Mindy and I just sold our old home. It had been a rental, but the numbers didn’t work well. We earned less than $3,000/month on a $600,000 home. We weren’t close to the 1% Rule. Hell, we weren’t even at the .5% rule. If we had pursued our original plan to put the home on Airbnb, the numbers would have worked much better. But then, we’re trading time for money. I need time much more than I need money at this point in my life. We bailed on our Airbnb plans and closed on the sale about two weeks ago.
Numbers
Here are the dirty details from way back in June of 2013 when we moved in:
- Purchase price: $176,000
- Amount financed: $140,800
- Loan term: 3.25% for 15 years
Mindy and I could have paid cash for the home, but we took out a loan instead. More on that decision in a moment. First, I have more juicy numbers to share.
Mortgage For The Win
Over the course of the mortgage, we paid about $27,282 in mortgage interest.
We took out a mortgage because we thought we could do better in the markets. And did we ever. Here is how the S&P 500 performed:
$140,800 invested in the S&P 500 would have grown to $378,081.
Another way to think about it is that we made $237,281 in exchange for paying $27,382 in interest. Not bad. Not bad at all.
But, index funds aren’t what we put the money into. Back then, I didn’t know what an index fund was, so we bought tech stocks including Facebook, Google (now Alphabet), and Tesla. Because tech boomed, we faired much better than we would have if we just went with the index. However, this is dangerous territory and not reproducible. Also, I’m mostly an indexer now, so I prefer to keep it simple and compare to the S&P 500.
Some Caveats (The Fine Print)
There are some definite disadvantages to having a mortgage:
Insurance
Mortgage companies require that you keep your home insured at certain levels. Even if we didn’t have a mortgage, we’d still have insurance, but maybe we’d be able to get a cheaper policy. Is there such a thing as a catastrophic policy for a home? By this, I mean a policy that has a crazy high deductible (>$50,000) that you’d only really exercise if the home was totally destroyed. If so, this is what we’d get if we had a paid-off home.
Escrow
Our mortgage company made us have an escrow account for insurance and taxes. I HATE escrows! Our cash sits around wasting away in the mortgage company’s account, not earning a cent. For us anyway.
No Payment Equals More to Invest
If we had paid cash for the home, we would have had an extra $1,300 to invest every month. Note: Front-loading usually beats dollar-cost averaging, so this argument is mostly moot.
Sequence of Returns Risk
Some early retirees don’t want a mortgage for fear of sequence of returns risk. This doesn’t apply to us because we oversaved and Mindy still works, but I can understand the peace of mind that sailing into retirement with no debt would bring.
Really ****ing Good Timing
With dividend reinvestment, the markets returned almost 14% annually over the course of our mortgage! This is above the historical average of around 10%.
Cognitive Dissonance?
I find that most in the FIRE community are eager to pay off mortgages and I never really understood why. We’re counting on index investing to give us a return of 4% in a worst-case scenario. Why would you rush to pay off debt at 3% then? Would you rather have more money or less money?!??
Mindy and I will always take advantage of cheap money. We did this back in April of 2020. We had paid cash to get a good deal on a home, but then took out a mortgage when the world seemed like it was collapsing. It all comes down to this:
I feel that over a long time period (>10 years), the stock market has a good chance of appreciating at least 4%/year.
And history backs me up. From 1926 to 2018, the stock market has lost money over a 10 year period 5% of the time. And, if you happen to get caught in one of these rare down periods, it’s usually followed by above-average returns.
I also find value in having a powder keg of money ready to pounce on a great investment. This is slightly less important now that I discovered that I can take out a loan against my portfolio.
Debt And Finance Are Personal
But, I know plenty of humans with better brains than mine that have aggressively paid off their mortgages. Debt, money, and investments are personal. What helps me sleep at night is having the most amount of money over the long-term. For others, eliminating debt is more important.
And truth be told, I HATE debt. But, I like more money just a little more.
