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Rent vs buy property in FIRE decumulation stage

Including Financial Independence and Retiring Early (FIRE)
Bigspenda
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Rent vs buy property in FIRE decumulation stage

#403070

Postby Bigspenda » April 10th, 2021, 12:24 am

I am in the fortunate position of having reached my FIRE number via selling a property plus existing investments. We are now renting while we get rid of remaining son (this summer) and to allow us to decide where to live next since we now have more or less complete freedom of location.
My question is, should I rent or buy over the longer term? I have seen discussions on this question but they are all focussed on the accumulation stage rather than decumulation stage I will shortly be in.
My property purchase budget is max 500K. If I just stick it in a FTSE100 tracker, or Vanguard High Income fund I will get approx 4% dividend, so £20K pa approx (disregarding tax considerations). To my simplistic way of looking at it, if I can rent for <1650 per month I am ahead financially just from dividends, regardless of underlying fund value. Or I could do the conventional FIRE all share index fund approach and finance rent from dividends and sale of units. There is the extra factor of how the purchased property would appreciate/depreciate in relation to the tracker fund assets, but who knows how that will go?
Does anyone have any thoughts on the purely financial side of renting vs buying? I'm sure that in the end emotional factors may become more important, but it would be interesting to hear any thoughts on the financial aspects.

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Re: Rent vs buy property in FIRE decumulation stage

#403074

Postby Kantwebefriends » April 10th, 2021, 12:41 am

Decide where you might like to live and rent there while you test the waters. Only if you decide that it is the area for you do you have a long term rent vs buy decision to make.

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Re: Rent vs buy property in FIRE decumulation stage

#403077

Postby 1nvest » April 10th, 2021, 1:29 am

Broadly, home price appreciation + imputed rent is similar to share price appreciation + dividends. Own a home and liability matched 'rent' is safer than renting and having to find/pay rent. You are in effect both landlord and tenant and it doesn't matter if rents soar or collapse nor do you have the concern of having to find/pay rent each month. Consider If stock total returns amount to 0% real (after inflation) for a decade, or worse, as they sometimes do.

A home might also be considered as insurance for late life care costs (more usually for the longer surviving partner).

If you have inflation adjusted pensions that covers your disposable income/spending, own a home so rent is liability matched, you have enough in "land" and "bonds", any surplus can pretty much be invested however you like.

If you could liquidate pension value, sell your home and dropped it all into stocks in the hope that that might cover your rent and disposable income/spending and late life care costs then you'd be taking on a considerable risk. More so at present day valuations (low interest rates/inflation = high prices).

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Re: Rent vs buy property in FIRE decumulation stage

#403094

Postby TUK020 » April 10th, 2021, 8:36 am

1nvest wrote:Broadly, home price appreciation + imputed rent is similar to share price appreciation + dividends. Own a home and liability matched 'rent' is safer than renting and having to find/pay rent. You are in effect both landlord and tenant and it doesn't matter if rents soar or collapse nor do you have the concern of having to find/pay rent each month. Consider If stock total returns amount to 0% real (after inflation) for a decade, or worse, as they sometimes do.

A home might also be considered as insurance for late life care costs (more usually for the longer surviving partner).

If you have inflation adjusted pensions that covers your disposable income/spending, own a home so rent is liability matched, you have enough in "land" and "bonds", any surplus can pretty much be invested however you like.

If you could liquidate pension value, sell your home and dropped it all into stocks in the hope that that might cover your rent and disposable income/spending and late life care costs then you'd be taking on a considerable risk. More so at present day valuations (low interest rates/inflation = high prices).

Tax may also be a consideration. If you have just sold a house, and wondering whether to buy/rent, it is unlikely that the proceeds are tax sheltered. If you buy, you are not then taxed on the rent saved.

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Re: Rent vs buy property in FIRE decumulation stage

#403102

Postby JohnB » April 10th, 2021, 9:22 am

I don't think you can ignore tax. If you need an extra 20k of income for rent, that needs to be 25k pre-tax, and is pushing some of the rest of your income into 40% tax bands.

In a sensible housing world, a 500k house would rise in value only at inflation, say 2%, CGT free, but would cost 1%, 5k to maintain. Meanwhile your trackers might have 3.5% dividends and 2.5% capital gain, but you are taxed on both of those. But landlords not getting capital gains would charge more rent than the OP quoted to make it worthwhile. So renting is cheaper than owning because you are forgoing the gains of owning yourself.

