The following is a guest post by Kristy from Millennial Revolution. Kristy and her husband have been all over the Canadian news recently for denouncing homeownership. They considered buying a Toronto property in their late 20s when they realized they couldn’t get anything nice for ~$500,000. Instead of buying, they saved as much as they could, rode the bull market, amassed a $1M investment portfolio, and quit their jobs to travel the world by age 31.
Given I’m pro homeownership because I’d rather be a price dictator than a price taker, I thought it’d be great to get the other perspective. Their blog is written with an irreverent flair that I enjoy. It’s one of those things that happens when you become financially independent and don’t give a damn what other people think. So for those of you who are pissed off about ridiculous home prices in places like San Francisco, Honolulu, London, Sydney, Mumbai, Hong Kong, Vancouver, Toronto, and New York City, know that homeownership isn’t the end all be all!
Disowned For Being A Millionaire: Why I Still Won’t Buy A House
When I first told my mother I was a millionaire, her response was:
“So what? You don’t even have a house.”
Didn’t matter if the houses in Toronto were unaffordable. Didn’t matter if I didn’t want to work a stressful job I hated just to pay off a massive mortgage. Didn’t matter if I have enough money to live the rest of my life with complete freedom, never having to set foot in a corporate prison again.
Without a house, I was a loser.
My parents and I barely speak anymore. Other than the occasional e-mail or phone call, we haven’t seen each other in a year. What’s the point? It’d just be the same fight every time.
My friends think I’m nuts. They think I’m anti-house for the sake of being anti-house. They think I’m having SO much fun being a contrarian. But what they don’t see is that, as the child of Chinese immigrants, it’s sacrilegious to not buy a house. Home ownership is part of our culture. It’s part of our DNA. Financial Samurai can back me up here. In Asian cultures, paper assets aren’t real. Only things you can touch with your hands are.
So even though I knew that logic and statistics and cold hard MATH told me I was right, because of my culture I had to get disowned for believing that the purpose of money wasn’t to buy granite countertops, hardwood floors, or soaker tubs.
The purpose of money is to buy…
Time is our most precious resource. We can always make more money, but we can’t make more time.
So I decided to buy back my time. Instead of paying off a mortgage for 30 years, waiting until I was 65, only to get too sick and too bedridden to travel, I decided to build a 7-figure portfolio, live off the passive income, travel the world, volunteer for non-profits, and be an author/blogger instead.
And here’s what I’ve learned about the benefits of not owning a house and why I was willing to get disowned for it:
Benefit #1: You are NOBODY’s bitch
When you own a property, all your money is stuck in the house and because you can’t sell a brick or window to pay off your house, you have to continue being a bitch to your boss in order to pay the mortgage, insurance, and property taxes.
And if you decide to rent your place out, you become a bitch to your tenants. Because of rental laws that somehow heavily favor deadbeat tenants who refuse to pay their rent over the property’s rightful owners, you somehow live in fear of them! After all they could take a claw hammer and destroy your life savings in an instant.
When you rent, if you don’t like your job and find a better one somewhere else, you can leave. Even if it’s in a different city. Without the house tying you down, you’re free to move anywhere for better career opportunities.
And sure, you can argue that as a renter, I can get kicked out whenever a homeowner wants to sell. BUT, as a renter, I can also take advantage of moving to “renters market” areas and take advantage of the high vacancy rates. I can also rent an apartment building, where the chances of the landlord kicking out the entire building to capitalize on the housing market is next to nil. As a renter, my choices are endless.
The last three times I’ve left my rentals, all three landlords begged me to stay. They kept throwing irresistible offers at me, like lowering my rent, and when that didn’t work, they even offered a special deal to a friend if I could recommend someone trustworthy. Guess they’ve been burned more than once.
Benefit #2: You won’t be hit with a wealth tax
When you are a homeowner, you have to pay property taxes. And if the value of your home goes up? Even HIGHER property taxes. Oh and if out of the blue, the government decides to slap on an additional “land transfer tax” or “15% foreign ownership tax” like they did in Vancouver? Too bad, you’re paying for it.
Houses are the perfect vehicle for the government to screw you, because they know you’re landlocked and have no choice.
But when you’re an investor, you can shelter your dividend income BIG TIME! You can make up to $37k each in qualified dividend income, and pay NO taxes in retirement (since your earned income drops to 0). When you’re working, you can take advantage of the lower qualified dividend tax rate.
And even if they pull a Cyprus-style wealth tax, they might get you once but after that you’re going to pack up your money and ditch the country. With your house, you have no choice but get screwed year after year.
The system is designed to reward investors, and punish homeowners.
Benefit #3: You have ALL the TIME in the world to do WHATEVER you want
When you’re a homeowner, there is always a lawn to mow, a porch to fix, a roof to re-shingle, a driveway to clear. Because let’s face it, unlike a portfolio, a house deteriorates over time and parts need to be replaced.
