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I never had much interest in the great rent versus own debate. Both sides make excellent points. I came down on the own side of the debate for non-financial reasons. I love tinkering and home-improvement projects and homeownership gave me more opportunities to pursue those interests.
The main reason I have no interest in the great rent versus own debate is because it ignores a third option that is far more beneficial to the FIRE enthusiast. And that third option is outright homeownership.
To show why outright homeownership should be the primary objective of every FIRE enthusiast, let’s look at the costs of renting and mortgaging in my state of North Carolina.
| To Rent | To Mortgage | |
|---|---|---|
| Average Monthly Cost for North Carolina in 2018 | $1,300 | $1,264 |
Now let’s look at the Groovy Ranch expenses that—like rent for the renter and mortgage payments for the mortgagee—I am contractually obligated to pay.
| Monthly Cost | |
|---|---|
| Property Taxes | $166.67 |
| Total | $166.67 |
Because I own Groovy Ranch outright, it doesn’t take much to meet the contractual obligations of Groovy Ranch and keep a roof over my head. Property taxes come to $166.67 a month—I think. The county is still taxing Groovy Ranch as unimproved land, a whopping sum of $17.84 per month. Next year’s property tax will reflect the addition of Groovy Ranch, and I’m assuming it will be around $2,000 annually. My builder thinks it will be around $1,400 annually. For our purposes here, though, I’m erring on the side of caution and going with the higher estimate.
Renting Vs. Mortgaging Vs. Outright Owning
At least as far as contractual obligations go, outright owning is roughly 13 percent the cost of either renting or mortgaging. Over the course of a year, that adds up to a staggering amount of savings. And over the course of 10 to 20 years, those savings are even more staggering.
| Annual Contractually Obligated Cost | Annual Contractually Obligated Cost for Groovy Ranch | Annual Difference | Annual Difference Invested for 10 Years at 7 Percent | Annual Difference Invested for 20 Years at 7 Percent | |
|---|---|---|---|---|---|
| Renting | $15,600 | $2,000 | $13,600 | $201,056 | $596,564 |
| Mortgaging | $15,168 | $2,000 | $13,168 | $194,669 | $577,614 |
Outright Owning and Financial Independence
In 2006, once we relocated to North Carolina from Long Island and achieved outright homeownership, our net worth was approximately 7.5 times our annual living expenses. In 2016, a mere ten years later, our net worth was approximately 30 times our annual living expenses.
Our rapid drive to financial independence was only possible because of a high savings rate (roughly 60 percent of our gross household income). Our high savings rate, in turn, was only possible because of outright homeownership. It’s easy to save a boatload of money when your household income is over $100K and your contractually obligated housing costs are $300 a month.
Now a couple of questions. How do we make outright homeownership more of a thing? And how do we make it more feasible for young people? Here’s a novel suggestion.
Opportunity Parks
Picture, if you will, a trailer park. But not an ordinary trailer park. Picture a trailer park for people without trailers. This park, which I have dubbed an opportunity park, will be geared towards people who want to live temporarily in either a tent, a car, or a van.
Now, to make sure my opportunity park doesn’t devolve into a glorified skid row, we’ll need some rules. Here they are.
- Lot fees will cover the cost of communal toilets and showers. Residents will get key fobs to make sure only residents have access to the toilets and showers.
- Lot fees will also cover the cost of the following amenities: wi-fi internet access, 30-amp electrical hook-up, a small storage shed or locker, and a picnic table.
- Lots can be used for tents, cars, or vans.
- Residents must be under 25 in order to join the opportunity park.
- Residents must have full-time jobs.
- Residents must put at least 20 percent of their take-home pay into some type of saving vehicle (i.e., savings account, money market fund, CDs, mutual funds, etc.). Each resident’s saving vehicle will be in his or her name, and he or she may only access the money built up in his or her saving vehicle once he or she has left the opportunity park.
- Residents may not stay longer than five years in the opportunity park.
By American standards, opportunity parks are incredibly spartan. But by world standards, opportunity parks ain’t that bad. I don’t know the exact number, but I bet more than two billion of our fellow earthlings right now don’t have access to toilets, showers, electricity, and the internet.
And don’t forget what the objective is here. On the one hand, the objective is very cheap housing that gives young people with ambition and modest incomes a great way to save a ton of money. More importantly, though, the objective is to challenge the status quo. Renting or mortgaging makes the path to financial independence harder and locks you into being a wage slave. Outright homeownership makes the path to financial independence easier and gives you the power in any employment situation (i.e., you won’t have to suffer the slings and arrows of a crappy boss because you’re not saddled with a rent or mortgage payment every month).
