Investing – Living The FIgh Life

Real Estate is Passive or I Make $2,800 Per Hour

What? $2,800 per hour? This must be a crazy MLM scheme or some sort of bait and switch scam, right?

Not at all. On average I work one hour a month managing my two real estate properties. Each month I clear an average of $2,816 (including my principal and net of expenses and taxes). So my hourly rate is $2800!

But “passive”? That is impossible, you might say. Yes, really. As I show below, the average percentage of my time (.006%) that I spend each year managing my two rental properties rounds to zero! It essentially takes me the same amount of time as investing in stocks.

For 19 years I have owned one or two rental houses at a time (I have two right now). I like to say I am a lazy landlord, but actually I’m an efficient landlord.

I bought and lived in all of my rental houses before I rented them out. I have calculated that buying is often a better investment than renting (comparable houses), but ONLY if you are willing to keep the house for 7-10+ years, much like long-term stock investing. Since keeping these houses instead of selling was the better long-term investment, I now rent them to other people instead of renting them to myself.

So How Much Time Does It Take To Manage a Rental Property?

Let’s put this in perspective: In the 13 years (156 months) of self-managing my current property in Ohio, I had 87 maintenance and repair expenses. In other words, on average I had a 20-minute issue to resolve every 1.8 months.

Of course, I can’t ignore the upfront and more time-consuming effort to get a lease, advertise, screen tenants, and then handover the property (~10 hours) and the infrequent work of replacing my tenants (6 hours) or renewing the lease (2 hours)–a great house rents quickly. There is also the rental-property related work on my taxes that takes about an hour each year, and maintenance inspections of the properties that take about two hours per property each year. (My trusted handyman actually inspects for me in OH, so now I only visit that property once every 2-3 years).

On average over the last 13 years, I have spent about 35 minutes a month managing my OH property (not even a full hour!) and I clear over $1000 per month. That’s $12,000 a year for 7 hours of work – a pretty good wage. I make even more on my VA property ($1800 per month) and I average even less time per month managing it (25 minutes). I think you get the point–it doesn’t take that much time to manage a property if you have good systems in place.

Most months, nothing happens except the rent arrives by direct deposit.

Setting Up Good Systems Saves Me A Lot of Time

Number one is finding good renters. I don’t skimp on tenant screening. I always call work and housing references, and I complete credit checks unless they are active duty military, and even then I still collect all the info needed for a credit check.

Great renters are looking for a quality home for their family. They tend to care about their belongings, their credit score, the appearance of the yard, and they will care more about my house. Many of my renters do simple maintenance and repairs themselves, or they are willing to pay for improvements they want. One renter (with the help of her handy dad) offered to install new composite decking if I paid for the materials. The house now has a huge, great-looking deck for 10% of the cost I would have had to pay a company to install it.

Getting great renters requires a great house. I buy houses in desirable school districts and neighborhoods, which I know first hand because I first lived in them myself (my system works for a small number of rentals). I have bought in military communities, and I usually rent to senior-grade military families.

I make sure my lease agreement is comprehensive. Setting standards and expectations up front is key to avoiding problems later. My first lease was OK, but every renewal since I have strengthened it with lessons I have learned myself or learned from smart friends with more experience.

Set expectations with renters up front on maintenance and communication. I walk through with my new tenants how maintenance and repairs will work. For true emergencies (e.g., no heat in the winter or a water break), I empower them to call for repairs directly with the appropriate company if they can’t reach me quickly and it can’t wait. When they do reach me with a problem, I either have my handyman look at it (with a quick email or text), or I have the renter call a company of my choice (or theirs if I don’t have one lined up already). I have the bill come directly to me. This saves everyone time as the repairman has to schedule with the renters anyway, and the renters are very happy to be in charge of scheduling.

A reliable handyman is recommended but not required. I have a great handyman for my OH property but I have yet to find one for my VA property. While addressing maintenance issues takes the same amount of my time, having a reliable handyman saved me money and improved my confidence in getting quality work.

Take advantage of the quality and often free resources online to make renting a property easier. Online sites like Zillow (no endorsement intended) work great for advertising, tenant applications, and background checks. I invested about 3 hours, one time, to modify a premade lease for each state I rent in to make sure I comply with state landlord-tenant laws. I set up my property management tracking spreadsheet, where I keep a simple on-going record of income and expenses, in about 30 minutes.

