I bought my first property a week after turning 26. It was a two bedroom, two bathroom, 1,000 sqft condo in Pacific Heights, San Francisco. It was nothing fancy, but it had one car parking, and a terrific view of Lafayette Park. The condo cost $580,500 and I put down $120,500 for a remaining $460,000 mortgage that I finally paid off 12 years later in mid-2015!
My original goal was to pay off the mortgage by 2013 (10 years), but life got in the way as it so often does when we aren’t honed in with our finances. The original mortgage rate was 5.85%. After several refinances, it went down to 3.375% and I no longer had the urge to pre-pay as aggressively.
HARNESSING DEBT TO BUILD WEALTH
The reason why I didn’t pay down my mortgage faster was because I used my savings to buy more properties and stocks. I knew my career had upside potential since I was only in my 20s. Taking on more risk with more debt seemed like the best way to go.
From 2003 through 2008, the bet paid off. My returns trounced the 3.375% mortgage interest rate. Then the financial crisis hit in 2009, making me wish I had used the proceeds from my vacation property purchase a couple years earlier to pay down debt or hold cash instead.
Now that it’s 2016, I don’t regret taking 12 years to pay off the mortgage. I found, and went beyond my maximum comfort leverage point. That’s the only real way you can find out your true risk tolerance. To regain my sense of financial security, I’m presently actively trying to increase my asset-to-liability ratio. As your desire to work and ability to produce income start to fade, it’s important to reduce debt.
The paid off rental property now generates about $50,000 a year in gross income and $35,000 a year in net operating profits (post HOA, property taxes, maintenance). With cap rates getting down to 3% – 3.5% in SF, this property is currently worth between $1,000,000 – $1,200,000. For comparison, in mid-2015 a 610 sqft one bedroom version of my condo in the complex sold for $840,000.
Originally, this Pacific Heights condo was going to be the cornerstone of my retirement income strategy i.e., $35,000 a year in net rental income + $25,000 in Social Security + $40,000 in dividend and CD interest income. Now it’s just one part due to the accumulation of multiple passive income streams.
EXTREME MORTGAGE PAY DOWN
In personal finance land, paying off your mortgage in 12 years is pretty ho-hum. So I want to introduce you to Sean Cooper, a Canadian who came up with a $170,000 down payment on his $425,000 house he bought in August 2012 as a 27 year old. Three years later, he paid the entire sucker off!
So how did he do it? The first thing I thought about was parental assistance given there’s a massive generational wealth transfer on the way. Sean promises me he received no help from his parents for either the downpayment or the quick mortgage payoff. He had a single mother, and he helped her instead.
This is what Sean did:
- Lived in his basement and rented out the upstairs portion of his house, which contains three bedrooms.
- Lived off ramen noodles, Kraft dinner specials, and water mostly.
- Regularly worked 70-100 hours a week as a pension analyst, freelance writer, and as a part-time meat department clerk at his local grocery store.
- Generated a total annual income of ~$100,000 net, comprised of $55,000 from his FT job, $18,600 from rental income before expenses, and ~$40,000 in freelance income.
- Had discretionary expenses of $9,600/year, i.e., $800/month excluding his mortgage.
- Paid $850 a week to his mortgage ($700+ to principal), and had total expenses of roughly $60,000 a year.
- Mortgage rate was 3.04% for 5 years.
- Doing the math, he therefore used 100% of the remaining $40,000 a year to pay down his mortgage = ~$120,000 over three years, and the remaining $130,000 of his mortgage was paid down monthly at a rate of over $3,000 in principal a month.
- Didn’t go on vacation. Didn’t go out with his buddies to eat our drink for three years. His most exciting vacation was a 24 hour bus ride to Wisconsin.
- Didn’t take girls out anywhere and had/has no girlfriend.
You can read more about his story that caught his nation’s attention here. The 1,200+ comments in the article are particularly enlightening because the feedback is split between praise and vitriol.
One negative commenter wrote, “So basically he wasted 3 years of his life. Life is short, a house is just not that important.”
Another commenter wrote, “Another media PR job to whitewash the economy misery of the youth. 100 hours of work a week = over 14 hours of work a day, every day. Before we celebrate him, I’d like to know more about the psychological price he paid by turning into a work addict.”
I’m totally on board the frugal train, and I think it’s great Sean was able to crush his mortgage so quickly. There’s just no way I could just live off $10,000 a year in NYC or San Francisco after paying my mortgage. After slaving away at a difficult job the first four years out of college, the one thing I really wanted was a place of my own. That’s why I bought my first property after sharing a studio+alcove apartment with a guy for two years, and a dumpy 2/1 at the edge of Chinatown with a woman for a year. I figured, if I was going to work that many hours, I better at least have a nice place to live! I’m sure Sean felt a similar way.
