Clicky

How Does Home Ownership Fit Into An Investment Portfolio and Financial Plan?

New Reader? Get free regular updates from Can I Retire Yet? on saving, investing, retiring, and retirement income. New articles weekly. Join more than 18,000 subscribers. Unsubscribe at any time:

A great framework for developing positions and hypotheses is what Stanford professor Paul Saffo describes as strong opinions, weakly held. Using this approach, my ideas on home ownership have evolved over the years.

Is House Investment

Like most Americans, I started out believing home ownership is a great investment. A few months after finishing graduate school, I started my career and got married. My wife and I then put down 5% and bought our first house that came with a 30 year mortgage.

Later I read contrary opinions. JL Collins wrote “Why your house is a terrible investment.” James Altucher’s opined “It’s financial suicide to own a house.” My opinion began to shift.

I started viewing our home as a liability that tied up capital and drove our spending, rather than it being an asset that would help us achieve our financial goals. But that view is incomplete as well. 

Home ownership is not a great investment for everyone. But it can be a great lifestyle decision with financial upside. Ultimately, we decided home ownership was the right decision for us. 

That left us with a couple questions. How do we incorporate this asset, that represents a substantial piece of our net worth, into our investment portfolio? What role does home ownership play in financial and retirement plans?

Inflation Hedged Cost Control

Your home is not the same as liquid paper assets. It doesn’t produce income in the form of dividends and interest. And you can’t sell off portions of your home as you can sell shares of a portfolio.

A primary residence is also fundamentally different than a rental property. An investment property produces regular income and could be sold to create income without disrupting your lifestyle.

Home ownership does provide unique benefits. It enables you to deploy capital in a way that is uncorrelated with other investments.

The first benefit is true whether you own your home outright or whether you are carrying a fixed rate fully amortizing mortgage. You know exactly what you will spend on mortgage and interest for the term of the mortgage, or you’ve eliminated these expenses completely once the mortgage is paid off. 

Fixing or eliminating your housing expense can provide a psychological benefit. With so many uncertainties baked into any retirement scenario, having certainty over this large expense can be comforting.

Having housing costs fixed also offers a tremendous inflation hedge. Those who rent need to prepare for the potential of rent increasing at or greater than the rate of inflation.

You must not ignore the fact that homeownership comes with unexpected expenses as well as property tax increases over time. However, renters are exposed to these risks as well. They are passed on to them indirectly in the form of rent increases.

Tax Advantages of Home Ownership

A simple and effective strategy to lower income taxes over your lifetime is to defer as much income as possible in your higher earning working years. You can then recognize this deferred income at lower marginal tax rates when you have little or no other income. 

An often overlooked tax benefit to owning your home outright in early retirement is that you can live well without needing to spend much. Eliminating rent and mortgage payments gives you greater control over how much income you will need and thus how much income tax you’ll pay each year.

Owning your home also enables you to optimize Affordable Care Act (ACA) tax credits. These credits are based on household income (MAGI to be technically correct). The cost of an identical health insurance plan on the open marketplace can vary by tens of thousands of dollars per year between those optimizing subsidies by lowering MAGI and those paying the full cost because they can’t. Eliminating mortgage and rent payments gives greater ability to control your income needs.

Those who want to be more aggressive in minimizing their tax burden can utilize a Roth IRA conversion ladder. This requires rolling over a targeted amount of money from tax-deferred investments to Roth IRA accounts each year. 

Needing less income to support your spending gives more space in favorable marginal tax brackets to do these conversions.

Moving to Create Income

One argument against home ownership is that it ties up capital that can’t be used to fund your lifestyle. However, that’s not necessarily true if you’re willing to move to free up some of that capital to fund your retirement.

Owning a home with the plan to sell it later provides options that can enable you to retire sooner. Home ownership can also provide a contingency plan if you need to free up capital in retirement.

Geoarbitrage

There is a belief that developing a high savings rate to enable financial independence and early retirement is impossible for many people because their work requires them to live in a high cost of living area. 

This can be a challenge during your working years. But there is no rule that says you must  stay in a high cost of living area when you no longer need to earn an income. Utilizing geoarbitrage, moving from a higher cost of living area to a lower cost area where your dollars stretch further, provides a way to free up capital tied up in a home while simultaneously improving lifestyle.

I recently discussed this scenario with friends who live and work in the Washington D.C. metro area. They are contemplating early retirement and are considering different variables that could impact their decision.

