Is Owning a Home a Necessary Part of a Retirement Plan?

Fort Worth, Texas based Certified Financial Planner Jason Hull of Hull Financial Planning firmly believes that owning a home is not a necessary part of a retirement plan.

A study by Walter D’Lima of Old Dominion University and Paul Schultz of Notre Dame showed that >real estate investors outperform general market indices, but only when they:

  • Live near the investment property
  • Buy without a mortgage
  • And have experience in real estate investing

Furthermore, those investors earn less when the live in the house.

Typically, the average person will buy a property with a mortgage and with no experience in investing in real estate. Additionally, emotions become completely entangled in trying to “invest” in the house that you own, and oftentimes, such emotions and behavioral biases, such as the endowment effect, are completely separated from what will generate money as an investment.

Moreover, further studies of residential real estate show that >almost all profits from residential real estate investment come from rental income rather than from price appreciation. Unless you’re planning on renting out rooms in your home sweet home, you’re not going to get rental income from the house that you live in.

In other words, based on historical evidence, you’re going to be at breakeven on your house if you buy it without a mortgage. Once you include a mortgage, even if you qualify for specific deductions above and beyond the standard deduction because of your mortgage – put another way, you’d have itemized deductions even if you rented, you’re probably going to have a negative inflation-adjusted return on the money that you will spend on a house.

Yes, you’re going to have to pay to live somewhere regardless. If you can buy a house with all cash, then you are probably as well off or slightly better off with a house than with rent, but if you’re going to have to rent, generally speaking you’ll be pretty close to financially equivalent. Real estate is local, so it does depend on where you live; the New York Times has a >decent rent versus buy calculator.

That said, renting also provides much more flexibility. Many gains in people’s incomes are based on their ability to move to where jobs are. Owning a home means that you do not have that flexibility, or, if you have to sell quickly, not only are you paying a Realtor’s 6% commission, but you’re probably going to have to drop the price enough to find a buyer who can close quickly. With renting, you can usually break the lease for 1 or 2 months’ worth of rent to move.

Mr. Hull and his wife retired early. He was 46 and she was 45 when they FIREd. They have lived in apartments for the past 7 years, and plan to do so for the foreseeable future.

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

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