Exception to the Rule: A Case for Not Buying
What sacrifices are you willing to make in order to launch your savings on an exponential trajectory? I know what you are thinking, “what’s the catch?”. Keep in mind, this will also reduce the time it takes to reach Financial Independence.
When thinking about it in these terms, there is a lot we would sacrifice: Starbucks? Eating out less?
Please… those changes don’t even compare… What is the case for not buying a house?
Hint: Read to the end for other options that could follow same principal…
Rent vs Buy: An Exception
So, if you remember back to January, we posted on home ownership vs renting. We made the point that owning a home will come out ahead of renting and for many cases. There are, however; exceptions to the case study (what good would an argument be without some exceptions? This is life). Well, it turns out there is a very specific exception to our argument that puts renting far beyond home buying…
I have a friend that used to work at the same company as I do. He left a couple of years ago but recently returned to the business. Since he has been back, we have been talking about finances and some of our strategies. During one of these conversations, he blew my mind….
And hey man, if you are ever reading this… sorry in advance LOL…
His wife has made a successful career as a manager at a large apartment complex (I think she may also be getting promoted to a director). Anyways, as part of her benefits, she has the opportunity to live in one of the rental units, For FREE! This includes one of the larger 3-bedroom units. They would only be responsible for their power bill (which is most likely less than their current power bill for their house).
This is an amazing benefit and the savings go far beyond what you would think at first. The simple transition of moving back into the apartment and selling the house would liquidate the principal and allow for investing. There are also a ton of auxiliary benefits that go along with this. Let’s try and take a stab at what the list would include:
- Mortgage principal could be invested once the house was sold
- All future money that would have gone to mortgage payments could be invested instead
- Homeowners insurance could be downgraded to rental insurance which is most likely much cheaper
- They would save money on gas and potentially drop down to 1 car due to ability to walk to work
- Lawn care is covered
- Home repairs are covered
- Water/Trash/Sewer are covered
- Their specific situation covered cable
Taking all of these expenses into account, what is their cost of home ownership?
To begin, let’s put some estimated numbers out there and make some assumptions:
- They are 6 years into a 30-mortgage fixed rate Mortgage of 3.2%
- They are making minimum payments and plan to continue minimum payments going forward
- If they sold the house, all of the principal and future monthly payments would go into index funds
- Home purchase price of $270k (in 2015) and current value of $390k thanks to the inflated prices that we are currently seeing in the market (possibly an even bigger reason to sell)
- All auxiliary savings due to renting are also allocated to investments going forward
- Market return of 8%
- Home appreciation of 3% going forward
We are getting a little wordy so here are a couple of tables to summarize the assumptions.
Alright, so let’s compare three scenarios:
- Blue Line – (Principal value) They keep the house and continue minimum payments until it is paid off. In other words, the value is based on their principal in the home.
- Orange Line – (Savings (Mortgage Only)) They sell the house, invest the principal and all future money that would have gone to mortgage payments. In other words, they save the equivalent of what would have been going to the bank as they paid off the house.
- Green Line – (Total Savings) They do bullet point 2 (orange line) but also save all of the money that they would have been spent on the auxiliary expenses that come with home ownership.
Remember we are making the decision on what to do today (this is year 6 of them owning the house). Let’s break out a few highlights:
This spread can be as much $1.5M in opportunity cost! That is the value that is lost just by keeping the house vs living in a rent-free apartment. The only cost is being “ok” with moving into an apartment and selling the house…this is the same as getting paid $64k/year to live in an apartment!
I will admit, this is a pretty specific case and not available to most people, but; what other cases could have the same benefit?
- Living with your parents
- Living for free in basement of an elderly couple who need help with lawn care and house maintenance
- Renting a place and subletting out to a few roomates to cover the total rent
- Living in a tiny house (that you built with minimum $$$)
How creative are you willing to get to save $1.5M????
Until Next time, continue to Choose Beta