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Author: duggg Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 757322  
Subject: rent vs. own? Date: 10/15/1999 1:44 AM
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I keep hearing how it's more Foolish to rent than
to own during early retirement, but I'm having a
hard time rationalizing this.

If you rent, you're paying a monthly fee that is
not tax deductible and the rent often increases at
a rate faster than inflation.

If you own (read: pay a mortgage), that monthly
expense is largely tax deductible and, if you have
a fixed rate mortgage, immune to inflation.

Yes, there are other expenses a homeowner must pay,
such as property tax (again, deductible), property
insurance, and maintenance. Utilities are usually
more expensive for a home as well. But these
expenses seem to pale compared to the tax
deductibility, not to mention the quality of life
upgrade a home seems to offer.

Later, when the home is sold, its value will have
appreciated, and the owner's equity in it will have
grown. This could more than offset the expenses
associated with selling it.

So other than portability, what are the advantages
to renting?
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Author: HuggieBear One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 591 of 757322
Subject: Re: rent vs. own? Date: 10/15/1999 7:43 AM
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I think that the answer to this question really depends upon what the housing market in your particular area looks like. Where I live, Atlanta, houses in desirable neighborhoods have been DOUBLING about every 6-7 years for the past decade or so.

Obviously, this is not the case every where, s my friends in Orange County, CA can attest.

It just seems to me that appreciation rate is key. For me, a home has been, as you say, a great lifestyle upgrade, and has served as the foundation of my ability to retire significantly earlier than my peers.

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Author: ajgray One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 592 of 757322
Subject: Re: rent vs. own? Date: 10/15/1999 11:30 AM
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duggg wrote:
So other than portability, what are the advantages to renting?

John Andersen wrote a nice essay about his family's reasons for renting; it can be found at http://members.xoom.com/joandersen/renting.html.

-- Andy


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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 594 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 11:59 AM
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To me, this is like the old question of term life vs whole life insurance. In every case, buying term life and investing the rest is ALWAYS be better than buying whole life insurance.

This is the same with homes. If you run the numbers honestly, it is ALWAYS better for the very early retiree to rent vs buy. Why?

When you own a home, you work for this asset. It is an asset that COSTS you. It's a monetary black hole. When you are in the 15% tax bracket, tax deductions don't mean much.

An early retiree arranges his life so that he lives BETTER than when he worked but on 1/3 to 1/2 the accustumbed earned income. You learn that money isn't everything when you retire early.

This is our case. We live better now on 33% of what we used to live on when I worked. We could not be retired if we still owned our home. Our current housing cost (rent) is 14.8% of our monthly net income. Most upper middle class Americans spend 35 to 45% of their net monthly income on housing costs. We've got better things to spend our money on such as FUN.

As a sucessful early retiree for 4 years now, I categorically say that if one is serious about retiring early, the first thing that needs to go is the white elephant house. If you talk to people that have REALLY retired early (vs just talking about it) you will find that 95% of us don't own our own homes.



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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 595 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 1:04 PM
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IMHO, I could not disagree more (after all what are these boards for):


To me, this is like the old question of term life vs whole life insurance. In every case, buying term life and investing the rest is ALWAYS be better than buying whole life insurance.

This is a truism; however, I believe it is an invalid comparison to home ownership. No one has demonstrated to me that you can rent the same spacer as one might buy; invest the difference & come out ahead.


An early retiree arranges his life so that he lives BETTER than when he worked but on 1/3 to 1/2 the accustumbed earned income. You learn that money isn't everything when you retire early.

Why on earth would I retire (early, on time, or late) to live on less than 1/2 of what I used to make. We have retired on 100% of what we used to make (and want it that way). However, we have pleasingly found that the $20k per year that was spent (directly or indirectly) supporting our "work habits" is more pleasurably spent on recreational activity & vacations.

This is our case. We live better now on 33% of what we used to live on when I worked. We could not be retired if we still owned our home. Our current housing cost (rent) is 14.8% of our monthly net income. Most upper middle class Americans spend 35 to 45% of their net monthly income on housing costs. We've got better things to spend our money on such as FUN.

Again, I have to disagree. Our total (and I mean total; mortgage, taxes, insurance, all utilities, repairs, firewood, telephone and satellite hookups) cost $2500 per month (about 18% of gross income). Further, because we happened to move to the mountains, I do absolutely zero outside maintenance (in fact I sold my lawn mover to the buyer of my last house) which creates even more time for fun.

As a sucessful early retiree for 4 years now, I categorically say that if one is serious about retiring early, the first thing that needs to go is the white elephant house. If you talk to people that have REALLY retired early (vs just talking about it) you will find that 95% of us don't own our own homes.

I couldn't disagree more. Most of the retirees that I know own at least one home and many own more than one.

On a philosophical note, IMHO, owning a home is a differernt experience than renting; one which an individual either wants or does not want. If you want it then do it & plan accordingly. If you don't want it don't do it. To come to the conclusion that one can retire early if you rent but can not retire early if you own is to me categorical nonsense.



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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 596 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 2:02 PM
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TheBadger wrote,

No one has demonstrated to me that you can rent the same spacer as one might buy; invest the difference & come out ahead.

I think "same space" is the operative phrase in this statement.

In neighborhood I live in, a single family homes run about $250k. With mortgage, taxes, lawn care, maint., etc. your monthly expenses would easily top $2,000 month. (This assumes you contract out all the services included in an apartment lease.)

My smaller, rented townhome is $560 month. The complex has a pool, health club, etc. (They even send someone around to pick up after my dog.)

The $1,500/month difference is one of the reasons I was able to retire at age 38.

Why on earth would I retire (early, on time, or late) to live on less than 1/2 of what I used to make. We have retired on 100% of what we used to make (and want it that way).

If you've always "spent 100% of what you made", you're savings would have to be zero. How did you accumulate enough capital to retire on?

My strategy was to identify the lifestyle that suited me, and then ignore "keeping up with the Jones." As my income increased, I invested most of the excess. The last few years I was working, I saved 40% to 50% of my gross salary. I didn't have a set retirement age in mind. My goal was to retire once I was able to live off 4% assets. If I got there at age 28 instead of 38, I would have retired younger.

intercst

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 597 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 2:06 PM
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I keep hearing how it's more Foolish to rent than
to own during early retirement, but I'm having a
hard time rationalizing this.



This is an interesting issue for me. When I gradutated from college I moved to Boston. There were two retired couples living in the apartment complex that I lived in. They had lived there for 20 to 30 years. At the time I moved in the rent was under $200 per month. Five years later the rent had gone up to $800 per month. I often think about the retired couples and wonder if they are homeless. All those years of paying rent and they have nothing to show for it.

