Joshua Sheets, TMZ Foundation Welcome to the Radical Personal Finance Podcast. I'm your host, Joshua Sheets. Today's show is certain to be challenging, controversial and I hope appropriately radical. Our topic today is real estate and we'll be discussing why your house is a terrible investment, how to do a proper rent versus own calculation and other wealth building topics with our special guest, James Collins.

James got his start selling flyswatters door to door and picking up empty pop bottles from the side of the road at eight years old. Since then, he's earned his living as a soda jerk, bus boy, a dishwasher, an order puller, a grocery bagger, a stock clerk, a produce clerk and a gas station pump jockey, a mail clerk, ground man for a tree crew, landscaper, ad agency founder, account executive, ad space salesman, investment officer, entrepreneur, consultant, sales trainer, speaker, writer, radio talk show host and a publisher.

Today he is officially retired, sort of, but from time to time he shares his wisdom with the world over at JLCollinsNH.com in addition to sitting on a couple of corporate boards for small entrepreneurial companies that he finds interesting. James, welcome to the Radical Personal Finance Podcast. James Collins, Jr.

Thank you, Joshua, but I got to say that sounds like a guy who can't hold a job. When I went and read your about page I couldn't resent because you did such a good job on there. That is a great list. It was kind of my life flashing before my eyes.

I figured it out one time. I had, someday I got to make that list for myself because I think I had like 20 jobs or something like that by the time I was in my 20s and anyway I got to go and like count them all up sometime but it's so fun to do that and see all the different experiences.

Well, it is kind of fun and of course when you do that you think back on them and I can honestly say with maybe one or two exceptions I like doing them all. Well, that's good. So today I'm excited to have this interview with you. I think it's going to be fun.

We're going to attack the American religion of home ownership which I'm excited to do. Oh goody, I'm going to get in trouble with some more people now. Exactly. So we'll get into that in just a second though. Before we do, give the audience just a quick background on you, kind of your history in addition to what I just shared and specifically how did you get interested in the topics of money and personal finance?

Well, that's a great question. I think actually I've probably been interested in that since the very beginning. I mean, anybody who picks up pop bottles on the side of the road when they're eight is obviously interested in money. I got a two cent, in those days pop bottles had a two cent deposit on them.

So I was making nickels and dimes but I guess I've always liked earning money and at some point I discovered that my money could earn money. That was a real eye opening experience and of course that's a route to financially independent and being financially independent and being much more able to pick and choose what kind of work if any you want to do at various points in your life.

So once I discovered that then the whole world of investing opened up to me and I started exploring that and making mistake after mistake after mistake. And so when I write my blog and I talk about the various concepts that I have behind the way, I look at investing, index funds being the core example.

I probably come to that by making mistakes in investing and all the other things. I mean, when I hear people arguing about index funds, I will argue against them. I hear myself 25 years ago. I know those arguments I used to make. So yeah, that's kind of how it started and developed.

>> I know you write a blog on varied topics and you've got a lot of interesting things that we could talk about but I want to talk about your favorite essay or excuse me, my favorite essay on your blog. And I don't know what your favorite is but this one is my favorite.

>> And the one you picked by the way is also the one that has proven to be most controversial and got me the most hate. >> Good. >> Easy for you to say. Fortunately, most of that hate has occurred on forums other than my blog. My readers are a much more civil group by and large but not that they necessarily agree with me all the time but they are civil in the conversation.

But I've had other forums pointed out to me where that's not so much the case. >> Yeah. Well, the tone that I hope that my show has as time goes by is that it's just to look at facts and not come with a bias that this is the right way or that's the right way but look at facts and look at individual situations.

And what I love was that this essay that I'm about to read really did a good job of kind of laying out some facts. And so in the right situation, different people are going to make different choices. And I think that after we read the essay, we'll talk about that because you've made different choices as time gets on over the years.

But I think this is going to be a really valuable tool for people who are considering buying houses, renting houses and to give them some confidence that they can make their own decision based upon what their goals are. So what I'm going to do is since I've got the author here with your permission, I'm actually going to read your essay.

I've read this essay at least half a dozen times to friends and family members so that's how compelling that I think it is. And then we'll talk about it. So anything you want to add before I read it though? >> No. I mean, the only thing I would say is that as you're going to read it and I think one of the reasons that it drew some negative response from some corners is that in and of itself it makes it sound like I think that nobody should ever own a home under any circumstances.

And there are other, and I know we're going to talk about this, there are other posts on the blog that talk about one being roots and wings where home ownership is, home ownership is a very personal decision and it's not just a financial one. So the essay you're about to read is based on looking at it just as a financial tool, as an investment alone, taking out any of the other considerations.

And maybe when you're done I'll explain why I think that's a useful exercise. >> Absolutely. So let me read it here. This is James' essay, "Why Your House Is a Terrible Investment." "My pal James Altucher calls home ownership a part of the American religion. So I know I'm treading dangerous ground here.

But before you get out the tar and feathers let's do a little thought experiment together. Imagine over a cup of coffee or a glass of wine we get to talking about investments and maybe one of us says, "Hey, I've got an idea. We're always talking about good investments. What if we came up with the worst possible investment we can construct?

What might that look like?" Well, let's see now. Let's make a list. To be really terrible it should be not just an initial but if we do it right a relentlessly ongoing drain on the cash reserves of the owner. It should be illiquid. We'll make it something that takes weeks.

No, wait, even better, months of time and effort to buy or sell. It should be expensive to buy and sell. We'll add very high transaction costs, maybe 5% commissions on a deal coming and going. It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.

It should generate low returns, certainly no more than the inflation rate, maybe a bit less. It should be leveraged. This one's great. This is how we'll get people to swallow those low returns. If the price goes up a little bit leverage will magnify this and people will convince themselves it's actually a good investment.

Don't worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out. It should be mortgaged. Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.

It should be unproductive. While we're talking about interest, let's be sure this investment we're creating never pays any. No dividends either of course. It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist.

Sometimes, some places, none at all. It should be subject to the fortunes of one country, one state, one city, one town, no, one neighborhood. Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous. A plant closes, a street gang moves in, a government goes crazy with taxes, an environmental disaster happens nearby.

We could have an investment that not only crushes its owner's net worth but does so even as they are losing their job and income. It should be something that locks its owner in one geographical area. That'll limit their options and keep them docile for their employers. It should be expensive.

Ideally, we'll make it so expensive that it will represent a disproportionate percentage of a person's net worth. Nothing like squeezing out diversification to increase risk. It should be expensive to own too. Let's make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.

It should be fragile and easily damaged by weather, fire, vandalism and the like. Now we can add on expensive insurance to cover these risks, making sure, of course, that the bad things that are most likely to happen aren't actually covered. Don't worry. We'll bury that in the fine print or maybe just charge extra for it.

It should be heavily taxed too. Let's get the feds in on this. If it should go up in value, we'll go ahead and tax that gain. If it goes down in value, should we offer a balancing tax deduction on the loss like with other investments? Nah. It should be taxed even more.

Let's not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, let's tax it each and every year. Oh, and let's raise those taxes any time it goes up in value. Lower than when it goes down? Don't be silly. It should be something that you can never really own.

Since we're going to give the government the power to tax this investment every year, owning it will be just like sharecropping. We'll let them work it, maintain it, pay all the costs associated with it, and as long as they pay their annual rent -- oops, I mean taxes -- we'll let them stay in it, unless we decide we want it.

For that, we'll make it subject to eminent domain. You know, in case we decide that instead of getting our rent -- darn, I mean taxes -- we'd rather just take it away from them. I'm adding two bonus ones here for you, James, from your commenters. It should increase stress, lead to more divorces, but then be impossible to divide.

And finally, you only need one motivated -- read -- desperate seller to set the price for the whole neighborhood. Imagine your so-called investment suddenly gets scuttled when your neighbor decides to sell his particle board mansion at 20% below assessment. Wow, howdy, that's quite a list. Any investment that ugly would make my skin crawl.

In fact, I'm not sure you could rightly call anything with those characteristics an investment at all. Then, too, the challenge would be to get anybody to buy this turkey, but we can. In fact, I bet we can get them not only to buy, but to believe that doing so is the fulfillment of a national dream, nay, a national birthright.

So that, Jim, is one of my favorite essays that is in the personal finance blog. And I thank you for writing it. It's a gem. >> You're welcome. >> So, yes, obviously, right before the essay -- and by the way, you mentioned earlier James Altucher, who's also one of my favorite bloggers.

I will link to his posts on home ownership. He also writes two excellent essays on home ownership. But you rightly point out -- >> His assessment, by the way, is even harsher than mine. >> Oh, yeah. But then again, there's nothing tame about any of his essays. So he's good at stirring the pot.

>> That's true. >> So just to start with, I think that you made a valid point before, is that the key point here is that -- and the essay is ironic. It's a little bit tongue-in-cheek. But the key point here is not that people shouldn't buy a house. Knowing all of these things very well, I personally bought a house seven months ago.

And I'm very happy with that decision. I don't have any problem with it. I'm pleased to be there. And we'll talk about why. It's not that people shouldn't buy houses. But it's the fact that it's a different set of decision criteria. And it's not just that buying is always better than renting.

Is that a good place to start? >> I think that's a good place to start. And I would also add, the thing that I was probably reacting to as I wrote this was the common wisdom that buying a house is always a good investment. There are lots of reasons to buy a house.

But buying one as an investment should be at the bottom of that list, if on that list at all. Owning a house -- and I actually just sold my house in the spring. I'm now renting, which I'm thrilled to be doing, by the way. But prior to that, I owned that house for 13 years.

