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Creating Freedom Through Financial Independence


Is Your Dream House Costing You Your Freedom?

November 12, 2018

The largest progress to financial independence is made through cutting wasteful spending and being more in control of our money.

Then investing this surplus cash to create many more future dollars.

But what about costs that aren’t optional, like housing?

These need to be considered too, of course.  While we’ve already covered the rent vs buy dilemma, there’s still a problem.  Many fail to realise what a huge difference buying ‘too much house’ can make.

The Sydney, Melbourne housing boom of the last half-decade (which is now over) has meant the numbers are whackier than ever!  So let’s tackle home ownership from another angle and consider opportunity cost in its finest form…


Consumption Reigns

A key factor in our financial strength and freedom is our consumption.  Our level of consumption, relative to our income and wealth, dictates how free we really are.

We know that higher consumption doesn’t make us any happier, yet most of us still pursue it.

I know housing has many positive features, many of which make us feel good.  But at the end of the day, housing is really another form of consumption.  And that’s true globally.

But in Australia, housing is something that consumes us!  It seems to own us, rather than the other way round.

We dedicate (terrible) TV shows to it, follow price movements like a national sport and wear our property ownership as a badge of honour.  And even after a home is paid off, it still costs a tidy sum to own and maintain.

Anyone serious about saving and getting somewhere financially, needs to optimise their housing choice.  Or at least dilute the cost by renting out rooms or sharing.

Anyway, onto today’s example…


Our Investment Property

A good case study is a Melbourne rental house that we sold 2 years ago.  We’d held it for a number of years and made a strong capital gain.

So we had a decent lump of equity tied up in the property, yet it was still generating large negative cashflow – (our bills and mortgage were much more than the rent).

As you probably know by now, we decided to sell up and put the equity into shares to create an income stream.

As it turns out, a young first home buyer couple bought our property.  Here’s the numbers at the time of sale…

Market rent:  $475 per week.  ($24,700 per year)

Market price:  $1,030,000.  Plus stamp duty, and settlement costs.

Because the price had gone up far more than the rent, this house ended up with a rental yield of 2.4%.  Pretty low indeed.  And this is before costs.

I started to wonder why the couple was so keen to buy when renting would be so much cheaper.  Making some assumptions, here’s how the numbers looked for our couple…


The Numbers

To buy this place with a 10% deposit, they were going to have a mortgage of at least $900,000.

With a mortgage rate of 4%, the weekly mortgage payment would be roughly $1,000.  Or $52,000 per year.

And this is with record low interest rates.

Then of course there’s also maintenance, repairs, upgrades, council rates, water rates and insurance.  This would likely amount to $5,000 a year.

All up, this couple would be looking at $57,000 a year to own the property, or $1,100 per week.
Plus the opportunity cost of having the $100,000 deposit tied up in the property.
Plus the $50,000 stamp duty paid on purchase.

Remember, this compares to a mere $25,000 per year to rent, and no capital outlay.

So we’re looking at somewhere between 2 and 3 times the cost, in terms of monthly cashflow.

And if you look across many suburbs in cities across Australia, these numbers are far more common than you’d think.

But renting is dead money I hear you say.  Eventually they’ll have it paid off!

‘Free rent’ is a term I hear used a lot, for when a house is paid off.  Awesome, let’s think about that for a minute…

If you have a car loan and pay it off, is your car ownership now free?

No, not at all.  You simply paid off the loan.  You’ve removed one bill by paying off the loan, but it doesn’t earn you anything.  And so it is with a home loan.

Both assets still cost you money to own and maintain.  Both provide zero income.  They just don’t cost as much as they do with a loan attached.

Now I know some people don’t look at it this way, but I do.  I’ve noticed people will tell themselves almost anything to convince themselves they’ve made the right choice.

Let’s see how the numbers stack up if this couple somehow saved up the entire purchase price and bought the house with cash…


House Paid Off

OK, our couple buys the same house for $1,030,000 with cash, and pay $50,000 in stamp duty.  This saves them $25,000 in rent each year.

But they still have to pay the $5,000 per year in ownership costs for the house, as detailed above.

Let’s say they’re a frugal couple who is keen to create freedom in their lives and retire early.  We’ll assume their only luxury is a well located capital city house, which they want paid off as part of their financial independence plan.

Because they’re generally frugal, let’s say the couple’s other living expenses are a modest $25,000 per year (the same as ours).

So the cashflow on their $1,080,000 net worth looks like this…

Housing costs: $5,000 per year.
Living costs: $25,000 per year.
Total costs:  $30,000 per year.

Our couple could probably cover this level of spending with part time work income and can easily leave the full time workforce if they choose.  And that’s a great achievement in itself.

It’s not full freedom, but it’s pretty good.