I bought a house eight years ago with a 6.5% 15 year mortgage. The house is currently worth about 70% more than what I paid for it. I plan to sell the house after I retire and I won't have to pay capital gains on any profit.

Aside from the equity I have built up, I also am enjoying living in this house. I was so sick of apartment living, I couldn't wait to get out.

For me, the ultimate isn't to retire as young as possible, but to try and balance living in a way that adds quality to my life while working toward the goal of retiring early.

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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 598 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 2:21 PM
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<<To come to the conclusion that one can retire early if you rent but can not retire early if you own is to me categorical nonsense.>>

Of course. There are many paths to early retirement and it is a fool's errand to attempt to conclusively establish which one is best. As for me ...... my early retirement (not to mention my children's higher education) has been made possible by my lovely tenants, whose rent payments have purchased me several houses; each of which generates an inflation-proof and partially tax-sheltered income while the houses themselves continue to appreciate. This income, as a percent of equity, represents twice the amount that can be safely withdrawn from a portfolio consisting of equities alone. (An important consideration for those contemplating early retirement)

Meanwhile I shall be happy to live mortgage-free in the "white elephant" that I designed, built and raised my family in. May each of us find our own best path.

Regards,
FoolMeOnce



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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 599 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 2:22 PM
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When I gradutated from college I moved to Boston

Obviously I wasn't an english major.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 600 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 2:28 PM
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hjg0989 wrote,

This is an interesting issue for me. When I gradutated from college I moved to Boston. There were two retired couples living in the apartment complex that I lived in. They had lived there for 20 to 30 years. At the time I moved in the rent was under $200 per month. Five years later the rent had gone up to $800 per month. I often think about the retired couples and wonder if they are homeless. All those years of paying rent and they have nothing to show for it.

If I lived in Manhattan, Silicon Valley, Calif. or some other area where apartments were hard to find and real estate was rapidly appreciating, I'd probably be looking to buy a place too. If rents increased 400% in 5 years, the appreciation on the apartment building should beat every stock in my portfolio, save DELL and PFE.

Fortunately, for renters, 400% rent increases are the exception.

In many areas of the country (particularly the Sun Belt), there is a surplus of rental apartments.

As I drive down the street in Houston where I live, there's a huge sign advertising "Two Months Rent Free" at one property, followed by "Name Your Own Rent" at a new complex just opening further down the road. A Houston apartment that would have rented for $400 month in 1981 is maybe $600 month today. That's less than 2.5% per year inflation for that whole 18 year period.

As galeno points out, if you're an early retiree you have the opportunity to "vote with your feet." If they jack up your rent in Boston, you can move to Florida -- the golf's better down there anyway <grin>.

intercst

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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 601 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 2:45 PM
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As galeno points out, if you're an early retiree you have the opportunity to "vote with your feet." If they jack up your rent in Boston, you can move to Florida -- the golf's better down there anyway <grin>.


I agree. Having flexibility will be the best part of retiring.

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 602 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 2:48 PM
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TheBadger wrote:
<<IMHO, I could not disagree more (after all what are these boards for):

Our total (and I mean total; mortgage, taxes, insurance, all utilities, repairs, firewood, telephone and satellite hookups) cost $2500 per month (about 18% of gross income). Further, because we happened to move to the mountains, I do absolutely zero outside maintenance (in fact I sold my lawn mover to the buyer of my last house) which creates even more time for fun.>>
*******************************************************With all due respect. If I would have waited until my investment portfolio could replace 100% of my earned income in order to retire, I probably would have 18 years more of work ahead of me instead of 4 years of blissfull early retirement under my belt.

Hell, if I work until 90 and continue to invest $36K per year, my kids could share an estate in the $200M range. But that wouldn't have been much fun for me.

Early retirement is a lifestyle choice that's not for everyone. Barring winning the lottery, inheriting a fortune or some other unusual cash windfall, most of the time an early retiree gets that way by living below his means and investing the difference. It's difficult to retire early when one is dumping $2500 per month down the white elephant's trunk.

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 603 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 4:58 PM
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Intercst, in response to your earlier question about my response of "Why would I retire to live on 1/2 or less..." By that I was implying that I would not want to retire if it forced me to halve my living standard. Instead, I waited a few more years than you & retired essentially @ 120% of old pay. Of that we actually spend about 80% to 90% & continue to save the remainder.

Regards "voting with one's feet" I couldn't agree more. We used to live in Chicago in a pretty nice neighborhood in a 5000 sqft house. on 3/4 acre in the burbs. Sold it & moved to the mountains. My current "white elephant" is slightly less is size but I gained 70 acres of protected forest to keep away those pesky renters.

P.S. It's snowing here --- enjoy your golf game, I'm going skiing.


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 604 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 5:29 PM
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TheBadger wrote,

Instead, I waited a few more years than you & retired essentially @ 120% of old pay. Of that we actually spend about 80% to 90% & continue to save the remainder.

I don't understand why you had to wait.

A 4% draw on my savings is now more than 120% of my gross pay the final year (1994) I worked. (Holding DELL will do that to you.) Of course, my annual living expenses are now only about 1% of assets.

I've been investigating things that would absorb the excess cash flow. About the only thing I would change about my lifestyle is the fact that I still have to fly commercial airlines. I was considering one of those fractional shares of a business jet aircraft. (You can get a 1/8 share of an 8-passenger jet for a little less than $1 million from NetJets.) But then I realized it's even more of a luxury being able to arrange your life so that you don't have to fly at all. <grin>

intercst



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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 605 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 7:41 PM
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Call me Mr. Conservative plus the actual circumstances at play at the time as well as desire to leave a legacy of 7 digit proportions to my two children & two nieces.

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 606 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 7:44 PM
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P.S. I too looked at fractional ownership in a private jet & disgarded it. I look at this way, you like golf, I like motorcycles in a major way --- give me 50 degrees (or better) & a road & I'm gone. Lastly, if I can't get there on a bike, I probably don't want to go.



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Author: utahtea Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 607 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 10:02 PM
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I agree. Having flexibility will be the best part of retiring.

That is what the RV is for, traveling this great country. I still want to have a place to rest my weary feet and so I will always keep my white elephant.

I guess I don't understand. If you own your house outright, how could renting be better? Don't rents go up? If I rented my house 24 years ago, instead of buying it, my rent would be 6 times what my house payment use to be. Finished paying over a year ago and can now invest that money.

I will admit that we were lucky enough to buy in an area where house prices have soared! We will probably sell and move from this area to a cheaper area once we retire, but we will still buy a house. I want to be able to do what I want in my house, not what the landlord says I can and can not do.