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i have to say although i enjoy owning our house i can’t ever see us being landlords. for me it just seems the numbers always work out better in the markets. maybe if you were going to scale up and buy apartment buildings it might make sense. don’t you love knowing you could sell some stock with zero commission with just a few keystrokes? you can have the cash in your checking account in 3-4 days if you ever wanted to buy something expensive.
good for you on getting the deal wrapped up.
freddy smidlap recently posted…February 2021 Stock Scorecard: Smidlap +5.4%, #QQQ +0.3%, #VTSAX +3.1%
I was just looking at our amortization schedule this morning. If we pay an extra $1141 today against our 2.625% mortgage, it’ll save us $255 in interest over the life of the loan!
But the remaining loan period is nine years.
And that $1141 thrown into VTI or ESGV — where all our excess dry powder goes on the first of every month — will likely churn up significantly more than $255 over nine years.
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Leverage is an interesting beast. I’d love to take advantage of it here shortly as cheap money is always a good thing.
Like you I’d much rather have the cash on hand. Debt ,like opiates, is a great tool if used appropriately. But if abused it gets dangerous quick.
Yep. Leverage can make you super-wealthy or run you over like a rabid steamroller on amphetamines.
“I need time much more than I need money at this point in my life.”
Funny how that equation flips over at some point in life, eh? 🙂 Congrats on getting there.
One point I’d add to your Caveats is that, in some cases, it can make financial math sense to pay off your mortgage: when your monthly mortgage payment is gone, you need to “realize” less income in order to meet your obligations. A lower monthly expenditure could mean fewer capital gains in retirement are required which might mean:
1) Lower tax bracket
2) Qualifying for subsidies (ACA, etc.)
3) Qualifying for tax credits/deductions
Figuring out “which is better” in this context requires a whole lot of math and investment assumptions, though!
Aside from that, for a lot of folks, there’s a huge mental/emotional burden to just being in debt. Even 3% interest rate debt. It might not make a lot of sense to some of us (me included), but that doesn’t make it an invalid response. What’s most important is for folks to be on a sustainable path to good financial health—and sometimes it might mean making the less optimal decision at the limits (paying down debt vs investing for example), but in the grander scheme, it might let them stick to the healthier path in the long term. Forest for the trees and all that.
Coincidentally, I just wrote a post on this whole topic—how financial independence doesn’t really have set “rules”, though there’s plenty of good common sense to follow. We all approach it differently. Mortgage debt vs investing was one of the topics I addressed as an example where we all largely agree, yet often find room to polarize the decision (paying off the mortgage is ALWAYS the right move, investing is ALWAYS the right move). To be clear, you’re not doing that here—and you’re sharing your own experience, which I think is the right approach.
Chris@TTL recently posted…FIRE Isn’t Prescriptive (It’s a Spectrum of Personal Choices)
Great point about the benefits of smaller income.
And yeah, much of this is personal. We’re the human we are today because we’ve been shaped by a lot of experiences. My obsession with investing probably comes from struggling with finances for the first 2.5 decades of life. I wonder how much of a different person I’d be and in what ways if someone paid for my education or bought me a car?
I’m with you on not paying off the mortgage, especially when you have a steady flow of income coming in. I think the argument I can buy into is that paying the mortgage off at early retirement locks in that 3-4% return (i.e., mortgage) rate, vs a more variable index fund return. Given the importance of the first 10 years of withdrawals (a la Big ERN analysis), I’m giving serious thought to paying off the mortgage (in one lump sum) when I retire. That will significantly lower my minimum monthly cash flow needs.
Is the 1% rule telling you that real estate is overvalued and investors should be exiting real estate in your area?
Not on the whole. I sure wouldn’t buy rental properties though.
Congrats on being free! What a great investment, paying $180k for a home and selling it for almost 3-4x that price.. The city that I live in is notorious for not having any house appreciation unless you live in a rich neighborhoods where home prices easily equal $500k+….
I don’t have the capital for that!
David @ Filled With Money recently posted…Contrary to Popular Belief, Life is Long, Not Short
Congrats on very successfully extracting yourself from a bad Covid induced situation. The right thing to do when circumstances change.
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But the story of the Covid created Airbnb financial ‘problem’ could be a cautionary tale for many people.
