As I’ve gotten older, I’ve had to realize that some of the nuggets of wisdom that I hold dear won’t work for everyone. Even my cherished belief that everyone should live below their means is flawed. It is literally impossible to follow the LBYM edict if you most basic needs – food & shelter – outstrip your take-home income. Advising everyone to “live below your means!” is tone-deaf to the reality that not everyone has sufficient means to survive.
Another bit of wisdom that I’ve always questioned comes from the blogger behind GreaterFool. Prior to the pandemic, this blogger encouraged everyone to sell their home, invest the proceeds in the market, and live off the dividends and capital gains. Quite wisely, he took the position that cash flow is more important than net worth. Beneficiaries of outsized tax-free capital gains on their home would be smart to sell it and invest the proceeds in a diversified stock-and-bond portfolio. In turn, the portfolio would churn off enough money to pay rent to a landlord somewhere.
The blogger explained how landlords were effectively subsidizing their tenants. In his view, home prices were going to drop drastically so homeowners would be better off selling their home at high price points and becoming tenants. Before the pandemic, market rental rates were less than the landlord’s expenses to own and operate rental units. The landlord couldn’t increase the rent too much or the tenant would walk away and find somewhere else to live. At the higher end of the rental market, this was a serious concern.
So if a homeowner could sell their home, and their proceeds could cover the rent of a comparable rental property, then it would make sense to sell. The homeowner-turned-renter would realize the tax-free capital gains of their home and move into a landlord’s property. According to the blogger, their invested proceeds would generate enough dividends and capital gains to cover the cost of market rent. The landlord would cover the difference between the rent received and the costs of owning the unit. The homeowner-turned-renter could then cover the rest of their expenses with income from their employment.
The first time I heard this financial advice, I was really impressed. It sounded like a very good thing, but then I started asking questions:
- what if there was a dividend cut or the capital gains dropped?
- what if rents went up faster than growth on the invested portfolio?
- what if the portfolio was compromised somehow?
- what if the portfolio’s generated returns weren’t enough to rent in the first place?
These are the questions that would keep me from sleeping well at night. Never worrying about how I’m going to pay for my shelter is one of the very best benefits of having a mortgage-free home. Others may feel differently.
I’ve no doubt that the blogger’s proposed financial path would work for some people. After much careful reflection, I realized that I wasn’t one of them.
This advice never sat well with me, even though I own a mortgage-free home. Yes, selling my own home would give me a six-figure sum to invest. In my case, the resulting dividends and capital gains wouldn’t be enough to cover rent for a comparable property in my city. I would have to keep working way beyond my intended retirement date. It would be years and years and years before my portfolio would be generating enough money to cover all of my expenses.
Once again, I’d be sharing walls with strangers and living without those little extras a house brings to one’s life: added privacy, extra room, green space. Undoubtedly, my rent would increase every year and I’d be without any guarantee that my investments would churn out enough money to cover those rising costs. Finally, if I was living off my dividends and capital gains, then I wouldn’t be able to have them automatically re-invested. In short, I’d lose the benefit of compound growth.
Nope. This blogger’s advice was not for me. There were too many drawbacks and too few benefits given my preferences and how I want to live my life.
That said, I could certainly see this advice working for people whose homes were worth over $3,000,000. At a conservative 5% return, there would be $150,000 of favourably-taxed income to spend every year. With that many millions to invest, there might even be enough money to cover inflationary pressures and rising rents.
In my humble opinion, an investment portfolio of less than $3,000,000 wouldn’t work for me. That’s not to say it wouldn’t work for someone else. Again, not all advice is for all people. In my head, going into my dotage while still paying rent to a landlord is rarely a wise course of action. Rents tend to go up. Without the benefit of compound growth over the long term, my dividends and capital gains would eventually become insufficient to cover rising rental rates.
For the record, my house is not worth an amount anywhere close to seven-figures. Investing its proceeds might generate $1000 per month. In my city, that’s currently not enough for the average 2-bedroom apartment. Why would I move from a comfortable-for-me-sized house to an apartment with half as much space, no yard, and less privacy?
With my own paid-off house, I benefit from compound growth of my dividends and capital gains while I’m still working. Yes – I still pay property taxes, insurance and repairs for my home. However, those aggregate costs are far less than what I would pay in rent to a landlord, year-in-year-out. When I eventually stop working, I don’t have to worry about rental increases because I own my home.
The only benefit I see to the blogger’s proposed course of action is immediate lump-sum investing. Someone following his advice would be able to invest a big chunk of money today and benefit from long-term growth. The stock-and-bond portfolio would grow over time and possibly make the homeowner-turned-renter wealthier that someone like me. I rely on consistent bi-weekly contributions from my paycheque to dollar-cost my way into the market. In short, my chosen path was to pay off my mortgage in under 5 years then build an equity-based, buy-and-hold investment portfolio. I’m making contributions but I’m not going to receive the benefits that come from investing a huge lump-sum immediately. This is because it’s always better to invest as much as you can, as soon as you.
The blogger in question is writing for a wealthier audience. I’ll still visit his blog to learn things and to get a perspective on how some of the Wealthy handle their money. I’m seasoned enough to know that I won’t agree with everything this blogger writes. Those best-served by his views are those who have a considerably higher level of wealth than I do.
As you continue to learn about personal finance, you’ll come across many suggestions about what to do with your money. Think carefully! Every money mistake can be undone, given enough time. Yet, wouldn’t it be nice to avoid those mistakes in the first place? Just because something is a good idea or it’s works fabulously for someone else doesn’t mean that it’s the right move for you. It never hurts to remind yourself that not all advice is for all people.