I pointed out (with a somewhat selfish motive of trying to get them to move closer to us) that if they sold their current home and bought something comparable in our area they would be able to pocket about $500,000. 

Assuming a 3-5% safe withdrawal rate, that $500,000 would create an annual income stream of $15,000-$25,000. This would also significantly decrease their spending by lowering taxes and cutting the amount they currently spend on travel.

Downsizing

Some people have no desire to move to a lower cost area due to family connections, friendships developed over your working years or other lifestyle considerations. A similar strategy could be used with downsizing your home.

There are various reasons it may make sense to own a larger home during your working years. With kids at home, having extra space can be a luxury. A home gym can provide convenience and enable a healthier lifestyle. Many people keep a home office.

As your stage in life changes, so do housing needs. Things that at one point were luxuries and conveniences can become burdens to maintain and add unnecessary costs.

Selling a home and downsizing to a lower cost home can provide a sudden infusion of cash. This decision can also come with ongoing economic benefits in the form of lower taxes, maintenance expenses, and utility bills.

One decision to use your house to create income through geoarbitrage or downsizing can be a complete game changer for your retirement planning.

Staying and Creating Income

Some people may be set on staying in their home for life. Home ownership provides several options to fund your retirement while providing diversification away from stocks and bonds.

Creating Rental Income

Many people dream of traveling in retirement. To some, a home is seen as an anchor that weighs down these dreams. While you travel, you still have expenses like property taxes, utility expenses, and possibly having to pay someone to maintain the property.

Times are changing. Services like HomeAway and Airbnb make it easier than ever to use your home as a source of income when you’re not using it for your own shelter. Excellent online resources are available to teach you how to rent your home while you go traveling.

This opens up opportunities for homeowners to use their primary residence as an income producing asset in ways that would have been challenging, if not impossible, just 5-10 years ago.

For others who don’t want to downsize, these same services give the option to use your primary residence to create income by renting out areas of your home that you’re not currently using. I’ve written how we designed our home ownership to retire sooner utilizing this approach.

For full disclosure, we’ve used our extra space to host guests and we lived in it this past summer while renovating our primary living space, but we haven’t made a penny renting our home out. But having the option to do so provides another contingency to our early retirement planning.

Turning Equity Into Income

I am debt averse, so I never considered a home equity line of credit (HELOC) or home equity loan until a few years ago. We decided to buy our current residence and use it as a rental until we sold our former one. 

A real estate investor friend who was advising me suggested looking into using a home equity loan against our former residence to buy our current one. I was amazed at the favorable terms we were able to obtain on a home equity loan, so that’s how we financed our current home until we sold our old one.

This opened my eyes to other ways it’s possible to use a home for your shelter and simultaneously use the equity to provide for your spending needs. 

One option is to use a HELOC as an emergency fund. This can come with origination fees and annual expenses which should be considered. This strategy can also bring increased risk to your financial plan and enable unwise spending decisions if not used carefully. 

It may also be harder to get a loan or you may get less favorable terms as a retiree with little or no income. Still, for the right person this can be a viable and attractive option to use the equity in your home.

Another option that recently came onto my radar is a reverse mortgage. Respected retirement researcher Wade Pfau advises retirees to consider reverse mortgages as part of their retirement plans and has written an entire book on using reverse mortgages to secure your retirement

Other interesting research from the journal of financial planning shows that using a reverse mortgage closer to the eligibility age of 62, rather than as a last resort, can increase retirement income and security in particular circumstances.

Using Your Home as Long Term Care Insurance

I’ve recently been thinking about the complex decision around buying long-term care (LTC) insurance after reviewing Cameron Huddleston’s book “Mom and Dad We Need to Talk” which is about caring for aging parents and helping them with their finances. 

A reader, Laurel, recently left a comment on the blog. She stated, “. . . now I view our house as our long term care insurance. When we need assisted living, we will sell the house and have enough money for a very nice place.”

Combining the ideas from this comment and the information from Huddleston’s book gave me new insights into another benefit to owning your home as you age.

According to the website MedicareInteractive.org: “Home health care includes a wide range of health and social services delivered in your home to treat illness or injury. Services covered by Medicare’s home health benefit include intermittent skilled nursing care, therapy, and care provided by a home health aide. Depending on the circumstances, home health care will be covered by either Part A or Part B.”

However, according to Medicare.gov: “Medicare doesn’t cover long-term care (also called custodial care), if that’s the only care you need. . . You pay 100% for non-covered services, including most long-term care.”