And this ignores the upheaval of repeated moves, the inability to garden or modify the building to your tastes.

A secure tenancy on a flat when you are over 80 is a lot more attractive than renting a house in your 60s and 70s.

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Re: Rent vs buy property in FIRE decumulation stage

#403109

Postby Midsmartin » April 10th, 2021, 9:50 am

I would balance it against risk. An unknown economic calamity could cut your dividends by half. Buying a house frees you from this risk to a degree.

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Re: Rent vs buy property in FIRE decumulation stage

#403110

Postby xxd09 » April 10th, 2021, 9:53 am

I suppose another way of looking at it is that you are introducing a rather large financial variable into your portfolio of savings at a time when recovery from a financial downturn is much more difficult-ie getting old and running out of road!
Rents can increase in a very changeable manner
There will be enough ups and downs in retirement without unnecessarily creating a rather large one
Avoid renting if possible
xxd09
PS I think a 3% withdrawal rate is much more likely going forward
ie £3000 pa from a £100000 portfolio of equities/bonds not £4000

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Re: Rent vs buy property in FIRE decumulation stage

#403135

Postby Wuffle » April 10th, 2021, 11:27 am

Assuming this is a UK domestic situation you get a generous IHT allowance for owning property.
From the section chosen and the numbers quoted that sounds like it might be helpful.
And however tempting it is to gloss over the fact, retirement has an exit strategy.

I find myself on the other end of this where the remaining parental unit is worth over but close enough to the married couples 650k and likely to cost a bit in their remaining time that sacking the house off doesn't matter. But if there was a healthy gap I would have pause.

W.

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Re: Rent vs buy property in FIRE decumulation stage

#403139

Postby 1nvest » April 10th, 2021, 11:36 am

For a more informed decision, here's a century of UK history that may help. Just my opinion and best endeavours of digging out data etc. ...
Image
When on the gold standard, money backed by gold, you could convert between the two at a fixed rate. Under such circumstances it makes more sense to hold money deposited and earning interest. During times of world war uncertainties its better to hold physical portable assets in-hand, diamonds, gold, silver, art (paintings rolled up into tubes ... whatever). The above is yearly granularity data so it was assumed that for the UK/US/gold three way equal split assets silver was held for the year following outbreak of WW1 and WW2, until the year end of the wars.

Stocks/bonds/cash tend to do well during periods of positive real yields (when interest rates are greater than inflation), whilst gold tends to do well during periods of negative real yields. A chunk of the housing market is funded by mortgages and when real yields are negative so it can actually pay mortgage holders (or other forms of debts). Negative real yields can be a attractor out of stocks and into house prices such that when stocks are dropping, house prices like gold can rise (or drop less than stocks). A home has been similar to a three way UK stock/US stock/gold £/$/global currency diversification.

No costs/taxes were included in the above chart. At times of economic stress taxation tends to rise. 15% inflation, 15% gross cash interest rates, 40% basic rate taxation = -6% net real. Similar to what occurred in the past. In 1968 Labour (Roy Jenkins) opted to impose a retrospective tax that had taxation for some up at 130% levels (every £1 extra earned incurred a £1.30 tax liability). During the 1960's the Beatles sang 'Taxman' "19 for you, 1 for me, taxman" ... in reflection of 95% taxation rates. The consequence was that much capital flighted the country, accumulating in the UK having to be bailed out by the IMF in the mid 1970's. Such madness is why many opt to avoid voting Labour due to such historic irresponsibilities/economic-mismanagement.

Stocks are not the panacea that they are projected to be. The worlds richest sector is the financial sector and its highly efficient at extracting value that funds the likes of high rise real estate in the most expensive areas and paying high wages.. It's media/advertising is geared towards projecting history in a manner that favours attraction to areas where it benefits the most. Following the collapse in stock portfolio valuations during the 1960/1970's stocks made great 'compensationary' gains during the 1980/1990's. Price dives and recoveries are OK for those in the accumulation phase as new money (savings) add funds at lower prices, for those in drawdown/retirement however the combination of negative real (after inflation) total returns (with dividends reinvested) can be devastating, as it was for some/many retirees during the 1970's.
Playing with the stock market is like playing chicken with a freight train... no matter how many times you win, you only get to lose once. -Mike Masters

It's sensible to diversify - reduce concentration risk, one of the greatest risks. And ideally include assets with no/low/inverse correlations where individually the assets have positive reward expectancy (50% long, 50% short stock has inverse correlations but the short stock doesn't have positive reward expectancy ... so is not a suitable case).