And I owned the house before that for 15 years. So I have been a homeowner for 28 years. I, too, have seen in my lifetimes when it makes sense to own a house. But I've never lost sight of the fact that it is a decision that is always an expensive indulgence.

As long as you understand the expense you're undertaking in buying that house, and that you're indulging in a consumer good, so to speak, in the way that buying a Mercedes is a consumer good, then I have no problem with how you spend your money. That's entirely up to you.

>> Yeah, absolutely. And the interesting thing is that most people -- I think you make a good example with the car. There's absolutely nothing wrong with driving a fancy car. If that floats your boat and you want to and it's your money, go for it. But many times you'll find that people who drive fancy cars feel a little bit -- they do it with a little bit of a red face sometimes.

They make comments saying, "Well, you know, it's an indulgence for myself." But yet so many times people will go and they'll buy a fancy house and they'll justify it with the idea that, "Well, at least it's a house. At least I own something. At least it's going to go up in value and it's a good investment." So as long as we kind of make that differentiation, then you can look at it accurately and start with what I would say is a rational way to do it, which is, "What are my needs?

What are my wants? What level of luxury do I want?" And then let's make a shopping decision and say, "In my market, in my area, with my needs and wants, what can I buy? What can I rent? How can I arrange my living space in such a way that I can get everything that I want in life in an efficient manner?" >> Exactly, in a manner that you can afford.

There's nothing magic about houses and I think that people are convinced that they are. They're convinced that they're buying a great investment and therefore they can and should buy more house than they need or maybe more house than they can really afford. And there are a lot of things in our society, a lot of institutions that drive that way of thinking and it's profitable for them to drive it.

Real estate industry is of course at the top of that list. I mean, real estate industry loves it when we buy and sell houses. The whole idea that you start with a starter house and then you buy a little better house and a little better house and then finally you get into your ultimate house and then when your kids are grown you sell that and you go into your retirement house.

I mean, that's not an accident that that's the path that is laid out in the shining waters down the line. I mean, it's a very profitable path for us to follow for the people selling us the houses or for the people selling us the services to maintain those houses or to insure them or to mortgage them.

So, there are a lot of people who make money owning houses, not so much the people who buy them. And when they do, it's more often as I mentioned in that essay you just read, it's more often a function of leverage working for them than a good investment working for them.

And I think people didn't really understand that and when the housing market collapsed a few years ago, that of course is what caused it to collapse is that leverage can work very powerfully for you and for many years in housing it did but it can also work very powerfully against you.

And so, suddenly people were taking out mortgages for 95, sometimes even 100% of the price of the house. I won't even say value because the houses have gone way beyond what they were really worth but the price of the house. Well, if that house then goes up 10% and you've borrowed 100% of the money, you've made $10,000 for a $100,000 house, you've made $10,000 let's say out of thin air and that's got to feel wonderful.

But if it goes down 10%, you've just lost $10,000 that you might not have and that many, many people didn't have and the next thing you know you're foreclosed. And there in a nutshell is what happened when housing collapsed. And I think I want to continue on that theme of leverage for a moment and point out where, why houses are a useful point for leverage and then where the disadvantages are.

I think my thoughts is that for the most part people are comfortable leveraging houses because everybody leverages houses. It's common and it's understood. People understand if I buy a 30-year fixed rate mortgage then this is how it works and this is what happens. So they're comfortable doing it. They forget that many things can be leveraged.

You can borrow money to buy just about anything including other investments. So it's just that most people don't have a margin account open with their stock broker. They're not accustomed to how that works and they're not accustomed to how that works so they're comfortable buying and getting a mortgage though.

Now when it comes to that little comparison, to be fair, the advantage does go to the house. So if you're looking for ways to leverage and you want to use real estate as a place to leverage, it's been a dramatically good time to do that with low interest rates, interest rates near the long-term rate of inflation.

Also with the fact that generally mortgages are not callable. So if your house does decline in value by 10% like in your example, if you can figure out how to make the monthly payment you might be able to afford to sit and wait it out. Whereas on a margin account with a stock broker, generally if your account value declines below the term set in the margin agreement, they're going to sell your investment.

They're going to sell your stocks and the stock broker is just going to take the money. So there are some advantages there to leveraging real estate that don't exist in other areas. >> Well you're absolutely right and that's not a mistake by the way. It didn't happen by mistake.

During the Great Depression, before the Great Depression, very, very few people borrowed money for houses. I mean if you wanted to buy a house, and this is true in many places in the world today by the way. >> Sorry, hang on one second. My phone is ringing on my, I can't figure out how to turn it off.

Here we go. All right, keep going. Sorry about that. >> No, I'll just back up a second. >> Internet phone, keep going. >> And I'll say that it's not a mistake that houses are easily leveraged, easily mortgaged and there are certain protections to that. Before the Great Depression, people didn't borrow money to buy houses.

By the way, in many parts of the world today, people don't borrow money to buy houses. It's a certain financial structure that the government put in place in the 1930s and they wanted to, there was a lot of social unrest in those times because of the Depression and of course there were a lot of European countries that were going the way of Nazi Germany and Communist Russia and there was a fair amount of, there was a fair amount of social unrest leaning in those directions in this country and the government wanted to stabilize that.

And one of the things they very strategically did or one of the concepts they very strategically came up with was that if we want people to have a stake in the society and one of the ways to do that is for them to own a house. And one of the ways to do that is allow them to borrow money to own a house and we want to make that available and desirable and we want to encourage banks to extend that money and that was kind of the beginning of it.

That's one of the reasons for some of the points that you made. So there's a real strong motivation to push people into houses and it may be good, it's certainly, you can make the argument good for the country and it might also be good for the individuals, for many people it is, but not always.

And that's a decision that people ought to, if you decide to buy a house, and I would never suggest that don't buy a house, what I would suggest is go in with your eyes open and understand what you're doing and make sure that you're doing it because you've run the numbers, you've calculated the risks and the benefits and it best fits your needs, not because you've always heard it's a good thing to do.

>> It's interesting how that whole government stabilization kind of track when taken to its ultimate conclusion back in the early 2000s. I would argue that that made a significant contribution to the real estate bubble and it's interesting how when you take anything to an extreme, it always seems to turn on itself.

>> Well, I think that's true and all of these things are done with the best of intentions, right? The expression of the road to hell is paved with good intentions. But yeah, you have Fannie Mae and Freddie Mac who are guaranteeing loans, federally guaranteeing mortgage loans, of course that's done to make banks more willing to issue those loans and then the banks figured out that unlike that famous movie from the 40s, It's a Wonderful Life where you place the banker in the community and people deposit their money in the local bank and then the bank lends it out and other people build and buy houses and over time they pay the bank back.

Well, of course that's not how it works anymore. I mean the bank or the mortgage lender might not even be a bank, issues the loan and then they probably turn around and sell it. And they sold it to Wall Street firms who would bundle it and resell it as a package and sometimes they'd strip out the payments and it became a whole different kind of product and for a while there was an insatiable market for this stuff.

And so lenders became more and more aggressive in seeking out borrowers and by aggressive I mean they lowered their standards more and more and more. So when I first bought a house, you put 20% down. I mean at the end of just before it blew up, people were buying houses with nothing.

Now people were buying houses where not only did they put nothing down but the lender would kick in 5, 10, 15 dollars to fix the place up. So you could buy a house not only with no money down but they'd actually cut you a check. Well, that all came out of the incredible demand for these packaged products that Wall Street was creating and selling.

>> Eric Lander: It's amazing the distortion that that brings to the market. >> Tom Hanks: And all of it was federally guaranteed which is why we wound up on the front porch. >> Eric Lander: Yeah. So to be fair, you've been a homeowner up until this year for the last 28 years.

What were some of the reasons that you owned two houses in a row? >> Tom Hanks: Well, let me start with the most recent one. We live in New Hampshire now and when we moved to New Hampshire, my daughter was in second grade. And as anybody who has kids will appreciate, when you have kids, most all of your decisions revolve around what's best for your kids and what's best for raising them.

And there are advantages to raising a kid in a house in the kind of neighborhood that we were fortunate to be able to afford and the kind of school district that I wanted her to have access to. Before when we lived in Ohio, we lived in an inner ring suburb.

It was a very urban suburb and we like city life. This is before our daughter was born. And we bought that house. We've been renting and we liked renting but I got restless quite honestly and I like change. We kind of started going out looking at houses just for kicks and we found one that was a beautiful old century house that just really appealed to us emotionally and we could pretty easily afford it.

We bought it but then when our daughter came along, it wasn't in a particularly good school district. And of course, we hadn't been thinking about that and the purchase of that house. So we sent her to private school for kindergarten first and half of second grade. And then as I say, we happened to move to New Hampshire but when we moved to New Hampshire and I was looking at neighborhood and school district were the big things that were driving that factor.

But I never for a moment thought that these were great investments. They were lifestyle choices I was making and that I could easily afford. And by the way, neither one of them came close to costing what the real estate agents and the mortgage companies were telling me I could afford and worse were telling me I should afford.

There's a lot of pressure on people when they go out and buy houses to, "Oh, you can afford half a million dollars for a house. So obviously, you want to look at half a million dollar houses." Well, maybe but that's probably the outlier of what you can afford. And in my world, you don't buy the absolute most you can afford.

You buy something considerably less than that so you have considerably less risk involved in owning. >> Yeah. There's something about house fever that seems to be one of the most incredible like powerful fevers that people get. And maybe it's because it's so visible, maybe it's because it involves something that all of our friends know where we live but it's so common.

You see people and they get house fever and it's easy to succumb. >> Well, I mean that's true and I actually wrote a post on the emotional aspects of owning houses and I entitled it Roots versus Wings. And one of the things that was striking to me when we sold our house this past spring and we by the way had been trying to sell this house for three years.