In addition to wanting to balance hard work with a better living environment, my 20s saw a significant amount of recreational travel. Raised in a foreign service household that moved every 2-4 years, I wanted to visit a new country every year on vacation, and that cost money. Furthermore, how was I supposed to fly back to Hawaii and visit my parents at least once a year? Roundtrip tickets cost at least $350, and up to $1,000 during the holidays.
I also had a penchant for cars in my 20s; from the Mercedes G500 (a $78,000 mistake) to the 1989 BMW 635CSi (a classic car of my dreams I bought for only $3,600 and drove until the brakes stopped working one day). Although I saved 50% or more of my after-tax income every year, it’s partly because I was fortunate to have a healthy salary and annual bonus as well.
Finally, every heterosexual male out of college wants to take out the ladies when he finally starts making money. It’s hard to pick up a date with a bus pass, treat her to a nice meal, or fly her to San Diego for a weekend to see the baby pandas on an annual discretionary budget of $10,000 a year. Having the ability to treat a woman, whether she needed to be treated or not, was a huge motivation for making, saving, and spending money in my 20s.
LET’S ASK SEAN COOPER HIS THOUGHTS
I decided to reach out to Sean and ask him about his thoughts now that his story has gone viral. It’s a small world because Sean was actually one of my freelance writers at a place I was consulting for as their managing editor back in 2014. Small world!
Sam: You’ve gotten a lot of praise for paying down your mortgage in three years, but you’ve also gotten a lot of criticism. Why do you think some people hate you for being able to pay down your mortgage so soon?
Sean: Yes, my story has been very polarizing. Some people either love what I’ve done and want to follow in my footsteps and others think I’m crazy. I think it all comes down your own personal views on money. Canadians and Americans went from nations of savers to spenders. We want everything now – many of us just aren’t willing to make the financial sacrifices, instead relying on credit. I think I hit a sore spot for a lot of people, which has led to the criticism.
Sam: Instead of trying to tear someone down to their level, why don’t more people just do more for themselves to get up to someone else’s level?
Sean: Exactly. Instead of criticizing my story, try to draw inspiration from it. Whether your goal is to pay off your student debt or save towards the down payment of a home, it’s all about setting a goal and taking the necessary steps to achieve it. Unfortunately, there’s no easy answer – it requires hard work. If you aren’t willing to make those sacrifices, you have to be willing to accept your current reality. If you’d like to strive for something greater, then be prepared to roll up your sleeves and get to work.
I see it this way: short-term pain for long-term gain. I may have worked hard for three years, but now I have the rest of my life to enjoy myself. A word of caution: not everyone can pay off their mortgage in three years like me, but if you can learn a lesson or two from my story, maybe you can pay down your mortgage in 15 or 20 years instead of 25 years.
Sam: Given you were able to afford a home in your 20s through no downpayment inheritance, do you think the media is blowing the real estate affordability crisis out of proportion? If you can pay off a mortgage by the age of 30, surely plenty of other people with jobs can at least buy a median priced home with a lot of hustle and discipline no?
Sean: No, I don’t believe the media is blowing the real estate affordability crisis out of proportion. The facts speak for themselves: the average price of a detached home in Toronto and Vancouver is over $1 million. To pay off my mortgage in three years I had to make many financial sacrifices. I worked 70-80 hours a week, lived frugally, took no vacations and put my social life on hold.
I was fortunate to buy my home for only $425,000 in August 2012. Today my home is worth about $600,000. I would have a tough time affording my own house today – that in my opinion is an affordability crisis. While homeownership requires some financial sacrifices, it shouldn’t mean putting your life on hold until your mortgage is paid off.
Sam: There seems to be some alarm about a Canadian housing bubble, similar to the one we had in the United States. Do you agree there’s a Canadian housing bubble? Lending standards seem much stricter in Canada compared to lending standards in the US pre-crisis.
Sean: Everyone from the IMF to the Bank of Canada has said the Canadian housing market is overvalued. While I agree our housing market is overvalued in some markets, I don’t agree that there’s a housing bubble. As you mentioned, lending standards are a lot stricter in Canada compared to the U.S. Canada was praised for its rock-solid banking industry during the financial crisis. Canadian lenders don’t offer NINJA (No Income, No Job or Assets) mortgages.