Stocks do have elements of negative real yield benefits, typically/broadly around half of book value is held as debt by firms, such as via corporate bonds (debt). When real yields are negative so those debts are typically eroded by inflation. Stocks are in effect leveraged 1.5x. Leverage broadly yields no overall gains, just scales up volatility, the zigs and zags all cancel out overall. As such many investors opt to de-leverage stocks via 67/33 stock/bonds. A factor there however is that you are in effect borrowing via stocks, and lending via bonds, again that broadly cancels out and is wasteful, 33% of capital earning 0% nominal, losing in real terms. A better alternative is to hold a asset that can spike opposite to stocks, such as gold. 67 stock, 33 gold where stocks halve and gold doubles ... is break-even. Later the reverse may occur, stocks double, gold halves. Trading such motions (more often less extreme), albeit via simple yearly rebalancing, will capture some of those volatility motion benefits. Investment rewards arise out of price appreciation, income production (interest/dividends) and/or volatility capture. All tend to broadly be equal as if that were not the case then investors would concentrate into the consistently more productive choice. Instead we have investors that target price appreciation, or income, or volatility (such as Traded Options traders).

In retirement you want reasonable gains in a smooth/consistent manner, you can't afford to have portfolio value halve over one decade, double over another when you're also drawing income - as when combined with withdrawals for income a bad decade can draw down portfolio value to critical/fatal levels such that little/none remains to subsequently benefit from the good decade (you played chicken with the freight train and lost).

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Re: Rent vs buy property in FIRE decumulation stage

#403143

Postby 1nvest » April 10th, 2021, 11:53 am

US data, comparing 67/33 stock/gold with all-stock since 2000 where a 4% SWR (income) is applied

Link

Click the inflation adjusted tickbox in the chart. Over other periods that lagged all-stock, but still did OK/well (just not as well).

It paid to hedge/insure the portfolio. How much broadly was that insurance cost when you factor in 'insurance payouts'?

From 1972 (total returns, accumulation/no-withdrawals) ... suggests broadly no cost.

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Re: Rent vs buy property in FIRE decumulation stage

#403146

Postby 1nvest » April 10th, 2021, 12:06 pm

I was overtly harsh on bonds in my prior post. Broadly bonds and gold can be swapped/mixed. Gold might be considered as a zero coupon undated inflation bond - high volatility.
Link
Partnered with stocks 50/50 and that's like a barbell of two polar opposites/extremes. Similar somewhat to how a barbell of 1 and 20 year gilts is similar to a combined central 10 year gilt bullet.

Tax wise and regular income streams (interest/dividends) can be a risk factor. With capital gains you get to choose when such is taxed, you can defer selling if taxation policies are harsh/excessive. With bonds generally there's no choice (6 monthly/whatever regular payments of interest/dividends).

As such, a reasonable choice is perhaps 50/50 of both, perhaps FT250 for smaller cap stocks, S&P500 (US) for large cap stocks in $, bonds (Gilts), gold ... in equal 25% measure. Add a home into that, perhaps a third of total wealth, and you're diversified across land (home), commerce (stocks) and reserves (bonds/gold) ... as advocated by the Talmud millennia ago. Which also might be considered a variant of Old-Money 'generational wealth' ... third each in land, gold, art (a Cambridge University study indicated that in total returns art and stocks compared over the longer term).

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Re: Rent vs buy property in FIRE decumulation stage

#403160

Postby Darka » April 10th, 2021, 12:48 pm

1nvest wrote:I was overtly harsh on bonds in my prior post. Broadly bonds and gold can be swapped/mixed. Gold might be considered as a zero coupon undated inflation bond - high volatility.


I'm not sure any of your last 3 posts are relevant to the question the OP asked?

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Re: Rent vs buy property in FIRE decumulation stage

#403183

Postby Dod101 » April 10th, 2021, 2:20 pm

I think the main points are covered but to me firstly I prefer the security of owning somewhere. Furthermore, these days, the IHT benefits in owning a house are not to be sneezed at, plus of course if the past is anything to go by, you will see decent capital appreciation with a property which may or may not happen with your equities and with your house, capital gains are tax free. Of course you have maintenance costs such as insurance and Council Tax but you also have the security of being able to relax in the relative security that the house is not going to drop in value by 25% or more overnight.