What if they were a bit more flexible and open to another way of doing things?


Thinking Differently

Instead, let’s see what happens if our couple decides to rent the same property and put their wealth into Aussie shares which pay a solid dividend income stream…

$1,080,000 invested in a couple of Aussie LICs or an index fund, would likely yield over 4% per annum, plus franking credits.

This means their wealth would spit out at least $42,000 per year in cash dividends.  Plus around $18,000 in franking credits.

Owning these shares together, each spouse would earn $21,000 in cash dividends, plus $9,000 in franking credits.  This gives a gross income of $30,000 each.

Tax owing on an income of $30,000 is around $2,400, which means there’d be $6,600 of franking credits left over and each spouse would get a tax refund for that amount (at the time of writing).

Combined, this means our couple would generate an income stream of at least $55,200, after tax.

And remember, their living costs would be $25,000 for rent, and $25,000 for other expenses – $50,000 in total.

So by putting their magic million to work in a more effective way, this couple is able to cover their spending entirely!

Even if franking credit refunds are stopped, our couple would still earn at least $42,000 after tax.  This means they’d only need to earn $8,000 of part time income to cover the gap, versus $30,000 if they were homeowners.

Ultimately, the higher your passive income compared to your expenses, the stronger your financial position.


But, but, but…

I know some of you will think this is a ridiculous example.  So be it.  There’s no perfect example, and there’s no one size fits all.

There’s always an argument to be made.  But I have to share things as I see it.  That’s why you read this stuff, right?

Actually, I think this is a perfect scenario to look at.

Why?  Because it’s a real trade-off people are making in Australia all the time!

I get that it doesn’t feel like such a big deal because almost nobody is buying a house with cash.  And it might not seem like a large difference in monthly cashflow in most cases.  But the outcome is the same.

All that extra cash going towards consumption when it could easily be going towards investing.

In my view, the numbers on capital city property ownership have changed.  And it’s been heading this way for many years.  Long term rental yields continue to fall and overall cost of ownership continues to rise quickly.

Rates, insurance and repair costs are growing faster than rental increases.  And stamp duty creep means you’re paying an ever growing percentage of the property value when buying.

People are now paying huge prices (and ongoing costs) for places they can rent for relatively little in comparison.  Given our love affair with property, the stigma of renting and our fear of shares, this may well continue.

And that’s sad, because it’s literally costing people their freedom.  I believe there are many thousands of people in Australia, young and old, who could comfortably retire if only they removed their rose-tinted property glasses and learned about investing in shares for income.

They’re missing out on financial independence and they don’t even know it.  With this blog, I hope to reach some of them!


Now what?

So do we still think rent money is dead money?

Or do we now realise that’s complete nonsense?

Now, I’ll happily admit renting is dead money if you just blow the savings!

Forced saving is a real factor at play here.  So if you think you need the discipline, then simply set up an automated savings plan.

It’s also true that once you’re very wealthy and happily retired with a large taxable investment income, buying a house is a reasonably tax efficient option.  But until that point, it’s usually cheaper and more effective to rent.

Rather than following your peers or relying on what worked for your parents, learn to think for yourself.

Luckily, we’ve got some intelligent and independent thinkers around here who have done exactly that.

For example, I’ve received emails from many of you thanking me for sharing another option, other than 100% property investing which seems drummed into us from every angle at an early age.

These people should be extremely proud they’ve questioned the ‘normal’ behaviour around them and decided to seek out other information to forge their own path.  That’s not an easy thing to do!


Final Thoughts

By crunching the numbers first before deciding how much house to buy, you’ll be way ahead of your peers.

One less bedroom.  A slightly cheaper suburb.  Anything that helps you lower your cost of housing will boost your savings rate and mean more freedom, sooner.

I can’t emphasise enough how important it is to make sure every dollar of wealth you have is contributing to your overall goal.

That means more dollars invested in productive businesses earning a growing stream of dividends, and less dollars tied up in consumption assets like houses and cars.

There’s no point having heaps of equity and no freedom.

I’ve now seen a number of people with a huge net worth and zero freedom.  Either because they love the status that comes with their expensive house, they have a distaste for renting, a fear of shares, or simply an irrational level of love for bricks and mortar over other investment options.

I hope you can now see the opportunity cost with owning too much house!

And more importantly, the freedom and choices available for those that focus solely on building an income stream for financial independence, by controlling our consumption and shunning assets which suck away cashflow.

Don’t forget, your financial strength is a measure of your passive income compared to your spending.


