Jason Hull of Hull Financial Planning graces us with his humor, common sense and practical advice every Monday in the Carnival of Wealth. Today, he’s given us an entire post in conjunction with the launch of his new financial planning course. We wouldn’t plug this if it were anything less than stellar. We can testify to its excellence, given that we’ve worked through the course materials ourselves. Jason will not waste your time, and certainly not your money. 

Neither a lender nor a borrower be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.
–Shakespeare, Hamlet

A few years ago, we decided that we wanted to move away from Charlottesville, Virginia. We didn’t know when we wanted to move, but, after some discussions, we decided that we wanted to give Fort Worth, Texas a crack. It has a good cost of living and it was close to most of my wife’s family.

We started looking at houses, and we found a lot of HUD foreclosures on the market. This was at the height of the foreclosure crisis, and in real estate, one person’s misery is another person’s opportunity. We came up with a list of 15 properties, contacted the company that was responsible for listing most of the HUD homes, and scheduled a time to fly down to Fort Worth and look at properties. We were going to do a tour of all of the houses with the intent of picking one and putting in an offer before we left that weekend. It was like The Bachelor for homes; we were supposed to get engaged in the same season that we met our contestants.

Despite dealing with an utterly incompetent realtor, we managed to get an offer submitted and accepted, and closed on our property. However, we were nowhere near ready to move, so we rented the house out for a few years until we were.

The first few months after we moved were the honeymoon period of our adventure. We explored, got to know the area, met neighbors, and did all of the usual activities that happen when you move to a completely different locale.

Over time, though, we grew disillusioned with our location. It was great for a young family who was raising children. The houses were nice, and the school system was good, but it was a 30-minute drive from almost everything that my wife and I did.

Because of the HUD rules about buying a property as an owner-occupant rather than an investor, we knew that we had to stay in our house for at least a year, and we figured that depreciation and capital gains would make us want to stay in the house for two years so that we could avoid the capital gains tax. After I ran some numbers, we decided that the tax bite wouldn’t be as bad as we thought, so we asked our property manager-cum-realtor (new to us and exceptional, not the buffoon we used to purchase the house) how much she could sell it for. Once she gave us a price, we decided it was worth it to go ahead and move.

We wanted to move to downtown Fort Worth, and because of the locations we were interested in, we decided that, rather than buying a new place in the location we wanted, we’d rather rent.

Yes, while we own multiple investment properties, we ourselves were going to be renters.

Let’s look at the reasons why we decided to pursue this path rather than buying another house/condo/townhouse/whatnot to live in.

• We could sell our current house and purchase enough investment property to generate rental income to cover the cost of renting a new place. This was a twofold calculation:
  • Expenses that would disappear or decrease when we rented rather than owning, including:
    • Insurance. We would move from homeowners’ insurance to renters’ insurance, which is cheaper on a monthly basis.
    • Property taxes. We wouldn’t have to set aside an amount every month for that annual expense.
    • Home maintenance. We had been setting aside an amount each month for the eventual roof replacement or kitchen renovation or whatever would come up as an irregular, but unavoidable expense of owning a house.
    • Gym costs. The places we looked at all had community gyms, so we would not need to continue our gym membership to keep fit.
    • Lawn guy. No lawn, no lawn guy.
    • Alarm. The value of an alarm is debatable anyway, but with interior access in the apartments we looked at, there was no need for a separate alarm. Plus, we have a dog. He barks when intruders come (in theory, at least, since we’ve never tried out this plan). Alarm problem solved.
    • Lower water bill, and perhaps lower electricity bill. Since we had no yard and trees to water, that would get rid of a significant portion of our water bill. Furthermore, since we’d be insulated on at least two sides by other units, and the access points were air conditioned due to interior access, we could probably expect a lower electricity bill too.
    • Lower automobile gas costs. We could reduce the 30 minute round trips several times a week to either walks or short, 10 minute trips, saving on gas.
  • Rental income covering the rest of the costs. Yes, I’m about to wade into mental accounting here, which I know I shouldn’t do, so stick with me here. There are two important points to note here. First, we were already budgeting the first set of costs. Secondly, the rental income would make up the difference between rent and what we were already spending. In other words, selling our house, buying investment property, and subsequently renting in downtown Fort Worth had no overall impact to our net monthly spending. More money in, more money out, and money in minus money out was the same in either situation.
  • Comparable purchasable living arrangements (house, condo, townhouse) in the same area would require much more capital. The return on capital invested would be much lower. Why tie up 2x the capital unnecessarily?

  “Well,” readers who know me will say, “aren’t you hopping on the hedonic treadmill?”