My vote would therefore be to buy a house to live in.

Incidentally, just because you are retired does not mean you are necessarily in the decumulation stage.

Dod

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Re: Rent vs buy property in FIRE decumulation stage

#403200

Postby Gerry557 » April 10th, 2021, 2:57 pm

I would look less at the finance than the issues with renting. Can you find a rented place that will be available for your timescale and with all the problems that renting instill.

Not being able to decorate as you wish, not being able to change the garden, some might not even allow pictures on the wall etc

Then you get issued notice, the hassle of planing another house move whilst trying to find another property that is available and to your liking. You might not have even unpacked from the last move!

This may be a bigger or smaller issue depending on location, age and what friends you have available. Maybe you know a man with a van or a removals firm. Maybe you are a fit and healthy person who doesn't mind humping all your belongings about.

If you plan to move frequently anyway renting might make sense but even so I might be tempted to buy something and rent that out myself so if the worst happens I have a fall back plan.

If you known about a health condition that might limit your life expectancy then I might consider it.

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Re: Rent vs buy property in FIRE decumulation stage

#403218

Postby Dod101 » April 10th, 2021, 4:02 pm

Gerry557 wrote:I would look less at the finance than the issues with renting. Can you find a rented place that will be available for your timescale and with all the problems that renting instill.

Not being able to decorate as you wish, not being able to change the garden, some might not even allow pictures on the wall etc

Then you get issued notice, the hassle of planing another house move whilst trying to find another property that is available and to your liking. You might not have even unpacked from the last move!

This may be a bigger or smaller issue depending on location, age and what friends you have available. Maybe you know a man with a van or a removals firm. Maybe you are a fit and healthy person who doesn't mind humping all your belongings about.

If you plan to move frequently anyway renting might make sense but even so I might be tempted to buy something and rent that out myself so if the worst happens I have a fall back plan.

If you known about a health condition that might limit your life expectancy then I might consider it.


Yes but the OP was asking about the financial aspects and I was trying to bring the discussion back to that.

Dod

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Re: Rent vs buy property in FIRE decumulation stage

#403230

Postby Alaric » April 10th, 2021, 5:02 pm

Dod101 wrote: the OP was asking about the financial aspects and I was trying to bring the discussion back to that.


In cash flow terms, it's whether the income from the investment portfolio exceeds the property rental. In asset terms it's whether the gain from house and land price growth exceeds the gain on the portfolio. In both cases, maintenance costs and the effect of taxes need to also be considered.

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Re: Rent vs buy property in FIRE decumulation stage

#403231

Postby Bigspenda » April 10th, 2021, 5:08 pm

Thanks very much for all the comments, its greatly appreciated and I wasn't expecting such detailed responses. I suspect I will end up buying a house for a combination of stability, diversification and ability to tinker around with gardening, decoration etc. But I will use the current period of relative freedom while I'm renting (till December) to look around areas that are cheaper than where we currently rent since we are no longer tied to children's schools etc.

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Re: Rent vs buy property in FIRE decumulation stage

#403266

Postby Hariseldon58 » April 10th, 2021, 6:52 pm

One point to consider with renting vs buying is the time frame, if you are 80 then renting makes more financial sense than if you are 50, opportunity to spend some capital.

Apart from the matters mentioned re the issues with renting, the great advantage of owning a property is stability and freedom from rent rises...

The FTSE is below where it was 21 years ago, house prices and rents have risen substantially, that is one time period and one market but ....property is a good diversifying asset to shares.

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Re: Rent vs buy property in FIRE decumulation stage

#403329

Postby 1nvest » April 10th, 2021, 11:45 pm

Warning : Expletives

From the film 'The Gambler' (John Goodman & Mark Wahlberg)

The FU fortress of solitude : A base of a house with a 25 year roof, a reliable Jap car, some cash and the rest into a 3% to 5% system (implicit real/after-inflation) https://youtu.be/sPjNFp0diWE

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Re: Rent vs buy property in FIRE decumulation stage

#403341

Postby GrahamPlatt » April 11th, 2021, 6:41 am

Good(man) advice.


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