My opportunity park represents a wonderful opportunity for a lifetime of outright homeownership. Rather than going to college, moving back home after college, renting an apartment, and then mortgaging a house, a young person could outright own a tent, then a van, then a tiny home or trailer, and then a home. Not very glamorous. But a doable progression and a great way to build wealth and achieve financial independence.
Final Thoughts
Okay, groovy freedomist, that’s all I got. Mrs. G thinks I’m on to something by adding outright homeownership into the rent vs. mortgage housing debate. She thinks I’m totally bonkers, however, when it comes to my idea of an “opportunity park.” What say you? Is outright homeownership something the FIRE community should do a better job of promoting? Is my idea of an “opportunity park” a nice way of nudging young people toward outright homeownership? Or has this blog finally jumped the shark with this warped post? Let me know what you think when you get a chance. Cheers.
Personally, I don’t see a big difference between having a mortgage and a paid-off home. You have to pay at some point. The interest rate is so low now, it doesn’t make sense for me to pay it off early. It’s just not a big deal to me. I think it’s mostly psychological.
I prefer to invest the money instead of paying the mortgage off.
Living in a car/tent would have been fine when I was young. Not now. We like our comfortable home.
Joe recently posted…Passive Income Update 2019
“I prefer to invest the money instead of paying the mortgage off.”
Excellent point, Joe. In a low-interest environment, outright homeownership isn’t always a slam dunk. I wonder if there’s a Laffer Curve so to speak on outright homeownership. Maybe owning half your home, assuming a half mortgage, and investing the difference a half mortgage and a full mortgage makes the most sense. I got to think of this one. Awesome comment, my friend.
i think you finally went off the deep end groovy! i jest, of course. our house cost 98k and i think the mortgage was about 80k. i know you’ve seen the smidlap chateau. in order to achieve that massive downpayment mrs. smidlap lived in a 300/mo studio apartment and cooked on a hot plate for years to save. it feels like americans feel entitled to things like extra space and comforts. i remember 4 of us sharing a 2 br. apartment in college. nowadays i think a standard suburban family would think it was abusive to have kids share a room! people are soft.
we own our house outright and it is life changing.
freddy smidlap recently posted…How Did I Get This Way? Mentors, For Better or Worse
Thanks for sharing your college living arrangements. In my freshman and sophomore years, I was in a single bedroom dorm with three other roommates. We had two sets of bunk beds on one side of the room and a very spartan study/living room on the other side. Also, we had no amenities beyond an antiquated stereo and a tiny refrigerator. Oh, and the bathroom was down the hall. And here’s the really cool thing. We loved it. Not one of us considered our living arrangements as anything close to abject poverty. The young have a great capacity for “suffering.” It’s a shame so many of our young today fail to realize that. Thanks for stopping by, my friend. Cheers.
Couldn’t agree more about the benefits of living in a paid-for home. That first month after the mortgage payments stopped – I felt positively WEALTHY!!! I couldn’t believe how much extra money I had to play with! That’s when investing and travelling began… 🙂
With regard to living in tents etc, it’s winter in Australia and I’m sitting on the couch on a Saturday morning on my pjs and dressing gown, looking out of the window and the rain teeming down. In a second, I’m going to get up and turn on the central heating. It’d be a bit miserable living in a tent or car in weather like this – I’m inclined to agree with a previous commenter who said that tiny houses might be a better bet.
C’mon, FDJ, you wouldn’t want to live in a tent? Think of the adventure. Haha! I hear ya, a tent is surely a spartan abode. Tiny houses make much more sense.
Mr G, no doubt about it, home ownership should be a goal for almost everyone before they RE. We, like you, used the approach and have a monthly obligation of only$110 per month! Sure, it takes a while to pay for a house, but the long term benefits are worth the commitment.
Love the idea of Oppa’s. We’ve seen a lot of longer term residents in some of the campgrounds on our trip, and thought it’s not a bad option for someone just starting out. Amazing minds, once again thinking alike!
The monthly obligated cost of The World Headquarters is only $110? Holy crap! I think Mrs. G and I are relocating to Georgia. And you are so right about extended living in a campsite. Yes, it’s spartan. But it’s nothing close to abject poverty. If I were young again, and if I knew I could save $100,000 in three years by simply living in a tent, I would jump on that opportunity in a New York minute. Thanks for stopping by, my friend. You’re the best.
I want to agree but have to acknowledge that I’ve taken a different track.
