Mrs. Wallet and I recently bought a house. We live busy lives as I’ve described previously. The property is going to require quite a bit of work on our part and is going to divert funds that we would otherwise invest to accelerate our path to financial independence.

How did this happen? Having once thought we would be renters for life, why would we take on this huge commitment? Let’s take a look at what convinced us to make the leap to buying our home.

It’s all about that sweet, sweet cash flow!

Pretty much the first thing you learn in any type of finance is that all that matters is cash flow. Does it make sense that renting is throwing away money, whereas if you buy a house, you are investing in your future? This statement is a gross oversimplification, and as is usually the case, the answer depends on the specifics of your situation.

Over time, I came across stories of several young folks who had accelerated their path to financial independence via real estate. I’m wary of survivorship bias (where you only hear about the few who made it), so I took these stories with a huge grain of salt and started digging deeper.

As it turns out, there is a subculture within the FI/RE movement that successfully uses real estate as either an alternative or supplement to investing in the stock market. Using strategies like the live-in flip (living in a house while you work on it and selling it for potentially tax-free profits) or purchasing properties with rental potential and then charging as much or more than their cost to own the property (effectively eliminating their living expenses while simultaneously building equity), couples and individuals are sprinting to financial independence like never before.

I’ve written previously about reducing your spending on the big three (housing, transportation, and food), so naturally, the idea of reducing or eliminating my living expense (which is definitely one of my largest expenses) appealed to me as a way to accelerate our financial journey. Getting back to cash flows, I saw that if I could find the right property, I could improve my situation and further ratchet up the percentage of our income that goes to savings and investments beyond our current roughly 70%. Depending on the numbers, we could potentially accomplish this goal despite some initial cash outlays

In addition to potentially increasing our cash flow situation, if our living expenses no longer exist or are taken care of, we could reduce our target spending in retirement and thus our target portfolio value. Reducing your target portfolio value (ceteris paribus) translates to reduced time to financial independence!

Getting flat the housing market.

Another idea I found appealing about purchasing a home was the idea of “getting flat the housing market.” What does that mean, though? There are three basic situations you can find yourself in:

Short the housing market:

You solely rent and don’t own real estate; rents increasing (which they do fairly reliably) have a negative impact on your situation and cash flows. Rents decreasing have the opposite effect, improving your cash flows.

Flat the housing market:

You own a single property, probably the one you live in. Rents increasing or decreasing have no impact on your cash flows because you are locked in with the bank at the rate you got when you purchased the home. Over time, your rental expense (interest) decreases as you pay off your balance, although your note will mostly be the same until you pay off your loan, at which point it will disappear. Property taxes (rent to the government) can and likely will go up, but they will be going up for everybody and thus will also be reflected in rental prices.

Long the housing market:

You think rents (and house valuations) will go up over time, so you own multiple houses or pieces of real estate. Rents increasing have a positive effect on your cash flows and rents decreasing have the opposite effect.

What’s important to note here is that when you are flat the housing market, you lock in the largest portion of your living expenses at the prevailing rate at the time. This number isn’t going to fluctuate or go up over time as rents may, and if you are able to create a cash flow situation that covers that expense, you’ve eliminated the majority of your housing expense. In this case, especially if you pay off your mortgage, it’s even possible for you to turn the situation around and create a positive cash flow that will pay for other parts of your lifestyle!

Given that we live very close to downtown where we work, I was excited to lock in my housing expense as low as possible. As areas become increasingly gentrified, it’s most likely to become more expensive. Regardless of what happens, if I lock into a rate I know I can easily support, it becomes much easier to plan going forward.

While we’re excited about the possibility of the value of the home appreciating, we don’t plan on selling it anytime soon, instead opting for eventually renting it all out if we wanted to move, which could further increase cash flows.

Learning skills.

Purchasing a home that needed some work would offer the opportunity to learn some skills that I’ve always wanted to learn, such as how to fix or build things. If there was a rental involved, I would also gain valuable management skills in that area. While we’ve been extremely busy and this could be a bit much to handle at first, Mrs. Wallet was just about to graduate and I was only a couple to a few months away from graduation myself, which should free up more time.

Working on your home yourself is also an opportunity to build sweat equity. Labor is often the most expensive component of any work that’s done, so doing the work yourself has the potential to increase the value of your property by much more than the cost to you in dollars. This embeds some safety margin and hopefully appreciation into your plan.

Lifestyle upgrade.

When we started looking, we were living in a roughly 800 sqft one bedroom house. While this had worked very well for our purposes, we were ready for a bit of a lifestyle upgrade and a little more space. If it was possible to end up in a larger space, possibly even a nicer space, while either holding our expenses constant or reducing them over time, that would be a huge win. Even if you don’t have a friend (or friends) with these skills to show you the ropes, you can learn virtually anything on YouTube these days.

Stability.

Another consideration was that we really liked living where we did. Our apartment at the time was renting for well below market, and rents were continuing to rise in the area (the tenant after us ended up paying over 30% more). If we were forced to move out we would have had to pay much more to stay within biking distance. We wanted to ensure we could continue to support living the way we were, where we were without a sudden large hit to how much we were putting away in savings each month.

Caveats.

This isn’t to say everything is better owning, or that everything would be better owning in our situation specifically. These are simply some of the main considerations we entertained that led us to decide in favor of buying a home.

One of the main, obvious caveats was the initial increase in expenses. Even though eventually costs would be offset by other income, initial costs would be considerably higher. I ran dozens of financial scenarios based on different lenders, loan structures, properties, and courses of action.

It’s also important to factor in the amount of time, energy, and attention buying and owning a home demands. The searching and buying processes are not for the faint of heart and can take months of putting in evening and weekend hours. When you add in potentially becoming a landlord and/or having a property that needs maintenance, repairs, and remodeling, you have literally added another business and job (or two, or three) to your list of things to do. If this doesn’t sound fun for you, it might be best to stay away.

Buying a home also brings with it considerable risk. While you may be flat the housing market, any major or minor issues with your house are now very much your problem as opposed to a landlord’s and will likely hit your cash flow directly. What’s more, depending on your insurance policy, it’s possible you could be personally liable in a way that wipes out a significant portion of your net worth or even lands you upside down on a loan. Depending on your specific financial situation, you could also be investing an unacceptably high portion of your overall portfolio into real estate as opposed to diversifying cheaply and easily with the stock market.

Finally, purchasing a home locks you in for a long time, and you are now required to generate a certain amount of income per month in order to keep your home and your invested capital. You no longer have the flexibility to simply get up and move on a whim. Needless to say, you should consider all the variables carefully before making such an important financial decision.

That’s it!

And that’s more or less how we ended up at the decision to buy a home! While there were some other personal and emotional considerations, these points (both for and against home ownership) were at the forefront of my mind as we began searching for a house to suit our needs.

In the next post, we’ll examine the process of searching for the right home: how we went about it and what we found.

Love,
(Your) Wallet

PS – Ready for more? Head on over to part 2!