71 Replies to “Is Your Dream House Costing You Your Freedom?”

  1. Oh man I wish my family could live on $25,000 a year expenses! My families current daycare costs alone are $25,000 a year, increasing to $40,000 a year next year when two kids start going :S Ah kids you just got to love them 🙂

    I like your post though, and it raises some very good points, the biggest being for me what do you actually need in a house and what is just for bragging (i.e. the suburb, extra bedrooms / living rooms, pool…). Its one I am really thinking about moving forward, as it has a huge impact on your FI.

    1. Wow man, I’d probably have a heart attack if I saw the rest of your expenses 😉

      Thanks, glad you like the post – housing really deserves a lot of consideration since it makes such a big difference.

      1. Haha Dave I don’t think you would, we actually would probably be even more frugal than yourself 😉 When you take child care costs out, the rest of our budget is only $35,000 a year and this includes money to travel interstate each year to visit both sets of parents. Not bad for a family of 4!

      1. Hi Dave,

        Great post again. You’ll have a tough time convincing Aussies that home ownership is not the be all, end all!

        I disagree about you saying how Labor’s proposal won’t target the people “they’re really after”. It will target exactly who they intend, people like yourself who may depend on it and where it could make a material difference. The pollies might like to talk tough, but in my nearly 40 years on this planet, I’ve never seen them upset the truly wealthy who don’t need it anyway…

        1. Haha, thanks Christopher 🙂

          I do think Labor wanted to target those with many millions, getting large refunds, but this policy won’t achieve that as those benefits have already been diluted by the recent $1.6m super caps. But then again maybe they just see it as an easy cash grab and don’t care what the outcome is now that they’re wedded to the idea!

  2. I’m all about financial independence, but the retire early bit has never interested me. If it did, I’d absolutely rent and invest.

    The theory is built on sound economic logic – which is always good enough for me – and being natural savers I’m confident my wife and I would have the discipline to make good on investing the money saved.

    That said, I don’t for a moment regret the 4 years, 9 months and 16 days we spent ridding ourselves of the mortgage. Far from hamstringing us it’s provided us an enormous degree of freedom and choice to live the way we want to live. Yes, there’s nearly a million dollars tied up in our PPOR, but that doesn’t reduce our choices, it just makes clear that staying in the workforce IS our choice (or at least mine, my wife hasn’t worked since we had kids three years ago, and that’s how we planned it).

    I’d almost argue that paying out the housing component of an optimised life early provides equal freedom to renting and investing. The capital is always there to redistribute! It’s all down to your definition of freedom. If that’s RE, then then my way is going to get you there 5 years slower. And that’s a choice, same as any other.

    Fortunately I love my job and I intend to continue doing it for a long time. So for my money I’m going to try and have it both ways. I’ll have just-enough-house, and stick with working till the investment portfolio has provided plenty of frivolous consumption and I’m jack of working.

    We all do it our own way hey.

    Solid article Dave.

    1. Thanks for your thoughts MrMcGee.

      You frame it really well – it’s a choice we get to make for ourselves and it may slow us down, but the benefit may be worth it. I simply aim to highlight that it’s a choice and that people have more control over their freedom than they think 🙂

      Sounds like you’re in a great spot, I’d say most people never find a job they truly love, so well done for that!

      1. For me the foundational question has always been ‘what if I could never retire?’ rather than ‘what can I do to retire as early as possible?’

        By the numbers I could retire (although it’d be tight with two kids), and at 35 that’s probably not bad.

        The way I see it is if the point of FI is to RE and do what you really love, then in a backwards kind of way I just did the RE bit first, and used that to do the FI bit latter.

        Is there any job – any job at all – that could get you out of retirement Dave? What if you could never retire?

        It’s an interesting thought experiment.

        1. Not bad? It’s pretty damn awesome, well done!

          That’s an interesting way to think about it.

          To me, the purpose of becoming financially independent is being able to do whatever you want with your time. Having the choice to dedicate more time to things that are important other than work, including health, learning, family/friends, helping others, whatever’s important to the individual. Though the most enjoyable life will include some type of work that is enjoyable and meaningful, whether paid or not.

          Being FI lets you control and balance all of these life aspects, rather than being forced to commit 40-50+ hours to a mandatory job to pay bills. How many would continue their same job and hours if they didn’t need the money? I’d bet a very small percentage!

          I’m not sure there’s a perfect job for me (?), but I like what I’m doing right now. Writing this blog and trying to help people gives a sense of purpose and is very enjoyable as a form of ‘work’. I also write some articles for an investment website because I enjoy reading about different companies and investments, so that keeps the juices flowing too.

          As for full time work, I’m really not sure I’d be happy with that – it’s just very restrictive and doesn’t leave much time or energy for other things. Luckily I don’t have to think about that! From the start I figured there had to be another way.

  3. Oh the temptation to spend on our homes – just a new lawn and just a newer kitchen and just ….. phew. There is a whole series of industries booming around over-captilaisation in the family home (coughBunnings).