Eventually those feet that just walk are going to get very old and not be able to walk whenever they want. What will you do then? Let's say your 80 and don't want to move and they've turned your apartments into condo's and you have to move?

Everyone I know who is retired, owns their own home. Infact I don't know anyone who is retired that rents. Maybe it's the people I hang out with.

Utahtea



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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 608 of 757322
Subject: Re: rent vs. own? Date: 10/16/1999 11:15 PM
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Utahtea asks,

I guess I don't understand. If you own your house outright, how could renting be better? Don't rents go up? If I rented my house 24 years ago, instead of buying it, my rent would be 6 times what my house payment use to be. Finished paying over a year ago and can now invest that money.

It depends on where you own the house. Places like San Francisco or Manhattan have enjoyed extraordinary gains, while places like Houston or Phoenix have seen little in the way of real estate appreciation. The Realtors don't want you to know it, but the average home significantly underperforms a similar investment in the stock market.

Galeno posted the following on the Retirement Investing board:
----------------------------------------------------
Over the last 30 years, the typical one-family house in the USA compounded at 5.71% per year.

Other 30 year CAGRs: Gold 7.11%. Silver 5.04%. Crude oil 6.3%.

How has the S&P500 done over the last 30 years? 13.67% per year. And over the last 45 years? 13.41% per year.

Source: "How to Retire Rich" by James O'Shaugnessy. His source is the "Chase Investment Performance".
------------------------------------------------------

Most people don't realize the difference between a 5.71% and 13.67% CAGR over 30 years.

A $10,000 investment in a home would grow to about $53,000 in 30 years at 5.71% per year.

A $10,000 investment in the S&P500 would grow to $467,000 in 30 years at 13.67% per year. (That's not a typo.)

The almost nine-fold difference is the main reason I'm a renter and comfortably retired at age 38.

intercst



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Author: Linne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 609 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 12:25 AM
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I have to agree that you shouldn't enter homeownership as an investment. When we sold our last house (after 10 years in a good real estate market), we got a check for 200,000. Sounds good! When I figured what our real profit was, after capital improvements, mortage principal payments, etc., it was more like 30,000. Our current neighbors have never made money on any of their houses in various cities. Another friend in Houston couldn't move because they didn't have the cash to cover the difference between the mortgage and devalued house price. And others have made a killing. The point is, you never know, and you should buy a house if it's the lifestyle you want and you want to spend your money that way.

intercst said:
My strategy was to identify the lifestyle that suited me

In our case, my husband hates to move, and I love to plant things in the garden that take years to grow. For us, renting wouldn't give us flexibility, it would give worry, disregarding any financial issues.

I think the point is that, like cars, clothes, furniture, vacations, private jets, or any other way you want to spend your money, you have to balance the level of housing you want against your desire not to work.

I find it interesting to hear from those who retired really young (under 40) and hear what lifestyle choices they made to support that decision. For me, I think retiring medium young (50's) would better suit the lifestyle choices I'm willing to make. It still beats working till 70!


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 610 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 1:03 AM
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Linne wrote,

In our case, my husband hates to move, and I love to plant things in the garden that take years to grow. For us, renting wouldn't give us flexibility, it would give worry, disregarding any financial issues.

Excellent point.

One long time tennant in the apartment complex where I live had a combination greenhouse/arboretum on his patio -- until it collapsed under the weight and the landlord ran him off. That family would have been much happier in a home with a yard.

I'd be the first to agree that having your own personal garden is a lot easier in your own home.

intercst

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Author: utahtea Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 611 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 4:56 AM
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It depends on where you own the house. Places like San Francisco or Manhattan have enjoyed extraordinary gains, while places like Houston or Phoenix have seen little in the way of real estate appreciation. The Realtors don't want you to know it, but the average home significantly underperforms a similar investment in the stock market.

I guess the key is where you live. I live in the San Francisco Bay area. Price keep going up, level off, drop a little then go up even more and more.

So my case goes like this. If I had put our $9,000 down payment and invested it for the last 24 years at 13.67% it would be worth $235,000 today.

If we had rented and rents went up about 7.5% per year I would have spent about $260,000 just to rent. I would have a loss of $25,000.

I figured over the 24 years that we made payments which include taxes and insurance and all the improvements like the new roof, new carpets, new drapes, the air conditioner and heater, two waterheaters, stove top, built in microwave and an extra $5,000 for little things and I come up with a total out lay of about $160,000. You read that right! House in today's market is about $285,000 so even if you subtract the realitor fee at 6%, I have an asset worth $108,000 in pure profit.


I think it's wonderful that you retired at 38. We don't see it until about 55. I will bet that besides the housing market other things in our lives were different too.

Utahtea





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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 612 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 7:42 AM
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<<Over the last 30 years, the typical one-family house in the USA compounded at 5.71% per year.

Other 30 year CAGRs: Gold 7.11%. Silver 5.04%. Crude oil 6.3%.

How has the S&P500 done over the last 30 years? 13.67% per year. >>

Every time I see these figures I cringe. Not because I own a lot of real estate, but because they are misleading. It appears there is a lot of confusion regarding the difference between investment real estate and real estate purchased for personal use. This thread started as a discussion of the relative merits of owning vs renting. As I have stated before, it is inappropriate to make comparisons based solely upon historical appreciation rates. This oversimplified comparison totally ignores the fact that most real estate (even if bought only as a personal residence) is highly leveraged. In a fair comparison, leverage would have to be considered and the stock returns would have to be adjusted to consider the real value of having a place to live, since you obviously can't live in your stocks. No one pays all cash for a personal residence and then allows the house to sit empty in hopes of garnering appreciation. By throwing out these nonsensical comparisons, are you being you are purposely obtuse or do you really not understand real estate?


The average house may indeed underperform the stock market, but only when viewed in a narrow and wholly inappropriate way. Also, the average house is purchased as a place to live. It may turn out years later to have been financially rewarding, but an owner-occupied house is not investment real estate since it normally generates no income.


Regards,
FoolMeOnce




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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 614 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 10:25 AM
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<<Over the last 30 years, the typical one-family house in the USA compounded at 5.71% per year.

Other 30 year CAGRs: Gold 7.11%. Silver 5.04%. Crude oil 6.3%.

How has the S&P500 done over the last 30 years? 13.67% per year. >>

I agree with FoolMeOnce. Further, lets take an example focusing only on capital appreciation. MrA has $100k and invests it in the SP500 for 10 years earning his average of 13.67%. At the end of 10 years he has $360.1k (before taxes which will be LTCG's only because he traded very infrequently).