  Yes and no. Yes, we are increasing the costs associated with our housing because our rent is more expensive than the overall costs of owning a house were. No, because we’re trading an asset that provided us with a place to live for assets that provide income for us to pay for a place to live. It’s why I say that you shouldn’t count the house you live in as part of your overall net worth. We haven’t changed our overall equation or our retirement plan as a result of this move. Our target number for retiring solely on passive income hasn’t changed one iota. Furthermore, if we decide to downsize, which will probably happen after we retire, our housing expenses will decrease, meaning we’ll have more spendable or investable passive income.

  There are other reasons why we chose to rent:

• I’m not handy, so I don’t add value to a property. Alas, I never learned how to fix things, so I’m not the type who is going to go into a fixer-upper situation and made a house more valuable through my sweat equity.
• We plan on long-term travel when we retire. If we rent an apartment in our “base,” particularly one with interior, restricted access and gated parking lots, then we know that it’s generally watched over for the times we won’t be there. The exterior will be taken care of, and the security will remain the same. We simply cannot say the same for a house that is unoccupied for months at a time.
• We may not yet know exactly what we want. Sounds surprising for a 40-year-old to admit to, but we don’t know if Fort Worth is where we’ll eventually end up, or if it’s somewhere else, and no matter where it is, we’re not sure exactly what we’ll want in the place. We think we know, but we’ve thought that we knew before. Renting helps us with our commitment issues.
• What we want now is different than what we’ll want in the future. While we’re still (relatively) young and vibrant, different things interest us. When we’re older and ready to become less active people, we may want something completely different in a community. Eventually, we’ll have to live in a place where others can help us out – a particular dilemma for the childless – and neither of us is the type that feels so strongly about a given house that we’re going to have to be carried from it feet first.

You’re renting but you also own real estate. What gives?

This may seem like a dichotomous statement. We don’t want to own a house for ourselves, but we’re happy to own houses that others live in.

The biggest reason for this dichotomy is that we’re using the rental properties as part of our investment portfolio. Unlike the irrationality of the stock market, I can take advantage of the irrationality of the real estate market. Since I’m already invested in small businesses, both in the previous one which I sold a majority stake in but remain a minority shareholder and in my financial planning practice, and we also invest appropriately in the stock market, investing in investment real estate represents appropriate diversification for us.

Furthermore, we can take advantage of individual behavioral biases in both the sale of our house and in the purchase of investment properties. We’re practicing what I preached; we bought from HUD and sold to a retail buyer, and if the opportunity to sell to retail buyers happens in our rental properties, we’d do the same thing, as we only buy rental properties at extreme discounts, which are almost always precipitated by distress situations on the part of the sellers. We could reinvest the proceeds in more distressed properties. However, our plan does not count on capital appreciation; we only look at rental income that each investment will generate.

Finally, rental properties provide the stable foundation of our strategy for retiring completely on passive income. Investing in the market provides capital appreciation, and the small business investments allow us to swing for the fences, having already hit a long triple once with the sale of my company. We want to deal with money once a month when we’re retired. When we retire, our investment setup will allow this to happen, freeing us up to spend time on the things which matter most to us, none of which start with the word money.

To recap, the market provided us with an opportunity to upgrade our living arrangements, decrease our commitment, and maintain the same net spending as before. After 10 years of living in a place we owned, we decided to take a crack and see what life on the other side was like. It was a confluence of the right conditions, and we felt like it was too good of an opportunity to pass up.

How do I find properties to invest in and feel reasonably certain that they’re going to be profitable? How did I calculate how much I’d need to retire? These are but a few of many, many questions that I answer in my Winning With Money course: 20 lessons and 8 Excel-based financial planning tools that are a part a program designed to give you the path to financial security that you need. This self-paced course is designed to encapsulate most of what I do as a financial planner, teaching you 95% of what I cover with my financial planning clients, giving you the tools that you need to be able to control your destiny and win with your money.

Between now and October 20, I’m offering $50 off of the course if you use the coupon in the link below.

You can click here to get information about the course. The discount will be applied at checkout in Paypal.

Control Your Cash and Hull Financial Planning have a written affiliate agreement where Control Your Cash will be paid 10% of all sales generated from the Winning With Money course link above. The fee does not change the cost of the course offered by Hull Financial Planning. The Hull Financial Planning Form ADV is available by clicking here.

Jason Hull is a candidate for the CFP(R) Board’s certification, is a Series 65 securities license holder, and owns Hull Financial Planning. He is also a personal finance columnist for U.S. News & World Report.