    Sadly renting in Australia is a very different ball game to say UK where you can get long term leases. We have moved 30 times in 30 years and 90% of these where due to landlord selling/divorcing/getting sick etc and the investment property was the first thing to go. We are in our own place now and the cost of just owning compared to renting is much higher … but its nice not to have to move house again.

    We will down size significantly in about 10 years and plan to invest 1/2 and spend the other half on something small and fit for purpose for two empty nesters.

    1. Have you seen the latest thing…a butler’s kitchen? So when you have guests your real kitchen doesn’t look messy! Holy shit, that’s a disgusting waste of space, resources and money!

      Yes very true, renting would be much better if we had long term leases here. Wow forced to move almost every year sounds like pretty bad luck! The peace of mind with knowing you don’t have to move, ever, is pretty cool and certainly worth something. I like your end game, seems like a good strategy 🙂

  4. I think there’s three angles you don’t mention in the post: 1 the LVR on a house is amazing, the debt you get on that LVR benefits from inflation and your gains are tax free. On the negative side I would also point out the couple has all there wealth tied up in one asset (plus super though).

    1. I think LVR is irrelevant in this case – this is a home, not an investment. The point is it’s creating no freedom for them compared to having their money parked elsewhere. The return on equity might be high for a while (or it might not, prices are now falling), but in any case it doesn’t matter. It’s still providing no freedom for them, it’s just superficially attractive.

      Sure the debt erodes with inflation, but other investments benefit from inflation too, and also come with tax benefits (albeit not tax free), without the substantial upfront stamp duty, ongoing costs and eventually transaction costs.

      It’s not aimed to be an exhaustive property vs shares article, simply a look at a common trade-off occurring across Australia all the time.

      Most Australian households sadly have swallowed this medicine and have the majority of their wealth tied up in the family home, an investment property and super. And the numbers tell us it provides very little in the way of passive income and the ability to start living on their own terms.

      1. Don’t get me wrong, I personally will never get an investment property, but I don’t think the case is closed on PPoR given the lending and tax benefits. As an example you have mentioned debt recycling in the past, trickier now for sure, but still effective.

        Anyhow, thanks for providing great content and thought provoking commentary – looking forward to more posts.

        1. Totally agree, I’m not at all saying buying is a bad choice. I’m merely pointing out how it can affect financial independence and the amount spent should be carefully considered.

          Thanks for reading Vaughan 🙂

        2. Vaughan/Dave, I’m interested to know why you think debt recycling would be trickier now? I’m looking to do this employ this against my PPOR.

          1. Agree with everything Dave has mentioned in that post. When I first implemented it, even with excellent credit, I found it more affordable to go P&I than IO due to a 60 basis point differential. It’s less now, but the ongoing rotation through IO would be challenging to navigay.

  5. Great post Dave, thanks for that. I think the title is slightly misleading compared to the examples in the post though, because a million dollar home in Sydney or Melbourne isn’t anyone’s dream home it’s basically just a starter which makes things even worse!

    I think property has it’s place as an investment but here in Australia it’s basically a religion if not an out and out cult. And whenever you question investing a million dollars in an illiquid indivisible asset with bad cashflows as well as huge transaction costs and lots of ongoing expenses you get looked at like you’re an idiot. It’s amazing how many people forget or never even knew that one of the main causes of the GFC was a huge property bubble exploding in the US and then much of Europe, but any time you bring that up you get told it couldn’t happen here? Why not?

    I do think that there is definitely a case to be made for owning your own home, particularly if you prize the security of not having to move, and in fact I own my home. There’s also a good case to be made for people to rent as well, it really comes down to your individual circumstances. Perhaps the best of both worlds might be working in a capital city with capital city wages but living in a nearby regional city with good transport links and having those lower house and general living costs.

    1. Cheers Aussie HF, great comment.

      Haha yeah you’re right, I guess people see this million dollar place as a starter. That in itself is quite stomach-churning and I just look at the foregone freedom and the trap they’re now in.

      I agree, property investing is perfectly fine, but the craze is a bit bewildering now. And the numbers, environment and outlook just aren’t the same anymore.

      Sure home ownership is a great thing, but I think people get too caught up in the love of it and the property mantra, so they don’t question whether it really makes sense or not. The strategy you outline is a good one, though the travelling time would bother me. I’d prefer to rent close to work in that case, but definitely worth considering 🙂

    2. My wife and I sold up our PPoR in a capital city more than 10 years ago and moved to a regional city one hour away where the cost of housing is halved, school fees are a quarter (but the quality is still on par with the capital city schools), rates and insurance costs are also less. My brother-in-law, on the other hand, decides to forgo all of these benefits along with family support and good regional city job prospects to enter the property market in a small unit on a busy road in an uninspiring ‘burb to raise his young family. Still cannot work out the rationale.

