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Rent vs buy property in FIRE decumulation stage

Including Financial Independence and Retiring Early (FIRE)
TUK020
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Re: Rent vs buy property in FIRE decumulation stage

#403350

Postby TUK020 » April 11th, 2021, 9:05 am

Monevator weekly roundup contains link to Which report of relative costs of owning vs buying
https://monevator.com/weekend-reading-d ... more-54706

ohit1
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Re: Rent vs buy property in FIRE decumulation stage

#403471

Postby ohit1 » April 11th, 2021, 7:25 pm

Bigspenda wrote: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.

Are you only focussed on the financial aspects for the decision?

I like the idea of my own house as I can do wtf I want with it - i.e. pick the tradesmen I want to replace the big ticket items, make upgrades, etc. That has always swayed me into the buy decision for anywhere I feel settled with a routine for at least 3-5 years.

Then, also, maybe optionality later where you could actually rent out that house you used to live in and then go somewhere else (rent or otherwise).

BTW, I am specifically talking about a house here as assuming freehold. Leasehold adds a different dimension which puts me off.

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Re: Rent vs buy property in FIRE decumulation stage

#403995

Postby hiriskpaul » April 13th, 2021, 7:02 pm

Purely from a financial point of view it is safer to buy, assuming you hold for the long term, as buying hedges out a substantial part of your living costs. Drawing from an investment portfolio to pay rent introduces 2 risks. 1) The long term capital return on the house exceeds the long term return on the investments less rent. 2) Sequence of return risk. Even if the total return on the investments exceeds the total return on the house (capital + imputed rent) over the holding period, the fact that you are drawing from investments to pay rent may still make owning the house work out better. Worse case scenario is that the investments are entirely depleted paying rent. This sequence of return risk may of course work the other way if the investments grow quickly in the early years.

You have a taxation drag on the returns from the investments (CGT & IT) until you can work it all into ISAs, so you need returns on investments to exceed that of the house + imputed rent in order to compensate.

The additional financial benefit of the inheritance tax Resident Nil Rate Band may reduce your eventual IHT bill, but you should be able to use this RNRB with the proceeds from the house you have just sold even if you don't buy another, provided the investments bought with the proceeds passes to direct descendants.

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Re: Rent vs buy property in FIRE decumulation stage

#404081

Postby Wuffle » April 14th, 2021, 7:10 am

Thanks to hiriskpaul,

Having only skimmed the rules (it turns out) I was unaware of the ongoing benefit from RNRB when downsizing or passing into residential care. I find myself in such a position with a parent and and am happy to have sidestepped looking foolish when the conversation was had.

W.

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Re: Rent vs buy property in FIRE decumulation stage

#404685

Postby Gerry557 » April 16th, 2021, 10:27 am

Dod101 wrote:
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


Whilst I didn't quote figures in my observations, they do have financial implications but the lack of information precludes detailed costs. Additionally how important the various observations, will play a bearing on the costs. The more important something is to you the more you are willing to pay extra!

If your landlord gives you notice, you will have to spend time planning another move, pay costs etc. We dont know the area or the rental market or if he owns a van or needs a full removal service. Removals can cost thousands! how mush is his time worth?

Does it need to be a limited area or willing to travel. What are the extra costs in this? Another car for the family? What are the costs associated with his priorities. Maybe he likes a really nice garden but the rented house needs money spending on it to get it up to his standard. The landlord is unlikely to pay so will it require him to do the outlay? Of course this could be any important element.

What happens if the landlord give notice after just six months again. Will furniture fit or will that be time for a new sofa etc

So whilst there is no defined costs involved it is quite open. He might get a long term rental or not be bothered about anything in particular which could reduce overall costs.

I suspect that the longer the term the more it swing in favour of buying. Again not an issue if your a chain smoking, 8 pints a night, do no exercise type sickie type person with other health implications. There are costs to owning a property too and these can be substantial. New kitchen?

There are also tax benefits in having a main residence. Basically is a question of will investments do better than property and a what if statement.

What if one doesn't perform as well as the other. A house and less money or no house and less money. Albeit the less money in the second scenario will be bigger than the first, or you hope it would. I suppose you could buy a cheaper house if the investments were poor compared to the investments over time if you decide to jump before its all gone.

Property tends to be more stable than investments and often has an element of gearing. Although not in this case as no mortgage being proposed. He could look at diversity. Buying with a mortgage (if he can still get one) and paying the currently low interest with the investments. (Best of both worlds?) inflation will also effectively reduce the mortgage over time and aid some investments income. What about x3 BTL properties?