A reasonable strategy is to stay in your home and receive home based services which are covered by Medicare as long as possible. 

Owning your home can act as LTC insurance if the time comes that you can no longer live there without custodial care. You can then sell it to fund ongoing expenses. Simultaneously, you maintain the upside of keeping the home while not having paid LTC insurance premiums if you never need LTC.

Factoring Your Home Into Your Portfolio

Clearly, your home is an asset that provides different financial planning options as well as psychological comfort. But circling back to my first question: How does your primary residence fit into an investment portfolio?

Your primary residence is fundamentally different in several ways from assets such as stocks, bonds and investment real estate that are traditionally included in an investment portfolio. One difference is that your primary residence typically lacks the regular income component associated with other investments.

Another is that your home represents a large sum of money tied up in one financial asset. You can’t easily rebalance a portfolio by selling off a portion of your home if it is appreciating faster than your other assets. Conversely, you shouldn’t buy a bigger house than you need because you arbitrarily determine that your house should be a certain percentage of your portfolio.

For those reasons, we don’t consider our home as part of our investment portfolio when considering asset allocation, rebalancing and withdrawal strategies. We consider it a separate entity that doesn’t directly impact our investment decisions, but does factor into our overall financial plan.

Factoring Your Home Into Your Retirement Plans

This leads into the second question we started with: How does home ownership factor into an overall financial and retirement plan?

There is no one size fits all answer to this question. There are many opportunities to use home ownership as part of an overall financial and retirement plan.

My goal with this blog post is to highlight some options and to get you thinking about which make sense for your situation. You can’t use all of these strategies. For example, you wouldn’t want to take equity out of your home if you are banking on being able to use the equity to fund your LTC needs.

My own thinking about home ownership, as with most things in life, is constantly changing and evolving as I continue to accumulate knowledge and experience.

How do you factor home ownership into your investment and retirement plans? Have you thought of ideas I’ve missed? Have you utilized any of these strategies to your advantage, or found they didn’t work well for you? Share your thoughts and experiences in the comments below.

* * *

* * *

[Contributing Editor Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris' writing has been featured in MarketWatch, Doughroller, Business Insider and RockStar Finance. He is also the primary author of the forthcoming book Choose FI: Your Blueprint to Financial Independence. You can reach him at chris@caniretireyet.com.]

* * *

Disclosure: Some links on this site, like the Amazon links, may be affiliate links. As an Amazon Associate we earn from qualifying purchases. If you click on one of these links and buy from the affiliated company, then we receive some small compensation. The modest income helps to keep this blog going. Affiliate links do not increase your cost, and we only use them for products or services that we're familiar with and that we feel may deliver value to you. By contrast, we have limited control over most of the display ads on this site. Though we do attempt to block objectionable content. Buyer beware.

Comments

  1. Using a paid off home as LTC insurance can be tricky. When my dad got cancer and needed long term care, it was very difficult for my mom to manage selling the house. I ended up doing most of the work, including helping to empty the house and prepping it for sale, finding the right realtor to help sell the home remotely and then dealing with closing issues. Unless you have a trusted helper to do this, it’s a huge burden to sell a house and get your loved one (your spouse?) cared for at the same time.

  2. Chuck Chadwick says

    There’s more to owning your “home” than just as an investment. There are important downsides to live at the discretion of a landlord. Choose carefully as it is one of those decisions that is quite difficult to undo!

  3. I have written:

    “The bottom line is that buying a home while working is either an investment that pays off (as imputed income) in retirement or it is a cost of living while working that does not carry over into retirement (imputed savings).”

  4. In answer to your question “How does your primary residence fit into an investment portfolio?”, my three word reply is simply It Does Not. My investment portfolio is exactly that, what investable assets we have across all accounts, both taxable and tax-advantaged. We wanted our current home (our third during our 40 years marriage) to be paid off entering retirement so I did so within six months or so of buying it, after the sale of our former abode went through, which wound up being a few years before I retired. Maybe I like to keep things simple or maybe there are too many if’s when it comes to looking at a home in the same light as our investments, but bottom line is I ignore it for such purposes, even though it is a fairly substantial asset.

    • Chris Mamula says

      Agree and have taken a very similar approach with our investment portfolio. However, that is part of our bigger overall financial/retirement plan.

  5. Great article Chris – it aligns with how we think about home ownership and home equity as well. It can be a great diversifier and inflation hedge. Plus there are many ways to use home equity in retirement. (note – we’ve made this much easier to model in the latest version of our planning tool – worth checking out.) https://www.newretirement.com/

    • Chris Mamula says

      Thanks Steve. Checking out the updates to the NR calculator is on my short list of things to do!