You are at the end of the FIRE accumulation road and have the resources (immense financial resources) to comfortably handle the anticipated rent shortfall and to be able to take the time to find a solid financial exit.
For those earlier in the path to FIRE, your problem could have been crushing especially if these other people had one or more mortgages.
I’d like to suggest that de-risking a life right now might be better than assuming nothing bad is going to happen on the most rapid path to financial growth.
I know people who modestly leveraged (60% mortgage) an Airbnb. And Covid crashed them 100% .. but still the obligation to pay mortgage, taxes, and other items related to their Airbnb. They have savings but the savings are a lot lower now than a year ago and the unit isn’t salable at a decent price because it is a condo in a closed northern city center.
And something similar happened to another person who VRBO’d his NYC midtown condo. He only used it a few weeks a year and rented the rest of the time. And then NYC clamped down on condo rentals and he’s short about $60k per year.
In Naples Florida there is a high end condo complex with $3k/mo condo fee (I have a friend there). A neighbor died and the kids in Ohio now have an unexpected $3k/mo expense and when they sell the buyer also has to pay a $65k country club initiation fee. They are trying to sell the property at 1/3 the price that a more patient seller might have gotten. It might have been different if the kid (in his 40s) didn’t have a big mortgage and illiquid investments.
And people in Atlanta who had mortgages in 2008/9, who saw home prices drop at the same moment their stock market savings dropped and then they lost their job.
If there is an overwhelming 95% probability that everything will work out without really big bumps in the road, then 5 of every 100 families will have a crisis.
And I can report a hundred different types of financial crisis that I have seen people have (and getting crushed sometimes) … divorce, medical expense, accident, financial liability, etc.
People can handle a crisis better if their cost of living is low … no/low mortgage and home prices that are appropriate for a single family member income. Having a substantial cash cushion to meet sudden needs even if the market crashes. Having a second gig if your business field has job risk. And more.
I agree that you will have more wealth if things go according to plan and that the majority will have a life that goes according to plan. But you don’t know if you are the exception until it is too late.
Perhaps you and I are just smarter. But half the population is below average (in experience or smarts or maturity or … it’s just math). People are at risk assuming they will make perfect decisions and that circumstances will never hurt them.
I’d strongly advocate a more balanced approach. People need to plan aggressively for a future that will probably come. But they should also de-risk their life while on the road to FIRE. And eliminating mortgages would be one of the things I’d point to. Ditto for car payments. And making sure the kids get a 3.0/4.0 in high school (Georgia) to get a Hope/Zell scholarship to a state college. Taking the government job that has a pension and lifetime health coverage and which is really hard to get fired from. For most people, there are many life decisions that can be made to get to some form of FIRE in a reasonable amount of time while making day to day life far less risky.
And when you get $3 million in cash and liquid assets, you should lighten up and take some more risks and even have a more expansive life style.
We never hear stories about lottery of life losers, only those that are successful. It doesn’t mean that the losers don’t exist.
Lots of wise words there Bob. I know someone whose livelihood depended on Airbnb and they were put out of business with COVID. They figured out a way to pivot out of the situation.
If we didn’t have the big cushion, we’d be taking smaller risks. I suppose one of the luxuries of having excess amounts of money is that it allows you to not only expand your lifestyle if that’s your thing, but also take on investments that have a higher risk/reward profile.
So cool to see an update on the house!
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That return on the house though is phenomenal! Buy for $170k (plus costs), sell for $600k 8 years later? Wow! That’s a fantastic return even if you had paid 100% cash, nevermind post the leverage!
My own home story is different (because our economy is in the toilet and currency goes with it), so although it’s up 50% in local currency, in USD it looks like this: Buy for $200k in 2009, currently worth $120k 12 years later, nice return lol. That’s also under a 20-year floating rate mortgage that fluctuated from 12% when we bought it in 2009 to 7% in 2021. Ahh the joys of emerging markets, currency, high rates, etc. But on the bright side, at least the most expensive properties are cheap as chips compared to trying to buy one in the developed world per square foot. Just don’t finance it all or expect any appreciation in value (at least not in USD) haha.
