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Discussion Starter · #1 · (Edited)
Hi friends,

I'm rethinking my current retirement strategy and wanted to know your thoughts on an idea. It could be really dumb but maybe not..
I'm in my early thirties and own a house with around $600,000.00 in equity. If I sold the house and invested the $500,000.00 ( to be conservative ) into an Index fund ETF that averages 6%-8% over the long term which according to my calculations would yield anywhere from 2.9M to 5M over 30 years which is when I plan to retire... This is also not including the additional contribution's that I would be making.

Obviously I like owning my home, but it seems like a good trade off to liquidate and invest everything and just rent for the next while. The housing market where I am (Vancouver) is insane so I doubt i'd be able to own again for a while. But it appears like this is a slam dunk for retirement. Rather than keeping the house and only investing when I have the available funds from my income. What are your thoughts? Is there a better way to approach this? I feel like the equity is just sitting doing nothing when it would be better served earning interest, and the pressure of worrying about retirement savings would disappear.

Have a great day
 

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This is the old Rent vs Own debate. You might want to take a look at some of the "deep dives" that Ben Felix has done into this

The case for renting part 1
The case for renting part 2
Rent versus buy
Housing as an investment (addresses the misconception that a house is a great investment)

As I recall, Ben illustrated that they are more or less equivalent and either way can work out fine. I haven't watched these recently but I remember thinking that either route is OK.

One danger I see in the renting approach is that you have to be very disciplined. You need to make sure you invest that extra money. In comparison, when you have a home and mortgage, it's a "forced savings plan" as you are forced to pay down the mortgage. So I suspect that home ownership tends to work out better for people only because most people don't have great self discipline and will not steadily invest the extra money.

The other problem with renting, and investing the excess money, is that you open the door for behavioural investing mistakes. IMO investing is actually quite a bit more difficult than it's made out to be. Markets tend to be very scary -- like they are right now -- and people have trouble sticking with their investment plans. So although it's true that if you remain invested, you'll do fine, are you really going to do that?

Or like many people, are you going to start timing the market, sitting in cash to "wait out" the bad times, etc. This is what many people do when investing and it harms their long-term returns. The "forced savings plan" in home ownership protects people from themselves.
 

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I feel like the equity is just sitting doing nothing when it would be better served owning interest, and the pressure of worrying about retirement savings would disappear.
After my long post I'll add: no it's not a crazy idea. Your home price may perform well over time, but this is highly unpredictable as you're talking about a single asset in a single city. It's a wildcard and who knows what its performance will be.

Moving the money to a diversified stock/bond portfolio is likely to give a more predictable return over time, purely because it's diversified and not concentrated in a single asset.

So I think the idea makes sense. However, I'm not sure this would solve the issue about worrying about retirement savings. Most people DO worry about their stock market investments, because the stock market is a pretty scary place. Sticking with an ETF portfolio for the very long term is not easy for everyone, and stock returns aren't guaranteed. Stock returns can even be poor for 10 years or longer! So there still can be stress.
 

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Discussion Starter · #4 ·
This is the old Rent vs Own debate. You might want to take a look at some of the "deep dives" that Ben Felix has done into this

The case for renting part 1
The case for renting part 2
Rent versus buy
Housing as an investment (addresses the misconception that a house is a great investment)

As I recall, Ben illustrated that they are more or less equivalent and either way can work out fine. I haven't watched these recently but I remember thinking that either route is OK.

One danger I see in the renting approach is that you have to be very disciplined. You need to make sure you invest that extra money. In comparison, when you have a home and mortgage, it's a "forced savings plan" as you are forced to pay down the mortgage. So I suspect that home ownership tends to work out better for people only because most people don't have great self discipline and will not steadily invest the extra money.

The other problem with renting, and investing the excess money, is that you open the door for behavioural investing mistakes. IMO investing is actually quite a bit more difficult than it's made out to be. Markets tend to be very scary -- like they are right now -- and people have trouble sticking with their investment plans. So although it's true that if you remain invested, you'll do fine, are you really going to do that?

Or like many people, are you going to start timing the market, sitting in cash to "wait out" the bad times, etc. This is what many people do when investing and it harms their long-term returns. The "forced savings plan" in home ownership protects people from themselves.
Thank you for the reply
I think you may have misunderstood or perhaps I did a poor job of explaining. The intent would be to sell the house that I already own and invest the equity gained ( approx $500,000.00 ) Thus eliminating the requirement of constantly worrying about saving and allocating funds to investments altogether. I would invest the 500K and that alone should be some assurance. The reason for renting after the sale would be that I would not have enough money to get back into the housing market for at least a few years. I agree though, any other contributions would require diligence.
 

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I don't think there are many people on this forum that will agree with selling a home to invest and then rent. Generally an older demographic here who have been sold the idea for decades that home ownership is the way path to wealth for the average person. I wouldn't sell a house for equity to invest just to then turn around in a few years and buy again.

You didn't mention how much is remaining on your current mortgage.

I think the question comes down to lifestyle and long term plans.
 

