Rent vs buy property in FIRE decumulation stage

[TUK020]

Monevator weekly roundup contains link to Which report of relative costs of owning vs buying
https://monevator.com/weekend-reading-d ... more-54706

[ohit1]

I am in the fortunate position of having reached my FIRE number via selling a property plus existing investments. We are now renting while we get rid of remaining son (this summer) and to allow us to decide where to live next since we now have more or less complete freedom of location.
My question is, should I rent or buy over the longer term? I have seen discussions on this question but they are all focussed on the accumulation stage rather than decumulation stage I will shortly be in.
My property purchase budget is max 500K. If I just stick it in a FTSE100 tracker, or Vanguard High Income fund I will get approx 4% dividend, so £20K pa approx (disregarding tax considerations). To my simplistic way of looking at it, if I can rent for <1650 per month I am ahead financially just from dividends, regardless of underlying fund value. Or I could do the conventional FIRE all share index fund approach and finance rent from dividends and sale of units. There is the extra factor of how the purchased property would appreciate/depreciate in relation to the tracker fund assets, but who knows how that will go?
Does anyone have any thoughts on the purely financial side of renting vs buying? I'm sure that in the end emotional factors may become more important, but it would be interesting to hear any thoughts on the financial aspects.

Are you only focussed on the financial aspects for the decision?

I like the idea of my own house as I can do wtf I want with it - i.e. pick the tradesmen I want to replace the big ticket items, make upgrades, etc. That has always swayed me into the buy decision for anywhere I feel settled with a routine for at least 3-5 years.

Then, also, maybe optionality later where you could actually rent out that house you used to live in and then go somewhere else (rent or otherwise).

BTW, I am specifically talking about a house here as assuming freehold. Leasehold adds a different dimension which puts me off.

[hiriskpaul]

Purely from a financial point of view it is safer to buy, assuming you hold for the long term, as buying hedges out a substantial part of your living costs. Drawing from an investment portfolio to pay rent introduces 2 risks. 1) The long term capital return on the house exceeds the long term return on the investments less rent. 2) Sequence of return risk. Even if the total return on the investments exceeds the total return on the house (capital + imputed rent) over the holding period, the fact that you are drawing from investments to pay rent may still make owning the house work out better. Worse case scenario is that the investments are entirely depleted paying rent. This sequence of return risk may of course work the other way if the investments grow quickly in the early years.

You have a taxation drag on the returns from the investments (CGT & IT) until you can work it all into ISAs, so you need returns on investments to exceed that of the house + imputed rent in order to compensate.

The additional financial benefit of the inheritance tax Resident Nil Rate Band may reduce your eventual IHT bill, but you should be able to use this RNRB with the proceeds from the house you have just sold even if you don't buy another, provided the investments bought with the proceeds passes to direct descendants.

[Wuffle]

Thanks to hiriskpaul,

Having only skimmed the rules (it turns out) I was unaware of the ongoing benefit from RNRB when downsizing or passing into residential care. I find myself in such a position with a parent and and am happy to have sidestepped looking foolish when the conversation was had.

W.

[Gerry557]

I would look less at the finance than the issues with renting. Can you find a rented place that will be available for your timescale and with all the problems that renting instill.

Not being able to decorate as you wish, not being able to change the garden, some might not even allow pictures on the wall etc

Then you get issued notice, the hassle of planing another house move whilst trying to find another property that is available and to your liking. You might not have even unpacked from the last move!

This may be a bigger or smaller issue depending on location, age and what friends you have available. Maybe you know a man with a van or a removals firm. Maybe you are a fit and healthy person who doesn't mind humping all your belongings about.

If you plan to move frequently anyway renting might make sense but even so I might be tempted to buy something and rent that out myself so if the worst happens I have a fall back plan.

If you known about a health condition that might limit your life expectancy then I might consider it.

Yes but the OP was asking about the financial aspects and I was trying to bring the discussion back to that.

Dod

Whilst I didn't quote figures in my observations, they do have financial implications but the lack of information precludes detailed costs. Additionally how important the various observations, will play a bearing on the costs. The more important something is to you the more you are willing to pay extra!

If your landlord gives you notice, you will have to spend time planning another move, pay costs etc. We dont know the area or the rental market or if he owns a van or needs a full removal service. Removals can cost thousands! how mush is his time worth?

Does it need to be a limited area or willing to travel. What are the extra costs in this? Another car for the family? What are the costs associated with his priorities. Maybe he likes a really nice garden but the rented house needs money spending on it to get it up to his standard. The landlord is unlikely to pay so will it require him to do the outlay? Of course this could be any important element.

What happens if the landlord give notice after just six months again. Will furniture fit or will that be time for a new sofa etc

So whilst there is no defined costs involved it is quite open. He might get a long term rental or not be bothered about anything in particular which could reduce overall costs.