If I only focused on the initial one-time effort needed in the first few weeks of renting out my house, then it may feel like a lot. But over a 19-year time frame, each month it is hardly any time at all.

Skip The Property Manager – It Doesn’t Take That Much Time

Since I have two properties and live far from either of them, I must have a property manager, right? Nope! I learned the hard way that a property manager doesn’t really save you any time.

If the water heater broke, the tenants contacted my property manager who would then call me about it. Then the manager called a repair person and scheduled the repair with the tenants. Then I was sent the paperwork each month that I needed to file away for taxes with the amount subtracted from my rent (or I was billed if the repair was major).

Now that I’m my own property manager, the renters text me if the water heater breaks. I ask them to call a repair company and schedule the repair at their convenience and have the company bill me. It’s the same amount of effort on my part and more convenient for the renter to schedule their own repair, but without having a middleman or becoming the middleman between the renter and the repair company.

With a 5-minute call from the tenant (or usually a text with a picture), and a 5-minute call to the company to pay (usually an online payment), the work is done and the problem is solved. I then open up my property management spreadsheet and record the expense (another 5 minutes). So after 15 minutes of work, the problem is solved.

On more complex issues like working with a neighbor to take down a shared tree, I had to write a good 10 texts back and forth to coordinate the work. It took me a whole hour total to get that job done – whew!

As my good friend and real estate expert Keith Nugent shared with me at a CampFI, you need to be your own property manager until you understand every aspect of it and then only consider hiring one once you own five or more doors. My experience confirms this. Since I’m not planning to expand my properties past two, I’m never planning to hire a property manager.

Don’t Confuse Stress With Work

It can be a stressfulI conversation to demand overdue rent or pursue eviction action, but these actions do not take up much actual time. The one time in 19 years I needed to pursue eviction it was definitely stressful, but it did not take much time to resolve. I called a lawyer (it took maybe an hour) who sent the eviction proceedings letter to the tenant. The tenant then left.

The reason I hear that people feel renting properties is too much work often goes something like this: “I don’t want to deal with calls at 3:00 am for an overflowing toilet.” I feel that is a worn out trope. For one, an overflowing toilet is almost always the renters’ fault for clogging it, so they would pay the bill for any repair or damage and clean up. My excellent renters have never called me for such things.

My tenants did call once at 11:00 pm about the heat not working in the winter, and I empowered them to call a repairman directly and that I would cover any extra fee for an emergency response (I don’t skimp on safety). Then I went to bed and slept well. Being called after 10:00 pm has happened maybe 4 times in 19 years and it took me 5 minutes to resolve each one.

I try not to confuse stress with time. Over the years, tenant issues are infrequent and rarely take much time. Even getting quotes for a new roof or windows only took a couple hours. I am responsive and get the problem fixed.

Is Stock Investing Truly Passive, but Real Estate is Not?

I often hear in FIRE podcasts and read in blogs that stock investing is truly passive – the old “set it and forget it.” While I am a “passive” index fund investor, I have found I actually need to spend some time managing my investments.

I rebalance every quarter so my funds stay within the percentages of my investment strategy. I spent time calculating my traditional IRA to Roth IRA conversions (I have some after-tax basis). It takes many hours to rollover my wife’s and my 403b, 457b, 401k, 401a accounts to our IRAs. I keep an eye on the stock market and buy when it drops 10% or more (push more bonds into stocks) and then I rebalance when the market recovers. I spend about an hour each year on my taxes related to my stock investments.

I spend nearly as much time on my stock investments as I do my real estate management and both pay me a handsome wage per hour! So technically neither is 100% passive, and neither has to be a lot of effort.

Basic real estate investing in a few houses can be fundamentally as passive as stock investing. If I ever did get too many rentals where I noticed and cared about the higher workload, then I’d switch to a good property manager and drop my level of effort back down.

Real estate investing, as with stock investing, benefits from up-front research. Setting up a good system will minimize your long-term efforts, diversify your portfolio, and save you money over renting if you decide that the renter of your house is you.

So is Real Estate Passive Income? In My Book – YES!