  6. Hi Dave.

    Great post as usual.

    “Postcode Povo” is a term I’ve heard in relation to people buying in an area to “keep up with the Jones”. It certainly has a massive detrimental effect on FI.

    Lets remember though that a similar property in outer metro Brisbane would set you back around half that amount. It’s really only Sydney and Melbourne that have such a poor yield.

    That said I agree that in the main property doesn’t come close to a share based portfolio in terms of ROI and a bunch of other measures.

    However I know a lot of people don’t consider a PPOR as an investment. I would tend to disagree. It is simply an asset with a fairly poor return. In my humble opinion you need to look at what you would spend on rent less interest, rates and upkeep. Then use what you paid for it for the yield calculation.

    I understand a lot of people will disagree but I think housing expenses are too significant to not have some kind of financial formula for accounting for them.

    Keep up the good work

    1. Thanks mate. You’re right that not everywhere has such a large difference for rent vs buy, but most city areas favour renting. While this amount will buy you a dream house in some cities, in Melb/Syd it’s only a moderately well located house which some people see as pretty basic as another commenter pointed out!

      Couldn’t agree more – the numbers have to play a part in making a decision when it has so much impact on your life, freedom and overall financial wellbeing.

  7. Great, brave post. Property is our religion. In fact I’m a fan of getting our national flag changed to a picture of a outline of classic house.

    For me there is the numbers argument and then there is emotional one. This is the numbers. The emotional arguments will be:
    * what about the kids? (Moving etc)
    * what about schools (don’t want shift schools)
    * what about sunk investment (stamp duty)
    * but my castle !!!

    I guess my answer to kids is to keep the house until the kids move out. The problem there is if they stay 25 years I’ll never be able to retire…..

    Personally I like a hybrid approach:
    350k house
    750k share portfolio

    The 750k @ 4% generates 30k which you can live off.

    The trouble is where can you live off property that low cost. Not in a capital city.

    Anyway no easy answers it seems.

    1. Haha! Yeah I always expect a few complaints from every article, even more for housing related posts!

      Kids – It’s my understanding that children are allowed to live in rental property without permission, unlike pets 😉 So I don’t see that as being a problem, moving house isn’t going to scar your kids for life or anything like that.

      Schools – I’m pretty sure there’d be more than one suitable rental property in a particular suburb (or two) at any one time, allowing a family to stay within their desired school zone.

      Sunk costs – Stamp duty and selling costs are an absolute killer. This should make people think twice about buying, selling and moving on a whim.

      My castle – I get it, it’s nice to own stuff, but in many cases the stuff ends up owning you. People can do what they like, but recognise there’s always a trade-off, and there is other options.

      Damn mate, that sounds like your kids get to decide how much freedom you have in your life, that’s no good!

      $350k would get a small outer suburb house in most cities other than Sydney. But you’re right there’s no easy fix. Since we all have limited capital we need to prioritise, in many cases the choice may be – home ownership or financial independence?

  8. Great read as always.
    Doing something similar to the above as in bought an older house in Melbourne that needed minor work on a big block of land with a smaller mortgage a few years back. It wasn’t easy seeing all the nicer houses around and choosing this one but common sense prevailed! Common sense doesn’t seem to be too common these days though as most of my entourage went with new builds…

    Money in offset account now covers almost half the mortgage so saving on interest big time but planning on dumping some of the offset money into the mortgage to lower the repayments where it becomes extra manageable giving me some freedom and the rest of the money I’m planning on putting it in shares to create another income stream.

    Thanks again for all the great articles

    1. Thanks Paul!

      Haha yes common sense is quite rare these days 😉

      Sounds like a pretty solid plan mate and well done on thinking for yourself and not simply following your peers. Great comment and thanks for reading.

      1. A late reply, if I may also ask, with official mortgage rates now so low, is an Offset Account strategy still the best way for my kids to deal with their surplus savings to minimise borrowing interest, when the current after tax yield has reduced to say 3%? Or is it time to divert into shares? The share market timing has me worried with more commentators raisingbthe prospect of a future recession (as at Aug 2019). So I’m wondering if cash might be safer in the short term and they should keep the offset account going? Also important they dont make the wrong call as they are looking to trade up to a bigger home within the next 2 years, as the current one is quite small, first baby has arrived, currently no garage and trade tools storage space is becoming an issue. I wonder if this topic deserves a separate post?
        A huge thankyou also for your blog, it is giving me a new totally perspective on planning my own retirement!