  6. Paul Elliott says

    Hello Chris,

    In addition to the HELOC option for purchasing a home, have you ever researched the use of a Collateralized Asset Line? At Schwab, they call it a Pledged Asset Line. Basically, one would “pledge” or deposit funds into this brokerage account and access it similarly to a HELOC except, one can invest the funds as long as a certain margin is maintained between the funds used and the funds invested. I would be interested in hearing your thoughts on this type of option.

    • Hi Paul,
      Sorry I’m not Chris but am curious if this Line you mention is any better than their margin rate? My primary broker is Fidelity and when I explored what they can offer, they pointed me to their margin rates, which is higher than what I got by shopping around for a no fee HELOC (except at the $1M level, which was only slightly lower). Not exactly the same thing but given I can only borrow on margin up to half of my investable assets and the fact that my portfolio is much more liquid than a house, I can’t see why I would get a better rate than the margin rate.

    • Chris Mamula says

      Paul,

      I am not familiar with Collateralized asset lines. Others below have mentioned this as well.

      If I’m understanding correctly, you are borrowing against your house to invest on margin which sounds like way more risk than I would consider.

      I’ve added this to future topics to research and write about.

      Best,
      Chris

  7. When we bought our first home many years ago, we bought a modest home. The mortgage was barely more than the rent we were paying at the time. With tax breaks, I felt we were breaking even. At the time we sold it, we realized about 4 times the original value of the home in the sale, substantially more than we put into it even including interest. We expect to have about the same thing happen with our second home. At this time, rent on small apartments is more than our mortgage payment. Don’t get crazy on moving up in size and opulence and the economics are there.
    The drawbacks to consider are: 1) even small houses are typically larger than apartments and have more outside walls, so the utilities are often higher and 2) there is maintenance required if the value of the house is to be retaintained (or increased!). Learning to do simple home maintenance is a valuable skill – make it a hobby, it even may become a potential side hustle.

  8. We consider our home only as part of what will be inherited by our children. I include the purchase price only in our asset list / balance sheet – minus 10% for costs likely incurred in a sale. Since our current home is paid off and if/when we move we would hopefully downsize and pay off the next one as well, reducing many of the problems for whomever needs to liquidate it. With little or no debt, carrying the expenses for a few months until it is sold is factored into our will.

    Another form of leverage is a pledged asset line. Many brokerage firms allow you to borrow against your assets at a rate tied to 30 day LIBOR (plus x%), which has been demonstrably less than a HELOC. We use this to smooth out cash flow, especially for large one time needs (wedding, etc). The downside is of course that it ties up those assets, but you can still spend the dividends.

    • Chris Mamula says

      That is a great position to be in Tim. Congrats! Unfortunately for many people considering retirement their home represents the majority of net worth, thus the need to consider other creative options as I’ve outlined.

      See response to Paul above. I’m not familiar with pledged/collateralized asset lines, but have added it to my list of things to research.

  9. Michael Williams says

    Just a few random thoughts:
    1) Check carefully before taking a reverse mortgage. Every one I looked at had exhorbitant fees.
    2) As you get older, you may be less inclined to deal with home/garden maintenance, so a rental situation might be easier. My mother was not capable of handling home maintenance after my father passed, so it made sense for her to sell the house and move to an apartment.
    3) As a couple you might want to stay in the big house you’ve had all those years, but after one passes, it might make sense for the other to sell it. First, the extra money from selling may be needed to generate additional income. Second, it can lower their expenses to rent a smaller place instead of having the costs of home maintenance, utility bills on a large house, annual taxes and insurance, etc.

    • Chris Mamula says

      Agree in general with #1, but it does seem that the options there are improving and for the right person, approaching the situation carefully and purposefully, they can have a place.

      Great points on #2 & 3.

      Thanks for writing.

  10. I was so glad that you mentioned reverse mortgages. I read Dr. Pfau’s book after hearing him speak about their possible value to retirees. We will be moving to be closer to family in a few years, and the ability to buy a home similar to the one we currently own and only pay about half to keep the rest working for us in our investments. I listened to a podcast recently by a retirement expert that classified them as sleazy, and when I challenged them in a facebook group using Dr. Pfau’s book, I didn’t get a well thought out response. Josh Scandlen was the first person I found to talk positively about them on his YouTube channel, and he recently had Dr. Pfau on to talk about them. I appreciate that you took the time to understand them and present them as a possibility without dismissing them out of hand. Yes, the fees are high, however, it is a non-recourse loan, and it will save our children the responsibility of selling a home when we are gone. I expect that the money we don’t pay for the house will be worth quite a bit if it is invested well.