So, with all of this talk about how much time it takes to manage rental properties, it can’t be considered passive, right? Let’s run some numbers…

There are 2080 hours in a work year (40 hours per week x 52). I work an average of 12 hours per year on my rental properties, which is .006% of traditional work time. Even if I doubled it with 2 additional properties or quadrupled the time spent, it would still round to zero!

So, either real estate is passive income or I earn over $2800 an hour! Either way, it is worth the effort.

P.S. For further information on how being a landlord does not have to consume a lot of time, and how to set up good systems to become a “Lazy Landlord,” check out James Lowery’s presentation at the 2023 ECONOME conference.

My FI Story and Why FI Needs the RE

I was recently interviewed on the EverydayFI podcast where I shared my FI story, how I fully embraced minimalism, became a full-time nomad, and some philosophy on the FI movement and choosing contentment over happiness. Cheers!

Link to episode: https://podcasts.apple.com/us/podcast/everydayfi/id1747124575

To learn more about my story check out my About page and my Taking the Leap post about my decision to retire early.

Is The Stock Market Becoming a Ponzi Scheme?

The convergence of the widespread use of 401k and similar retirement accounts coupled with the rise in index fund investing has created a Ponzi scheme-like dynamic with the stock market over the past 30+ years..

What is a Ponzi scheme?

From Wikipedia, a Ponzi scheme “is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.” Is the stock market truly a Ponzi scheme? No, but since 1980 it has taken on some similarities with a Ponzi scheme that investors should be aware of.

Stock Market Valuation to Scale

Most graphics of the stock market (the Dow Jones Industrial Average) that include performance data before the 1980s, use a logarithmic scale. The log scale distorts the long-term variations in market value to make it appear that the changes over time are more consistent. On the chart below which uses a logarithmic scale, it visually doesn’t look like anything unusual happened around 1980. The only sizable blip in the trend is the Great Depression.

Source: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

A couple of years ago, I stumbled across an unusual graphic of the stock market’s historical performance that surprised me because it was to scale.

Source: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

I was shocked to see that, relative to the performance in the last three decades, the previous eight decades were basically flat to include the Great Depression (now a very minor blip on the chart) and the industrial economic growth of the 50s and 60s. I wondered what happened around 1980 that exponentially changed the dynamics for stock market valuation.

What Happened Around 1980?

Four major things: 1) invention of index funds (1971), 2) Individual Retirement Accounts or IRAs (1974), 3) the 401k plan (1978), and 4) increased institutional investment of pensions in the stock market. (Note that for this post I am using “401k” to mean all similar plans to include 401a, 403b, 457b, and the Thrift Savings Plan (TSP).)

Jack Bogle invented index funds well before 1980, but they did not take off on a mega-scale until the 401k, IRAs, and remaining pension plans began growing in number and size and therefore dramatically increased their share of the stock market.

Section 401k of the Revenue Act, which became the namesake for the retirement accounts it authorized, was passed on November 6, 1978. The first 401k plan was implemented 3 weeks later. Since then, public and private employers have gutted the traditional pension plan. Employers have either replaced pensions entirely with a 401k (sometimes with matching funds), or they (often government entities) have deeply cut the value of their pension plans and then offered a 401k option to help offset the lost value.

According to a 2021 CNBC article, “401(k) and other defined-contribution plans like it quickly replaced traditional pension plans. From 1980 through 2008, participants in pension plans fell from 38% to 20% of the U.S. workforce, while employees covered by defined-contribution plans jumped from 8% to 31%, according to the Bureau of Labor Statistics.”

Even though the number and dollar value of pensions has sharply declined since 1978, they still represented 10% of stock market value as of October 2020.

So How Does This Create Ponzi Scheme Dynamics?

According to Annie Lowrey in an April 2021 Atlantic article, “[s]ome $11 trillion is now invested in index funds, up from $2 trillion a decade ago. And as of 2019, more money is invested in passive funds than in active funds in the United States.”

The issue here is that index fund investing works differently than other types of investments. Most IRA, 401k, and pension accounts invest in index funds each month regardless of the performance of the market or any particular company in the market.

Index funds are cap-weighted, meaning that if a large company like Google represents 5% of the value of the index (e.g. S&P 500) then every month passive investors (i.e., everyone with a 401k in the stock market) will invest 5% of their monthly retirement dollars on Google whether or not Google is a good investment right then. This monthly automaticity arbitrarily drives up the price of Google stock because the index must buy the stocks in the index at their cap weight. Likewise, every other company’s stocks in an index are also purchased independent of performance.