I mean, as soon as our daughter went off to college, we were ready because the house, we no longer needed the advantages that the house provided. We didn't need the school district or the neighborhood and I've never been one to be emotionally attached to anything I own and that includes houses.

So we immediately were looking to sell. Unfortunately, as most people will remember, it was very bad market to be trying to sell a house in. So we didn't have much luck until the spring. But what was striking, so by the spring I was really, really ready to be rid of this house in a real profound way and go back to the much more carefree lifestyle of renting.

But what was striking to me is the young couple who bought it and it was a young couple who bought it and they had two little girls who were just about the age that my daughter was when we bought it, could not have been more thrilled to acquire this thing.

I could not have been more thrilled to get rid of it. And it's a difference in needs at the time. I mean, they were looking to put down roots and raise a family. My wife and I were looking to spread our wings and have a lot less obligations and a lot less ties and a lot more flexibility in where we live and how we live and how we travel.

And it's a different needs. So I did this post based on what I call Roots vs. Wings that talks about those different kinds of things. There was that when I was doing a garage sale to get rid of some of the stuff in preparation for the move, there was another young couple who came and they picked up a lot of the garden tools and things that we were selling and we get to talking and they just bought a house.

They got it in a foreclosure sale and they evidently, I don't know the numbers, they didn't share them, but they seemed to think they got a great deal on it and they were real excited but needed a lot of work and they were excited to do that. And this is a young couple who are looking to put down roots.

So some people are roots people, some people are wings people. I think I'm personally more of a wings person but that's also varied depending on what was going on in my life at the time. That would be similar to where my wife and I are with our housing decisions.

We bought a house in January of this year. My condolences. And we thought pretty carefully about it because we really considered what did we want to do and what were we looking for. I ran the Rent vs. Own calculations and analysis and I want to come back to that and spend a good bit of time walking people through that.

But one challenge with Rent vs. Own is that a national or I guess international podcast or a national magazine article can never tell the story of what's going on in any one neighborhood. Everything is intensely local and if you don't factor that into your decision making and look at your specific scenario and run the numbers on your specific situation it's tough to, you've got to run the numbers which is why I probably spend the back half of the show walking through how to do that.

But for us we wanted some place where we could grow a garden without any problem. I'm into a lot of urban homesteading stuff. I want to grow a garden. I want my house to be super efficient and low ongoing costs. I want a backyard for the dogs. So we found a house that was exactly what we were looking for right next to the grocery store and the library at the third of the mile from my office.

So with all of these advantages of being so geographically centrally located and all that plus the timing and the market was a fair price. It was cheaper than what we could rent something for. So all those things put together it came out and we decided it's a good decision.

But it wasn't based upon any idea that I was going to get rich by owning a house and my experience over the first seven, eight months of home ownership has been that it has definitely taken money out of my pocket as it's want to do. >> Probably in ways that you never anticipated.

I mean that's one of the insidious things about it. You know as I hope has come across so far in our conversation here as harsh as the essay you read is and I meant it to be a little harsh. I also as you pointed out meant it to be tongue in cheek and I hope that comes across.

But the point, the fundamental point is not don't buy a house. The fundamental point is to run the numbers and understand what you're getting yourself into. And I actually have a tendency to do this with everything that I buy or everything that I own or do that involves money.

I want to know what it's going to cost me, what it's really going to cost me. Most people have no idea what the car cost them to operate. I know to the penny what my car cost me to operate. Maybe I'm sick by doing that but I think it's useful to know what things actually cost you.

And most people in my experience don't have a clue. So in buying a house I think the first thing to do is to start out and run the numbers and see how it compare. You're looking at to buy a house and as you were six, eight months ago. So you say okay I'm going to run the numbers based on this house that I think I want to buy and then I can compare it with what it's going to cost me to where I am living now.

And it will either be higher or lower. If it's lower and I want to move, I like this house and it's kind of a bit of a no brainer. If it's higher that doesn't mean you shouldn't necessarily do it but it does mean that you now know that it's going to cost you money to own this thing that you think you want to own.

And you'll have a pretty good idea of how much money it's going to cost you. And it's not just the purchase price by the way, it's the ongoing cost that you have to consider. And once you know that then you can make a rational decision as to whether or not that is money well spent.

And of course you have to look at it in terms of not only is it money well spent but what else could that money be doing for you. And then it's your call. I mean if you look at it and you say okay I'm living in the place I am currently in but I want to buy this house but it's going to cost me an extra $10,000 a year to live in this house.

Now you know and now you can make a decision as to whether you have that $10,000 and whether that's how you want to spend that $10,000 knowing you have it. Or whether that $10,000 would be better invested or better in a different car or whatever floats your boat. >> And now we get into one of my, I think is, I wish high school classes hammered opportunity costs home into every student's head every day for four years of high school so that everyone could say oh the opportunity cost of my decision here is such and such.

Because people forget the concept that you just talked about which is the opportunity cost is that if I'm going to make this purchase what am I giving up and what is the alternative use of the dollar. And that's what you have to do I think with every buying decision in order to make good decisions.

If you don't run that scenario you just jump at thing after thing after thing. But if you run that scenario you don't get buyers remorse. But you've got to run that. >> Well you don't have buyers remorse because you really understand what you just bought. And by virtue of going through the process of understanding what you're about to buy you have a chance to back away from it if in fact it is something that would turn out to give you buyers remorse.

But I agree with you the opportunity cost is the single biggest thing that people don't understand and they don't think about it when it comes to their home ownership. And the most glaring way I see that is people who, you know my house I've chosen to pay off the mortgage for a variety of reasons.

So I owned it free and clear and people say well gee you know then you don't have any cost in your house. You don't have a mortgage. Well no I mean I have a huge amount of capital tied up that is stagnant. It's not doing anything. There is an opportunity cost to that.

Owning your house free and clear is not necessarily better than having a mortgage. It's different. But you still have, there's still a very real cost in having that capital tied up in that house. And that's by the way in the formula that I talk about in the post I think you want to get to is one of the key things that I talk about is calculating what that opportunity cost is.

So you have a realistic when you're comparing owning a house, not owning a house or even owning this house versus some other house. You have an accurate assessment of what you're looking at. If you don't consider the effect of having a bunch of capital tied up and that does, and by the way you don't have to have your house paid off for this to be an effect that you have to consider.

I mean just putting money down on your house ties up a certain amount of capital to the degree of how much you're putting down. Absolutely. And if you don't put much down you got to ask yourself what's your back door out. I think in any transaction you should have an exit plan in case you need to get out.

And you should consider the ultimate potential downside and see if you're willing to live with that. And that is one of the most dangerous things in the no money down world over the last decade whenever that was possible. Things would change and if people hadn't factored in a margin of safety into their decision their job would change and they have to move.

Well now they're stuck, they can't sell the house because they're upside down in it and then they can't rent it out for more than they're paying and now they got a house in Colorado when they're living in Florida or vice versa and they're trying to be a landlord from across the country.

So just by going a little bit slower, having a margin of safety and having an exit plan it'll help eliminate some of the stress in life. I think that's a great point. Having an exit plan is a great point and a great strategy and a lot fewer people would buy a lot fewer houses if they thought in those terms and they'd buy a lot fewer bad investments of all kinds.

The moment you buy a house you start thinking about buying a house you ought to be thinking about how you're going to sell it. I got a lot of pushback from that essay you read and in fact I'm going to do a follow up post kind of addressing some of the points that people make because a lot of them repeat.

But one of the points that comes up on a routine basis is well if I own a house I can do anything I want to. If I want to knock down a wall I can knock down a wall. If I want to paint a room black I can paint a room black.

Well yeah technically that's true if you don't care anything about resale value. If you want to start knocking down walls or punching holes in walls and painting rooms black and parking junk cars in your yard which of course will irritate your neighbors you can do that when you own a house but you're going to destroy any value you have in that house.

Most people are smart enough not to want to do that so the truth is that no owning a house doesn't mean you can do anything you want. The irony is when you own a house you spend most of your time fixing it up preparing it and caring for it for the next people who are going to own your house for the people you're going to sell it to.

At least if you're looking at it with any kind of financial savvy. So how did you do your rent versus buy analysis with the recent move that you've made? Well let's take a look at that. First of all there are a lot of rent versus buy calculators on the internet.

One of the core principles in the blog when I write about investments of any kind including this is that most of the investing world is made far more complicated than it needs to be made. The reason for that is that the more complicated things are the more people will throw up their hands and turn to the "experts" and the more the experts will be able to charge for their expertise to walk people through the maze.

So I'm a big believer in keeping things absolutely as simple as they need to be on investments. I think when I look at these calculators they're great but some of them are just way more complicated than they functionally need to be. The other objection that I have to a lot of the ways that people figure this is it's an academic exercise rather than an exercise that looks at a person's real situation.

What do I mean by that? Well if you're an academic and you're doing a study and you say, "You know what? I want to do a little research here and I want to figure out definitively is renting better than buying or vice versa?" Well you're going to construct an academic study and one of the things you're going to want to do is compare absolute apples to apples but that's not how people live.

When I sold my company and sold my house and moved into the apartment where we live, it's not the same square footage and it's not the same location. It's apples to oranges but that's real life. So I don't care and I also, you can run the numbers, it happens somebody offered to rent my house at one point so I had a pretty good idea of what the rental was worth.

So I can run the numbers looking about, "Okay, what if I sold this house and rented an equivalent house?" But in my real life, I don't care about that. I care about what if I sell this house in my case and I move to where I want to move.