Its such an open ended question that hinges so much on the OP and what is important to him. Looking after shares plus buying and selling is much easier than doing the same with houses. You cant part sell a house either if you need some cash!

One final point, Covid has just shown what can happen in the investment world, share prices dropped substantially and dividends were cut or stopped completely. All this in a very short space of time. Yes things are improving now but how would the OP cope through that type of event next time. Is there some other fall back income?

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Re: Rent vs buy property in FIRE decumulation stage

#406458

Postby 1nvest » April 23rd, 2021, 12:38 pm

Gerry557 wrote:One final point, Covid has just shown what can happen in the investment world, share prices dropped substantially and dividends were cut or stopped completely. All this in a very short space of time. Yes things are improving now but how would the OP cope through that type of event next time. Is there some other fall back income?

Risk during accumulation years is near zero. Looking to maximise rewards (stocks) along with addition of periodic savings and its near certain you'll do OK.

Risk during drawdown is major. Some suggest just spending dividends from a 'Index' that is most unlikely to fail (such as a all-world stock index fund) as being 'safe'. However that overlooks that dividends can (and have) halved and halved again in real terms historically, and stayed down for extended periods. If prior dividends just about covered living expenses then that is as good as failure of the desired objective of covering living expenses.

To reduce insufficient income risk, some opt for SWR, where a fixed initial percentage of portfolio is drawn in the first year and then that amount is uplifted by inflation each year as the amount drawn in subsequent years, which provides a 'safe' (inflation adjusted) income. That however is a 'self dividend' paid out of total return approach to amounts and times that match ones own personal circumstances/needs. If too high that can spend down capital to critical/unsustainable levels. Consider for instance that the worst 10 year period over the last couple of centuries saw a 10 year -7.5% annualised type total real (after inflation) return (gross with dividends reinvested). Portfolio value with dividends reinvested more than halved. If income were also being drawn then core capital would have declined further.

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.

Having liability matched rent (owning) is safer than not. For a enduring portfolio you shouldn't seek to maximise potential rewards but instead seek a reasonable reward with the lowest risk. Plan for the worst, hope for the 'average'.

The safest is a very low SWR, as that provides a consistent inflation adjusted income but where sufficient capital remained after the worst of times to subsequently 'recover' across better times. One way to lower SWR % is to use a larger capital base. Those that have accumulated 100 times spending, where a 1% SWR is 'enough' are very safe. For others who might never get anywhere near that level of capital base then there are risks involved, hit and hope. Diversification of income streams, paying into the state pension during accumulation years etc. along with owning a home so you don't have to find/pay rent out of 'investment income' are such diversifiers. Sadly however, like with inflation bonds, the times where such alternatives are most needed are the times that they're more likely to be unavailable/changed - the same circumstances that drove the need also hits the state. More appropriately the state should act as lender/insurer or last resort and follow fiscal policies that reflect that. The US does, but the UK tends to instead follow 5 year based fiscal policies and flips between two extremes (Lab/Con). In the US citizens can purchase guaranteed inflation bonds from the state, the state insures their citizens and they promote their citizens to manage their own retirement funding, to accumulate investment pots. In contrast the UK withdraws insurance when most needed, and sees those that have accumulated pensions as easy targets to hit. Which has the effect of capital flight towards safer pastures and/or having uncertainties needing far more having to be accumulated than more often necessary. If for example the state provided a safe/guaranteed tax free 4% real return choice to its citizens then each individually could precisely plan around that and that would lower the wealth divide (where some who had accumulated more than enough still sought more - just in case). If for example you knew you had a 10K state pension and had 250K in investments that would provide another 10K and where 20K/year spending matched your needs then many might step aside to retire having reached that goal to provide opportunities for the next generation to work/accumulate until they'd reached their goal. As-is however, and some have far too much, many have far too little.

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Re: Rent vs buy property in FIRE decumulation stage

#589622

Postby Bigspenda » May 17th, 2023, 11:39 am

I was just googling the question of rent v buy again and came across my own post, so I thought I'd do an update two years on....
In the end, we did rent (and are still doing so). This was initially due to the impossibility of finding any house to buy in our immediate area (Devon) in 2021.