MrB also had $100k and purchased a $500k home (let's say a single family residence) and assumed a $400k mortgage. During the intervening 10 years MrB did not live in home but rented it to MrA at exactly break-even so that there were no intervening year cash/tax advantages to MrB. During those 10 years MrB's house appreciated at 5.71% so that 10 years later it was worth $871.2k. MrB sells paying off the $400k mortgage which now has a balance of just under $350k. Even assuming rather hefty displosal costs of 7.5%, MrB pockets $457k; approximately 100k more than MrA.

Looks like MrB made the winning move because MrB's return on investment is in the 17% range whereas MrA's ROI was 13.67%. HOWEVER, there are two issues worth discussing before we declare MrB the winner:

1. Not all real estate markets increase at 5.7% per year --- some go down & some skyrocket. Thus, MrB needs a new set of analytical tools (different tools than those used to pick stocks) to analyze real estate markets & real estate projects within those markets. Further, most real estate investors (often unwisely) only invest in their home markets; well, what if your real estate home market stinks?

2. MrB signed a mortgage; thus he was 80% leveraged on a single asset. Some would/could/should consider this to be dangerous/risky. However, the mitigating factor is volatility --- in the short to intermediate term reale state is less volatile than stocks.

In conclusion, real estate (whether you live in it or rent it to others) can be exceptionally profitable; even more so than the stock market; however, it is a different investment model in which different rules apply.

On a personal note, I only have three real estate projects going right now but I own maybe 40 stocks & my investment is maybe 20% / 80% respectively. I wish it were closer to 40/60 or een 50/50; but GOOD real estate projects are much harder to find than good stocks. However, all of my real estate projects have way out-performed the SP500 and have way out-performed all but some stellar stocks (DELL, HDI).

Thus, IMHO, those who think real estate investing is somehow counter-productive or stupid simply don't know the rules.



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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 615 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 10:38 AM
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intercst wrote:
<<Most people don't realize the difference between a 5.71% and 13.67% CAGR over 30 years.

A $10,000 investment in a home would grow to about $53,000 in 30 years at 5.71% per year.

A $10,000 investment in the S&P500 would grow to $467,000 in 30 years at 13.67% per year. (That's not a typo.)

The almost nine-fold difference is the main reason I'm a renter and comfortably retired at age 38.
*******************************************************
Ditto for me. That 8% difference in CAGR is the reason that I am a renter and comfortably retired at age 38.

Most retirees DO own their own homes. Practically NO retirees under 45 own their own homes.

It's extremely difficult to retire before age 40 when you are paying large monthly "medical bills" for self-imposed "mortgagitis".

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 618 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 12:00 PM
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FoolMeOnce wrote,

...it is inappropriate to make comparisons based solely upon historical appreciation rates. This
oversimplified comparison totally ignores the fact that most real estate (even if bought only as a personal
residence) is highly leveraged. In a fair comparison, leverage would have to be considered and the stock returns would have to be adjusted to consider the real value of having a place to live, since you obviously can't live in your stocks. No one pays all cash for a personal residence and then allows the house to sit empty in hopes of garnering appreciation. By throwing out these nonsensical comparisons, are you being you are purposely obtuse or do you really not understand real estate?


I understand that most real estate is highly leveraged, which amplifies your gains when prices are rising and compounds your losses when prices fall.

Lots of families in Texas and Southern California can tell you hair raising stories about the latter.

intercst

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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 619 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 12:43 PM
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TheBadger said:
<<In conclusion, real estate (whether you live in it or rent it to others) can be exceptionally profitable; even more so than the stock market; however, it is a different investment model in which different rules apply.>>

Absolutely right. Consider the following example which shows how to safely squeeze an extraordinary return from real estate by turning the conventional wisdom on its head. The figures are drawn from actual price conditions in my area. (rural suburb of Washington D.C.)The property is a single family starter home.

Purchase price: $90K
Monthly rent: $750
Taxes: $700/year
Insurance: $300/year
Down payment: $35K (not very good leverage, but as you will see, done for a purpose)
Mortgage principle and interest: $667/month, based on 10 year note @ 8%. Yields break-even cash flow.

Let's see how our investment performs:

Value of property after 10 years at 5.7% appreciation equals about $156.7K
Amount owed on mortgage equals zero. (mortgage has been paid off using rent proceeds)

Gross equity equals $156.7K on $35K investment yields return on investment of about 16%. This soundly beats the average return of the stock market and was achieved without the use of extreme leverage. For the sake of simplicity I have ignored certain costs such as closing costs on the original purchase, maintenance during the period of ownership, etc. These will be more than offset by rent increases during the same period. And let's not forget based on an estimated value of the depreciable improvements at the time of purchase of about $72K, an annual depreciation write-off of $2618 would result in tax savings of $733/year (based on 28% bracket).

The beauty of this approach is that in the event you wanted to sell the house, $55K of the proceeds would be absolutely tax free. Debt reduction, courtesy of your lovely tenants is not a taxable event. But why sell at all? Simply refinance and pull out as much cash that you can carry on a break even cash flow basis considering current interest rates and rental values, and start the process anew. This money is also tax free, since refinancing like debt reduction, is not a taxable event.

Also consider this: In the event that over the ten year period, your real estate did not appreciate at all, (practically unheard of in these parts) your return on investment would still be about 10%.

These results are obtained even though full market value was paid for the property. Most real estate investors will seek and negotiate hard for undervalued situations. This will tremendously boost the returns. No investment rewards knowledge and creativity like real estate does.

Regards,
FoolMeOnce







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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 620 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 12:57 PM
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Intercst wrote:

<<I understand that most real estate is highly leveraged, which amplifies your gains when prices are rising and compounds your losses when prices fall.
Lots of families in Texas and Southern California can tell you hair raising stories about the latter.>>

The reason most real estate is highly leveraged is that it is generally safe to do so and no one will call and demand that you sell your house because of local changes in valuation. This begs the question however since we are comparing real estate with stock ownership. I believe you will find no shortage of hair-raising stories among investors in equities even during the best of market conditions, and when the stock market gos into the tank, it is not a unusual local situation; it affect everyone. P.S. Thanks to you and Galeno for holding your end of this discussion. You are two of my favorite Fools even though we don't share much common ground on this particular topic.

Regards,
FoolMeOnce



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Author: HuggieBear One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 621 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 2:14 PM
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I have no doubt that some folks have made out better renting, as opposed to owning -- but the sweeping categorical statement that owning ALWAYS falls short of renting is just not true.