    • Chris Mamula says

      Karen,

      Unfortunately there are a lot of awful products out there. Equally unfortunately, the vast majority of people are financially illiterate and are easy prey for unethical sales people who are highly incentivized to push the most fee laden products. So I get why people get dogmatic and give oversimplified rules of thumb. Frankly, those rules of thumb will help more people than they hurt.

      That said, for the right person in the right situation who uses the right product, reverse mortgages can be useful. It is similar to the use of annuities or financial advisors in general. We’ll continue to do our best to give nuanced analysis so you can make an informed decision.

      Thanks for the feedback.

      Chris

  11. We too consider our house only in the light of total net worth that will pass down to our children. We do not consider it part of our investment portfolio. We have no plans to move, house has been paid off since my husband was 56, which enabled us to fund college for the kids without them having to take out loans. It is getting harder to maintain the house and yard as we get older (67 and 65 now), and there may come a time when we have to move to a smaller place, but if we do we will be paying cash. No more mortgages or any other kind of debt.

    The only problem that I see with using a house as a way to pay for long-term care is that it only really works if both spouses need the care at the same time. Otherwise, the spouse that does not need the nursing home still has to fund a place to live. It would work if the only care required is home care and both spouses can stay in the home or if both can sell the house and move into an assisted living facility, but not if one spouse is so badly off that he/she must be moved to a memory care or nursing home situation.

    • Chris Mamula says

      That is a good point and adds nuance that everyone should consider if using this strategy and bypassing long-term care insurance or not planning in other ways for it.

      Often when both spouses are still alive and aging, the healthier spouse finds themselves in the role of caregiver and could be assisted by home health agencies in caring for the dependent spouse. It is certainly not ideal for either the spouse that has to be caregiver, or the one that needs the care. However, few things in life are ideal and this is often the reality for many people.

      Thanks for taking the time to read and add your thoughtful comment.

      Chris

  12. I am glad you mentioned Dr. Pfau’s excellent book on reverse mortgages. I agree that the fees are high, but not if you view it as a replacement for long term care insurance. We got a HECM (reverse mortgage line of credit) and have the minimal balance (`$100 to keep it open). The cost to put it in place was 1-2 years worth of long term care insurance premiums and we can use the money if and when we need to (for other emergencies as well as long term care). When I previously checked these out for my mother prior to Dr. Pfau’s book, I too rejected them as absurdly expensive. So, it seems if viewed in isolation, but if comparing to LTC insurance, I felt it was cost-effective, flexible, and has given us great peace of mind.

    • Chris Mamula says

      Thanks for the thoughtful comment Denise. Interesting combination of the strategies discussed in the post.

  13. Did I miss the part in your piece where you address the value of imputed rent? This is the element most-often overlooked in overall analyses of the rent-vs-own calculation. As the underlying value of your house rises over time (except in the worst of circumstances), so does the imputed value of your rent.

    Personal example:

    We bought our property with 3 homes almost 30 years ago. Two, rented out over time, long-ago came to pay all expenses, including additions/repairs equal almost to our initial purchase price. We’ve also taken money out to buy other properties, which also yield rent income and appreciation. Rental income thus pays for all costs, repairs, taxes, plus half the cost of two other homes. Wife and I now live, for the most part, in the free cash thrown off from rental income,on top of some remaining mortgages.)

    If we factor in 30 years of imputed rent (even as we used 2 of the homes for ourselves, at different times), we have really cleaned up—and yet the underlying property value is some five or more times greater than the purchase price.

    Considering financial factors alone (e.g., excluding relocations; desire for landlord services), I consider home-ownership to be the closest opportunity to a “sure thing” when it comes to securing a solid financial future.

    This aspect becomes clear, once you get your head around it, but seems to present a challenge for many of us.

    (($; -)}™

  14. NOT PAYING OFF YOUR LONG DURATION FIXED-RATE MORTGAGE IS A GREAT INFLATION HEDGE! in the 1970’s home prices actually declined slightly in REAL terms, although they skyrocketed nominally. meanwhile their fixed-rate mortgages, based on the original nominal purchase prices, were decimated in real terms, producing enormous windfalls.