        1. Thanks Bruce, really glad you like the blog!

          Is an offset the best choice? I don’t think there is a best. Everyone will have a preference for different approaches. I compared mortgage, investing and super in this article, not sure if you saw that one. Also, the thing is Bruce, if you google ‘Australia recession 2018, 2017, 2016, 2015, and so on, there are articles every single year saying the same thing – the end is coming so don’t invest. There’s simply no way to know as I answered a few questions on this recently. The market delivers good long term returns despite the ups and downs, it’s unrealistic to try and avoid the downs and only get the ups – if someone could do it consistently, they’d be the richest person in the world.

          If they’re looking at trading up then they definitely want to keep that money on hand because they’re going to need it. The market is a fantastic place for long term savings, but can go anywhere in the short term. Hope that helps.

  9. Some interesting thoughts. I tend to agree, the golden years of property gains are gone. Definitely with respect to investment properties and likely changes to negative gearing and CGT. Though one still needs to factor in leveraging and the actual returns that can be generated. Then the fact that property isn’t really a passive investment unless you pay for it in which case returns drop of even more.

    The family home is a slightly different story. Many of our decisions are not purely financial. Having kids is a terrible financial decision! 🙂 Though there are so many intangible and unquantifiable things in life i suppose. With a young family – the security of home ownership to me is worth a lot. Though you are right, taking a step back and considering what you need and the opportunity cost of the extras is super important.

    ps. my childcare costs are more than $40k – it hurts!. But it allows another income which covers that cost.

    1. It’s very complicated to measure returns and compare that to shares, but I’ll give it a good shot one day and probably write a big article on it!

      Haha you’re right that it’s not always about the numbers. But the thing is, everybody knows the emotional benefits, so I have to be the one to point out the numbers 😉 Then people can make a decision with all the information and acknowledge “yes there’s another way, but this is worth it to me”.

      As always, there’s no perfect answer, just trying to shed light on a big expense from another angle. Thanks for your thoughts.

  10. An ever ongoing debate. I hope the more people write about it and it sinks in a little, the more people will consider renting and investing in other ways to build wealth. It’s working well for me so far.

    1. Us too Miss B – really enjoying not having to pay for repairs, or rates, or anything really 🙂

      Hopefully it just makes people think twice and realise what it’s really costing them, in terms of yearly cashflow and freedom.

  11. Great read as always.
    Doing something similar to the above as in bought an older house in Melbourne that needed minor work on a big block of land with a smaller mortgage a few years back. It wasn’t easy seeing all the nicer houses around and choosing this one but common sense prevailed! Common sense doesn’t seem to be too common these days though as most of my entourage went with new builds and big mortgages …

    Money in offset account now covers almost half the mortgage so saving on interest big time but planning on dumping some of the offset money into the mortgage to lower the repayments where it becomes extra manageable giving me some freedom and the rest of the money I’m planning on putting it in shares to create another income stream.

    Thanks again for all the great articles

  12. Hi Dave, love the content. How many times have you tried moving with kids?Going to open homes, putting in applications, being at someone elses mercy? Id much prefer the freedom of a mortgage rather then continually churning through rentals. But def not a million dollar mortgage! Cheers

    1. Haha you got me! No kids here so I can’t argue that point. It would be a ongoing hassle no doubt, but one that you’re compensated for.

      As always, the point is to highlight it’s a lifestyle choice and like all our spending choices, we should consider whether it’s truly worth it – clearly for you the answer is yes!

      Thanks for reading 🙂

      1. Haha rock and hard place. Happy medium as others have suggested would be buy somewhere cheap that fits the bill and concentrate on income producing assets!

  13. Hi Dave,
    It is refreshing to hear a young person discussing property in such frank terms rather than get sucked into the property vortex by the constant hyperbole emanating from insiders. The strong emotions about property are well documented. However, the raw analysis is often substandard, conflicted and sometimes boarding on negligent. Banks understand very well the emotional aspect of property ownership as it is a central driver in their credit creation process.
    I believe that the concept of LVR is a ruse that is sold to the public; it works as an initiation test for the public to see at what level of the property ladder they are eligible to join. From the bank’s perspective, the house is not the asset. Houses provide collateral for a loan but they don’t pay off mortgages, people do. The real asset of the bank is the borrower and his or her credit worthiness. Banks don’t want to repossess houses – they only want the long term income stream that the borrower provides. In order to protect the income stream, banks are constantly conditioning their would-be borrower by adopting first the carrot approach (saying yes to buying or building or refinancing your dream home) and then applying the stick approach once the mortgage is in place. All with the aim of securing and protecting a long term income stream.
    I imagine these comments will cause some to turn reptilian. Matters not much to me. That is their psychological issue to handle. Keep up your good work Dave!