Living in a HCOL area makes outright home ownership tougher (having 600k cash on hand is hard for most anybody).
I bought the cheapest house I could find back (400k) when interest rates were at an all time low. I used an 8/1 ARM knowing I would be able to pay the house off by the time the rate could increase and put 20% down.
At a 60% of my income since and invested it, since my stated goal was to pay the house off in 8 years. Six years later I’ve far surpassed that goal, I’ve hit my FI number, so I’ve started paying the house down with about one year to go. If I had paid off the house immediately I would have missed out on the 12.3% returns since I bought.
It’s less psychologically appealing but I think there are some valid subtleties that are rarely discussed.
1) a 30 year loan is insane for anybody. Imagine how many jobs and spouses most people go through in 30 years. 30 years is many people’s total career.
2) Optimize for a 3-10 year timeline because life is virtually unpredictable past that.
3) An oversize mortgage payment is BY FAR the easiest way to hamstring yourself financially for life.
4) An ARM can be extremely useful depending on the loan rates.
Now houses are 50% more expensive than when I bought and rates are twice what I’m paying. If I finished school now I don’t know what I’d do. Devil’s in the details.
Wow, Paul. Lot of wisdom here. I love the following point you made.
“Optimize for a 3-10 year timeline because life is virtually unpredictable past that.”
Instead of immediate outright homeownership, modestly-delayed outright homeownership in 3 to 10 years is a wonderful compromise. You still get the benefits of outright homeownership rather quickly, and you also get the benefits of a low-interest-rate environment coupled with a roaring stock market. Very well played, my friend. Bravo.
Ditto Mrs. G. LOL. Ditto.
Et tu, Laurie. I can’t believe you’re siding with Mrs. G.
Cool idea. i think you should add to the mix a community room for entertaining AND holding FIRE educational seminars as well as support groups for various wealth-killing afflictions..
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Nice! I love it.
I like the idea of having personal key fobs for the communal bathrooms. People are absolutely disgusting in public restrooms. Maybe this would hold others more accountable.
It also sounds like a great idea for young people. I can tell you that one reason why I exercised geoarbitrage was to have my own apartment at age 22. Living with my parents would have been a mark of personal humiliation. And I had my fill of shared spaces after 4 years of living in a college dorm.
Anyways. First world problems and another thoughtful post.
Josh recently posted…20 Things to Do With Money This Year
Yeah, public restrooms have a knack for attracting degeneracy. I remember visiting the main branch of the New York Public Library, a formidable building built in the Gilded Era, and there was a sign above the urinals in the men’s room that read, “No Bathing.” Who the hell bathes in a urinal? An Opportunity Park would only work if it operated with well-thought-out rules. Bathroom key fobs would be an absolute necessity. Thanks for stopping by, my friend.
Outright home ownership only makes sense in certain circumstances, the 80’s for example when interest rates on home loans were 11% or more, then sure.
Right now with rates in the 3 to 4% range paying off your mortgage early makes no sense at all. My house is financed at 3.25% for 30 years. The stock market returns over 30 years will more than likely be 10% or more. A 7% spread on a quarter million dollars over 30 years is a lot of money! This year alone the spread for me is almost 20%($50,000). Not only would I not pay the bank back I wish the bank would loan me a lot more money at 3.25% for 30 years without having to take out another mortgage. Nothing is for sure but the stock market over 30 years is almost certain to produce a large spread versus 3.25%.
Bottom line, don’t do the banks any favors and pay them back early, take the money and put it in the S&P.
“Nothing is for sure but the stock market over 30 years is almost certain to produce a large spread versus 3.25%.”
Excellent point, and great analysis. My only quibble is risk. Our national debt of $22 trillion (and growing!) scares the crap out of me. I don’t see how we avoid some serious pain in the next ten years. And I think the people who are completely debt free will have the best shot of shouldering that pain. Great comment, my friend. Thanks for stopping by.
This is an interesting debate. I like the idea of the opportunity park. It provides a path to ownership and beats the crap out of putting 3% down on a $450k house for 30 years, a suggestion made on the Choose FI Denver Facebook page recently. Coincidentally, she just happened to be a mortgage broker using the tired old “build equity and get a tax break” argument. Go figure.
Anyway, the peace of mind and cash-flow advantages of outright ownership is real. But I read an interesting guest post on the Mad Fientist where the author is borrowing half the purchase price at an attractive rate and investing the other half in a Vanguard balanced fund. The result is that the investment returns have more than covered his mortgage payment.
https://www.madfientist.com/mortgage-payoff-experiment/
This is a very good topic. Both outright ownership and high-equity ownership are far better than the dated and misguided advice to buy with little down and mortgage your future away.
