May 9, 2020
I’ve had a few emails asking me this very question: “Do I need to own a house to retire early?”
Sometimes in Australia it’s just assumed that everybody aspires (or should aspire) to own a home.
But there are plenty of folks who are happy renting and they have no interest in owning property, for a variety of reasons.
Some don’t care either way, but simply prefer owning investments like shares, rather than the roof over their head.
But is that a problem when it comes to early retirement? Are you on rocky ground if you plan to rent forever? That’s what we’ll get into today.
It’s an interesting topic with emotions involved and many aspects to discuss. As always, there are benefits on each side. So we’ll run through those and I’ll also share what we’re doing and our future plans.
In the blue corner, we have home ownership. Here are the points that come to mind in favour of owning your own place if you want to retire early…
You won’t be forced to move by a landlord who wants to move in, renovate, or sell the property. This offers huge peace of mind in retirement and is hard to put a price on.
This means you can decorate however you want, dig up concrete to put in a veggie patch, install solar panels, etc.
You’ll pay no capital gains tax (CGT) when you sell your home – even for a large profit.
Also, the value of your residence is not included in the ‘assets test’ for the pension or unemployment benefits. This is a huge benefit later in life and as a backup plan, but it also may not stay this way forever.
This can be used as an emergency fund/buffer or for investment opportunities. Banks will lend large amounts at relatively cheap interest rates against residential property.
This leverage can be used to increase your investments, or be more fully invested and have less cash laying around, since there is easy access to a cheap emergency fund via a line of credit or similar.
Let’s say half your spending is for housing and the other half for other living costs. In this case, half becomes locked in and paid for.
So this means less reliance on investments to cover your annual spending. As we know, returns from shares (including dividends) , can vary from year to year and are not ‘locked in’.
I see this as a large psychological benefit. Having less money leaving the bank account every month is arguably a more enjoyable situation for your finances in retirement.
Plus, if your investments are going through a rough patch, it’s much easier to plug the gap with part-time work. Compare that to renting and relying 100% on investments (see above), where a downturn can have more of an effect and create a bigger ‘gap’ to cover.
In the red corner, we have renting. Let’s run through some of the upsides to retiring early while not owning your own place.
With a rental, you can switch locations, move interstate, or pack-up and go travelling with none of the major costs or complexity involved with owning.
Moving house while owning is going to cost an absolute fortune in stamp duty and agents fees alone – often 5-8% of the property value. This would be $30k-$50k for a $600k property. Painful!
Let’s say your situation has changed. Your investments aren’t going as well as expected, or you have a large unexpected expense. When renting, you can easily trade your current place to a lower cost home when the lease expires.
On the other hand, if things are going well and you find yourself with extra income and wealth in retirement, trading up and renting a swanky beachside or city residence is equally simple. This way, you get to have fun experimenting with different locations, property types and lifestyles to see which you like best.
Not owning a house means all your cash can be tucked away in investments which should provide higher returns over time. This may or may not be important to you in retirement.
Owning a home means having a massive amount of savings tied up in one asset, in one location. This concerns some people, who would prefer to spread their money across a large number of assets.
Having 100% investments allows you to control exactly where those dollars are sitting. Aussie and international shares. Local or global real estate investment trusts. Emerging markets. Individual companies. Your local fish ‘n’ chip shop?
For similar properties in most cities renting is still the cheaper option Even a paid-off house comes with the following ongoing expenses: Council rates. Water rates. Insurance. Strata fees. Maintenance. Upgrades over time. Huge moving costs.
Renting comes with a clear monthly cost, with no hidden surprises. The hidden costs of owning are massively under-counted most of the time (more below). This difference often means that in Australia, less wealth is needed to retire in the first place.
Owning property means everyone has their hand out. Governments and councils are seemingly always looking for ways to increase revenue, by hiking taxes/charges to property owners.
Stamp duty has kept increasing over decades (even faster than home prices). And home prices have continued growing faster than rents (evident from rental yields declining over decades).
Not to mention council rates, insurance and strata fees rarely seem to fall, even if house prices and rents do. In fact, they often still rise. Trust me, I’m a Perth property owner with first-hand experience here 😉
Rents rise over time too, of course. But relentlessly rising stamp duty and ownership costs disproportionately hurt owners and very much favours renting.
There’s only one hand out – the landlord’s – and it’s very clear how much we’re paying them. Not so with owning, once everything is accounted for.
For those who don’t know, here’s the story. Mrs SMA and I met, and I moved in with her. We stayed in this owner-occupied home for the entirety of our FI journey.
After leaving work, we could essentially live anywhere. So we decided to move further out of Perth, for more space, more nature and more peacefulness.
Because it’s INSANE to sell-up and move without knowing whether you’ll like the new place and enjoy living there for at least 10 years, we decided to rent. That was 3 years ago now and we’re still happily renting. Our old place is now one of our investment properties.
Down the track, we’ll sell these properties and eventually just have a share portfolio. We’re doing this slowly over time as mentioned on the blog several times.
Despite enjoying renting, we’ll almost certainly buy a place later, if we’re happy committing to the location. For the following reasons…
1 — Mrs SMA can turn as much space as she wants into veggie patches and plant her fruit trees which are currently in big pots.
2 — We can install a shitload of solar panels and hopefully run entirely on clean energy. And we may also install a water tank and look at various ways to recycle what we use.
3 — It dramatically lowers our annual living costs permanently, which gets me very irrationally excited.
4 — We’ll have access to cheap debt, should we want to put our lazy equity to use, or just have a convenient and efficient emergency fund. Then, any cash can be stored in an offset account rather than a savings account.
5 — We won’t have to move for any reason unless we feel like it. Flexibility is probably not as important to us as certainty.
You can notice a theme among the two comparisons. The benefits of home ownership skew towards security. While the positives for renting centre around freedom. I find that interesting.
There are clearly benefits to both options, and each can work well. Once again, it comes down to what suits the individual.
So, while there are benefits to doing so, you do NOT need to own a house to retire early. Despite what some may say, you are not insane if you want to keep renting!
If you value security, control, settling in, access to cheap debt, or the structural advantages of buying, then maybe owning a house in retirement is the best move for you.
But if you value freedom, flexibility, having more investments/diversification, the ability to retire a bit sooner, working your money harder or to avoid holding the cookie jar that everyone dips into, then maybe renting in retirement is a better fit.
Will you own a home when you reach Financial Independence? Or are you happy renting? Let me know what you think in the comments below…