Many stock investors, especially those investing for retirement, are not selling their shares each month when these new index investment purchases need to be made. They want to avoid stock market volatility. This dynamic creates supply and demand price pressures that help keep the valuations going up.

The growing demand for index fund investments drives up the valuation of the stock market. This helps explain, at least in part, the meteoric rise of the stock market’s valuation over the last three decades.

It doesn’t matter if the company is actually worth what its stock is valued at as long as investors keep passively buying the stock at a high price and driving it higher. And if this dynamic sounds familiar, it is: this is similar to how new investors in a Ponzi scheme keep the returns high for the older scheme participants.

The expansion of retirement account vehicles like the IRA and 401k, with their strong tax incentives coupled with the increased ease and lower costs of stock investing, have helped this trend grow. The big question is, when will the new money stop rolling in every month and the first investors start selling off more than they are investing? This turn of events could cause a partial collapse of stock valuation, create great losses, and leave the more recent investors waiting for long-term returns holding the bag – again, similar to the effects of a Ponzi scheme collapse.

It’s Not Really a Ponzi Scheme, Right?

Right. A Ponzi scheme is illegal, and there is nothing illegal about the investment vehicles I’ve just described. BUT, there are some Ponzi scheme dynamics at play in today’s market. I recognize that a large part of the amazing overall stock performance that I have enjoyed over the last three decades, particularly since 2009, is in no small part due to my fellow index fund investors who continue to invest in the stock market every month, regardless of performance.

While the stock market will continue to respond positively and negatively to economic events (e.g., COVID-19, an oil crisis, AI, interest rates, etc.), market drops are dampened and gains are propelled by the drumbeat of the monthly capital infusions from index funds.

I agree with the MorningStar MarketWatch assessment that the market is overvalued based on any measure. Much of this overvaluation can be attributed to the relentless monthly retirement stock investments (passive and active). This overvaluation should not pose a problem unless (until?) the infusions of new investments in the market become significantly less than the amounts being withdrawn by investors over a prolonged period.

To prevent this devaluation, we “older” investors need to keep encouraging new index fund investing among our fellow citizens until we have sold our shares. Then those investors will need to encourage future generations to do the same. The current structure of the stock market will continue to need new investors, investing monthly regardless of individual stocks’ performances, to keep that line on the graph moving upward.

So while I remain fully invested in the stock market, I also remain vigilant to mega trends that might indicate the tide is turning on the Ponzi-esque dynamics on the market from index fund investing.

Rent vs. Buy: the Power of Inflation (and a fairer calculation)

The FIRE community talks a lot about the rent vs. buy discussion. Which is the optimal financial decision for your personal housing and how to calculate that? While there is great information out there to help you decide, I see two important considerations often left out of these discussion:

(1) Many compare a short horizon for buying a house with a long horizon for investment of down-payment funds by renters (opportunity cost). A long-term horizon should be used for both.

(2) Many overlook the long-term impact of inflation on this financial calculation.

If you treat your personal home as an investment (for example, avoid unnecessary house upgrades and be willing to rent out your home if you need to live elsewhere for a while) and use the same long-term buy-and-hold strategy that an index-fund investor uses (a 20 to 30-year horizon that smooths over the ups and downs), then buying a home for your personal use (in other words renting to yourself) is often a good investment – especially due to the power of inflation.

The pendulum has swung on this topic. For years, the common advice was that “renting is throwing your money away” and “your house is your biggest investment.” In response, many prominent articles, blogs, videos, and podcasts have weighed in on this decision arguing the wisdom of renting. These include:

JL Collins: “Rent v. Owning Your Home, opportunity cost and running some numbers” and “Why your house is a terrible investment”

Go Curry Cracker: “How I Made $102k in Real Estate and Am Poorer For It”

Preconceived Podcast interview with Brad Barret: “173. To Buy or To Rent?” and ChooseFI episode “House FIRE | Ep 414“

Next Level Life YouTube video: “Should You Buy A Home or Rent? | Renting Vs Buying A Home”

NYT Article: https://www.nytimes.com/2014/05/22/upshot/rent-or-buy-the-math-is-changing.html

NYT calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

While each of these pieces have great information, they didn’t fully include the power of inflation over time for both increased rent prices and the inflation-hedge of a fixed-rate mortgage. The one exception is the NYT calculator. It did include inflation, but it did not appear to weigh inflation appropriately if you own your house over a long time (based on my testing of the calculator parameters). I believe that omission misconstrues a key part of the Rent vs. Buy financial evaluation.

