I used money invested in low yielding fixed income for the down payment. Since my new monthly housing expenses so far are close to what I would have been paying by renting, I think I that there isn’t a high opportunity cost to this transaction.
Plenty of other bloggers are against owning a home. They believe that they are better off renting the smallest housing unit possible, and using the down payment to invest in the stock market. Real estate varies from location to location, which is why this thinking works in some places, but not in others. In our case, the housing expense for renting versus buying is roughly equivalent. The down payment ensured that too.
Perhaps I could have invested the downpayment in stocks, and rented ( accomplished by selling the fixed income and buying stocks with the proceeds, rather than put the money towards a downpayment for a house). Despite the fact that ownership and rent expenses are roughly equivalent for me, there is an opportunity cost to that amount of cash.
Perhaps I am ”naive”, but it seems “safer” to own my home and live in it than to have the money invested in the stock market and use the income to pay for expenses in retirement. Or at least it feels safer to tackle one of my largest expenses, and be relatively independent from the vagaries of the stock market for this portion of net worth. If you are striving for financial independence, you should also want your “returns” to be generate from various sources.
Given the low expectation for investment returns over the next decade, I think that buying and owning that home at a decent valuation versus owning a collection of dividend paying stocks is probably a moot point over the next decade.
Of course, this whole analysis is dependent on my personal situation, and the area I live in. If I lived in San Francisco or New York City, chances are that the inputs would have been starkly different.
If we discuss longer term periods however, it is very likely that returns on equities will be higher.
It is very well possible that the opportunity cost of owning that home is that I could have been richer by the dividends and capital gains my portfolio would have otherwise generated.
On the other hand, if my portfolio does not do as well as expected, owning that home would seem like the smarter decision.
To Summarize:
1) Owning a house has similar cost to renting in my situation, due to low price to rent ratios
2) Due to 1), I am essentially paying rent to myself and building equity in the process
3) Owning a house is a better use of capital than investing in fixed income today
4) It makes no sense to borrow for a mortgage at 3%/4%/year ( for 15/30 years), but invest in fixed income for 2% – 3%/year in investment accounts
5) It is safer to own the home for the predictable return from the “housing dividend”, rather than invest the money, and use the stock dividends to pay for home expenses.
6) Owning a home is for long-term investors only, willing to hold for a decade (which is similar to long-term dividend investing)
7) Owning also provides better control over the housing situation than renting. Hence it could be argued that unless you own your home, you cannot really call yourself financially independent.
This article has been republished with permission from Value Walk.