In the early months of 1997, I put $15,000 down on a $150,000 house and got a 7% loan on the remainder. That gave me about a $1300 a month mortgage (including PMI). Assuming that I spent $300 a month on maintenance (it hasn't been that much), I have still come out way ahead -- as the house reappraised a couple months ago at more than $250,000 and I was able to get rid of the PMI when I refinanced to a 6.5% note less than a year later. I am doubly lucky because this house is in an attractive neighborhood where houses sell in a matter of hours.

Granted, I got REALLY LUCKY. But I have a lot of friends who are handy with tools who have been able to fix up their own bargain houses and "flip" them for 10-20% profit in a matter of months.

As I said before, it really depends on the market where you live. But if it's a hot market, your house can be as big a retirement investment as your brokerage account. In my case, it has paid off much more handsomely than my stocks have.

Huggie Bear

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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 622 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 3:10 PM
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HuggieBear wrote:
<<As I said before, it really depends on the market where you live. But if it's a hot market, your house can be as big a retirement investment as your brokerage account. In my case, it has paid off much more handsomely than my stocks have.>>

Wow! I wish we had that kind of appreciation in my area. A little luck sure doesn't hurt. I'm a firm believer however that "luck" is what happens when preparation meets opportunity. YOU made the decision to buy instead of rent and YOU selected the neighborhood. The rewards are yours and resulted first and foremost from your actions.

Regards,
FoolMeOnce



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Author: phantomdiver Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 623 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 5:08 PM
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The Realtors don't want you to know it, but the average home significantly underperforms a similar investment in the stock market.

Absolutely. Another good reason, IMO, for *not* prepaying one's mortgage.

But owning a house isn't all about making money on the investment. For me, owning our house means nobody can ever kick us out for having "too many" children or dogs. I can paint the place any color I want, or not paint at all. I can remodel if I want.

I'm an Army brat. After so many years of not being able even to pound a nail in a wall, it means a lot to me to be able to do what I want with my living space.

Melissa

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Author: dantes One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 626 of 757322
Subject: Re: rent vs. own? Date: 10/17/1999 11:05 PM
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"But owning a house isn't all about making money on the investment."

I agree with Melissa. I've been following this board and most recently this thread for some time and I'd like to provide another data point. Paying off our mortgage at age 34 was one of the reasons I was able to retire at 36 (with 4 kids ages 4-14.) I've crunched the numbers many different ways, and rent vs. own is not clear-cut either way. We bought our house in 1989 for $67K, paid it off in the early 90's, and it would sell today for $180K (Portland, Oregon area.) An equivalent rental in this area would be $1600/month or more. Even adding in taxes and other ownership expenses, it's hard to see how $180K (minus sales costs and commission) could provide a SAFE return that would cover rent. So I'm keeping the house for as long as we live in this area. So you can put me down as one person who retired early and owns rather than rents his own home.
-Dantes

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Author: baanista One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 627 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 7:56 AM
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As always, the answer is "It depends".

One thing that hasn't been pointed out so far is that rental property is typically in a lower price range than purchased property, i.e. people tend to rent apartments or small homes but tend to buy as much "dream" home as they can afford. Somehow you instinctively are less willing to rent extra features than you would be willing to buy.

This is a big part of what makes renting a popular strategy among the early retiree/simple living crowd. By sticking to the rental housing segment, you will normally be in less expensive housing. This is, of course, a general trend. You can rent an expensive high rise or buy a modest starter home.

Someone who buys a modest home can enjoy the benefits of both ideas. We used to own a modest home in an OK neighborhood in Houston. After living there for 15 years we sold it for less than we had paid for it to move out of town. At first blush this sounds like a bad investment but we enjoyed years of rent free living. The amount of money we sunk into the house would have never generated enough after tax cash to pay equivalent rent.

The key here is that we picked a modest house. At the end it represented only a modest percentage of our net worth. This meant that we could take a loss on sale and shrug our shoulders.




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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 629 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 11:11 AM
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dantes wrote,

I've been following this board and most recently this thread for some time and I'd like to provide another data point. Paying off our mortgage at age 34 was one of the reasons I was able to retire at 36 (with 4 kids ages 4-14.)

That's a very impressive achievement!

When some people find out I retired at 38, they say "Yeah, that's easy, you don't have kids."

Galeno has children, but he lives in Costa Rica where the cost of living is a fraction of the United States.

I'm sure the other members of this board would be interested in knowing what you did besides paying off your mortgage to retire at 36. How about giving the rest of us a few tips? (e.g., were you saving 50% of your salary? did you have a bunch of Intel stock options? lottery winner?, etc.)

intercst

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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 630 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 11:20 AM
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This meant that we could take a loss on sale and shrug our shoulders.

Did you really take a loss though? To be fair, the calculation would run something like this (with fictional numbers):



Amount spent on house: $90,000
+ Maintenance ($100/mo): +$18,000
---------
Total cost of house: $118,000
- Amount house sold for: -$75,000
---------
Apparent loss: $43,000

Paying rent on the same
house at $750/mo (avg). -$135,000

Actual gain: $92,000


Of course, this discounts tax savings, and the maintenance is a little low (but remember that renters are responsible for some maintenance in a house too). I'd say that you probably came out way ahead!

The real point here, as far as a primary residence goes (discounting income-generating property), is that its not primarily an investment, its a lifestyle choice. I'm in an apartment right now, but am in the process of finding a house to live in because I don't like the restrictions, lack of a big yard for the collies, et cetera. If it makes money, that's a bonus. I certainly don't see how it can lose money when you include the rent payments.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 631 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 11:54 AM
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rjstanford wrote,

Did you really take a loss though? To be fair, the calculation would run something like this (with fictional numbers):

Amount spent on house: $90,000
+ Maintenance $100/mo): $18,000
-------
Total cost of house: $118,000-

Amount house sold for: $75,000
---------
Apparent loss: $43,000
Paying rent on the same
house at $750/mo (avg). -$135,000
Actual gain: $92,000


Of course, this discounts tax savings, and the maintenance is a little low (but remember that renters are responsible for some maintenance in a house too). I'd say that you probably came out way ahead!


I think your numbers are reasonable, except our renter started this 15 year period with $90,000 in his pocket since he didn't buy a Houston home. (I know, I'm sure they got a mortgage, but indulge me.)Invest the $90,000 at the 30 year CAGR of 13.67% for the S&P500 for 15 years:

1.1367^15 x $90,000 = $615,078

15 year's rent at $750/mo. = -135,000
-----------
Amount renter is ahead = $480,078

Result: Renter retires early.

