Don't invest in real estate. If it was a free lunch, someone else would eat it first. VTSAX is way less work.
All that matters is the savings ratio. Everything else cancels out. I promise. https://www.mrmoneymustache.com/2012/01/13/the-shockingly-si...
So a penny saved is actually worth more than a penny earned, because it means you need less invested to retire.
If you live on 100% of your income, you are doomed, you can't save anything.
If you live on 90% of your income (ignoring market returns for simplicity) you "earn" one year every 9 years or so.
If you live on 50% of your income, you earn a year every year.
And if you somehow got down to 10% of your income, each year you worked would be nine years you wouldn't have to.
This math works with 0% return (or a return matching inflation only).
What it takes to retire early or at least be in a situation where a job loss, or other difficult life situations wouldn't effect you all that much is known for ages. Acting on it is just a totally different thing altogether.
And this is not just restricted to money. Nearly everything is like this. You could have a habit to read everyday, do push ups and eat healthy. You just have to do a little of this everyday. But most people struggle to keep up.
Success is doing boring things. Unfortunately since being boring is unattractive, some people actively avoid succeeding.
And it's also why everything seems to coincide; those who can maintain physical fitness often have the wherewithal to maintain financial fitness, etc.
It really does come down to "we know what we have to do, but it's too f**ing hard and/or tedious".
And arguably not worth doing. Tomorrow may never come -- you could get hit by a bus driving home today.
Studies show that a lot of poor people spend money immediately because their lives are often crazy uncertain and trying to balance and pay debts -- which they may never pay off -- doesn't get them anywhere. Blow the money on a new xbox now, because even if they pay the rent today they probably won't be able to stop eviction next quarter.... but at least they have an xbox, and can take that with them to the next flophouse.
It should be adjusted by current and expected returns. Else, it becomes an asset bubble with insane multipliers of real returns (like today). You are just counting on someone else to buy the stocks when you sell in the future.
If it is not your primary home, it may be correct, but not necessarily.
And only saving is not enough, because inflation can eat it all.
Really, just look for opportunities. Something undervalued, or something you are in a special position or have the skills to leverage (eg you are great with people and like DIY, go ahead and do rentals). That isn’t very easy though, and definitely doesn’t fit into a book.
It's just not happening.
I did buy a home (a flat, really) rather than investing and my mortgage payment is pretty much the same amount I was paying in 2014 for a single room as a student (same city, high cost of living).
Housing usually is the primary and largest expense every month, so it makes much sense to get that sorted out and stabilized.
This of course assumes that you plan on staying in that city (I've been in the same city for the last 11-12 years). If you're not sure you'll be in the same city in 3-5 years then sure, go ahead and rent.
> It's just not happening.
Buy versus rent is pretty complicated, and specific to each market and timeframe.
You are right that rents will increase over time, but so will the value of invested assets. While I cant speak to your youtube videos, it is not crazy to assume that the value of invested assets will increase at least as fast as rents.
Also, even if your mortgage payment is flat, that doesnt means housing expenses are flat. Taxes, insurance, and maintenance should be expected to regularly increase on property you own.
In general I have always found the passive investment "standard smart advice" to be wrong, but I'm a contrarian by nature. I actively manage everything because I like to know what's going on.
It might be an okay investment for me (I'm a salary man, can't be bothered with freelance work), but for him I'd bet it's a money loosing proposition
[edit] the 500€/hour is an outlier, he wanted out of a project and kept increasing his rates, which were accepted up to that point.
I would also rather be an engineer than fix apartments.
Wow, I'm a genius!
- you previously spent time building relationships with contractors. You didn’t just type in property management in Google
- a significant overhead goes to insurance and management. Your comfortable putting money as needed into the venture. You have knowledge of legal pitfalls of being a landlord.
- you regularly spend time managing these contracts
Depending on the market that may be so easy you'll think everyone else is stupid. Or it may be so hard you wonder if you are doing something wrong.
I know a number of people who have done very well with RE, but they all actively manage their properties.
First, and most obvious, it increases how much savings you have. But secondly, he states that you permanently decrease your expenses, making that magical 4% withdrawal rate of your savings easier to attain.
And yes, while that is true on the surface, the underlying message is - if you just don’t have cable tv (streaming in today’s world) and other things like cars and basic vacations, then you are almost there! And yes, if you want to live as a monk then this could be considered by some as a noble thing. But some want to live reasonably comfortably (new-ish car, trips to places like disney world with the kids while staying in a nice hotel vs biking and camping).
I only bring this up because even mister money mustache has admitted that he is unusually monk-ish in his lifestyle choices. Don’t get me wrong, I actually retired 7 years ago partly on reading his blog, so I get it. But we have to be realistic on what his message is and what others are liable to achieve.
I guess what I take most umbrage with is, he says that it is easier and more effective to cut expenses than raise earnings. And just like a business, this strategy quickly runs into diminishing returns. Raising the top line while keeping expenses reasonable is always the best strategy to an early retirement (or a successful business).
Woahhh there, thinking camping is an inferior trip is wrong. Being cheaper isn’t inferior.
My main point is really this - be real with yourself on how frugal you can reasonably get sustainably. If you try to be as frugal as Mr Mustache and that is beyond your level of comfort, you are going to fail and/or be miserable and wonder why you are not enjoying your retirement because it is based on false figures.