And hey, if you’re handy like Financial Samurai and love fixing things, great! But I’d rather use my time to travel, spend time with my family, and write the next bestseller (HA! Yeah right). Sure, I could pay a property manager and hire contractors to do all those things, but that still involves oodles and oodles of time and effort to find, vet, and manage contractors, and that is not my idea of fun.
My time is too precious to waste on home maintenance and babysitting contractors/property managers.
Benefit #4: Your assets are liquid
Stocks are easy to buy and easy to sell. Within seconds, you could be out of the market.
Not so with a house. You have no control over who moves in next-door (ever seen the movie “Neighbors?” Would YOU want frat boys moving in next to you?). If they start making your life miserable and you want out? Your house could be sitting on the market for months.
What if you bought the house at the peak and now you’re in a down market? Well, guess what? All your friends and neighbors are also trying to unload their houses, so good luck trying to get out. Your house will be sitting on the market, while it continues to lose value, and you continue tearing your hair out. And when you do finally sell? You get slapped with another 5% in closing costs.
Benefit #5: You are diversified
With a diversified portfolio, you are hedging your risk. As stocks plummet, inversely correlated assets like bonds will rise. And if you own REITS, you can even take advantage of a rising real-estate market, without having to put everything into 1 asset.
With a house, all your wealth is stuck in 1 asset. If that falls, you’re screwed.
Benefit #6: You have no maintenance costs
It costs next to nothing to own and maintain a portfolio of low-cost Index ETFs. Maybe a $5 transaction fee here and there, and a rock-bottom 0.1% MER. But for a house the costs just never end: property taxes, insurances, maintenance, lawyer fees, and closing costs when you sell.
On the contrary, a portfolio pays YOU, not the other way around.
Benefit #7: You don’t need to time the market
If you’re doing long term investing like me, you don’t have to time the market. Simply buy low cost index ETFs, and rebalance periodically. This ensures that you buy low and sell high. And with the portfolio structured to pay me enough dividends to cover my living expenses, I never have to touch the principal. This means I never have to figure out when to buy or sell. It’s a no brainer and very passive.
With housing, however, you need to time the market. You need to know when to get in, and when to get out.
Housing: Is it EVER a good idea?
Now, before you all get out your torches and pitch-forks, let me explain. I’m not saying all houses are a bad investment…I’m just saying they’re a bad investment for MOST people.
Take Financial Samurai, for instance. If we ever opened up his laptop, I guarantee we’d find reams and reams of spreadsheets and analysis on every house he’s ever invested in. To put it mildly, the guy does his homework. Here’s an article detailing his insanely rigorous method of finding good tenants. Here’s an article talking about how moves in the LIBOR affect adjustable rate mortgages.
He knows what he’s doing because he puts a ton of thought into any financial decision before pulling the trigger. Someone like him SHOULD be investing in real estate.
The average real estate “investor”? Not so much. Armed with the knowledge that “houses always go up” and that “rent is throwing money away,” they just put in a bid after a 10-minute inspection. That can get you into a lot of trouble, as a reader on my blog recently learned when they bought a luxury condo in Edmonton, Alberta right before oil crashed 70% in value.
So if you live and breathe numbers, know how to read a US Treasury yield curve, and like spending your time doing house maintenance, I’d say housing is a good bet for you.
But if you’re dumb and lazy like me and would rather spend your time traveling and doing what you love, renting and index investing is a better way to go.
Even if you get disowned for it.
1) Why is Canadian real estate so much more expensive than US real estate? It’s cold half the year, oil prices have taken a hit, and you seldom ever hear about new innovation or huge company growth stories like Amazon, Google, Facebook, etc. For example, Vancouver is more expensive than San Francisco, yet I don’t think they have nearly as many six figure jobs. Shouldn’t Canadian real estate trade at a discount instead?
2) In a bull market, almost all investors win. If a $500,000 Toronto property was purchased with 20% down in 2012 when Kristy and her husband were considering, and the rest of their money was invested in the stock market, how would their net worth differ? Let’s do the math.
3) Do you think the culture of homeownership will ever fade to the point where the desire to rent and invest in the stock market will overtake the desire to own and invest in the stock market? Does homeownership really tie you down more than renting?
4) Do you think the desire to live in a nicer place has faded for the desire to be more mobile and free? For example, Kristy and her husband have been living in a one bedroom apartment or smaller since college and are fine with it. I, on the other hand, got sick of roommates after I turned 25 and am currently looking for a 40 jet, out door hot tub that seats five so I can soak my muscles after a long tennis match and drink a beer while watching the sunset with friends. Is this abnormal?
Invest in real estate more surgically: If you don’t want to constantly pay massive property taxes, don’t have the downpayment to buy property, or don’t want to tie up your liquidity in physical real estate, take a look at RealtyShares, one of the largest real estate crowdsourcing companies today. You can invest in deals around the country for as little as $5,000. It’s free to explore.
Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. Interest rates have finally started to tick higher post election.