Unconventional wisdom: Why I’m still renting for life
Home ownership is often viewed as the cornerstone of financial success in Australia but I’ve chosen to measure success in a different way.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: Why I’m still renting for life
Personal finance is more personal than finance.
- Tim Maurer
There are many good reasons to buy a home – emotional and financial. But there is also a widely held view in Australia that buying a home is the only way to get ahead.
I don’t think that is true. And in an age where housing prices in many parts of Australia are comically high, I have a different perspective to offer for people wondering if the sacrifice is worth it.
It is time for Australians to think differently about housing.
It isn’t – and shouldn’t be – a universal goal to own a home. It is choice each person should make within the larger consideration of how your financial resources can be best directed in a way that improves your life.
Framing the role of housing in a succesful life
Successful leaders of companies make wise capital allocation decisions. These leaders consistently direct a scarce set of resources to areas where they best contribute to the goals of a company.
As investors we evaluate these choices using metrics like the return on invested capital. Good capital allocation decisions over time are reflected in consistently high returns on invested capital.
As the CEO of our own lives, we are constantly allocating scarce resources. Our success at allocating resources should be measured in a less quantitative manner – happiness and satisfaction.
But measuring happiness and satisfaction can be challenging. Unlike investment returns there is no simple benchmark to compare ourselves with others or even gauge progress over time. Instead, most people judge success in terms of net worth.
When I imagine a happy and satisfying life I think about flexibility and freedom. The ability to switch careers, pursue opportunities, adapt to changing circumstances and take risks. Flexibility and freedom allowed me to quit my job and move to Australia when I was 35.
In pursuing flexibility and freedom I decided cash flow was a better success metric than net worth.
I’ve always focused on growing a sustainable stream of cash flows because dollars coming in the door provide options. Options create freedom. That is why I’m an income investor. It also informs my view of housing.
Viewing home ownership through a cash flow lens
When I considered buying a home in Australia, I struggled to make the decision fit with my cash-flow focused view of financial success. The prices were just too high.
Owning a home had little emotional appeal for me. I don’t have children and I’m not tied to a particular community in Sydney.
A good salary and my desire to keep my housing costs low make renting relatively easy. For me the decision on home ownership was primarily financial.
My rent is less than paying a mortgage for the apartment I live in. And the high property prices in Sydney meant the opportunity cost was high for money locked up in a house.
The advantages of home ownership from a net worth perspective is clear. A median home in Sydney is $1,700,000. If you put $340,000 or 20% down it means if the property value rises 1% your net worth increases 5%.
The combination of gearing and rising property prices means many Australians are wealthy - on paper.
Looking at the same decision through a cash flow lens leads to a different conclusion.
Investing the $340,000 deposit at 4% yields $13,600 in cash flow annually. Buying a home eliminates that income stream along with the potential income from stamp duty and other transaction costs.
If you can grow that cash flow by 7% a year through dividend growth and reinvesting dividends you will have a little over $100,000 in annual cash flow in 30 years.
Paying 1% of the purchase price of a home in maintenance and upkeep annually is not unreasonable. That is a further $17,000 reduction in cash flow.
Along with these advantages there are financial challenges to renting. My rent will continue to increase and I will not reach the promised land for homeowners – a paid off mortgage.
All of these challenges can be overcome. I just need to prudently invest the extra cash I’m gaining as a renter.
Reasonable people can come to different conclusions about the best use of their money.
I am likely hurting my net worth by making this decision. But I get no happiness and satisfaction from paper gains on a house - I want my assets to play an active role in making my life better.
Rising house prices reinforce the value of owning property for people focused on maximising their net worth.
But they also reinforce my decision. As property prices increase so does the opportunity cost of owning property for existing homeowners and people considering buying. Life isn’t just about what you gain from one parth – it is what you give up by not taking another.
At this point property prices are so high in Australia that to buy a property at your borrowing capacity severely limits the financial flexibility of many Australians.
Whether this is healthy for a society is a policy debate – all I know is that it isn’t what I want.
Final thoughts
Many of our money problems come from doing what we think we should do instead of creating a personalised plan for our own lives.
That is the power of Tim Maurer’s quote - personal finance is more personal than finance.
There is no formula for how you are supposed to live your life or manage your finances. There are many approaches that can work.
Taking an unconventional path can be difficult. There will always be people eager to tell you you’re making the wrong decision. Few topics generate stronger opinions in Australia than housing.
Our financial decisions aren’t just about maximising our net worth. They are about happiness and satisfaction and building the life we want to live.
Only you can figure out what a successful life looks like.
If it includes home ownership that is great. If it doesn’t, that is fine too.
Share your thoughts and email me at [email protected]
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What I’ve been eating
Many of the British in Singapore had Hainanese servants prior to World War II. After the Japanese invasion and occupation of Singapore the British were gone and their servants needed a new livelihood. The started selling a local delicacy from home – Hainanese chicken rice. Now it is one of the national dishes of Singapore.
The chicken is poached in sub-boiling water which creates a flavourful stock which is used to cook the rice along with the chicken fat, ginger, garlic and pandan leaves.
I’m a big fan of chicken rice and normally go to Tian Tian in Maxwell Hawker Centre. When I showed up on the Singapore National Day public holiday Tian Tian was closed. Luckily a rival stall Ah Tai started by a former Tian Tian chef was open and just as tasty.
