up saving of at least an extra $100,000 in your account and we haven’t even factored in property tax or maintenance costs yet. Property tax is included in your rent, but we need to add it on top of the $676k you will gift to the bank to own that $350k house. Property tax where I live is around $3800 per year increasing annually faster than inflation. Ignoring inflation this expense will add another $100,000 to the bottom line bringing the total up to a whopping $771,124 over 25 years.
Now lets talk maintenance and renewal. Both are included in your rent. When the roof leaks in a rental it’s your landlord that has to fix it before you move somewhere better. When you own the home you have pay for the upkeep. We put aside around $4000 pa for each of our properties. $3000 is spend every year on basic day to day maintenance. This is simple do it yourself stuff like painting, replacing the odd bit of decking timber, fixing spouting and so on. The other $1000 we save for heavy maintenance and renewal. Over 10 years this allows a budget of around $10,000. It’s not quite sufficient if you need a new roof or a major structural replacement like repiling or reinstating a rotted wall cavity, but it covers most things and its generally enough of a cushion to softens the impact of the really big bills.
Unfortunately this $4000 per year adds another $100,000 to the bottom line so that house just cost you $871,000 compared to say $500,000 in rent over the same period.
About now you are probably thinking that once you have paid off your home it becomes a good financial decision.
Nope sorry it doesn’t.
Now you have $350,000 of your cash tied up in an illiquid expense. Notice I didn’t say asset. An asset makes money. If your home was a rental giving you income then that’s a different deal, but its not. Your home is still going to cost you $8000 every year you own it. Maintenance and property tax. The money tied up in it is also an opportunity cost. If you saved $350,000 and had it in a investment making a paltry 6% you could draw a living cost at a safe withdrawal rate (5%) which works out to an income of $17,500 per year. Put another way that is about what you’d be paying in renting a house. Now all you’d need to earn each week is a little living and fun money. Probably so little that you don’t need the office anymore. If you have managed your life around simple living principles then chances are you could nab this loot working part-time, in a casual gig like singing in a pub band or from a small hobby business.
Hello freedom. Bonjour laziness!
Key takeaway message: It will take you 25 years of work to pay $800k for a house only slightly over a quarter of that value, but you could have saved $350,000 in 1/3 of the time. That’s 8 years or less to leave the office permanently. Just by making one lifestyle choice. Level up points if you are already thinking that perhaps you don’t need to live somewhere that rent is expensive if you didn’t need to go to the office everyday.
I hope this article helped. Let me know your thoughts by leaving a comment.
If you’ve read this far you may also enjoy:
A nifty way to buy that house
Right size your residence: How to build a thermonuclear money bomb
Critical Advice for anyone buying a house