This post is responding primarily to the first article by JL Collins and uses JL’s comparison formula as a starting point.

Why does Inflation Matter?

(1) Because rents generally increase over the long-term, but fixed-rate mortgage payments (P&I portion) stay fixed. And (2) while the value of a home rises slower than the stock market index, that smaller increase is for the entire value of the home — not just the down payment and other accrued principal. For example, $100,000 in the stock market getting say a 12% avg annual return is the same as a 3% return on a home valued at $500,000 with a 20% down payment of $100,000 – both gain $12,000 in value the first year (excluding taxes on those gains).

We have seen recently how the increase in inflation and increased demand for remote work have generally increased home prices across the nation. Rents have also dramatically increased. One article indicates the U.S. medium rent amount has increased by an average 8.85% per year since 1980 (although not in either of the two areas I own homes). But even in times of lower inflation, house prices and rents tend to rise over time. In recent memory, only 2010 gave the U.S. real estate market a very short period of rent deflation.

So the longer you hold your low fixed-rate mortgage property (assuming you refinanced at the historically low rates between 2012-2021 timeframe), the greater benefit you will have from inflation as the majority of your house payment will stay the same over time. The amount you would pay in rent would increase over that same period. To illustrate below are a couple of examples from my own experience below.

But first, a couple of caveats and assumptions:

Real estate is local. I use a Midwest example and an east coast example.
I’m not asserting that buying a house is the BEST possible investment. I contend that it can be a GOOD investment (part of a diversified investment portfolio) and often better financially than renting a comparable house when all numbers are considered.
I assume you’re familiar with investment returns and other general financial concepts, so I’m not getting into lengthy explanations here.
My buy-and-hold strategy for houses means that if I decide (or am forced) to move I will rent the house until I can return — I won’t sell. Selling a home too soon changes the calculations and makes buying less likely to win the financial comparison.
If I do need to rent my house, I do not hire a property manager (more on this below).
I ignore renter’s insurance. I agree with Jeremy at Go Curry Cracker that I can self-insure. If you can’t (many landlords require it) or don’t wish to self-insure, add that cost to renting.

Running The Numbers

I fully agree with JL that the key is to run the numbers for your specific situation and not assume one choice is automatically better than the other. However, JL’s example (and formula) appears to undervalue inflation benefits over time for principal and interest. For example, in his blog post comments he equates rent inflation increases to be equal with inflation increases in property taxes, insurance, and maintenance and thus offset each other. However, my data indicates otherwise because the majority of the mortgage payment is P&I which remains the same over time.

Also JL provides a very high repair, maintenance, and insurance cost of $7000 average per year (in 2012 and prior). National averages for repair and maintenance are approximately $3,000 per year and insurance certainly doesn’t cost $4,000 (I hope!). My records for the two houses I own show a much lower average for maintenance and repair costs. The breakdown for each is as follows:

For my large Ohio house, even after reroofing ($13K); completing a $3500 tree trimming; replacing the fridge, dishwasher, air conditioner, furnace, garage door opener, new bathroom floor, and decking (Trex composite); having the whole interior repainted professionally and completing numerous other small repairs and maintenance, I have averaged $3,784 per year over 13.5 years. I expect this average to go down now that I have upgraded the primary systems, and if I add insurance, it increases to $4,548 average per year — still significantly less than JL’s $7K figure.

My home in Virginia has cost me much less in maintenance and repair ($1635 per year for 10 years). In part because I enjoy doing a lot of repairs and maintenance myself, but primarily it’s because I’ve had fewer major system replacements (I did paint the interior, re-roof, replace the gas lines, install new windows, and replace the stove).

So, while I had a couple of expensive years with repairs and maintenance for both houses (especially those new roofs), the key is that these costs even out over time IF you hold onto your house. Those roof shingles usually need replacing only once every 30 years.