Firstly the lifestyle choices and impacts of renting:
We did find a nice rental in a nearby seaside town that was within our budget and on a bus route to our son's school. That was perfect as a way to 'detox' from house and land ownership and was ultimately a great move since we completely re-evaluated what we thought we wanted from a property. We loved our original house due to its remote location and land, but after moving to a small seaside town we realised that we preferred being able to just walk to shops/cafes/the beach. So great, all working out well in terms of lifestyle until the big risk of renting hit us when our landlord decided to sell up and didn't renew our 12-month contract. It was then a nightmare to find a new rental property in the same town - there was absolutely nothing to rent at any price. The few places that came up either went before we rang the agent, or needed a full CV and begging letter to even get a viewing. So we extended our search area to the whole of Devon and Cornwall and eventually found a place at the very western end of Cornwall. Previously this would have been too remote for us, but with our youngest son now on a gap year and going to Uni, it was feasible. So we took it and love it. So much so that we will stay in this area and probably buy when something comes up. So in terms of lifestyle, renting has worked out very well. We have lived in two new towns that we probably wouldn't have considered had we bought immediately after selling. We would almost certainly never have moved to where we are now considering buying. So renting has been a great way to 'try before you buy' that has worked out well for us.

Now to the nitty gritty of the financial side of renting:
Again, it's actually worked out rather well. The bulk of the proceeds of the house sale went (against standard FIRE advice) into UK FTSE100 index trackers. Partly due to the high yield which I thought would cover the rent and partly due to my assessment (gamble?) that at the time (April 2021) the FTSE was undervalued and global funds (dominated by the US) were overvalued due to the high US tech stock prices. I I used the CAPE index to justify this decision. As it turns out, as of May 2023, it has worked out to my advantage and my FTSE 100 trackers (accumulation) are up 22%. I sell units monthly-ish to pay living expenses. Overall my net worth is up 15% since selling the house which I'm very happy with considering we have had two expensive years with quite a bit of travelling and rent to pay. I am now slowly rebalancing back to global index trackers over time since I believe that long term it is the correct strategy. A large chunk will remain in the FTSE trackers since the proceeds of the house are in taxable accounts and would be subject to CGT. We will probably sell these to fund the purchase of a new property and take the CGT hit then. leaving our ISAs untouched.

Summary:
Overall it's worked out very well for us - so far. We have found an area to settle down in that we almost certainly wouldn't have had we bought a house immediately. Financially it's also worked out, our investments have outperformed property prices. Also, by waiting we avoided the crazy property market of 2021 when there was almost nothing to buy at any price. Now, at least, we have options.
I realise that it could have gone the other way - house prices could have continued to rise and the UK stock market could have crashed, but ultimately, whatever you do involves a degree of judgement. The 'standard' FIRE approach of a 60/40 fund would have left me in a much worse position as of today, so I think I made the right call this time. I'm not going to kid myself that I can keep getting it right, so going forward we will probably buy a property with the FTSE trackers in the taxable accounts and move whatever is left into either low-cost global trackers or a Vanguard LifeStrategy fund which will mainly be held in our ISAs and SIPPs.
Going forward I'm happy to continue to rent until we find somewhere to buy in the next year or so. If our landlord doesn't extend, there are other properties to rent so it's not a showstopper. I'm happy to take the risk that house prices may grow by more than stock markets in the next year or two. I can't see it happening, but then I couldn't see COVID or the Ukraine war, so who knows? If the stock market does plunge I am happy to rent until it recovers.
I also got approached to do some part-time consultancy work 6 months after 'retiring' and this would cushion any hit to investments.
Finally, I'm very happy to have sold up, retired and moved on. Before we sold up I could never have imagined that I would be where I am now and doing what I am. It was a huge change from my previous life and I would never have had the guts to do it without discovering FIRE, to which I am eternally grateful. For me the big eye-opener was realising I had enough. I got lucky in having accidentally reached my 'number' by owning a property and having lived a relatively modest lifestyle, but without looking into FIRE and discovering the 4% rule I would still be working full time and maintaining a house that was largely empty and land that no-one used.

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Re: Rent vs buy property in FIRE decumulation stage

#589800

Postby Gerry557 » May 18th, 2023, 7:06 am

Good luck to you and I'm glad it's worked out.

Having lived in Devon several times myself I know both sides.

Looking at the current renting issues in the news it listed the amount of those rises in different areas. Some had nearly 100% rises in the time period, it might have been 4 or 5 years. Lots were London area but I noted Devon as being quite low.

So you might have been double lucky and who wouldn't take that.