These numbers are pretty close to what I did to retire at age 38 in 1994, after living on and off in Houston since 1981.

intercst



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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 632 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 12:27 PM
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Being a little more thoughtful, lets say that you had $5000 burning a hole in your pocket, and wanted a house to live in. Running the previous numbers again:

Using the $5K as a down payment on a $90K house and getting a 15 year note at 7.5% (tax rate 2.5%, PMI .75%). This ignores tax savings, but it also ignores maintenance, et cetera.


Initial investment: $5,000
Monthly investment: $980

Total investment: $181,400

Final value: $75,000 and a roof for 15 years


Assuming that you can rent the same house for only $750 a month (which seems low to me), and you invested the rest over the 15 year period (compounding monthly assuming a 13.67% annual return (ie: 1.0735%/mo):


Initial investment: $5,000
Monthly investment: $284
Total investment: $56,120

Final value: $190,839 and no housing

Rent: -$135,000

Final value: $55,839 and a roof for 15 years


I'd say that owning still wins, but not by a lot. Care to check the numbers? I may have missed something.

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Author: dantes One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 633 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 12:35 PM
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intercst wrote:
"I'm sure the other members of this board would be interested in knowing what you did besides paying off your mortgage to retire at 36. How about giving the rest of us a few tips? (e.g., were you saving 50% of your salary? did you have a bunch of Intel stock options? lottery winner?, etc.)"

The other things I did were to (1) make maximum contributions to my 401K (mostly S&P500 index) for 9 years, which was helped by a generous annual contribution from the company and a lengthy bull market, (2) save almost half of my salary for several years (especially after the mortgage was paid off,) and (3) monitor my expenses (per "Your Money or Your Life") and make sure I really understood what our $ needs would be. When I got to the point where I realized that my investment income was greater than what I was spending, I gave my notice. (A few Intel options did get me to that point two years sooner than I had planned.) So far I haven't had to tap into the 401K (rolled over into an IRA), using the substantially equal withdrawals, but I may need to do that as my kids get further into teenage-hood.
-Dantes

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 634 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 1:04 PM
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Dantes wrote:
<<So you can put me down as one person who retired early and owns rather than rents his own home.>>
******************************************************
Congratulations!! You are the FIRST very early retiree that I have EVER met that retired owning a home.

But, you were practically the same as a renter. Your monthly mortgage payment was small.

My point is that most upper middle class Americans pay anywhere from 30 to 40% of their net monthly income on housing costs. The conventional wisdom is to buy "as big a house as you can qualify for." In California, I understand that lenders will let you pay up to 45% of your monthly net income on PITI.

When you are paying, say, 35% of monthly net on home ownership, I simply don't see how you can save and invest the 30 to 40% of net monthly income that it takes to be able to retire before age 40.

My personal rule of thumb has always been to keep my total housing costs under 20% of net monthly income.
That way, I was able to invest 1/3 of my net monthly income into the stock market. Do this for 10 to 15 years and you too can retire before age 40.

Barring a windfall ($500K salaries, inheritance, lottery, or magic stock options), I just don't understand how a 25 or 30 year-old who buys "the most expensive house he can afford" financed over 30 years can manage the investment needed in order to retire young.

Most early retirees retired early because they lived way below their means and invested the rest. I just don't see how this can be done by a homeowner who suffers from "mortgagitis".

Plenty of upper middle class homeowners can retire at age 50 to 60. But to retire at age 35 to 40 requires a different mindset. That's my point. I believe intercst agrees.

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Author: backslash Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 635 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 1:14 PM
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The conventional wisdom is to buy "as big a house as you can qualify for."

But we're not wise, are we?

Financially it may or may not make sense to rent vs. buy. Either way you can retire early if you work on it by setting your goals, understanding your finances, and living within your means after all bills, savings, and investing criteria are met.

Personally, the freedom of the single family home is worth far more than the cost. I've done both, and I've occasionally been lucky with my neighbors when renting, but only occasionally. Owning requires some more expenses and responsibilities, but not that much. And anyway, if I was renting an apartment, where would the dogs run, and where would the band practice?

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Author: rjstanford Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 636 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 1:49 PM
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It also seems that we're comparing "renting a cheap apartment" with "buying a really expensive house" in a lot of these. Around here (Plano, near Dallas,TX) you can buy a house/townhome for less than you could rent the identical property. Admittedly homeowners have higher maintenance costs, but they also get some tax breaks and are appreciating value. If your monthly housing expense is the same when buying as it would be when renting, and buying fits your lifestyle better, then why on earth would you rent?



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Author: HuggieBear One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 637 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 2:07 PM
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Galeno wrote:

Barring a windfall ($500K salaries, inheritance, lottery, or magic stock options), I just don't understand how a 25 or 30 year-old who buys "the most expensive house he can afford" financed over 30 years can manage the investment needed in order to retire young.



I agree. I think a big part of the equation is not borrowing as large an amount as the bank allows. I bought my (small) house at age 26, refinanced to a 15 year mortgage at age 27, and am on track to pay it off when I am 39. (My plan is to retire at age 40-42.)

Huggie Bear

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 638 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 2:37 PM
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I'm not convinced that you can't own your own home and still retire early nor am I convinced that you could afford more during retirement if you rented. I think an awful lot depends on each individual's circumstances and that we can't just use a broad brush to say which is 'best' for anyone. I look at my parents. They bought their house back in the early 1950's as new construction, paid the mortgage, and now own it free and clear. They have been retired since 1981, and have gone back and forth from their house up north to one in Florida since then. It costs them taxes and insurance for both houses and together they only cost around $500 a month for all costs except utilities, but those are generally separate even if you rent. If they had rented all these years instead, they would not be able to afford their retirement lifestyle because rents are more than that in either place let alone if they had to pay in both places at the same time to ensure they had somewhere to live. Now, I grant that they never did any investing so only live on their pension but that is because they are children of the Depression and neither of them trust the market. Imagine what they could do, though, if they had invested.

I also think that the basic assumption on this thread is that your dream house has to cost some exorbitant amount of money with an associated exorbitant debt. That's a choice that people make, but it doesn't have to be the only one. We just moved into our dream house which cost almost twice the one we sold and moved out of. But we have been saving for this house for a while and used the equity from the old house as well as from a piece of rental property so that our total monthly payments are still around 20% of our gross. So even having our dream house and being able to put the kids through college, we still expect to be able to retire in our early 50's. That's not as early as most of the folks who are already retired on this board, but it's early enough for us. And if we keep saving at the rate we are, we should be able to bring that in by a couple of years if we like.

