Bob and Jane get married. They put their savings together, and with a little extra help from the ‘Bank of Mom and Dad’ they manage to put down a down payment on a home and purchase it with a mortgage. They plan to live in the same house for the next 20 years and raise their kids there.
After all, they might as well make mortgage payments toward their OWN house instead of WASTING the same money on rent, right?
Now all Bob has to do is keep his job for 20 years, make steady mortgage payments, and never move anywhere. And at the end of it, he’ll own his own home – free and clear!
This narrative is all too familiar to most of us. We’ve seen it in the movies. We might know someone in this scenario. It might even be the case for you.
It is especially commonplace in Asia, where property ownership is put on a pedestal like no other.
The danger with a universally familiar narrative is that it becomes so familiar that it receives little scrutiny or critical thought, regardless of how big its impact is on our lives and destinies. After all, how can it be wrong, everyone else is doing it, right?
Just for fun, let’s change the story a little bit.
Jim and Mary get married at the same time as Bob and Jane. Just like Bob and Jane, they pool their savings and with the help of their parents, they put down a down payment on a property next door. But instead of living in it themselves and paying off their own mortgage, they rent the place out, and find a separate place to rent for themselves. They’ve done the math, and the rental income is enough to cover their mortgage and management expenses, with cash left over!
Over the next 20 years, they are free to rent and move around as they wish while their tenants effectively pay for their mortgage. They use the money they would have paid toward their own mortgage to pay for rent, except it is subsidised by the positive cash flow from their own property. If their circumstances change, they can be flexible and match their circumstance with the rent they wish to pay. They can also go where opportunity is. Just like Bob and Jane, after 20 years they have a property that is paid off free and clear.
Who played their cards better? Bob and Jane, or Jim and Mary?
They both put down the same down payment. They both make similar monthly payments- one toward their mortgage, and the other toward their rent. They both own their property outright after 20 years.
But one is stuck, while the other is free.
Millennials are sometimes referred to as ‘Generation Rent’. Many cite unaffordable property prices and the freedom to move around as the main reasons for not committing to a mortgage. Although I don’t think you should write off property investing altogether to become a perpetual renter, they are right about one thing – there is immense freedom in renting.
After all, it doesn’t make much sense that a person or family should live in the same place for 20 or 30 years. People change. Circumstances change. Family sizes change. Cities change. Your residence should also change.
And since it’s impractical for most people to buy every place they want to move to, renting should be the natural alternative.
I know what you might be thinking. “But Sam – isn’t it UNFAIR to pass on the BURDEN of paying off YOUR mortgage to your tenants?”
The answer is a simple ‘No’.
First of all, it doesn’t have to be the same tenant for the whole duration of your mortgage. Tenants are free to come and go. As long as SOMEONE is in the property and helping Jim and Mary with their mortgage, they’re not too worried.
Secondly, as a landlord, you are simply providing a service to the tenant and receiving a fair payment for that service. They’ve chosen to rent your property by choice. A tenancy is much like an extended hotel stay. If you go to a holiday destination and somebody has conveniently built a well-serviced hotel exactly where you would like to stay, you’re not complaining about unfairness as you pay for the nightly fee.
What frustrates me to no end is that many people dive nose-first into ‘Bob and Jane’ style ‘home ownership’ simply because they think that living in your own home conveys a higher social status, while renting is simply for lowly people who can’t afford to buy a home.
This social conditioning and desire for other people’s approval clouds their judgement when it comes to what might be the biggest financial commitment of their lives.
Do away with convention, we should do what makes sense. And sometimes, renting simply makes more sense.
I am not saying that everybody should do what Jim and Mary did, or that you should never pay off your own mortgage. There isn’t one right answer when it comes to property investing and home ownership. What I am simply trying to convey is that it is dangerous to simply assume and adopt a conventional narrative without first analysing it from a rational perspective.
The marathon continues.