So anyway, with that little bit of background, we can walk through the numbers a bit if you'd like. Yeah, absolutely and that's where I think ultimately I believe the fundamental foundation question that you have to start with in good financial planning is, "What do I want?" Depending on what you want, that's going to determine the decision that you make and there's no right or wrong unless you want something and your decision isn't helping you get that.

So that's why the lifestyle stuff is so important but so is the opportunity cost. So yeah, go through the numbers here. Okay. So basically, again, I think this should be very simple and hopefully you'll provide a link to this post so anybody who wants to look at it, the advisor can look at it and they can do that.

Maybe it's easier to look at it black and white than just listening to us talk about it. But basically, there's only four things you really have to think about in terms of what a house costs you. You have to think about opportunity cost and that's frequently one of the biggest.

You have to consider utility cost, particularly in the northeast where we live. The heating oil is a big one so I include that. You have to think about the maintenance repair and insurance which I'll embalm together. You have to think about those kinds of costs and then you have to think about taxes.

So if you look at our house, our house and as I sit here, I can't remember exactly what we sold it for and what we netted but as you know, when you sell a house, of course, that's not what you get after commissions and all the fees and everything.

You get something significantly less than that. But at the time when I did this post and the house hadn't sold, I calculated that after going through all that, we would net $330,000 in the sale of our house and that's pretty close to where we came. I think we came in a little bit higher than that but I'm going to use the 330 number because that's where I ran these numbers in the post and it's just a little bit easier because the math works without my calculating it as I'm talking here.

So I sell the house as I did. I wind up and as I mentioned, my mortgage was paid so I owned it free and clear. After I paid all the fees, I got a check for $330,000. The first thing, so first question is, all right, if I have that $330,000 and it's no longer tied up in the house which was the opportunity cost we were talking about in the moment, what could it be earning for me?

Well now you have to choose a proxy. You have to say, well if it's not tied up in the house, where would I have it invested? I happen to think real estate is a pretty good investment and the real estate vehicle I prefer is the REIT which is a real estate investment trust because that's what R-E-I-T, REIT stands for.

Vanguard has a great index of various REITs and it's VGSLX if anybody is interested. So that was my proxy. Now this REIT fund, this REIT index fund pays a dividend of about 3.5% a year. So I say, okay, if I take my $330,000 and I invest it in VGSLX which by the way is exactly what I did after I sold the house, that will generate a 3.5% dividend and 3.5% of $330,000 is $11,555.

So now I am earning $11,555 that I didn't have coming to me when it was tied up in the house. That's the opportunity cost of owning that house. So that's cost number one. Then I looked at the other three costs and they came up to about $18,000 altogether. We're in a very expensive heating oil state as I alluded to so I got about $2,500 in annual heating costs based on the actual records of owning the house.

It cost me about $7,000 a year in maintenance, repair, insurance. So those things lumped together. And then my real estate taxes on the place we owned was $8,500. So we add those three together and you've got $18,000. So now I know with my opportunity costs and my actual cash costs, my house cost me $29,555.

Now at the time, and I'll keep using this number, at the time I was guessing that the kind of apartment around here that we wanted would cost me about $2,000 a month. Actually, we found one that cost us much, much less than that. But we'll use the $2,000 as a number because that's what I was using when I did the post.

So $2,000 a month obviously is $24,000 a year in rent. You subtract 24 from 29,555 and I know now that my annual premium on average, and of course the cost of owning a house go up and down year to year, but on average it was costing me about $5,555 a year to live in the house.

So now I'm sitting here owning a house and I can say, "Well, is it worth the extra $5,500 to live in this house or not?" Well, in my case, not only wasn't worth it, I mean when my daughter was young and I cared about the school district and the neighborhood and all that kind of stuff, yes, absolutely it was worth it.

I was happy to pay it. Now she's off in college, now I don't care about that stuff, now I would prefer not to have all the hassles involved in owning a house. I prefer to have the flexibility and freedom of renting. I prefer to live back in the city where I can walk to places.

It's not worth the extra $5,000 a year at all. In fact, I'd probably be willing to pay a premium to be rid of it. So there you have a real simple formula that allows you to make the decision that you're looking to analyze and think about. Does that make sense?

It does. I think that putting numbers to it, I would challenge any person who's considering decisions like this to put actual numbers to it. I want you to keep going with your post and then I'm going to come back and I'm going to pick all your numbers apart, not because they're wrong for you, because they're absolutely right for you, but I want to demonstrate how they would change for somebody else depending on different choices that people would make.

But this is where each person has to do their own individual numbers. It's pretty staggering when you look at it like that and you realize that, yeah, you had a paid off house, which is what most people's dream is, had a paid off house and yet it's costing you $5,500 a year more than going and living in an apartment that was more conducive to the lifestyle you wanted to live in, lower hassle, more flexible, just a better option for you.

It is and you do have to look at those things. But now, seeing as you've kind of suggested it, I'll kind of walk through the post here. But the next step that people should pay attention to and I think that probably some of our listeners will have already picked up on is the fact that, well, wait a second, that opportunity cost is not that when owning the house is not cash out of pocket and all of that rent that I've now taken on is absolutely cash out of pocket as was the $18,000.

So if you turn around and you say, well, wait a second, if you look at it in terms of cash outlay, it actually does cost me more to live in the apartment now, right? Because my actual out of pocket cost for the house, weren't the 29, I'm going to call it, I'm going to round it to $30,000 to make the conversation easier, wasn't the $30,000.

In total, it was $18,000 and then plus $12,000 in opportunity cost, plus or minus. Of course, my rent, at least in the exercise we're doing is $24,000. So out of pocket cash flow is actually a $6,000 advantage to owning the house. I hope that's making sense so far. This is kind of for anybody who has a business background, this is EBITDA.

This is earnings before interest taxes, depreciation and amortization, which is what businesses do all the time. And cash flow is critical to running a business and it's critical to somebody owning a house. Now, you can turn that around and say, "Okay, my investment, my refund is now thrown off this $12,000 and that certainly helps." But setting that aside for a second, one of the things that you want to ask yourself is, "Do I have the cash flow resources to make this change?" Because a paid for house is going to require less cash coming out of your pocket, perhaps.

I mean, you're more likely to be more cash positive than renting. Now, in my case, it didn't matter in the actual dollar value was a very real one that I was happy to have. As I say in the post, overall costs trump cash flow costs because they're more complete.

But that's assuming that you can afford the cash flow. And that's true in owning your house versus renting. It's also true as any business person will tell you in running a business. I mean, if you run out of cash, you run out of business. >> It's also true paying off a mortgage early.

So if you say, "I've got excess funds. Should I pay off a mortgage or should I invest the money instead and which is going to be a better use of the dollar?" A lot of that comes down to emotion and cash flow. So if somebody is going to actually invest the money, many times that may be better, but they're still going to have that money, that cash coming out of their pocket.

And this is where if somebody is potentially maybe a low income earner, kind of on the edge, and you said you have an opportunity and their jobs are unstable, maybe, there could be a tremendous peace of mind that could come by not having that cash flow deficit. But if somebody feels good about their income, they have other reserves to draw on, then they can handle the cash flow difference in favor of the total net cost difference.

>> Of course, the other side of that is that if the person is owning the house free and clear and is worried about their income, they're also tied to that location. And that's a very dangerous position to be in. And you look at, as I'm sure most people are aware of, the fact that Detroit just defaulted and services are up and taxes are going up.

And if you own a house in Detroit, you're in a world of hurt. And so, yeah, location is a very risky, it's one of the things that makes owning a house a very risky thing. And it's one of the, looking at it from a purely financial point of view, and I understand that buying a house, I mean, I did it myself, as I've already said, is more than just looking at numbers.

But just for a moment, looking at it from a purely financial point of view, not only should you not buy a house unless it's less money than renting, but it should be significantly, in my opinion, significantly less money than renting to compensate you for the risks that you're taking on with that investment.

>> Absolutely. That's a good point. Also, there's something that you point out, I think that a lot of people don't point out, don't realize, and it goes back to your roots versus Wings Post, an example. Many people don't think about the power of what the equity in a home could buy for them in terms of lifestyle.

So, a $330,000 house, assume for a moment that someone has no other assets and investments, and using the numbers that you gave, and I'm going to use $12,000 for convenient numbers, even though the actual answer is $11,555. But let's say that that portfolio could throw off $12,000. It can throw off that $12,000 under the scenario you gave without invading principle and purely based on dividends, which means it's perpetual as long as the dividend rate on that fund stays high, which means that they can take and they can rent for $1,000 a month anywhere in the world.

So, instead of it being forever, exactly. When you get to retirement planning, which is where you're in the early stages of retirement, unless you change your mind, of course, think about a lot of people. You have to consider the fact that many people's dreams is to have a paid-off home when they enter into retirement, but yet many people have dreams of doing things like traveling in retirement.

The paid-off home may be a great asset, but every single month, no matter where you are, it's tied to the same piece of real estate, whereas if it were an investment asset, that cash flow will follow you wherever you want to be. This ties into your buddy, Matt Fientist.

One of the things that he's into is slow travel. This concept of instead of just simply taking a whirlwind two-week trip or three-week trip, I can simply move more slowly and live like a local. People say, "Where do I get the money to travel?" You're living in it. Maybe you should consider turning it into cash flow instead of a roof over your head.

>> I personally wouldn't do this because I think there are headaches and worries that are involved in it that I wouldn't want to have, but there are some people who would say, "That's right. What I'm going to do is I'm going to keep my house, my paid-for house, but I will rent it out, and that will be the cash flow." If you're of the correct temperament and your house is a reasonable kind of rental property, that too can work.