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Well as one of the younger posters here, I'd say that renting has some huge advantages including mobility. You aren't locked down to one location and can expand your career by taking jobs elsewhere.

I think I've had many unique opportunities over the years that renting opened up. For example, during the pandemic, I got up and went to a nicer location. I didn't have a house anchoring me down. Similarly a friend of mine was living in upstate NY when the pandemic hit. He said "to hell with this winter" and moved to Florida... really easy to do when you're renting.

I have a close friend who did exactly what the OP suggests. This guy sold his Bay Street condo and started renting, and it was partly for financial reasons. Didn't want to keep that exposure to a high risk condo in a bubble market and preferred to have his wealth in a diversified equity portfolio.
 

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Obviously I like owning my home, but it seems like a good trade off to liquidate and invest everything and just rent for the next while. The housing market where I am (Vancouver) is insane so I doubt i'd be able to own again for a while. But it appears like this is a slam dunk for retirement. Rather than keeping the house and only investing when I have the available funds from my income. What are your thoughts? Is there a better way to approach this? I feel like the equity is just sitting doing nothing when it would be better served earning interest, and the pressure of worrying about retirement savings would disappear.
Have you heard of the Smith Maneuver?

By using the Smith Maneuver, homeowners can make their interest tax-deductible, receive increased annual tax refunds, reduce the number of years on their mortgage, and increase their net worth. As a financial planning strategy, the Smith Maneuver involves converting the interest a homeowner pays on their mortgage into tax-deductible investment loan interest.
When I do the math it makes far more sense for me to rent but everyone has their own situation. I like the flexibility for living and to be active with my investments. If I already owned RE in Vancouver and liked living there vs a passive ETF portfolio is not as obvious.
 

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Discussion Starter · #8 ·
House value is $850,000.00 and mortage is $250,000.00.

I just feel like the equity should be making money and is currently under utilized. Therefore I should either refinance and purchase some rental properties, or sell the house and invest the money earned as I have 30 years before retirement. 500-600k compounded over 30 years ( not including additional contributions I will make ) should make for a very decent ( in my opinion ) nest egg when I retire.
 

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House value is $850,000.00 and mortage is $250,000.00.

I just feel like the equity should be making money and is currently under utilized. Therefore I should either refinance and purchase some rental properties, or sell the house and invest the money earned as I have 30 years before retirement. 500-600k compounded over 30 years ( not including additional contributions I will make ) should make for a very decent ( in my opinion ) nest egg when I retire.
Or borrow up to $300k against the home equity using the Smith Maneuver and invest it

I wouldn't do it all at once though and I wouldn't max it out
 

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Your house could be getting a good return in Vancouver though.

I think you have to do this.

1) House option
Predict what % return your house is getting and get a future value FV in 30 yrs
minus - the cost of the owning the home (total of your mortgage remaining, plus land taxes , utilities and insurance) over 30 yrs

2) Sell house option
Investment returns FV in 30 yrs
minus -rent costs FV for 30 yrs.

Then compare the FV for options 1 and 2.

It is cheaper owning vs renting net cost so could be interesting ( excluding the principal repayment)

Royal_LePage_Rent_vs_Buy_Report_Summary.pdf (rlpnetwork.com)
 

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There is also the caveat that the days of easy credit are over, i.e. the last 10-15 years, and neither house prices nor stocks will do that well. It is conceivable Vancouver RE could do a repeat of the late 1980s, starting about now, and dropping some 20% and not recovering to past peaks for 10 years. It could also be another decade of the stagflation '70s in equity markets. The question to ask yourself is whether you want to be a homeowner if both happen... i.e. a decline in RE plus stagnant equity markets, especially with borrowing against your equity for investment purposes.

No one knows what the future holds so you need to do an assessment of any/all of those scenarios playing out.

Added later: I am not much of an RE guy so it shouldn't be a surprise that I don't think much of counting on RE as a foundation of strength. It is highly illiquid and has a high MER relative to capital markets. Never mind more oversight. RE cap rates, especially in the GVR, are terrible with the only real upside being capital appreciation.
 

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If purely a financial move I expect the rent side of the equation will win...

With that in mind as a homeowner with kids in school etc. I prefer the lifestyle I have over the renting alternative. If I look at stats in the neighbourhood there are 2 places to rent out of about 300 houses. Therefore renting would mean a different location likely. I actually enjoy taking care of the property but some people do not and would rather have that time doing other activities...

More flexibility for location. Moving for work opportunities. Not needing to spend your time tending to the house. are all pros for renting.

Given the capital you have at a young age you will likely do well financially with either option. Therefore the most important question is what lifestyle do you want?

Choose the lifestyle that will make you happy and then do what you can to be financially successful with that lifestyle.
 

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I just feel like the equity should be making money and is currently under utilized. Therefore I should either refinance and purchase some rental properties, or sell the house and invest the money earned as I have 30 years before retirement.
Have you considered operating an AirBnB? Perhaps you can keep the house and still use it to generate income by converting a bedroom or two?

The idea is sound. It would be right for some people and it would be wrong for others. The up side is that you have an opportunity that not everyone has so this decision is part of the freedom you have created for yourself.
 
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