After numerous months of second guessing ourselves and contemplation, Wendy and I made the monumental decision to put our family home up for sale and then go do some extended traveling. Literally, countless hours have been spent evaluating the pros and cons of selling our house versus renting it out and we finally came to the difficult decision of letting it go. Once we sell the house, the proceeds (minus the mortgage and real estate fees of course) will be fully invested in numerous financial instruments like ETFs and Fixed Income products. Our assets will grow the same (or typically more) in the stock market as they will in real estate.
Renting vs Owning
We've been told our whole life that renting is bad and that everyone must save up for a down payment, get a mortgage and buy a house. After all, isn't renting a home just throwing your money away? Well I'm here to tell you that this is a serious myth. If you're interested in understanding why this is the case, there are numerous people that can explain it much better than I can such as this website. Our parents and grand parents lived in a different generation and one where the only real option was to get a mortgage, buy a house and pay it off as soon as possible. In a world where real estate prices are getting out of hand (especially here in the Greater Toronto Area) other options (including renting a home) aren't as crazy as you would think.
Reasons we chose to sell our house and rent one when we return:
1. Its actually cheaper to rent than it is to own at the moment
I know this may sound outrageous, but when evaluating an investment like a home you must consider all the money you've put into the house and consider the 'sunk' costs of ownership which don't really give you a huge return on your house value, but instead are emotional upgrades to make you feel better or money paid to the bank in the form of interest. The amount of money we've spent to date on our mortgage, property tax and total cost of ownership (e.g. all the upgrades we've spent on our house) actually exceeds what we would pay in rent for a similar house in our neighbourhood. For us, we realized that over the course of 7 years we spent well over $100,000 in numerous upgrades and general maintenance which are costs you simply would not have as a renter. Obviously as a renter you also would not need to pay interest to a bank on a large sum or money that you borrowed (e.g. the mortgage). While some upgrades to your house certainly add value (e.g. we upgraded floors, kitchen or a basement) there are others which clearly do not add as much value (e.g. new roof, driveway, washer, dryer, dishwasher, A/C unit etc.) and are essentially 'sunk' costs. Additional 'sunk' costs would include property taxes (which increase regularly) and the interest on your mortgage (which can be a huge portion of your mortgage payment early on). A renter only pays a monthly rent bill and all upgrades and maintenance are obviously the responsibility of the landlord. The big difference of course, is that a renter must be comfortable in their surroundings and not being able to renovate as they desire. If you're diligent and invest the money that would have normally been spent on property taxes, mortgage interest, and maintenance costs you can build a very impressive retirement savings. The best explanation of this that I've found is here.
2. Selling will reduce monthly expenses and stress while traveling
Sure we could have found a renter, but we felt that its quite difficult and stressful to manage a renter while you're traveling and remote. We looked into several property managers to help find renters and take care of the property, but the stress level would still be there for our home. Over the course of 7 years we had three leaks and had we not been home and taken care of them immediately, the damage would've been much worse than it was. To us, managing a renter, worrying about the stress of something happening while we're away or even the chance that we have to carry the house and mortgage for a few months wasn't worth the headache. Going completely liquid and completely investing our liquidity was a better stress-free choice. Not to mention, there is psychological stress reduction when you look at your bank statement and you do not have one dollar of debt anymore. Your net worth hasn't changed, but psychological not having any mortgage or debt is a huge stress relief!
3. Buy low and sell high - the real estate bubble!!
Whether you believe the real estate market will drop or continue to climb at these unprecedented levels, the old adage of buy low and sell high still applies. Right or wrong, almost every economist is saying that the housing market has to slow down. Wages aren't increasing anywhere close to real estate prices so something has to give. Historical performance has shown that the stock market always outpaces real estate in the long term and the real estate market has had a good run the last several years. The stock market gives you an average return of 6-7%/yr and the historical return on real estate is closer to 3%. Investing the equity from our house into a diversified portfolio of low cost ETFs is a very good way to grow your retirement and frankly no worse than sitting on your house as part of your retirement strategy. Leveraging innovative strategies with TFSAs, RRSPs, RESPs and non-registered investments will really help grow your income while minimizing taxes. We've done a ton of research in this area and we're confident that we can grow a very substantial retirement income from Index ETFs and other investments vs simply real estate. Its not a hunch...we're already doing it!