    • Chris Mamula says

      I mentioned that in the post, and it is certainly a valid point and strategy. Not sure what is meant by the all caps though. If that implies that everyone should maintain a mortgage into retirement, I thoroughly disagree. Personal finance is personal, and as outlined there are many considerations, optimizing for both math and emotions, when making any decision.

  15. This is my reasoning for using our house for long term care. We don’t have children to leave the home to, so we either spend the house or we give it away to some organization we’ve listed in our trust. We prefer to spend it. We currently live in a two story house. I worked as a medical social worker on an acute rehab unit and regularly saw people who could no longer climb stairs because of their injury or stroke. Our house is currently worth about $1.7 million (husband bought for $168,000 3O years ago). If we stay in our home for another 15 years (we’ll be 80), we could sell the house (hopefully worth more) and use all that money to pay for assisted living. I like the idea of having 24 hour help available if needed. I like knowing someone would notice if I didn’t show up for meals. I like the activities I can choose to get involved in if I want. It will be very hard to give up our home, but it would be harder not spending it. We would choose a facility that has different levels of care as needed. I joke with my friends, I will be so upset if I don’t spend all the money I’ve saved! That includes our house.

    • Chris Mamula says

      Makes sense to me.

      • Fred Wallace says

        Agreed! I’ll be succinct. LTC insurance is a rip-off as insurers raise rates. We live in a $2.0 million home (very fortunate) that is nearly paid off and selling our home will fund LTC costs. (Have lived in the home for 25 years).

        • Chris Mamula says

          I don’t think it is fair or accurate to call LTC a rip-off. I do think it is accurate to state that it is very expensive due to the high likelihood people will need it due to living longer and the high and increasing costs of providing care.

          Being able to self insure is an attractive option for those that can do it. Using home ownership as a creative way of self insuring is appealing. Though as others have pointed out in the comments, this comes with challenges as well.

  16. Chris, I dont see how owning a home helps one qualify for the ACA subsidy. You said this, “Owning your home also enables you to optimize Affordable Care Act (ACA) tax credits. The MAGI calculation doesn’t allow a mortgage interest deduction, if that’s what you were getting at.

    • Mitch, I believe he is saying (I read that paragraph a few times) that if your home is paid off, you don’t need to generate income to cover a mortgage payment or a rent payment. You could conceivably get by on a lower MAGI and possibly qualify for ACA subsidy.

      But I don’t buy that theory. Your assets, whatever they are, are going to generate a certain amount of income. Whether you have a house payment or not. My dividend-paying stocks pay an average of almost 4% yield. I could sell them all and put the money in a bank account paying 2% interest, but my MAGI would still exceed 4x FPL for a single.

      • Chris Mamula says

        Larry,

        Yes that is what I’m saying. It may not be true for you, or others who have greater savings and/or less tax efficient investing strategies and can’t control income in taxable accounts. It is absolutely true for me and others in my situation. That’s why I summed things up at the end to say that you have to apply these ideas to your individual circumstances and pick and choose what makes sense for you.

        Chris

    • Chris Mamula says

      Mitch,

      Sorry if unclear. Let’s look at my example.

      My family lives very comfortably with no mortgage on about $50,000/year. So we need to generate only $50,000 year as early retirees through a combination of earned income from part-time work, dividends from taxable accounts (which to Larry’s point we would be paying taxes on anyway), and long-term capital gains on taxable investments we sell off. If we hypothetically paid $2k/month for rent or mortgage payments and all else was equal, we would now have to generate $74,000/year. Depending on your specific income situation and how you would generate that income, that could cost you thousands of dollars in increased insurance premiums because your premium subsidy would decrease (particularly if the income pushed you over the subsidy cliff).

      Does that make sense?

      Chris

  17. I think a very important psychological consideration is not factored here; the discipline regime in paying off the mortgage long term for the property tantamounts to disciplined saving. That chunk off from the monthly pay check, month after month, year after year for 20-30 years is indeed a discipline regime. That property be it for own stay or income, is a great means of saving.

    Often, I notice, without that chunk to pay off the mortgage, one would have much more liquid in the pocket. Psychologically, the tendencies to spend them away as gratifications in daily life such as more trips to Starbucks, that avocado juice, upgrade for nicer car or that dream vacations one after another. The end result is what many Americans are facing today, insufficiency for retirement.