Congrats, makes perfect sense to sell the property and create more time and reduce headaches.
Charlie @ doginvestor.com recently posted…Analysis of a potential business acquisition
Oof! Those are tough numbers to swallow.
Housing isn’t usually a great deal in the US either. Houses here typically keep pace with inflation.
Despite my good numbers, we totally rehabbed the house too. Too much of my time and blood are in that house. If I could hit Replay, I wouldn’t do it again. The main thing I got from the home are building related skills and the confidence that goes with it.
Congrats on the sale!
The 1% Rule certainly doesn’t work here in Metro Vancouver area. 🙂
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There’s something to be said for the value of the building skills and confidence you’ve gotten from working on that house.
I’m one of those folks who strongly prefers to pay off all debt no matter how cheap, so I’m always fighting against that instinct when I actively choose to prioritize putting money in the market instead. Now that our interest rate is extra low post-refi I really don’t have a good mathematical reason to pay off the mortgage aggressively.
Closer to retirement or even in retirement I might strongly consider paying it off so that we have one less major bill to pay, though. It would be nice to reduce our taxable income by eliminating this monthly line item.
revanche @ a gai shan life recently posted…Money and Life Report: February 2021
Nice post. I say as long as you either A/Pay or mortgage off, or B/Invest what you would have used to pay your mortgage off, it’s fine. The trouble for many is they don’t do either, and that’s why they are screwed. Both can be smart moves.
“The trouble for many is they don’t do either, and that’s why they are screwed.”
Completely agree. If you’re going to buy a $60,000 truck, by all means, pay off the mortgage instead!
Another part of the equation is taxes and ACA subsidies. You don’t generate taxable income on money you don’t pay the bank in interest, but you may from dividends (and capital gains when you sell one day) from index funds. Depending on your current tax and insurance situation the numbers may work out better to just pay off the mortgage, not even adjusting for various investment related risks. As always people should crunch their own numbers and consider the entire picture.
I love how open you are with numbers. We’ve been looking for a good rental for ages and we keep almost pulling the trigger on houses that we know won’t work. It’s tempting to just buy something so you can feel like you are invested! But yeah it sounds like you all made a great call on selling the place! Congrats!
John,
Your comment about pulling the trigger on rentals that wouldn’t work for the sake of being invested, is something I’m 100% guilty of as well!
And, I am finally realizing that I’m okay with not owning rentals, considering the path I took about 26 years ago has served us well. And can do the same for others too.
Hopefully, my story can help some younger readers just starting out on their path to FIRE or for simply investing their savings.
My wife is a teacher and I am a police officer. When we married 26 years ago, we didn’t earn much, about 60k combined, but we always managed to max out our 457’s/403b and IRA’s, invested in index funds.
We carried no debt other than our 15 year mortgage that we paid off in 12 years.
During the course of this time, I always felt like we should’ve invested in rentals. I looked but never found a deal which after crunching the numbers, produced an acceptable cap rate.
And, there were times I almost bought because of that nagging thought that I needed rentals and “it would just somehow workout”.
Fast forward to 2021, and here is how things have shaped up so far.
Still no rentals, and zero desire to own any. I don’t want to be a landlord, COVID related legislation has affected owners ability to collect and evict. The cap rates suck in my area and as Carl stated, I want more free time not less of it.
So, although I didn’t own rentals but had a strong desire to do so, here is how about 26 years of a “boring” approach worked out for us. In which we maxed out our various retirement accounts in index funds, invested in a taxable account with any surplus, and paid off our mortgage 3 years ahead of time.
As of this morning, our total balance at Vanguard is $2,908,000.00 with zero debt. We are blessed with good jobs and pensions. I will collect $7700 per month in four years with 3% cola’s and my wife will collect $6,500 per month with 3% cola’s as well.
With our pensions and assets, I could take on a rental and survive dead beat tenants and weather most storms, but why? That nagging feeling that I am missing out has evaporated.
I love the approach I have taken because it takes no effort to invest or sell. And over the long term it has provided us with critical mass and enough F— You Money!
And it was all done with a boring strategy which involved ZERO leverage.