I did not include any costs for upgrades. I find most upgrades (such as an upgraded bathroom or basement renovation) tend to be net financial losers as they rarely return full value for the cost in increased home value, especially when you look at opportunity costs of using that money elsewhere.

Similar to JL’s buy-and-hold strategy for stocks, we need to buy-and-hold when we buy a house. Just as you should hold your stocks for 20-30 years, hold your house for 20-30 years or more to get the long-term investment returns and most benefit from inflation.

These returns get better with each year as the mortgage payment typically grows at a much slower rate than rents do and homes tend to increase in value – on average around 3.5% to 3.8% per year.

Again, real estate is local. My home in Arlington, VA has increased in value by ~48% since 2013 (avg 4.6% per year) while my home in Dayton, OH has increased ~37% since 2009 (avg 2.4% per year). But I am not selling either house any time soon as I am enjoying how inflation is my friend in both markets.

Apples to Apples

JL compared his large house he owned to a small apartment he planned to rent when he was downsizing. As he states in his comments, he did an apples to oranges comparison. But an apples to apples comparison may be more relatable for many people looking to make a buy vs. rent decision between two comparable houses.

When my wife and I went from being a couple to having a family, we shifted from an apartment to a house. We wanted the larger space, the yard for the kids, and the good schools that often come with SFH neighborhoods. We knew where we wanted to live and the size of the home we wanted–we just needed to decide if we should buy or rent that house.

So instead of comparing the rent for a small apartment to rent for a family-sized home as JL did, I believe comparing renting a 3+ bedroom/2 bath home to buying a 3+ bedroom/2 bath home is a more common situation when considering whether to rent or buy in a particular location. So in his example, renting vs. buying comparable apartments.

In Arlington, VA in 2013, rent for a comparable house to the one we bought would have been $3,400 per month while our mortgage house payment was $2783 (3.25% interest). Our first month’s principal of that payment was only $857. Since principal increases a little every month, I use the mid-year monthly numbers when calculating the annual amounts to track the opportunity costs.

Getting to the Math

To make the financial comparison, JL’s basic formula is:

Opportunity cost (equity * annual investment return %). [Note: JL used VGSLX because he would otherwise invest in real estate. This number needs to be lowered for taxes (JL’s formula did not appear to do that)].

+ Total annual cash expenses which comes from adding up these annual outlays:

Maintenance & repair & insurance
Real estate taxes
Mortgage interest (note: excludes principal)
Subtract tax deduction savings

Total annual cost of owning and operating the home = Opportunity Cost + Total expenses.

Subtract annual rent to get annual premium (or savings) to live in the house FOR a single year.

JL’s formula doesn’t appear to factor in inflation over time. I have created a spreadsheet (see images below) using the detailed numbers for my Virginia and Ohio homes over time to indicate that, early on, renting is likely better (depending on your investment return and inflation variables). But, over the long-haul, buying (depending on your variables) is likely better–due primarily to inflation.

In my spreadsheet, I factored in opportunity cost for the down payment AND the amount of principal that is tied up in the house over time using the same investment return rate compounded annually.

But even with a high average investment growth rate (12%–much higher than JL’s 3.5%) and lower than average real estate value growth (2.5%) both houses were more profitable to buy AFTER several years (9 years VA and 7 years OH), and they got better over time even after the tax benefit was reduced by the Tax Cuts and Jobs Act of 2017. Based on actual property growth rates I saw profitability at 3 and 7 years, respectively.

Here are the Virginia house results:

Screenshot of Arlington, VA house calculations

…and here are the Ohio house results:

Screenshot of Beavercreek, OH house calculations

If you would like to play around with the numbers yourself (e.g., adjust investment returns, inflation, or add your own house numbers), you can download the unprotected spreadsheet here:

Rent-vs-Buy-Comparison-Spreadsheet Download

Be careful not to change the cells with formulas, as that could break the spreadsheet’s functionality. If you see an error or something missing, please let me know in the comments and I’ll take another look.

A few more notes:

While some locations may not achieve 2.5% inflationary growth, they can still be the better financial choice over renting, but you will need to hold the property over a longer period for the inflation-related benefits to make it worthwhile.

In the year you sell the house, reduce the opportunity costs from renting by the amount of the taxes/capital gains on those investments. Houses that you have lived in for at least two of the last five years provide a generous capital gains exclusion ($250K for single, and $500K for married filing jointly).