As we've already discussed, there are a lot of different solutions. Personally, I would be uncomfortable in retirement having that big a chunk of money tied up in one location and one asset. The other point, by the way, that I want to make before we move on from that is that sometimes people will say to me when I do this analysis, "Well, yeah, but the house might go up in value." Well, it might, but the real estate fund also has the potential to go up in value.

The real estate fund is absolutely a much more conservative investment than an individual house in that it is spread across a huge range of real estate by definition, whereas a house, any house, is focused on one piece of property in one specific location. It's a very -- I'm drawing a blank on the term I'm looking for, but it's a very focused kind of investment when you own a house.

If you're lucky, that might mean that you outperform the fund. Just like picking an individual stock might outperform an index fund over some period of time. But if you're unlucky, or over a more extended period of time, you run into a much greater risk that it will underperform the broader-based index of REITs.

>> Also, you have a specific asset allocation strategy. From reading your blog, I know you stick to a strategy 50% stock, 25% real estate, 25% bonds. Is that right? >> That's correct. >> When you sold your house -- >> By the way, I do that -- I don't necessarily recommend that for everybody at all times, but for somebody my -- >> I lost you there.

>> Can you hear me all right? >> Now you're back. >> What I was saying is that allocation you just described is in fact what I personally do, but it's also a function of my age and my retirement status, not necessarily what I recommend for everybody. When I -- back until a few years ago, I was strictly in the stock index fund, because that's the more powerful growth tool.

But as you get older, sometimes you want or you need more stability. You need to smooth out the ride a little bit. You want to protect yourself against the truly awful things that very rarely happen, like a Great Depression, which was deflationary, which is what bonds help you with, or the kind of thing that some countries have gone through, like Germany in the '30s, the runaway rampant inflation, which is what hopefully real estate will hedge against.

>> That's a rational way to do it. I think a lot of Americans could learn from that, because I know there are many people who have $100,000 of equity in a home, and yet a much -- they haven't decided that -- let's just say they have $100,000 of equity in a home, and frankly, I don't need to be too cautious.

Many people have $20,000 in stocks. I don't think they decided that I want to have this 80 -- whatever the number is there -- 80% in real estate and 20% in stock, and yet that's what they have. In today's culture, if you look at the consumer confidence numbers and things like that, you see that as goes the fortunes of the real estate market with Americans overexposed to real estate, so goes the national sentiment.

In Florida, where I live, the dramatic decline in real estate values or prices and a dramatic increase over recent times in real estate prices. It definitely affects the national mood, and the reason is because people are so exposed to real estate as an asset class. >> Yeah, absolutely. When it collapses, it caught everybody or a lot of people off guard and it cost them a lot of money.

Because it tends to be a leveraged investment, as we talked about earlier. They'd lost all of their money. They wound up owning something that wasn't worth what they owed on it. That's a really ugly situation to be in. >> You owned your house free and clear. I did not.

>> I did not initially. I borrowed money to begin with, but at some point, I don't know, maybe five, six years ago, I decided to pay it off. >> How would you have done this analysis if you did have a mortgage? >> Let's take a look at that. I was going to do something else first, but we'll jump down to that.

Let me just find my numbers on that here. Yeah, here we go. I'm just going to read through this a little bit, because when I wrote it, I was probably a little clearer than I can actually verbalize it now. What about mortgage interest payments? If you have a mortgage, and many do, you simply need to add an extra couple of numbers to the formula.

We'll take a look here. Suppose I had a 20% equity, or if I put 20% down on the house, and using my $330,000 house as the example, so 20% of that is $66,000. I've got an 80% mortgage then for the balance, which is $264,000. Now my opportunity cost is $2,310.

We get that, and we're using the same refund. That's 3.5% dividend that the $66,000 could have been earning if we didn't pull it out and put it as a down payment on the house. Now we have a little bit more in the way of cash expenses. We still have $2,500 in heating oil.

We've still got the $7,000 in maintenance, repair, and insurance. We've still got to pay the $8,500 in real estate tax. Now we also have a mortgage loan. By the way, I simplified this number. As most people know, when you make your mortgage payment, it's a combination of the interest you owe on the loan and, at least initially, a very small portion of paying off the equity.

That changes over time. If you pay it down, you're paying less and less interest, more and more equity, until after 15 or 30 years or whatever your term is, you're finally done with the thing. I'm going to assume that we've got a 4% loan, and I'm just going to look at interest.

4% on that $264,000 is $15,120. I'm going to estimate that as our interest payments on the loan. Now the other thing that comes into play, of course, is that when you have a mortgage, you do get a tax deduction, or at least potentially you get a tax deduction. I say potentially because there are a lot of things that can determine whether or not you actually get one and how much it will be.

What your tax bracket is, is one, and I put that in here. For the sake of this analysis here, I picked a 25% tax bracket, which, by the way, is a pretty high tax bracket. The 15% tax bracket goes up to about $70,000 these days. Then if you look at all the standard deductions and exemptions you might have, if you're married and you've got a couple of kids, you're earning over $100,000 before you move into this 25% tax bracket.

We'll use it as an example. The other caution I want to make, and I'm kind of digressing a little bit here on mortgage deductions because there's so much myth built around them, is that the standard deduction at the moment, which is the deduction you get before you itemize, for a married couple is something on the order of $11,700.

It's a very large number. Until you have enough deductions to itemize, which means more than that standard deduction, more than $11,700, having a mortgage isn't going to help you one way or the other. It's also not going to help you except to the extent it exceeds that amount of money, unless you have other deductions that take you up there.

What do I mean by that? Let's suppose that you've got this $15,000, and I'm going to round it, $15,000 in interest that you can deduct. What you're really able to deduct is that $15,000 minus $11,700, which was your standard deduction. Now, if you give charitable contributions or you have other kinds of deductions, your real estate taxes, that all comes into it.

Little digression as to why there's a bit of myth around this whole tax deduction. For the sake of running the numbers, I assume you're in the 25% bracket. I assume that you've got enough other deductions to take you over that standard deduction. You're going to get 100% of that $15,120 as a deduction.

That's going to save you, at the 25% bracket, $5,905. So now, what we have is a total cost of $29,525 to own and operate the house. Versus $24,000 to rent. What's interesting to me when I ran these numbers is how close that number is to the number owning at mortgage-free, which was $29,555.

So, I mean, it's within a handful of dollars of being the same. Versus the $24,000 in rent. So again, you're looking at a little better than $5,500 premium. In this particular example, my house and my projected rent to live in that house. I hope that makes sense. >> Trevor: Yeah, it does.

I was just looking at the numbers here again. I'd encourage people, when you're done driving or whatever, go click through to this post. It's worth reading. It is definitely interesting because one of the reasons why I especially like this article here is that you did take into consideration the tax deduction savings.

You were generous with your numbers. >> Tom: Thank you. That's a good point. I was trying to do it on the generous side. Not all those caveats I just put in as I was talking about it are not in the post because that would kind of muddy the water.

But the truth is that the tax deduction for most people would not be as generous as I indicated in the post. >> Trevor: That's where, in our tax code, many people don't truly understand how the tax code works. But if you look at a Schedule A and you say, "What are my deductions?" For many people, the major deduction is mortgage interest deduction and charitable deduction.

There are other deductions allowed depending on your situation. But those are the primary ones that people jump to. If we just ignore, for the sake of simplicity, if we just ignore real estate tax deduction or if we just ignore everything else and just focus on mortgage interest deduction, with an $11,000 standard deduction, that means that if you were only deducting your interest, your interest payments need to be in excess of $11,000 for you to be worth, to come out ahead doing anything but the standard deduction.

So if you calculate your mortgage payment, we're talking at minimum, I can't remember my calculator, I could run it, it would take, what is that, $200,000 loan? >> Tom: It's a pretty big loan. The other thing is, the important thing for people to understand is that until you get past that standard deduction, let's round it up to $12,000 to make the math easy, you don't get anything for your mortgage.

So if your mortgage interest is $15,000, you're actually getting a tax deduction on $3,000 that would be above and beyond what you would have with the standard deduction not owning the house. >> So I just ran the numbers on a 4% interest rate and I say 30 year loan, fixed rate, 4%, you would need a $210,000 mortgage balance for your total even payment to be higher than $1,000 a month, $12,000, and I'm assuming in the beginning that most of that is interest.

So those are rough numbers, but if your mortgage balance is not in excess of $210,000, ignoring other deductions you can take on the Schedule A, you're going to be in a situation where you're going to be in standard deduction territory. Many people take the standard deduction thinking, "I'm getting my real estate deduction." Well, no, it's just you handed your CPA, your tax preparer your taxes and he said, "Oh, we'll run this calculation, this one saves you $5,000, this one saves you $11,000 on your standard deduction, we'll take the standard deduction." >> You know, I actually have a post in the works about this very thing because you heard me already refer to the real estate tax deduction as a myth, and it is a bit of a myth in the way it is presented to people.

It's a reality in that there is such a thing and for some people, including me, because of my income and also the other thing that I hesitate using the word "helped" because real estate taxes around here are so high and they are also deductible. So when you pay $8,500 a year in real estate taxes, which I did, well that gets you up to a level where you get over that $11,700 standard deduction pretty quickly with your mortgage interest.

But setting that aside, there is this myth that is created that, "Oh, you know, when you own a house, you're going to get this great tax deduction, that's going to save you thousands of dollars." Well maybe, depends on you, depends on your tax bracket, depends on what other deductions you have, depends on where you live, depends on your real estate taxes, depends on all kinds of things.

And I suspect most people, if they really looked at what they were getting, weren't getting what they really thought they were getting. And then if you go to, by the way, the very higher income people, that deduction fades away. So there is kind of a sweet spot where if you're making enough money but not too much money and you have a big enough house but not too big a house, maybe you get a pretty sweet deduction, but maybe not.