I guess the point of all this rambling is that no one solution is 'best' but that you need to look at all the alternatives available to you and see how they are affected by your particular circumstances. The only answer you need is the one that's right for you. It doesn't matter much if it's not right for someone else.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 640 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 4:28 PM
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Galeno wrote:

Barring a windfall ($500K salaries, inheritance, lottery, or magic stock options), I just don't understand how a 25 or 30 year-old who buys "the most expensive house he can afford" financed over 30 years can manage the investment needed in order to retire young.

Huggie Bear wrote,

I agree. I think a big part of the equation is not borrowing as large an amount as the bank allows. I bought my (small) house at age 26, refinanced to a 15 year mortgage at age 27, and am on track to pay it off when I am 39. (My plan is to retire at age 40-42.)


I agree with both these comments.

The decision to limit the amount of your income spent on real estate is probably even more important than the "rent vs. own" question.

intercst

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Author: dcoleman87 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 641 of 757322
Subject: Re: rent vs. own? Date: 10/18/1999 4:56 PM
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intercst wrote:

The decision to limit the amount of your income spent on real estate is probably even more important than the "rent vs. own" question.


Exactly right. At some point in your life this becomes an asset allocation question, and the sooner the better. I'm a couple of years away from early retirement, and my "paid for" house is less than 20% of my net worth. I'm not uncomfortable with this sort of allocation. The key point is that this was planned. I bought a modest house that didn't crowd out other savings, and planned a relatively short payoff term. The comfort I have going forward with this comes from having a known expense budget for housing for the forseeable future, unlike I might with rents.


Dave

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 703 of 757322
Subject: Re: rent vs. own? Date: 10/22/1999 7:52 AM
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"Every time I see these figures I cringe. Not because I own a lot of real estate, but because they are misleading. It appears there is a lot of confusion regarding the difference between investment real estate and real estate purchased for personal use. This thread started as a discussion of the relative merits of owning vs renting. As I have stated before, it is inappropriate to make comparisons based solely upon historical appreciation rates. This oversimplified comparison totally ignores the fact that most real estate (even if bought only as a personal residence) is highly leveraged. In a fair comparison, leverage would have to be considered and the stock returns would have to be adjusted to consider the real value of having a place to live, since you obviously can't live in your stocks. "

Another issue that is also ignored is that there is a slight tax advantage to the debt in this leverage as well as later ability to borrow fairly inexpensively on the equity in this asset.

I also feel that buying vs renting should be more of a lifestyle choice than an investment choice.

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 705 of 757322
Subject: Re: rent vs. own? Date: 10/22/1999 8:18 AM
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galeno posts:

"Most early retirees retired early because they lived way below their means and invested the rest. I just don't see how this can be done by a homeowner who suffers from "mortgagitis".

Plenty of upper middle class homeowners can retire at age 50 to 60. But to retire at age 35 to 40 requires a different mindset. That's my point. I believe intercst agrees."

I agree that it takes a different mindset and a solid focus to retire that early.

My question is about the standard of living after retirement. Did you retire when you felt your investments would be able to match your present income, your present expenses, or some point higher than your present income?

This question is for all retirees. What was the thought process.

At this point, my decision point occurs when 5% or 6% of my portfolio equals my yearly income.

Once you made the decision, how long have you been retired and what unexpected things have occurred if any that the average person may not consider? Has your expenses - living lifestyle costs increased/decreased or what?

Sorry just curious.

BGP

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 711 of 757322
Subject: Re: rent vs. own? Date: 10/22/1999 10:44 AM
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BGPenhollo asks,

This question is for all retirees. What was the thought process.

At this point, my decision point occurs when 5% or 6% of my portfolio equals my yearly income.

Once you made the decision, how long have you been retired and what unexpected things have occurred if any that the average person may not consider? Has your expenses - living lifestyle costs increased/decreased or what?


In my case, I kept working until a 4% annual withdrawal was sufficent to support my lifestyle. (I retired in 1994 at age 38.) I did some consulting work the first 2 years after I retired to provide some "cushion", but I cut back on my consulting activities as my portfolio grew. I rarely do any consulting work today unless its an extremely interesting assignment with a client I like.

I found my expenses in retirement were about the same as when I was working. What I save in commuting costs and "work" clothes, I'm spending on health insurance (now I have to buy my own) and greens fees.

intercst



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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 715 of 757322
Subject: Re: rent vs. own? Date: 10/22/1999 3:51 PM
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BGPenhollo wrote:

<<Another issue that is also ignored is that there is a slight tax advantage to the debt in this leverage as well as later ability to borrow fairly inexpensively on the equity in this asset.

I also feel that buying vs renting should be more of a lifestyle choice than an investment choice. >>

Agree. Real estate equities are good friends. They allow so much flexibility. They can be tapped through low cost, long term loans as you have stated or they can be released through sale. They represent the highest quality collateral because they won't dissappear overnight.

Regards,
FoolMeOnce

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Author: SJLeftHand One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 731 of 757322
Subject: Re: rent vs. own? Date: 10/25/1999 12:53 AM
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With one exception, I agree with you completely with regard to the benefits of home ownership over renting. The exception is that property values do not necessarily appreciate.

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Author: SJLeftHand One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 732 of 757322
Subject: Re: rent vs. own? Date: 10/25/1999 1:22 AM
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Rents definitely continue to go up usually at least once a year. Furthermore, rents continue indefinitely. I would like to know if there are ANY landlords out there who will stop charging a tenant ever increasing rent after that tenant has lived in the same apartment for 30 years?!

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Author: SJLeftHand One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 733 of 757322
Subject: Re: rent vs. own? Date: 10/25/1999 1:55 AM
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People need to keep in mind that there are non-financial considerations to owning as opposed to renting. After living in a periodically noisy (usually at night when I tried to sleep), high-density apartment complex and condo-apartment neighborhood in Sherman Oaks, California, for three years (during which time I saved my money to make a 5 percent down payment on a house), I decided that I had enough with noisy neighbors, very early morning car alarms, and cars and motorcycles with defective mufflers. I now live in a very quiet single-family house neighborhood where many of my new neighbors are older people who have been living in their houses for at least 20 years. I get a good night's sleep and wake up very well rested the next morning. I wonder how many renters and condo owners out there wake up the next morning with dark black bags under their eyes or painful headaches due to a lack of sleep. Incidently, people who do not get enough quality sleep, with few exceptions, do not live as long as people who get at least 8 hours sleep each night. People need to remember that the human brain has a physiological need to refresh itself on a daily basis. Sleep provides that refreshment. Incidently, it is getting close to 11 PM in the Pacific Time Zone, and I am going to bed very shortly. Goodnight!

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 735 of 757322
Subject: Re: rent vs. own? Date: 10/25/1999 8:30 AM
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Very interesting thread! Lots of good points to think about. Now, for my two cents.