Real Estate is the one investment that most people can own, manage, improve as individuals without a ton of special skills/knowledge. Additionally, you can choose the amount of leverage you want to apply and there are considerable tax benefits.
If you have the time, a little knowledge, and enter at a decent time in the market with not TOO much leverage, Real Estate is an excellent long term investment.
The returns in real estate ONLY look amazing because of the leverage.
However, your own HOME being leveraged can make the returns astronomically insanely good.
Sorry, I'm not super knowledgable about this topic.
I picked a random house in Southern California, it is up 42% in the last 10 years, sounds great, right?
But that is only an annual rate of return of 3.572%. Nothing at all exciting.
Where it becomes exciting is where you bought that $500k house ten years ago with $50k down, and sell today for $800k - ignoring everything else like taxes, etc, you made $300k on a $50k investment (leveraged) - which is an 18% a year return. THAT is something to take notice of! Of course, you have to factor out all the associated costs, but the leverage is the be-all and end-all of your "investment". If you could leverage against stocks the way you can against single-family houses, you could go nuts.
The advantage to leveraging real estate that you live in is that you basically have a heads I win, tails you lose scenario; if the house crashes you walk away (at least in non-recourse states like California, and practically almost everywhere).
The problem is that in those 10 years you also paid a bunch of interest on the mortgage necessary to buy that house. For instance:
Assuming a 20 year mortgage with a fixed 5% interest rate, in 10 years you paid 200k just in interest. Makes that 300k look really much less appealing.
It's a bit more complicated than that though:
- A house mortgaged 10y ago isn't paying 5% interest.
- A house mortgaged today isn't necessarily going to be paying 5% interest for the life of the loan, one can refinance if/when interest rates become more favorable. Interest rates are set to start coming down next month.
- 20k/yr in interest isn't really 20k once one factors in the tax deduction on that money.
- Making 300k by other means is a lot harder, requires a lot more capital or much riskier leveraging than an asset like a home.
You get any tax deduction on your mortgage payments???
Also it's a bit of a wash, as prices end up reflecting the tax break because bidders are ultimately going right up to their budget, and they take that into account.
I wish there was enough housing so that it isn't seen as some sort of investment vehicle that distorts prices for basic human necessities.
And even then, only the amount above the standard deduction is effectively deductible, so it kind of is a wash.
(Fun fact - if you have an expensive enough house it is better NOT to be married to your spouse, as if so each can claim up to $750k of mortgage, whereas as married it's only a total of $750k or something. I don't know the actual numbers, never been close to that.)
The people who bought it from me tried to flip it but walked right into the chainsaw of 2008 and had to sell it at a loss. I could have bought it back for even less than I paid for it the first time a year later! Whoever did buy it got a great deal because now 15 years later it's worth $1.3 million and I feel like I should have just kept it. I definitely haven't managed to save $1m in the last 20 years.
House prices rise because of lack of supply, people are unable to make down payments/get approved, people can make rent though, which is more expensive than the mortgage on the house they are renting.
In the past renting was a stepping stone to home ownership. But now it's become more and more a lucrative trap to hold people down in as home prices have skyrocketed. Landlords are double dipping where the home value increases also means that the rent they can charge increases. Meanwhile tenants get slapped twice over, their rents rise and the cost of a home runs away from them.
Sure it can be lucrative, but at least right now it feels like a really dirty way to make money.
In my European country, you need to stay 5 years in the appartement you bought, otherwise you need to pay back a large amount of registration costs (tax) back.
It turns out our capitalist system associates very few returns to human flourishing!
Medical is similar, since it's basically "pay us this or suffer/die", but the returns from medicine are generally fairly lackluster since there is so much cost/risk in failed trials.
This is an oversimplification.
It reminds me of those retirement calculators that estimate retirement based on a percentage of current salary, without considering that income and expenses change over time.
We don't aim to live on ramen noodles for our whole lives.
From your link:
If you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be Ready to Rock (aka “financially independent”) in a reasonable number of years – about 16 according to this chart and a more detailed spreadsheet
Example numbers:
Take home: 50k Spending: 25k
Ok sure we can say that if nothing changes and historical returns approximate themselves then this person can retire in 16 years. But that's not going to happen. Things are going to change.
Say on year 5 after career advancement + kids it changes to this:
Take home: 100k Spending: 75k
Now the numbers point to a different retirement date (even though the annual saving amount is the same). Which means that the original 16 year estimate is already out the window.
Then on year 6:
Take home: 40k (lost job, looking for a new one) Spending: 60k (still got to pay the bills - from savings)
Now the numbers from year 1 and year 5 are even more further off. And the simple snapshot says they'll never retire now due to a negative savings rate.
I know people that invested in property and they either didn’t consider the risks they are taking (not servicing boilers) or the time managing tenants. If you end up with a court case, you are going to shorten your life through stress.
I get it that mortgage money is cheap leverage, but I think the good times on that have run out.
e.g. VTSAX doesn't have tenants who strip the copper out of the house and leave water running to spite you as you evict them.
VTSAX doesn't have surprise 15k roofing costs.
VTSAX doesn't for you to pay tenants triple if you don't follow / screw up rental laws.
VTSAX has a fairly small fee compared to what property managers charge.
a) provide capital
b) re-allocate capital from less efficient to more efficient co’s.
The autopilot style of investing is good as far as it goes, but it risks inflating the SP500 far beyond what is logical, while starving smaller but still great companies of capital.