TL;DR: I’m a big proponent of primary home ownership. It is the ultimate low risk, inflation protected investment to complement a barbell investment strategy. Paying off your mortgage is a huge step toward Ramen Retirement. The freedom that comes from owning your home outright will give you the time and energy to take risks and explore opportunities that could be transformative to your future.
I love the idea of primary home ownership. While some people see ownership as a burden or a risk, I see it as a key stepping stone to Ramen Retirement. By buying you can lock in your cost of housing, and if you pay off your mortgage, you can get it down to the small amount needed for tax, insurance and repairs. This probably covers more than half the distance to your Ramen Retirement (depending on where you live). If you plan to stay in a city for five years or more, it probably makes sense to become an owner. The benefits come in so many forms:
- Low risk investment – think of owning your own home as owning an investment property that you rent to yourself. You can’t get a more predictable, reliable tenant, and ideally – if you know your market – you’ll be able to make a savvy purchase that gives you a good relative return on your investment. Think about what it would take to rent something comparable in your neighborhood, and that will show you what sort of ‘yield’ you’re getting on your investment. If you’re in the midwest, it’s easy to get returns in the 8-10% cap rate range. If you’re in a high cost coastal city, it’s likely a pretty low return in the 3-5% cap rate range, but I would argue still worth it as part of a ‘barbell investment strategy’ to get you to Ramen Retirement. Owning your own home is the foundational low risk investment for your early retirement
- Potentially live for free today – if you’re in a place where you can ‘house hack’ a situation, it makes a lot of sense. Buy a duplex, and rent one half. Buy a large house and get some roommates. This sort of thing makes a lot more sense when you’re younger, and it can be a great way to get you in the housing game. FHA loans let you buy for as little as a 3.5% down payment. Your tenants can cover most of the mortgage, and your housing costs are reduced while you pay down the mortgage
- Ultimate inflation protection – the reason owning is such a great idea is that you’ve locked in your cost of housing. We’re all born ‘short’ real estate, and if you’re ‘short’ an asset, you get hurt when it goes up. If you stay ‘short’ real estate in a hot market, you’re going to sit there watching the cost of housing go up around you with nothing you can do about it. Sure, some cities (SF, New York) have enacted ‘rent control’ measures, but you’ll still be a renter. If you ever want to move, you’ll lose that rent control protection, and there’s nothing saying your landlord won’t find a way to evict you in the future if your rent gets ridiculously below the market rate they can charge
- Generational wealth creation – owning your home is one of the most widely used forms of wealth creation / capture. If you buy in a growing city, it’s likely your neighborhood and home will increase in value over time. More people will want to move there. This is a real source of wealth you can pass on to the next generation. If you’re just a renter, even with an amazing rent control deal, you can’t pass that ‘rent control’ on to your children
- A big step toward Ramen Retirement – lastly, as mentioned above, the cost of housing is likely your biggest household expense. If you can get that one covered, you’ll be more than half of the way to Ramen Retirement. If you can pay off your mortgage, you no longer have the pressure to meet that monthly payment. You can step back and figure out what you want to do with your time and the rest of your life. You can discover and share your gift with the world
So, if you’re thinking about staying in a city for the next little while, have enough to make a modest down payment, and feel like you know your market well, get out there and find your future home. Use one of the low cost brokerage options – like Open Listings or Redfin – to buy your house and have them pay you in the process. Find some roommates, pay down your mortgage and get yourself one step closer to Ramen Retirement. Your future self will thank you!
And above all else – enjoy the journey!
Chief Real Estate Advisor – Ramen Retirement