I never even considered early retirement 30 years ago when I entered the workforce. However, something about the way I was raised, kept me from following the prevailing wisdom of buying "all that the house I could buy". Instead, I bought a modest 'starter home' here in Texas in 1976; 1900 square feet, single story, new. The monthly payments were around $500 incl taxes and utilities. This was only slightly more than renting a much smaller apartment.

In 1993, I traded up to a much nicer house, (3600 square feet, two story, new, still in TX). This time I took a 15 year mortgage at 6.5% and my monthly payments are around $1300, including taxes and utilities. At this level, I am still able to max out the 401K, IRA's, and take full advantage of the ESPP.

Now that my son has left home, I am thinking seriously about retiring at 55 (I'm 52 now). I had never really thought much about early retirement during all my home buying years, but it turns out that by keeping my monthly payments low, I was able to also put away quite a bit in various stocks. Ever since the IRA became available, I have been maxing that out as well. I have enough invested/saved right now to retire if I wanted to. Looking back on my decisions to buy homes, I just don't think renting would have been a satisfying option for me. I also don't think I would have saved much more if I had rented.

So, in conclusion, I think that home ownership is a personal choice that can be made intelligently so as not to put a huge financial burden on the retirement savings. I can clearly see green fees replacing my 401K investments in a couple of years!

rkm

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 752 of 757322
Subject: Re: rent vs. own? Date: 10/26/1999 10:59 AM
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My strategy was to identify the lifestyle that suited me, and then ignore "keeping up with the Jones." As my income increased, I invested most of the excess. The last few years I was working, I saved 40% to 50% of my gross salary. I didn't have a set retirement age in mind. My goal was to retire once I was able to live off 4% assets. If I got there at age 28 instead of 38, I would have retired younger.


Wow, that's wonderful !!! One of things that would stop me from retiring at such a young age is the inability to determine how much medical costs may rise between 38 and 65. (which has to be covered privately)

How did you manage the medical costs issue ?

Hey, if the answer is good enough, maybe I will retire soon too. (now age 35)


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 753 of 757322
Subject: Re: rent vs. own? Date: 10/26/1999 11:19 AM
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markr33 asks,

<<intercst said:

My strategy was to identify the lifestyle that suited me, and then ignore "keeping up with the Jones." As my income increased, I invested most of the excess. The last few years I was working, I saved 40% to 50% of my gross salary. I didn't have a set retirement age in mind. My goal was to retire once I was able to live off 4% of assets. If I got there at age 28 instead of 38, I would have retired younger.>>

--------------------------------------------------

markr33 asks


Wow, that's wonderful !!! One of things that would stop me from retiring at such a young age is the inability to determine how much medical costs may rise between 38 and 65. (which has to be covered privately)

How did you manage the medical costs issue ?

Hey, if the answer is good enough, maybe I will retire soon too. (now age 35)


----------------------------------------------

I'm still licensed to practice Engineering and do occasional consulting work, so I can get health insurance through a professional organization. If you qualify for membership, professional or small business groups are often an inexpensive source for health insurance.

As far as handling medical inflation goes, I have about 20% of my portfolio in health care and pharmaceutical stocks. Over the past 5 years (I retired in 1994) the value of these stocks have grown faster than my health insurance premiums. I believe there's a good chance these stocks should at least track changes in health care prices.

intercst


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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2466 of 757322
Subject: Re: rent vs. own? Date: 1/23/2000 8:40 AM
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I just read through the threaded messages re: rent verses own. From what I read the "best" choice is dependent ultimately on a set of variables that are unique to an individual or couple's situation.

I love my home and did not buy it as an investment and do not regard it as such. It has a market value and could be converted to cash and as such is an asset. I just made sure I paid it off before I became a retired Fool. But it ends there. My real investments are seperate from my home. I guess that's an emotional choice I made long ago. I studied architecture in college and like to build, renovate and even cut grass. Though I live in a small village, I have a small pond, stream and wooded area, that is slowly evolving into a beautiful garden area.

Like a lot of other choices or should I say preferences in life: blond or brunette, vanilla or chocolate, mountains or shore, Ford or Chevy, retire early or not, rent or own, what works for your criteria and circumstances is the best choice.

(For me: brunette, chocolate, shore, Ford, retire early and for now...own..<grin>)

ttjasi





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Author: chbrian Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4020 of 757322
Subject: Re: rent vs. own? Date: 2/16/2000 11:41 AM
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Hello All,

A fascinating discussion, I just read the whole thread. I have a question for you older and wiser. We are military and must move every 2-3 years. We bought our first home at our last assignment after hearing all the supposed benefits (tax deductions, appreciation etc.) but lost money when the house sat empty for 6 months after we had moved while waiting for a buyer. The appreciation in value over two years was eaten up by the agents' commission. In all a loss of over $7k on a $75k home.

Do you all feel that with such a short time horizon, buying is not an option? Just looking for some options since LTB&H of our home (what many of you home-owning advocates base your numbers on) is not an option unless we use it as a rental property when we move.

Thanks,
ch

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Author: goinfishin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4023 of 757322
Subject: Re: rent vs. own? Date: 2/16/2000 11:48 AM
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Do you all feel that with such a short time horizon, buying is not an option?

2 to 3 years is not enough time to buy IMNSHO. You'd be better off freeing your capital up and investing in the market. When you factor in closing costs and broker commissions your house would have to appreciate 6-8% in that short time frame to just break even. And let's not forget, no matter how good of a house you buy, there is alwasy something you have to put into it to make it up to "your" standards.


Fishin

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Author: ready4retirement Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4066 of 757322
Subject: Re: rent vs. own? Date: 2/16/2000 3:37 PM
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This is in response to Post 4020 (chbrian).

I am military (23 years) and have always rented. I move every 2-3 years (including 3 overseas tours), so I never purchased. By the time I paid a real estate agent to handle the buy, then pay for one to sell it, I would probably lose money when holding the home for only 2-3 years (I do not have figures to back this up, though). Now, I know many people who purchase, transfer to a new duty station, then rent their homes. This works for them. Of course being a landlord has it's own stressors, ones that I did not wish to pay someone to handle while I was overseas or on deployment from homeport. I found that it was easier to pack up and leave my current duty station, move on to a new duty station, learn a new job, etc., if I did not have to deal w/the stress of selling my residence. I always managed to rent close to my Basic Allowance for Housing limit - with the bottom line being Uncle Sam paid for the majority of my housing throughout my career. That freed up my base pay for investing in the stock market.

The buy vs. rent seems to be a highly personal decision.

ready4retirement

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