You might be wondering, “what about closing costs?.” Good question. I paid ~$6K to close on my VA house in 2013. I would have locked up around the same amount on first, last, and deposit on renting a house, so that’s a wash. After 20+ years, the $6K is a deflated pittance on either score sheet. (Note that the landlord often increases the deposit amount if they raise the rent.) I did account for selling costs in my spreadsheet when calculating the capital gain for each house.

Property manager costs: I did not include hiring a property manager if you need to rent your house out. This is a whole separate article, but like self-insuring instead of paying the renter’s insurance, I do my own property management. I have found the time costs to be negligible and property managers not worth the money in my experience.

Making additional principal payments toward the mortgage isn’t supported by my data. By doing so, you would lose some of the benefit of paying off a fixed P&I amount with future inflated dollars. Many people’s wages receive inflation adjusted raises and make paying off their mortgages easier over time. Also, the more money added to the principal will negatively impact the opportunity costs comparisons as the house value will change (usually it will increase) regardless of how much principal is paid.

Bottomline: Inflation makes a big difference

My decision to buy instead of rent in Arlington, VA returned roughly $206K over the last 10 years than I would have gained with renting a comparable house and investing the down payment and principal.

Likewise, my Ohio house returned roughly $24K more in the last 13 years than a comparable rental. This is despite having lower than average capital appreciation (2.4% vs. 3.5%).

While $24K may not sound like much, don’t forget that these returns are above and beyond what I would have gained if I rented a comparable house and invested my available down payment cash at a 12% annual average return. This difference would be even higher if I had invested in real estate index funds (e.g., VGSLX which returned ~7% per year 2013-2022) or the 3.5% dividend amount that JL used for his calculation.

This only works if you keep the house for the long-haul. If you are going to sell before you breakeven, then renting is the better financial choice.

I hope this helps you to calculate the long-term financial value of renting vs. buying a comparable house, and helps you make a decision that’s best for your situation.

Addendum: After completing my analysis I stumbled onto Nerdwallet’s Rent vs Buy calculator. This has comprehensive variables you can input to make your comparison. I like the graphic that shows when the cross-over point will occur for buying vs. renting. However, I cannot access their formulas, so I’m not sure how they work behind the scenes. It uses statewide average property tax rates which do not reflect many local tax situations. Likewise, I find using a percentage of property value as a poor measure for repair and maintenance costs. For example, my less expensive OH house cost a lot more to maintain than my more expensive VA home.

I think my spreadsheet, updated each year using actual annual investment returns and inflations rates, will provide a more accurate picture if you wish to track your house’s real time performance and whether it’s better to rent or sell if you need to leave your home for an extended period of time. Note, high investment returns or capital appreciation percentages later on are less valuable than high returns early on due to sequence of returns and the power of compounding.

After Almost Two Decades of Investing, Why Weren’t We Rich or at Least Well on Our Way?

I thought my wife and I were doing everything right to achieve a rich, free life. Avoid debt – check! Spend less than we earn – check! Invest the surplus – check! So, after almost two decades of investing, why weren’t we rich or at least well on our way?

This essay is published in J.L. Collins new book Pathfinders (Harriman House publishing) — a follow-on book to The Simple Path to Wealth capturing personal stories of people who applied the many financial concepts from the book. Pathfinders is available on Amazon and other places where books are sold.

When I calculated our net worth 19 years after we started investing, we had invested $103K in principal into IRAs but their value was only $92K. We had actually lost money! I had also lost $15K out of $50K invested in a taxable mutual fund account and all of the $5K invested in individual stocks.

I thought I had done my homework. I had read an investment book, read several articles on investing, and sought advice from friends, but it wasn’t until I read J.L. Collins’ book The Simple Path to Wealth that I finally understood that my investing problem was…me.

I have been frugal and a great saver my whole life but, as you can tell already, I was a terrible investor. J.L.’s description of the “typical investor”– who panics and sells when the market takes a tumble, waiting to reinvest cautiously long after the market recovers – described me perfectly.

In 1992, when I was a young lieutenant in the US Air Force, I understood that investing in stocks for the long term was the path to financial success. My wife and I each opened a traditional IRA (this was before Roth IRAs) and invested in mutual funds.