    • Chris Mamula says

      Fred,

      I struggle with this argument. The part of my brain that wants to optimize things sees 50 better things you could do with your money than throw it at a mortgage. But the practical side of my brain looks at statistics regarding American savings rates and sees how little people save, and I know you are absolutely right and this forced savings is exactly what many people need.

      Thanks for chiming in.

      Chris

  18. Its easy to rationally consider selling your home when you are in your 50,60, or 70’s. From experience with my parents it was nearly impossible to sell the home that they had been living in for 25 years. Cognitive reasoning diminishes and it becomes an emotional decision rather than financial that you mention here. Put a plan in place that addresses your wishes as you age out.

    • Chris Mamula says

      Very wise words Michael. My parents are currently being proactive and considering what they want to do in the future and talking with me about it while they still have their physical and mental health. I realize how fortunate I am, because I am certain there are many more people in your situation who are stuck dealing with this when circumstances are far more difficult. Hopefully articles like this one will get parents and their adult children talking about these important topics sooner.

      Best,
      Chris

  19. Great post, Chris. As a very recent retiree (FI at 55), my wife and I considered and debated most of the options you outlined. We also had multiple financial planners over the years tell us that from a strictly investment perspective, it would be better to use the money tied-up in equity for other wealth-building options. For us, there is also a very strong emotional component of having a paid-for home. The security of knowing that nobody is going to give us a 30-day notice to find another place to live is huge. It also opens us up to all the travel, renting, etc. options you mention in the post. You also nailed it that we are able to relatively accurately determine our expense needs to help plan our portfolio withdrawal strategy. Our mortgage is paid off and in response to the question about how does this fit in our portfolio: We do not factor the value of our home in our investment portfolio. Our current strategy is we have basically self-insured for Long Term Care with that asset. If we need to sell it or use a reverse mortgage to pay for our care, so be it. If not, the home will go to our children. That is where we are today. Like you, our views may change over time. Life is about having options and a paid-for home provides those options and, for us, emotional security.

    • Chris Mamula says

      Thanks for the feedback Pat and congrats on your FIRE! Totally agree that there is no one size fits all advice that works for everyone, but your approach is very similar to my own so it makes sense to me.

      Cheers!
      Chris

  20. Great write up Chris. I know we thought long and hard regarding our house and how to use that asset as part of our financial planning picture. In the end, we decided to put it into the retirement plan as an asset we would sell around the age of 80 (give or take a few years) so we could downsize and save approximately one half of the proceeds for LTC if needed. This definitely helped boost our retirement cash flow projections because we didn’t have to save outside the house for this cost and/or pay for an expensive policy. If we wanted to, we could also just rent a condo or assisted living place at that time of our lives and use the proceeds to pay the monthly costs and later LTC if needed. Either way, it definitely helped our retirement plan to utilize the equity of our house at the later stages of our lives while still enjoying our home ownership up until the time it became a burden.

    • Chris Mamula says

      That makes sense Jerry, and I totally agree that your home is an asset that shouldn’t be ignored in planning.

      Best,
      Chris

  21. Thanks for sharing all of your knowledge. We are looking at buying our first investment house to house hack right now. Thanks for the information.

    • Chris Mamula says

      Thank you for reading. A house hack, done correctly, is the biggest game changer someone looking to build wealth quickly has at their disposal.

      Best of luck with it!

      Chris

  22. Chris-Thx for the post; this is one of my favorite financial subjects. First, I have to state that I’m firmly in the JL Collins camp on this subject; meaning that “financially” renting is better than buying most of the time. However, home ownership is more than just a financial decision, so we each must factor in our own circumstances. I’ve owned, rented & been a landlord multiple times, so I understand it from several perspectives.

    Having said this, my primary comment on your post, and most of the readers’ comments, is that the arguments made for home ownership are “financial”, which takes me back to JL Collins…and there we are.

    What this means for me is: keep the financial & non-financial aspects separate, analyze them separately, then make a decision. Don’t make the mistake of mixing the two.

    • Chris Mamula says

      Mark,

      I tend to agree with other investments like stocks that removing emotions as much as humanly possible is extremely wise.

      However, home ownership effects many aspects of daily life and happiness that has major financial implications. Also, the certainty of having a paid off home, or even locking in a fixed rate mortgage is an emotional decision, but also a financial one. So I’m not sure how you can separate the two completely.

      Cheers!
      Chris

  23. Great post! I’m of the opinion that one needs a smaller low maintenance home in area with senior support for old age. A home retrofitted for easy access with no steps. Good to be familiar with area and home for late life needs. Best if you are close to family, but if not remodel home to be as self sufficient as possible ahead of need.