>> Trevor: No, and that's exactly the point. So when you go to the phase outs on income, if my memory is correct, you can deduct interest on up to a million dollar principal mortgage and $100,000 on a second mortgage or home equity loan as long as it's used on the property.

Is that the right number? Do you remember? >> Mike: I'm not sure. You're more up to date on it than I am. >> Trevor: I think it's a million and a hundred thousand. So if you say, "Okay, someone has a million dollar mortgage," and that's probably like, off the top of my head, it's probably about five, something like five to six thousand dollars a month at a four or five percent interest rate.

So there you've got $60,000 a year of payments and when you do $60,000 a year of payments, now you're into a significant amount of that interest. >> Mike: You're in that sweet spot. >> Trevor: Exactly, but you've still got to look at the income limit. So the key is running the numbers yourself for your situation.

I would challenge listeners. I've asked people from time to time, maybe you have too, Jim. So interesting, I've asked people, "How much tax did you pay last year?" And I have learned, and I'm just asking friends and other people, I have learned that most people can't say the number.

They usually say, "Oh, how much did I get? Oh, I got back $3,000," or "Oh, I owed a thousand bucks." But very few people ever look at the number, which I'm going to look up while we're talking here, I'm going to look up the 1040. I think it's line like 61 or something.

Very few people know what the actual number of tax was that they paid. So I challenge listeners, go back and look at how much actual tax did you pay, and also look and say, "Calculate that as a percentage of income and figure out what your actual effective tax rate is." And with that number, you'll be able to run your own actual calculations, which will be hugely helpful.

And I think most people will be surprised that their tax rate is probably not as high as they think it is. - It's really not. - And, you know, I mean, as I alluded to earlier, and again, it's a little complex because tax rates vary depending on whether you're married.

But if you're married and you have a couple of kids, as I said earlier, unless you're making end to six figures, your tax rate is 15%. On the federal level, now, granted there's state and local taxes that all add to that, but on the federal level, it's probably more modest than you think it is.

But the other thing I wanted to do before we go on is I also did another post. I have an interest in Ecuador and I have kind of toyed with the idea of at some point moving to Ecuador. And I did, after I did the post we've been talking about on rent versus own and running the numbers, I did a follow-up post having come back from a trip I made to Ecuador last fall and I looked at some property down there and I thought it'd be interesting to run the numbers on property down there.

And if you'll indulge me, I'll share an example. And this is an example where actually the numbers indicate that it would be less expensive to own than to rent. So if you're interested, I'll do it. - I am, keep going. - So one of the, I'll just pick one, we can do others if you want, but one of them, there's a, my favorite city in Ecuador as it happens is a city called Cuenca.

And one of the places I looked at in Cuenca was a condo. And it's a two bedroom, two and a half bath condo, it's got a veranda, it's about 1500 square feet. And the asking price is $162,000. And based on what I could ferret out, and I'm hedging myself a little bit because it's hard to be sure about exact things.

Based on what I could ferret out, to rent this same condo would cost about $800. Now maybe if you're buying it, you could negotiate a lower price, maybe you could negotiate a lower rent, but we'll use the asking price and the stated rent value for running our numbers. So we say, okay, let's start out, let's assume that we're gonna pay cash for this thing, so we've got, which would be my situation, so that's the situation I'm using.

So I take $162,000 out of my refund, and I buy this condo. And now of course, I have an opportunity cost because that $162,000 had been earning me at that 3.5% that we talked about earlier, $5,670 a year. So immediately I have $5,670 a year poorer by virtue of buying this thing.

Now the annual, excuse me, I just had to take a drink of water there. The annual cash expenses, because this is in Ecuador, are significantly less. There are no heating and air conditioning costs because there is no heating and air conditioning because the climate is perfect. Buildings in Ecuador don't have heat or air conditioning, they're not needed.

So that cost goes to zero. The homeowners association fee on this particular condo is $94 a month. That's $1,128 a year. And the real estate taxes, remember for a second, my real estate taxes here in New Hampshire were $8,500 a year. The real estate taxes on this condo for the year are $124.

So obviously the cash costs have come way, way down. So the total cost of owning and operating this condo is $6,922. Most of that, $5,670 of it is in that opportunity cost. The actual out-of-pocket cash cost is $1,252 a year. So a little slightly better than $100 a month.

I mean it's just much different and you look then at what it would cost to rent that place and that, as we decided, was $800 a month. $800 times 12 is $9,600. So if you subtract from $9,600 the cost of owning it, which again was the $6,922, now you're looking at an annual premium to rent and that premium is $2,678.

Do you think that that may, just as I'm listening to those numbers, do you think that might be partially due to the difference in the financing system between Ecuador and the United States? In that the United States, just about anybody who's reasonably credit worthy can borrow money for a home.

I haven't been to Ecuador yet, but many of the countries that I've traveled in, in Central and South America, the financing system there is much more stringent and so many people who are buying are cash buyers or are wealthier. Do you think that might be one of the factors?

David Morgan: Well I don't know if it's a factor. It is certainly what you described is a real thing, but I'm not sure it's a factor with these numbers. I mentioned early in our conversation when we were talking about the depression and how mortgages became popular in this country and why, I mentioned that there were parts of the world where people routinely, if they're going to own a house, they pay cash for it.

In Ecuador and a lot of South America for that matter, it falls into that category. There is more as I understand it, and by the way I'm way out of my area of expertise talking about this, so this is just my basic understanding from conversations I've had is that there is mortgage money available.

It is very expensive. Let me define that by saying the percents I've heard are 17, 18, 20% for a mortgage, so very, very expensive and lots of money put down, so most people tend not to do that. So it is a market where if you're going to buy, you're probably going to be paying cash, so you just don't have the option of mortgages, but I don't think that necessarily affects the cost structure we described.

It might serve in tapping down the value of property because one of the functions of having readily available money to borrow is it tends to drive up the cost of an asset, so one of the reasons that houses have gotten so expensive in this country is because it's become easy to borrow money to buy them.

If mortgage money didn't exist, houses would be a lot less expensive. Simply supply and demand, there'd be a lot fewer people buying them. >> Yeah, and it also would, where my mind would go, would be that when you hear numbers like that, you immediately go and say, "Well, let me consider this from the perspective of an investor." I know in the past you also have been a real estate investor in individual properties, right?

>> A long time ago. >> Okay, so that's where many people, this is one of their strategies, which is a fine strategy towards financial independence, is owning investment properties. When you get into spreads like that, where you can command very high rents as compared to the purchase prices, that can be a great place to consider that situation.

It's unique down here in South Florida where I live. We're actually in a unique market because the rental prices are substantially higher. Rents are in high demand because a lot of rental units were not being built, and also a lot of people that were formerly homeowners are now renters.

The rental market is very substantial. The numbers, there's an interesting spread, and it's changing because the market down here is different than a lot of the country. It changes month by month, but right now the house prices have been in the past a little bit flat, held down by financing the challenges of getting properties appraised, but yet the rents were increasing.

It's actually been a really good time, not just because of low interest rates, dip in the market type of thing, but just rent versus own calculations here in South Florida have been different. The market dynamic. >>Ted Dixon Well, you know, and that sort of goes back to one of the fundamental principles that we've been talking about here, and that is the fundamental principle is not don't ever own a house, which I think some people who read the essay that you read for our audience and didn't read anything else I've ever written might have come to that conclusion.

The principle is to understand what the numbers say about the house you're looking to buy at that particular moment in the particular location where you're looking at it. And I also want to back up, and you heard me say earlier that looking at property and owning a house, or in this case owning a condo, from a strictly a financial point of view, I would want it to not only be less expensive than renting, I would want it to be significantly less expensive to compensate me for the risks.

Now let's take Ecuador as an example, but before our listeners all charge down to Ecuador and buy condos. You know, we were talking about the price of this place being $162,000 and the rent being $800. One of the challenges if you're going to buy property in Ecuador is that there is not a multiple listing service.

And so the price of a property, the asking price of a property is surprisingly difficult to nail down. It's very possible that had you gone to look at this condo that I just described with a different realtor an hour after I was there, they might have told you this is $142,000.

They might have told you it was $180,000. So you have to be very, very careful when you're buying property in Ecuador because it's very hard to know what the going price really is. And that of course, you know, it takes time and experience and what have you. There are a lot of Americans that I met down there charging down, everything seems cheap and they buy right away without understanding that what seems cheap to them might be significantly overvalued and they have to remember that when they go back home to California or to New Hampshire where I live, when the time comes to sell this condo that they just bought in Ecuador, they're not going to be selling it in California.

They're going to be selling it in Ecuador. And if they pay too much for it because the price is very flexible in that part of the world, they're going to have to find another foreigner to pay that price. So you definitely, it's not as easy as the numbers make it sound.

You need to look at more than just the numbers when you're looking at buying property in Ecuador. There are some unique considerations. And it's the same thing with rent. If you went to rent that place, you know, I go in and they say it's $800 a month, you might come in behind me and because your agent is a different agent, it might be a thousand or might be 600.

So it's, you know, you have to know the market that you're operating in. That's great advice. Prior to going into the mortgage, you had something that you wanted to talk about? I got a couple of other things as we kind of get close to wrapping up. But did we talk about what you wanted to talk about?

If I had something else, I don't remember at the moment. So we'll roll into whatever you want to talk about. All right. So I wanted to give just a couple of quick things. First, I wanted to talk about a couple of quick things on taxes. So advantages and disadvantages.