With monthly automatic purchases, we invested the annual limit and put the rest in a savings account. After 5 years, our $17K invested had grown to over $90K and our savings was over $90k. So far so good, right? But, then along comes yours truly. Here are the most egregious examples of my rocky investing.

Individual Stock Picking Fail

In 1997, I purchased 1,000 shares of Boston Chicken (later known as Boston Market). We had recently lived in Boston and I loved our nearby Boston Chicken restaurant. I was convinced that home meal replacement was a growing trend and thus a great investment.

Unfortunately, the company was cooking more than delicious chicken. Just weeks before I purchased the stock (and unbeknownst to me), the company revealed it was recycling money by loaning to its franchisees to build new restaurants, masking its true, troubling financial picture–huge debt.

Boston Chicken soon filed for bankruptcy. I watched that stock drop from around $5 per share to pennies as the company financially collapsed. Believing that I simply needed to learn more about stock investing, I read The Motley Fool Investment Guide. It was no fun to read their take that delicious chicken does not necessarily make a great investment. I learned picking individual stocks can be very risky.

Buy High, Sell Low?

Not to be deterred, I continued to closely watch the markets for three years, saw their year-over-year gains, and thought: We can’t miss out on the tech stock boom any longer. So, in January 2000, after the Y2K scare passed but right before the dot.com bubble burst, I invested a quarter of our net worth ($50K) into mutual funds (half in a tech fund and half in an S&P 500 index fund).

Yep, I bought high, joining the excitement of a hot market. But the value of my shares burst along with the bubble. I held them for a measly four years, and when there was little to no recovery, I sold our shares, locking in a $15K loss.

I didn’t yet understand how to hold and wait for recovery. In fact, many of the remaining companies, such as Amazon and eBay, would eventually fully recover and make a lot of money. Sigh. Luckily, we left alone our only remaining investments–our IRAs–and they continued to grow… until the Great Recession hit.

In September 2008, when the Great Recession was in full swing and the stock market was way down, I convinced myself and my wife that we needed to pull our IRA investments to safety and avoid further “losses.” So with much angst, I transferred our IRAs into money market funds and locked in losses of approximately 25% percent each.

The recession made me wary of the market, so I kept our investments in money market accounts until February 2014, when I felt I couldn’t let the market rise without us any longer. By then, the market had long recovered, but my jitters remained. I was certain (as were many pundits) that the market would once again drop.

There Has to Be a Better Way

Finally, in early 2018, I found the Financial Independence movement and took on a new perspective of how to build our financial future. I discovered J.L. Collins on the ChooseFI podcast. I checked out The Simple Path to Wealth from my local library and read it from cover to cover. I gave it to my wife. I bought copies to share with my kids and friends.

Reading the book felt like J.L. was speaking to me directly, as if he knew me personally and my poor investing history. His approach is so simple, yet it eluded me for years. Armed with J.L.’s wise words (we began to think of him as “Uncle J.L.”), I now understood the importance of investing in broad-based index funds, paying low investment fees, and giving like a billionaire. But most importantly, I learned how to hold (and even buy) when the market is falling and sell (rebalance) when it is up.

Testing My New Resolve

My first big test was in March 2020 when the COVID-19 pandemic hit and the market plummeted. In the past, I would have pulled out my money after it dropped precipitously, but now I had Uncle J.L. over my shoulder reassuring me to stay the course.

I didn’t sell. In fact, I confidently optimized our available investment dollars and shifted into more stock. I now trusted that, eventually, the market would rise again.

In early January 2022, I rebalanced our portfolio, selling stocks at their peak and buying government securities (I needed to wait on bonds as interest rates were rising). In early June 2022, when the market dropped 15%, I shifted funds from government securities to buy stocks “on sale.”

When it further dropped into bear market territory, I purchased more stocks at a deeper discount. If it drops past 25% or even 30%, I’ll do it again. Since reading The Simple Path, our stock portfolio has increased by 60% and we have achieved financial independence.

I am no longer investing with angst and a trail of lost opportunities. Now, my wife and I are investing thoughtfully, our eyes on the horizon, confident the market will eventually recover. Our two children, both in their early 20s, are getting a great start to a lifetime of smart investing. Thanks, Uncle J.L.