It looks like the government and the opposition want to "improve" things for renters. Lisa Nandy saying Labour want to make it more affordable!

It looks like this is having the opposite effect. Landlords (now despised fatcats... Spits on the floor!) are selling up as lots of things have gone against them. Tenants get more rights but this now seems to be offset against availability, resulting in more expensive renting not more "affordable" who knows what additional things will be brought in.

I suppose the higher rents should start to see the financial equations change more in favor of landlords, smaller spits! Hopefully resulting in more properly to rent.

More likely is that this will be interfered with so everyone complains then we can vote for someone better again.

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Re: Rent vs buy property in FIRE decumulation stage

#589833

Postby dealtn » May 18th, 2023, 9:04 am

Bigspenda wrote:Again, it's actually worked out rather well. The bulk of the proceeds of the house sale went (against standard FIRE advice) into UK FTSE100 index trackers. Partly due to the high yield which I thought would cover the rent and partly due to my assessment (gamble?) that at the time (April 2021) the FTSE was undervalued and global funds (dominated by the US) were overvalued due to the high US tech stock prices. I I used the CAPE index to justify this decision. As it turns out, as of May 2023, it has worked out to my advantage and my FTSE 100 trackers (accumulation) are up 22%. I sell units monthly-ish to pay living expenses.


Good to see a practical example of someone investing for yield, but instead of simply accepting the payouts as decided by the Company Directors, is pragmatic in controlling the income required as determined by them. Not a universally held, or understood, view in some parts.

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Re: Rent vs buy property in FIRE decumulation stage

#589836

Postby swill453 » May 18th, 2023, 9:12 am

dealtn wrote:Good to see a practical example of someone investing for yield, but instead of simply accepting the payouts as decided by the Company Directors, is pragmatic in controlling the income required as determined by them. Not a universally held, or understood, view in some parts.

If the "natural yield" of your holdings is more than you need to spend, then the excess can be reinvested.

This is exactly the same pragmatism in action, and I'd say it's well understood and very common.

Scott.

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Re: Rent vs buy property in FIRE decumulation stage

#589842

Postby dealtn » May 18th, 2023, 9:24 am

swill453 wrote:
dealtn wrote:Good to see a practical example of someone investing for yield, but instead of simply accepting the payouts as decided by the Company Directors, is pragmatic in controlling the income required as determined by them. Not a universally held, or understood, view in some parts.

If the "natural yield" of your holdings is more than you need to spend, then the excess can be reinvested.

This is exactly the same pragmatism in action, and I'd say it's well understood and very common.

Scott.


I think you need to look up "exactly" in your dictionary. I don't disagree that such reinvestment recycling produces that end result. But why undertake it yourself managing that excess, letting it build up to an efficient reinvestment size for instance, when that can be simply outsourced via accumulation unites as described. Simply drawing down what you require, and when you want it, is a better match to your neds.

That's before you consider when the natural yield doesn't cover or needs, or the "natural" income stream doesn't have a smooth pattern, or the frictional costs - including time.

I make no claims that your method isn't either well understood, or uncommon. That in itself doesn't make it the better alternative for many, nor that my method is universally understood - which was my claim.

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Re: Rent vs buy property in FIRE decumulation stage

#589862

Postby Bigspenda » May 18th, 2023, 10:39 am

Another reason why I like accumulation units and selling when required is that, against most FIRE advice, I haven't got an emergency fund. If I have an emergency I'll sell units and while I am emergency free the units are hopefully growing. I am comfortable with this - since I don't own a property, I am 'retired' and am in the UK so have the NHS, I am avoiding most of the potential large emergencies that an emergency fund would cover. The largest financial emergency I am likely to have is with the car, but I could buy a new (well second-hand!) replacement without a significant impact on my net worth.
The biggest risk is a prolonged downturn in the stock market and Sequence of Return Risk. While I have some part-time consultancy work my Withdrawal Rate (including rent payments) is 2%, if the work stops, my withdrawal Rate is 4% so I am reasonably comfortable with that. If I buy a property, the withdrawal rates stay roughly the same, since I'll have less invested and fewer expenses. I am now 2 years into retirement and have increased my net worth so far. I will likely have the part-time work for another 1-2 years. If so, I will have hopefully successfully navigated the most risky time for Sequence of Returns Risk.
If the work stops and stock market returns are poor, I have scope to reduce my expenses and in extremis I'd be happy to work in a supermarket etc, so I have some flexibility.


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