You had an interesting comment on your blog. And the commenter was asking you about your tax calculations. So the major tax calculation, just for the audience, number one is mortgage interest tax deduction. That's valuable when you own a home. But on the flip side, if you were an investor, you could take a deduction for depreciation.

And then, so that's one option. Disadvantage to owning the house as a rental unit is that your appreciation is going to be taxed when you sell the house, unless you do a 1035 exchange into a, sorry, for real estate, a 1031, a 1035. I can't remember. I think it's 1031.

I don't recall either, but what you're talking about is if you don't actually sell it, if you can exchange it for another piece of real estate. Yeah, a like kind exchange. I always get 1035 and 1031 confused. So you do a like kind exchange into another property, but the advantage is that in the US, if you are able to own the property and live in it, you can defer up to $250,000 of gain for an individual and not its tax rate or $500,000 for a married couple.

So this brings into play a couple of like opportunities that we could potentially exploit the tax code, which could be helpful for some people to factor into their thinking. So first of all, you had an interesting comment on your blog about a mental exercise that you ran back in the days of being a landlord and a renter at the same time, where you thought about it would be better if you just rented to somebody else and that they rented from you.

Explain kind of the thought process that people could just understand that conceptually and what your experience was like being a renter and a landlord at the same time. You are testing my memory because that goes back probably 30 years when I was doing that. But as best I recall, you alluded to it a couple of times.

One of the other pieces of pushback I got from the post that you read was, "Well, what if I own an investment property?" Investment properties are different and they are different for a lot of reasons. They are different because they are treated differently in the tax code. You mentioned that you can depreciate them.

And they are different because they are generating income. Just like my refund generates income, in a way my house doesn't. Well, an investment house does. And for what it's worth, before I go further, I think that investment real estate is if you are prepared, if you do your homework and you do it well, investment real estate can be a very lucrative thing to do.

What a lot of people seem to miss, or at least they miss in terms of the conversation of whether it's a better investment than mutual funds or some other investment, is that investment real estate is also a part-time job. And so if you are going to compare it to other kinds of investments, you have to say, "Well, okay, I'm going to own this rental house and that's going to be a better investment than your mutual fund.

Well, okay, I'm going to own this mutual fund and I'm going to get a part-time job fixing cars because I have that skill. Actually, I don't have that skill, but it's an example." So you have to understand that for most people, when they go into small-scale rental investments, they're also taking on a part-time job.

If you want to do that, it can be a great way to go. I never particularly enjoyed that part of it, which is one of the reasons that I'm not a real estate investor anymore. But when I was investing, I was living in Chicago and I accepted a job promotion that moved me to Cleveland.

And so I left the properties behind and when I moved to Cleveland, because I didn't particularly want to own a house and my wife and I didn't have any children, we rented. We rented a beautiful condo that somebody else owned and we had a wonderful view over Lake Erie and it was terrific.

So I had all the advantages of renting, all the carefree lifestyle of renting at the same time. I had this real estate investment, which was doing pretty well for me, and I had tenants and all that kind of stuff. So it was kind of the best of all worlds, but it was still a bit of a headache and a bit of a hassle and a bit of a concern being long distance that, "No, it doesn't bother everybody.

It bothered me." So now I'm much more content to own the REIT Mutual Fund and not have the hands-on real estate. >> Yeah. And the other nice thing about the REIT Mutual Fund, it's liquid. You want out of real estate, one click of the mouse and you're gone versus 5% coming and going and however many months on the market, in your case, three years on the market.

>> And you know, people, well, first of all, it wasn't consistently three years on the market. We went on and off, but three years in the present. But that's a great point, Joshua, because people don't often appreciate the value of liquidity. And there's enormous value in having liquidity. And the other comment I'd like to make on that is that I think one of the reasons that people have it in their heads that their house is an embedded investment than, say, a total stock market index fund, is that on any given day, you can go to your computer and you can click on that fund and you can find out exactly, to the penny, what the shares you own in that fund are worth at that particular moment in time.

That's kind of a cool-- >> And I'm going to interrupt you. What they're worth based upon the fact that that price is simply reflecting what somebody is willing to pay you at this particular time. >> Right, but that is by definition what they're worth. What anything's worth is by definition what somebody is willing to pay you.

>> Correct. >> And just making the only reason I do think that that's something a lot of people don't think about, because they look at that price and they say, "Well, that's the ultimate underlying value." And I would say, "No, that's just simply what they're worth as reflected by the current price." But the underlying value of the investment in the world that you're talking about is going to be driven partly by what someone's willing to pay you, but also by the profits of the underlying companies.

Sorry, that's a tangent that we get down. >> Right. And that's an important point. And actually, I can't think of which one, but on one of my posts I talk about that. The analogy I use is a glass of beer. You have the beer and then you have the foam on top.

And the beer itself is the real, hardcore, tangible value of a stock, and in my particular what I was talking about. And the foam on top is all the trading noise that goes on day to day over the course. And most frequently, your beer is in a mug so you can't see exactly how much foam there is compared to how much beer.

But anyway, backing up. >> I wish I hadn't interrupted you. I'm sorry. >> Yeah, no, that's just it. But backing up to it for a second. So if you own the Total Stock Market Index Fund, which is my preference, BTSAX, you will know at almost any given point precisely what somebody will pay you for it.

Let's all use that terminology. What it's worth, what somebody will pay you for it at that moment in time. And that's a cool thing to know, but it can also be a scary thing to know. Because if it bumps up tomorrow or for the next week, you'll have this feeling of euphoria.

If it drifts down for some reason over the next day or week or months or whatever, it can be terrifying. And so you tend to see that as a risky thing. The truth is that from point A today to point B, say, 10 years out, it is almost inevitably going to be much higher and it will make you a lot of money, probably much more money than your house will.

Now, you look at your house. You cannot in any precise way know what your house is worth day to day. Now it fluctuates. The reality in the real world, it fluctuates day to day. I mean, your house today is not worth exactly what it's going to be worth tomorrow or the day before.

So it does fluctuate, but there's no way that the market can precisely tell you what that fluctuation is going on is. And therefore it appears not to be there. And it appears to be a much more stable kind of investment. And I think that's one of the reasons that people are so psychologically comfortable owning houses.

Intellectually, they may understand all the risks that we talked about in the post you read. But emotionally, because it doesn't seem to vary unless we get this huge down draft that we had where just everybody was aware that their house was going down in value because they could see it in their neighbors.

But most people day to day don't know or care what their house is worth. And if they did, there's no real precise way to look at it very day to day. I mean, yeah, you can look at similar houses, but that's not the same level of precision that you get in the reporting that's in the stock market.

And therefore that mutual fund looks a lot more volatile than the house in ways that it really isn't. Does that make any sense? >> It absolutely does. And I think that's key. One of the biggest influences on people's decisions is, I mean, it's a whole study of behavioral finance.

And I think that you are accurately assessing one of the major differences between real estate and stocks. And it comes down to how people perceive risk. Some people would -- you would probably be one to say who would be able to accept that, hey, owning one house in one town in one neighborhood, that's incredibly risky.

Both from something happens to the neighborhood, something happens from that to that house, something happens to this region. That's very risky. >> Something happens to my life that makes me want to not live in that particular area anymore? >> Absolutely. Versus, I mean, I don't know how many companies VTSAX, which you've mentioned owns, but it's several thousand companies.

>> It's about 3,300. >> Okay. So there we go. 3,300 companies. So you would look at -- some people would look at that and say, I would much rather own a tiny little piece of 3,300 different companies, which all own plenty of real estate themselves versus one little house.

But other people say that would be so risky to own that, those 3,300 companies, because what if that goes up or down? It's a matter of understanding what's actually there. And you mentioned -- it was mentioned in your post, and I didn't kind of point it out at that time, but one misconception that I'd like to mention and see if you agree, people have this idea that houses always go up in value significantly.

And if you look at the numbers on that, even corrected, you can look at these numbers and you can correct it for the massive increases in the '90s and the 2000s. But if you look at it on average -- and before we -- I have the numbers. I've got the numbers here that you link to in your post so people can follow through to this.

But if you think about it, what a house is, is it's a place to live, ultimately. So it has a certain amount of utility. So the value of that place to live is going to be driven by what the underlying wages are. So it doesn't matter if I can only afford $1,000 a month just because you want a million dollars for your house, I can't help -- I can't help you.

But if I'm making a million dollars a year and you want $100,000 for your house, I'm probably comfortable offering you $110,000 if I know there's another buyer. That's why you have places with such high real estate values as compared to other places. If you look and chart the real estate values versus the wage values, you'll find some correlation.

So California real estate would on average be higher priced than Mississippi real estate. And the per capita income of California versus Mississippi -- I haven't checked these numbers, but I feel pretty comfortable saying there's a correlation with California having a higher per capita income. So ultimately the true price of real estate in general is going to be driven by the inflation rate and the inflation of wages.

So you link to the article and it says that by Michael Bluejay on his website -- so I just use his data -- the price of new homes increased by 5.4% annually from 1963 to 2008 on average. Obviously that's new homes, but that's what we've got. So first he points out that the average new home size grew from 983 square feet to 2,349 square feet over that 50 year period, or about 1.6% per year on average.

So he takes out 1.6% from 5.4, factors that in, and that's a 4.2% annual growth rate. When you compare that to inflation, it's 4.4%. So to me, inflation under his numbers were higher than the growth rate of homes. Not to say that you can't make a lot of money in real estate, but it doesn't come from mass appreciation.

It comes from buying at a deal, or it comes from forced appreciation. And those are the key levers that if you're going to buy real estate would be valuable to look at. Number one, is there a way that you can get a deal significantly below the market price, maybe a distressed sale, maybe a foreclosure, maybe somebody that just needs to move, or is there a way that you can force appreciation into the property and make the property much more valuable?