Similar to the U.S., the lending standards in Canada are a lot stricter post-crisis. The minimum down payment has been increased and the maximum amortization period has been gradually reduced from 40 years to 25 years. Unless the economy suffers a major recession, I don’t see a housing bubble happening anytime soon.
Sam: How are you spending/investing your increased disposable income now that you don’t have a mortgage?
Sean: I’m still living frugally, although I’m not watching my spending as much as I used to. I’ve been dining out more often with friends. I’m also planning to travel. To thank my friends for sticking by me during the last three years, I threw a big mortgage burning party to celebrate. I also went on a $1,000 shopping spree for new clothes. Instead of letting the money just accumulate, I’m saving go towards lifestyle inflation, I’m taking the amount I was paying towards my mortgage ($800 per week) and investing it.
Sam: When do you plan to move out of your basement and live in the main portion of your house and rent out your basement instead?
Sean: This is the question I’ve been asked the most. People are perplexed why I’m stilling living in the basement. As a single person, it just doesn’t make sense to live in the main floor. There are three bedrooms – I simply don’t need the space! That might change when I get married and start a family, but until then I’m perfectly content living in the basement.
It all comes down to cash flow: if I live upstairs and rent out the basement I’ll only earn $800 a month in rent, but if I continue to live in the basement and rent out the upstairs, I’ll earn double that amount, $1,600 a month.
Sam: Do you have a net worth goal or age goal where you plan to leave your day job?
Sean: My goal is to achieve a net worth of $1 million by age 35 (current net worth is ~$670,000). I believe this is realistic. If housing prices keep going up at their current rate, I estimate my house will be worth about $800,000 by 2019. I’ll just have to come up with $200,000 in investible assets. Paying off my mortgage is only one of my goals.
With over 80 percent of my net worth tied up in one asset (my house), my next goal is to build my investible assets. I have over $40,000 of contribution room in my Tax-Free Savings Account (the Canadian equivalent of the Roth IRA). I plan to max that out mid-2016. After that I plan to invest in low-cost index funds in non-registered accounts.
While my story has led to many opportunities, I don’t have any plans to leave my day job anytime soon. I’m currently working on a book that chronicles my journey to mortgage freedom and serves as a blueprint for those who would like to follow in my footsteps. Once the book is released, I plan to do speaking.
Sam: During your mortgage paydown years, how much were you spending on average a month and a year, and how much was your monthly and yearly gross and net income?
Sam: The homeownership rate has steadily declined among all demographics here in the US. How is the homeownership rate like in Canada? Is owning a home ASAP still one of the main goals of the Millennial generation today?
Sean: Despite stricter mortgage rules, Canada’s homeownership rate has been steadily rising. In Canada’s priciest markets, Toronto and Vancouver, a lot of Millennials are choosing to rent instead of buy. This can be a good choice as long as you’re financially disciplined. However, my worry is without the forced savings of a mortgage, some Millennials will choose to spend what they save from renting versus owning on lifestyle inflation instead of investing it.
Seam: Given it is so cold for six months a year in Canada, why don’t more Canadians migrate to the United States? There are plenty of areas where housing is cheaper than Toronto and Vancouver. Further, there’s more job opportunities.
Sam: I think it partially comes down to the U.S.’s strict immigration policies. Foreigners often choose to work and study in Canada because it’s tougher to get a work or study permit in the U.S. There are many Canadian snowbirds that head to Florida during the wintertime. When the Canadian dollar and U.S. dollar were near to parity, there was a lot more interest in investing in U.S. real estate. With the Canadian Loonie hitting an 11-year low versus the U.S. greenback, there’s less incentive for Canadians to head south of the border.
Sam: What do you think is the general perception Canadians have about Americans in terms of work life balance, productivity, ingenuity, financial acumen, and general way of life?
Sean: Canadians and the Americans seem to share a lot of the same views about work. Although the standard workweek is 40 hours, many work upwards of 50 hours. However, there continues to be a productivity gap between Canada and U.S. Despite similar work hours, Americans are more productive than Canadians. Both nations share as a whole share similar views on the general way of life, although it varies between regions.
Household debt in Canada keeps rising, as many Canadians see no urgency in paying down debt while interest rates remain low. The Fed rising interest rates should serve as a wakeup call for Canadians that interest rates won’t be this low forever. Take advantage of low interest rates while they last and pay down your debt. While you may be able to achieve a higher rate of return through investing, there’s no guarantee. Nothing beats the guaranteed rate of return of debt repayment.
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Updated for 2019 and beyond.