    1. Thanks for that Steve, interesting thoughts.

      Don’t worry I was affected too, earlier in life I believed leveraged property was the best thing since sliced bread. Now having done both renting and owning, investing in property and shares, and how the numbers affect savings rates, lifestyles and ultimately financial independence, I think I can provide some good viewpoints on it, and shares what others might be missing or what I would do starting again.

      Totally agree, there is very little questioning of the norms, so someone has to be the bad guy and point out the financial consequences of our emotional lifestyle choices 🙂

    2. Dave, I think you need a ‘like’ button on this forum. Steve, that’s a really interesting perspective – I’d actually never thought about it that way. As someone who got sucked in by the ‘put all your income on your mortgage, use credit card to pay all expenses, then redraw to pay credit card bill’ merry-go-round for many years – which is just a way of staying in debt longer because you tend to also spend your interest savings (because you don’t really know what they are without a fancy spreadsheet) – I’m kicking myself now that I didn’t realise earlier what a trap it is. Luckily I’ve changed my ways, even if it means I have to spend the next few years saving madly and getting that damned thing paid off. 🙂

      1. Thanks Nicola. The ‘like’ button would be a good idea if I knew what I was doing here! I should prob reach out for some help on web design and adding features at some point, thanks for the idea.

        Appreciate you sharing that, I’ve heard of that strategy before, but not from people who it didn’t work out for. Never interested me because I hate credit cards and there’s usually a small fee at lots of places to pay with credit card. A more effective plan I think, is to just spend as little as possible while having a good life – which you now seem to be going with 🙂

  14. I always enjoy these types of articles because I’ve done both (rented and owned) and find the numbers really difficult to crunch… rent money is ‘dead money’ in the same way interest payments are dead money. Rent costs will go up over 30 years whereas interest payments will be eroded by inflation and mortgage payments. It’s really difficult to calculate all the variables and the costs associated with those over a lifetime.

    One angle that doesn’t get looked at enough though is capital city vs regional living. I lived in a crappy small house in Melbourne that cost $800k and was 30km from the city. Commute to and from work was about 3 hours a day door to door. Living in a regional city now, my commute to and from work is 20 minutes door to door. My house is now luxurious (bought emotionally, though only minor regrets) and I pocketed $120k from the move. Living costs are way lower, quality time with amily is way higher and I suddenly wonder why anyone — particularly those pursuing FI/RE) would want to live in Sydney or Melbourne at all?

    ‘Dead time’ (e.g. commuting to and from work, going to the shops, visiting friends, etc.) in capital cities is a grealy undervalued commodity and probably deserves just as much air time as renting vs owning. Again I suspect the arguments for and against would be largely emotional and a matter of personal choice, but on a purely number-crunching basis I’m sure they’d be eye opening.

    1. Awesome stuff, thanks for sharing Chris!

      You’re spot on about the extra time – it has real value and underappreciated. Since moving further away from Perth, things don’t take as long to do because there’s less traffic which is great. Could be solved by living closer to work but then the housing is likely to cost more for many people working in or around the city.

      If one is investing the savings from renting into shares, the income stream and value of those shares will rise over time, meaning the increasing rent isn’t an issue, and probably grow faster as dividends have outpaced rents for the last 30 years –

      I suspected it was entirely possible to live a happy and prosperous low cost life living outside the capital cities, but since I live 25km from Perth I can’t exactly argue that point strongly. Great to have some examples now of people who have done it and with great results. Thanks for your story, hopefully it shows others it is completely doable 🙂

      1. There are trade offs living regionally, but there are trade offs living everywhere. It would certainly suit some people’s lifestyles and hasten their journey to FI if that’s what they wanted. For what it’s worth my 80km commute to the nearest capital city is 90 minutes on a good run — the same time it took to commute 30km by public transport to work in Melbourne.

        Interesting point about reinvesting the difference between rent and owning into shares. However wouldn’t that be entirely dependent on location and not a slam dunk pathway to higher net worth?

        1. That’s interesting, but I thought you were now 20 mins from work? Or do you have to commute to Melb sometimes?

          It does depend on location and rental yields in the area – but most capital cities have relatively low rental yields and hefty ownership costs so in many cases renting is cheaper. It’s definitely not a slam dunk for renting, there’s many other things to consider. When I question owning people seem to get very upset and start throwing all sorts of justifications at me and assume it means I’m against buying. Not at all!

          I wrote a more in depth post about renting vs buying here –

          1. Sorry Dave, what I mean is I’m living regionally now (Queensland)… it’s 10 mins to work (door to door one way, 20 mins in total for the day) but if I ever miss the capital it’s 90 mins away. That’s the same amount of time as commuting one way to Melbourne CBD was when I was 30km away in ‘suburbia’.