You buy a cheap run down one and fix it up. But it's not because necessarily real estate goes up in value. It's because of the individual -- it goes up in value so much that it's basically the inflation rate that it tracks, but it's the individual property. I went on for a little bit, but comments, thoughts, do you agree, disagree?

No, I absolutely agree. In fact, as you were talking, it triggers my memory that before 2008, before the housing market collapsed, there were people expressing concern about the rise in housing prices, because housing prices were rising pretty dramatically for a while there. And one of the concerns that these analysts would talk about was the correlation that you just referred to between the cost of a house and the average income of the people who lived in the area that potentially had to buy the house.

And they were noticing that the value of the price of the house was far outstripping the growth in wages. And of course, there were several reasons that that continued, at least for a while. One of the big ones was that lenders were getting more and more generous with their lending terms.

So you needed less and less income to qualify and more and more -- or less and less money to put down. So you can suddenly borrow 95 or even 100 percent of the property. So that allowed housing prices to increase even more beyond where the wages would have indicated.

But that can't go on forever. And that's also one of the factors that caused it to crash, because eventually there's just nobody who can afford them. And ultimately, the price of a house is going to be tied to the wages of the people who live in the area that would consider buying that house.

There was another point I wanted to make, and it slipped my mind. Maybe it'll come back to you. Yeah, maybe as we talk it'll come back. Yeah. I've got a couple of things here, just kind of as we wrap up. Believe it or not, we're at, what, an hour and 45 minutes.

Yeah, an hour and 45 minutes. I don't mean to do these two-hour podcasts, but it seems that I get interested in a conversation and we get back and forth. And I've enjoyed it, so I hope the audience has as well. Well, you can tell it's hard to get me to talk.

Me too, right? So I had just a couple of thoughts, and I want to read -- and then maybe these will spark some thoughts, and then I'll let you have the last word. But just some suggestions for folks. Number one, I'm going to repeat how you said to do the analysis.

Four things. Number one, calculate your opportunity cost. What could you be earning on the money if you were going to invest it? Number two, calculate your utility costs. Compare those. Number three, calculate your maintenance, repairs, and insurance, especially with emphasis on maintenance and repairs. If you have real data, use that, so your numbers are from real data.

But many people won't have that. Estimate and probably estimate higher than you think. And then number four, take into account your taxes and use those four things to figure out what the actual cost is between renting and owning. Now, the key thing is, however, the individual situation. So number one is opportunity cost.

If somebody weren't willing to say, "You know what? I've got this. I'm going to use your numbers. $330,000. I'm going to put it into the Vanguard REIT fund, but instead I'm going to buy a boat," well, now you've got a totally different calculation. Or if they said, "You know, I'm just scared to put money into a REIT fund," or, "I'm scared to put money into an index fund that doesn't fit what I'm trying to do, so I need to put it in the bank and now I'm going to earn .01%," different calculations.

So that's a huge, huge calculation. Number two is your utility costs. So in your calculation in the post, heating was included in the rental but was excluded in the house that you owned. If you could do something to a house where you completely changed your heating costs or your utility costs, maybe you could build in something like passive solar design to stay warm in the winter or to lower your cost or, I don't know, wood stove or whatever the version is up there in New Hampshire.

I live in Florida. We don't worry about cold. That would affect it. Number three, maintenance, repairs, and insurance. This would be where you would have to calculate one individual property. Is this property going to need maintenance and have higher amounts or is this thing a gem? What's the insurance cost going to be?

In Florida, we have hurricanes and I-95 runs right through my town. East of I-95, insurance rates are significantly higher because it's closer to the coast than west of I-95. A big deal. Taxes, got to look at that and you can affect that based upon where you're going to own.

So example is I live close between the Palm Beach County and Martin County line here in South Florida. So in Palm Beach County, property taxes are 2% per year. In Martin County, they're 1% per year. So maybe by buying smart, somebody could make some differences there. Then look at the buying decision.

You got to look at what am I comparing. It could be that if you're comparing a traditional stick-built house to the rent that you come out better ahead renting. But if you compare that with maybe some sort of new technology, some sort of alternative building, maybe very efficient building technology, maybe there could be a different way to do it.

So think creatively, run the cost for each one and think creatively. But I've loved this analysis that you've done, Jim, and I think it's been really good. What thoughts do you have to wrap us up? - Well, first of all, thank you for that. And I would agree with what you just said.

You made the comment that a lot of people probably don't know what their actual repairs and maintenance costs are. That's probably true. And if I could make the suggestion, I think that's something that people might want to start tracking. I think a lot of people struggle with this idea that maybe their house isn't a great investment because they really don't know what it costs them.

And it's not that hard. I mean, you can do it on a computer spreadsheet. You can do it on a pad of paper. Again, as I said earlier in this conversation, I believe in keeping things simple. And just jot down for a year what you spend on your house so you understand what it's costing you.

And I think that's an eye-opening exercise for people. I think too often, because there's so much in our culture, because so much money is made when people buy houses, the government likes you to buy houses, the real estate industry likes it, the home building industry likes it, the repair industry likes it, the utility.

There's a lot of forces putting forth the idea that houses are a great thing to own. And sometimes they are, sometimes they're not. You need to understand your own numbers. And that starts with keeping track of them. The second thing that you mentioned was you might be, instead of buying that fund, you might go out and buy a boat or you might put it in the bank.

One of the reasons I suggest a proxy is it does matter what you're going to do with the money. So when you're running the numbers, and again, remember when I say run the numbers, I'm not saying run the numbers and find out a house is a bad idea. I'm saying run the numbers so you know.

And if you run the numbers and you use a different proxy than I do, it might very well, if I used a different proxy on my numbers, like buying a boat or putting it in a savings account, it would be a very, very different result. And maybe a result that would say, you know what, if I'm really going to do that, I'm better off staying in this house.

If I were the kind of person who was going to go out and blow the money out of Ferrari, high living, and it would be gone in a few years, then I'm better off staying in the house. So it does matter. That's why I said at the beginning, it's not, I don't care what the academic research shows, so much as I care what my real choice, choices in my life that I'm looking at matter.

I don't care so much whether I'm better off renting or owning the specific house I own. I care, am I better owning this house or am I better renting the apartment that I want to rent? Because I care about the real world and my real life, and that's what I would suggest that my formula that I put in this post does for people in a way that a lot of calculators don't.

And I think that's the way people ought to think about it, is how does this really work for me? How does it really work in my life? Because that's really what matters. I think those are awesome, awesome, that's such a great place to leave the show. And you're ringing my bell as far as what I hope this show can provide for people.

It's just simply ideas, but at the end of the day, you've got to look at your specific situation and you've got to be your own financial advisor and say, "Here's what is specifically appropriate to my situation." So that's awesome. >> Right, and if you can look at my situation and adapt it to your needs, then the post I wrote has some value.

>> And one tiny tip, just because you said to track it. This is something that I hope these tips are, this may only help one person, but if it does, I hope so. When you're tracking that, it would be a good idea to record the cost, record the money that you spend on your house, that is repairs to the house, and money that you spend on your house that's an improvement to the house.

Now I don't, obviously I can't go into what is a repair and what is an improvement. Just think though, is this a repair or is this an improvement? Repair is just a straight up expense, but an improvement, if you'll track that separately, an improvement will add to your cost basis in a home.

So let's say that you buy a $250,000 house and then I'm going to use wide numbers to show why this is important. If you buy a $250,000 house, you may spend $50,000 during your period of ownership on repairs, but if you spend $50,000 significantly improving the property, maybe adding an addition, something like that, your tax basis increases to $300,000.

Maybe you spent $50,000 adding an addition and you can turn around and you can sell that house for, running the math as I go, $550,000. Well if you didn't track that $50,000, you would have had $300,000 of gain. Well you're going to have to pay tax on some of that gain.

There is a rule with your personal residence, if you live in the house for two out of five years, previous five years, you can exclude up to $250,000 in profit from the sale of a home if it's for an individual or for married couples filing jointly, $500,000 of gain.

So most people usually just simply always fall under those numbers. But there may be, it's possible that due to something, you may have significantly more gain than that and that increased tax basis, knowing it, may help you to avoid paying tax on the gain. So a little complicated there at the end, but hopefully that's a little tip.

Just always mark on your list, is this a repair or is this an improvement, and keep separate records so that when it comes time to sell the house, you actually know what the actual accurate tax basis is in the property. That's a great point. It always pays to know what something is costing you and to take a little effort to track it.

You're absolutely right in everything you just said about how it potentially can affect your tax bill when you finally sell. Jim, it's been fun and I've enjoyed this. I think we've given people some valuable info and it's been fun. So I just encourage people to go over. I'll link to all these blogs that Jim mentioned, these posts that he mentioned in the show.

I'll link to them in the show notes. Click over, keep writing, Jim. I know this is kind of a part-time hobby for you, but I really enjoy some of your writing. I think you give good information and it's accessible yet accurate. So I'd encourage people to sign up, subscribe to your posts, and keep up the good work.

Well, you're very kind. I appreciate it. I had a lot of fun doing this with you. You're going to send all these people to my blog now just as I'm about to shut it down and go to Ecuador for six weeks. You're retired. You're allowed. But they can read what's already up there.

Absolutely. With that, folks, this has been another episode of the Radical Personal Finance Podcast. I'd love to hear some feedback from you. Shoot me an email, joshua@radicalpersonalfinance.com, or comment on the blog. Hoping to adjust this show as we go on into being something that's a valuable resource for you.

I'd love to hear how it could become that. So give me some feedback on that way. Thanks very much.