    The optimum solution would be housing purchased from a Landlord that desires retirees since they typically supply long revenue stream of low maintenance and low hassle tenants. My friends and relatives in this stage of life require a very small living space, so don’t over estimate your needs. Good to have a landlord who is responsible for inside and outside maintenance. This is superior choice as compared to expensive condo or higher maintenance home..

    Yes, sell your homestead within an opportune time frame. Yes, remodel for aesthetic appeal. Note one will not be physically be able to do this in old age and note your children do not want the responsibility to accomplish the task even if gaining wealth. One needs to greatly simplify housing needs and put investments upon an automatic flight path. Your investments will pay a better premium than staying in your oversize expensive home. In this stage of life you’re down to basics and not attempting to impress neighbors. Letting your old home decay is a sad event. Evaluate your age and capabilities and be proactive. Move to another geographical location if needed and don’t underestimate your dependence. Money is money, Meaning your home is no different and not as attractive return as compared to investments..

  24. Stephen Richardson says

    Like you, I am debt averse, so I paid off my house as quickly as possible. I have read articles which indicate I am either very smart or very stupid for doing so. Oh well. I am willing to forgive myself for making such a big financial mistake and I’ll try not get too big-headed for being such a financial genius.

    • Chris Mamula says

      I’m in the same boat as you in paying the house off quickly Stephen. I’ve never regretted it for a day and if this is the biggest financial “mistake” we’re making, I’m pretty certain we’ll end up doing OK.

      Cheers!
      Chris

      • It seems to me you both made smart moves being intentional with your money, and putting it to work for you.

  25. A very interesting post, with strong veiws either side. When I was an adviser I always advocated loan free home ownership as a core component for retirement. To be well and truly free of landlords during ones later years is an enormous security both financially and emotionally.

    Additionally as owning a home in Australia is almost part of our DNA, retirement strategies were always about how to pay the mortgage out to coincide with stopping work rather than forging a retirement sans home.

    Consequently my point of veiw rests strongly with whenever possible, strive to own a home by the time you retire. Lifestyle considerations will always trump any financial benefits.

    • Chris Mamula says

      No one size fits all answer, but this certainly makes a lot of sense and gives a lot of options for many people.

      Thanks for reading.

  26. Hi Chris.

    I (very) briefly managed some home health services in my last position (billing & finance side). My understanding is Medicare will cover up to 60 days of home health services to treat the illness or injury (since it is therapeutic in nature). There is an opportunity for a provider to re-certify someone for additional time, but once a skilled service is no longer needed (like physical therapy) they no longer cover it. The average length of stay is just over 40 days. A lot of moving parts to it, and I am by no means an expert.

    I agree, though. If we are injured or sick this Medicare service/benefit could buy us (and our family) some time to pivot/reposition for the next steps if we are no longer to function independently and need custodial care. I haven’t really thought about it like that.

    We sold and downsized to a rental 2 years when we moved to New England. I am just recently starting to think about home ownership again once we find a long term place to settle. That might be Canada, though. My wife is Canadian so there might be an opportunity for us to geo-arbitrage our healthcare : ) She is applying for US citizenship now though to lock in Medicare here in the states in case we ever need it.

    Max

    • Chris Mamula says

      Appreciate you sharing your insights and experiences on LTC Max.

      Health care is the big challenge for all Americans who want to retire early, or really do anything outside of traditional W2 employment with insurance benefits, so geoarbitrage is a nice tool to have in your arsenal.

  27. Thanks for putting out these options Chris, as it is a subject greatly on my mind. I’m months away from full SS age (and a faded career) and am mulling my options. I live in SF with its crazy real estate and while I owe a half mil on my condo, I could probably sell it tomorrow for enough to pay off the mortgage and realize enough profit to buy a single-story(!) condo in Sacramento for cash and still have 150-250k to add to my investment portfolio. That decision would leave me with zero debt and low-maintenance living, although I’d be living in hot flat Sacramento with my daughter and family rather than beautiful SF with my friends. Do I need to own rather than rent? I don’t know, it’s just that I’ve been a homeowner for so many decades that it feels like part of my DNA and I can’t quite picture living in a home that is not my own to do with what I want. Any thoughts are welcome.

  28. Steve (NWOutlier) says

    did not read the article, did not read the comments – based on the title – “home ownership does not fit into an investment portfolio” unless it is a rental. it’s a pure expense and it’s expensive at any level….