            I suspect those arguing in favour of home ownership have either: 1) made the choice without thinking about the financial implications, or 2) made the choice thinking about the financial implications that they thought of at the time. That’s what I mean when I say articles like this are interesting… a different set of numbers and calculations can sometimes cast a different light on things.

            Appreciate the work you put in here, and don’t worry… I have read all your articles! 😉

          2. Oh I see, gotcha!

            Thanks for clarifying and it’s incredible that you’ve read every blog post, I’m humbled 🙂

    2. Hi Chris, Well done on your regional move – I’ll be doing it myself in a few years.

      I think part of the problem is the saying, “rent money is dead money”. No it’s not. it pays for one of the most essential and important things in life – shelter. How so many people came to believe that paying for something essential is “dead money”, I’ll never understand. Is your food bill “dead money” as well? What about the taxes you pay that in turn provide your medical care, defence (which keeps our country safe) and other essential things that make life living in this country pretty damn good? I don’t consider a PPOR a financial investment like many do – it is purely a lifestyle or emotional investment only.

      1. Cheers Christopher, going regional is certainly something I haven’t regretted yet. Even if I do move back (big IF) the savings in the meantime will carry us a long way down the track.

        Not sure if I was a bit ambiguous, but I don’t consider rent money as dead money either, for much the same reason as you. Shelter is one of life’s necessities! It sure is hard to optimise the costs around it though, particularly if you’re FI-minded.

  15. Hey Dave
    Enjoying your posts thoroughly. Just a quick request… you often have calcs that are scattered through your pieces. Any chance you could do a summary section which shows all the calcs grouped together? Beats scrolling repeatedly or getting the pen out to replicate them myself. It’d make it far easier to digest that way.
    Keep up the good work!

    1. Thanks very much Todd. Man that sounds like a bit of work 😉 And I fear that’ll make the blog posts even longer and a bit more repetitive – which I worry about happening already!

      Or do you mean one big blog post with all the savings I’ve listed so far? Now that’s a pretty interesting idea! Even though we’re only just getting started on possible spending improvements! That’d probably be pretty popular among the readers who like numbers, and it may put everyone else to sleep lol.

  16. Hey Dave,
    I’ve been looking at buying an investment property myself in recent times. While I do agree with everything you’re saying, and definitely in your case it was wise to sell, however if you can find the right property at the right yield, it might be a worthy investment. Problem is these bargains are few and far between at the moment.
    Great read!
    -Money Professor

    1. Cheers MP.

      Thanks for the comment. To be clear, I’m not against property investing at all, it can work out quite well depending on lots of things. I do think the love of it is a bit overdone and it seems to be the default choice.

      It can be debated endlessly of course, but having experienced both asset classes, weighing them up, on balance, I think shares are a better fit for those shooting for FI and wanting to create some freedom in a simple way, as soon as possible.

  17. “What most people fail to realize is that through buying fancier houses and newer cars, you’re not rewarding yourself for hard work. You’re creating more work for your future self in order to afford those things.”

    1. Great summary! Where’s that from? I feel like I’ve written something like that before.

  18. I revisited this blog and decided to comment.
    Excellent article Dave. Numbers don’t lie. Even Barefoot book said something about investment prop and our property religion.
    I hv a crazy idea. Do you know investment property seminars that pop out in your Fbook? My best friend got suck into it and bought an overprice off the plan apartment. Its been 10 years no capital gain but now worth less than 10 years ago.
    Back to my idea, I am thinking to bring this calculation there, do you think I would come out alive?

    About PPOR, agree on not over streched. I lost my job for 6 months, and I suprised how close I was to sleep on the street. No rental agents wanted to talk to me. Lucky no kids at that time.

    1. Thanks Edsan! That’s an interesting idea. It can’t hurt to explain the numbers to more people, but it might not be well received – like questioning any religion!

      Property ownership and investment are both perfectly fine as long as people know how the numbers work. But most of the time they don’t, it’s based on hope and high expectations, while the costs are glossed over…

      If you do spread the word, let me know how you go 😉

  19. I’ve binged read almost every post on your blog and this by far has had the most resounding impact on my decision making moving forward. I’ve built a comfortable level of savings and have invested mostly in random shares and ETFs for growth but I have been torn whether to buy an investment property to rent or own a property outright all for the sake of eliminating my main living expense which is rent. After reading this article it is very clear neither is the best as I won’t be getting the most bang for every dollar I have working. Sure owning your own place removes the rent but you have zero income to support yourself. And though having an IP that gives rental income is great its barely enough to cover the mortgage expenses plus your own rental expense. Not to mention the hassles of being a landlord and also the rental growth is poor compared to dividends. I also like how you conclude its sensible to get the property once you have generated a high enough passive income to make use of the tax savings.
    Thanks for opening my eyes to how to properly invest ie for income not growth which is just speculating aka gambling/hoping

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