I suspect that the longer the term the more it swing in favour of buying. Again not an issue if your a chain smoking, 8 pints a night, do no exercise type sickie type person with other health implications. There are costs to owning a property too and these can be substantial. New kitchen?

There are also tax benefits in having a main residence. Basically is a question of will investments do better than property and a what if statement.

What if one doesn't perform as well as the other. A house and less money or no house and less money. Albeit the less money in the second scenario will be bigger than the first, or you hope it would. I suppose you could buy a cheaper house if the investments were poor compared to the investments over time if you decide to jump before its all gone.

Property tends to be more stable than investments and often has an element of gearing. Although not in this case as no mortgage being proposed. He could look at diversity. Buying with a mortgage (if he can still get one) and paying the currently low interest with the investments. (Best of both worlds?) inflation will also effectively reduce the mortgage over time and aid some investments income. What about x3 BTL properties?

Its such an open ended question that hinges so much on the OP and what is important to him. Looking after shares plus buying and selling is much easier than doing the same with houses. You cant part sell a house either if you need some cash!

One final point, Covid has just shown what can happen in the investment world, share prices dropped substantially and dividends were cut or stopped completely. All this in a very short space of time. Yes things are improving now but how would the OP cope through that type of event next time. Is there some other fall back income?

[1nvest]

One final point, Covid has just shown what can happen in the investment world, share prices dropped substantially and dividends were cut or stopped completely. All this in a very short space of time. Yes things are improving now but how would the OP cope through that type of event next time. Is there some other fall back income?

Risk during accumulation years is near zero. Looking to maximise rewards (stocks) along with addition of periodic savings and its near certain you'll do OK.

Risk during drawdown is major. Some suggest just spending dividends from a 'Index' that is most unlikely to fail (such as a all-world stock index fund) as being 'safe'. However that overlooks that dividends can (and have) halved and halved again in real terms historically, and stayed down for extended periods. If prior dividends just about covered living expenses then that is as good as failure of the desired objective of covering living expenses.

To reduce insufficient income risk, some opt for SWR, where a fixed initial percentage of portfolio is drawn in the first year and then that amount is uplifted by inflation each year as the amount drawn in subsequent years, which provides a 'safe' (inflation adjusted) income. That however is a 'self dividend' paid out of total return approach to amounts and times that match ones own personal circumstances/needs. If too high that can spend down capital to critical/unsustainable levels. Consider for instance that the worst 10 year period over the last couple of centuries saw a 10 year -7.5% annualised type total real (after inflation) return (gross with dividends reinvested). Portfolio value with dividends reinvested more than halved. If income were also being drawn then core capital would have declined further.

Playing with the stock market is like playing chicken with a freight train... no matter how many times you win, you only get to lose once. -Mike Masters.

Having liability matched rent (owning) is safer than not. For a enduring portfolio you shouldn't seek to maximise potential rewards but instead seek a reasonable reward with the lowest risk. Plan for the worst, hope for the 'average'.

The safest is a very low SWR, as that provides a consistent inflation adjusted income but where sufficient capital remained after the worst of times to subsequently 'recover' across better times. One way to lower SWR % is to use a larger capital base. Those that have accumulated 100 times spending, where a 1% SWR is 'enough' are very safe. For others who might never get anywhere near that level of capital base then there are risks involved, hit and hope. Diversification of income streams, paying into the state pension during accumulation years etc. along with owning a home so you don't have to find/pay rent out of 'investment income' are such diversifiers. Sadly however, like with inflation bonds, the times where such alternatives are most needed are the times that they're more likely to be unavailable/changed - the same circumstances that drove the need also hits the state. More appropriately the state should act as lender/insurer or last resort and follow fiscal policies that reflect that. The US does, but the UK tends to instead follow 5 year based fiscal policies and flips between two extremes (Lab/Con). In the US citizens can purchase guaranteed inflation bonds from the state, the state insures their citizens and they promote their citizens to manage their own retirement funding, to accumulate investment pots. In contrast the UK withdraws insurance when most needed, and sees those that have accumulated pensions as easy targets to hit. Which has the effect of capital flight towards safer pastures and/or having uncertainties needing far more having to be accumulated than more often necessary. If for example the state provided a safe/guaranteed tax free 4% real return choice to its citizens then each individually could precisely plan around that and that would lower the wealth divide (where some who had accumulated more than enough still sought more - just in case). If for example you knew you had a 10K state pension and had 250K in investments that would provide another 10K and where 20K/year spending matched your needs then many might step aside to retire having reached that goal to provide opportunities for the next generation to work/accumulate until they'd reached their goal. As-is however, and some have far too much, many have far too little.