As a financially awakened ex-mortgage sales assistant, I’m continually amazed that mortgage reps still drink the Koolaid regarding the “build equity, tax break” argument for carrying a mortgage. There’s enough knowledge out there these days that people can quickly learn that the math doesn’t work. I still feel tremendously duped and a bit guilty that I was taught that – and sold it to customers.
I remember the economist Milton Friedman once remarking that it’s human nature for people to feel that what is in their interest is also in the national interest. And I guess this bias also applies on the micro level. The salesperson honestly believes that what is in his or her best interest is also in the best interest of the customer. Kudos to you for recognizing this all-too-human bias and stepping away from it. You’re the best, my friend.
Thanks, Mr. G. I vividly remember sitting in training after training, being told what great favors we were doing customers by helping them get the best (i.e. most expensive) possible house they could afford. What a crock of crap!
Thanks for the link. That’s a great post. And it makes perfect sense. The only downside is that one has to be very financially strong to go half-mortgage and invest the difference. Opportunity parks will give young people a fighting chance of becoming financially strong. Awesome comment, my friend. It really made me think. Cheers.
“Outright Homeownership” really isn’t talked about often enough! Our society has a knack for over complicating subjects, and this is definitely one of them. If you look at a person who is financially well under control, it’s rare they have a mortgage and car loan and student loan and blahblah loan even if that’s “good debt”. Compare that to someone with a paid off car, house, and possibly education – I’d bet a dollar they’re in healthier financial shape overall, too. It’s not so much the mechanics as it is the behavior – if you know you plan to pay off a mortgage or car ASAP, you won’t want to buy much more than you need. Compare the person with the mortgaged house with the paid off house (or Camry!), and I bet you’ll find the paid off stuff is not as fancy. And yet maybe the debt-free person is “somehow” happier!
I like the idea of Oppa (OPportunity PArks. Gotta make it sound trendy!). If people could live simply in the beginning, it’s a lot easier to say no to the excesses in the future.
“…[I]f you know you plan to pay off a mortgage or car ASAP, you won’t want to buy much more than you need.”
Exactly! For most Americans, their biggest problem is their inability to choose needs-based portions over ego-based portions. That 1,400 sq. ft. cottage just won’t do. Gotta have that 3,000 sq. ft. look-at-me home. And you absolutely nailed it with the following:
“And yet maybe the debt-free person is ‘somehow’ happier!”
Since 2006, once Mrs. G and I became completely debt, we have never once worried about money. In fact, on most days since we became debt free, our biggest worry is what to have for dinner. It’s amazing how easy and stress-free life gets when you have no debt.
And I love the OPPA acronym. It’s all about the marketing and OPPA is right up there with FIRE. Great freakin’ comment, my friend. Cheers.
Complete home ownership is the way to go. When I paid off my mortgage it was amazing to see the positive cash flow effect if had on the household.
I then used that money to create capital to make money of its own
It is far better to be on the lender side of the lender-borrower equation. Not having to pay someone else interest but rather collect interest is the way to build true wealth.
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“It is far better to be on the lender side of the lender-borrower equation. Not having to pay someone else interest but rather collect interest is the way to build true wealth.”
That is straight-up financial wisdom at its best. Thank you, sir. I couldn’t have said it better myself.
I like the idea but with a little bit of a different twist. In many areas, it is the cost of land that drives high prices for rent and home ownership. I don’t think many young people today will go for living in a tent or van for a few years, but what about a community of tiny houses for rent? You can park more of these on an acre than the typical mobile home so the cost of rent could be lower. You wouldn’t need separate storage units or community bathing facilities that have to be cleaned and maintained. Tiny homes are also better in inclement weather and where there are extremes of hot and cold. Zoning would likely be an impediment in some areas but maybe not any harder than a campground. Another thought is bringing back the old boarding house. Let someone rent a small room and have access to common bath, laundry and kitchen facilities. We already do this in college dorms. Of course, the challenge will be for these same young adults to actually save what they aren’t spending for housing!
I love it, Pat. Couldn’t agree more. In fact, while I was formulating my concept of an opportunity park, I was thinking of including a community workshop where residents could rent space and build their own tiny homes. I didn’t go there for this post because I didn’t want to get too far into the weeds. But, yeah, I think tiny home parks are an excellent idea, and I would love to see the zoning laws changed so they could proliferate. Great freakin’ comment. And check out these videos. I think you’ll get a kick out of them.
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