Indians are obsessed with real estate, and there is a near universal acceptance that buying property is the best– and some would argue only – pathway to build wealth.
Mark Lamonica, head of individual research at Morningstar Australia, believes that Australians think in the same way. But he chooses to live in a way that challenges this conventional wisdom. Even though he resides in Australia, the way he articulates the financial components of his decision and how it enables him get what he really wants from life is something worth reading.
There are plenty of gems here for Indians too. So let’s read what he says.
Hi, I am Mark LaMonica.
I am 44 years old. I am a renter.
I am lucky enough to have the means to purchase a home. I choose not to because I think my financial assets can better support the life I want to lead in different ways.
I do not have children which introduces more flexibility in decision making around renting as I’m not tied to a school or a particular area. Not having children also means that I can spend less of my salary on housing as I don’t require as much space.
It doesn’t mean that purchasing a home is the wrong decision for anyone and everyone. Investing is personal and there are no universal pathways to follow. Each of our decisions are based on our personal circumstances and following the consensus can be the wrong choice for some people.
I am super focused on cash flows.
A balance sheet lists assets or liabilities. Your house is an asset. Your mortgage is a liability.
A cash flow statement lists all the cash that comes in the door and all the cash that goes out the door.
If I have to use financial statements as a metaphorical way to classify my investing philosophy, I would say that I am a cash flow statement.
Like many people I started investing to gain financial independence. Financial independence is a popular goal but what it means is highly personalised. I am seeking the freedom and flexibility to take advantage of the opportunities that life presents, and this flexibility requires cash flow and liquidity.
My focus on enabling flexibility also shaped my view of my personal balance sheet or net worth. It led to a visceral reaction to the idea of going into any debt. Debt is an obligation against future cash flows. The exact thing I’m trying to maximise.
It has also led to decisions on my personal budget. I try and minimise the amount of my pay cheque that goes to things that are fixed costs that I need to stay alive. Largely shelter and food. That lets me dedicate more of my spending to wants that I can scale as my financial situation dictates.
In saying this I need to acknowledge that this was not always the case. At the start of my career my comparatively low salary barely covered these bare necessities. I am fortunate enough to be in a position now where I can make those choices, but part and parcel of that was to not let fixed expense lifestyle creep overwhelm my budget.
Trappings of success don’t entice me, flexibility does.
I spent my high school years in a town named Greenwich which is a suburb outside of New York City. It was considered a desirable place to live and had the home prices to match. After I graduated and started working, I had to commute to New York from my parents’ house one day. I found myself standing on the freezing cold train platform at 6am glancing around at my fellow commuters.
They stomped their feet to stay warm and prepared to charge onto the always crowded train in the hopes of finding a seat for the 40-minute ride into the city. I couldn’t help but think that the men and women on that platform had ‘made it’ in every conventional sense. They likely lived in expensive houses and had all the trappings of wealth along with the requisite high paying jobs needed to support that lifestyle.
And without being critical of others' choices I had no interest in following this pathway. I saw the trappings of success simply as traps. These material possessions that denoted success including the big mortgage just seemed to lock me into a life that I didn’t want. Even if I didn’t and still don’t know what I do want.
The real question for each of us is why build wealth in the first place? I am looking for more flexibility in my life. And a house just doesn’t lend itself to my goal for wealth. A house requires an initial large expenditure and continued costs to maintain. Wealth built up in a house is also illiquid and has significant transaction costs. For many people the majority of their wealth is locked within their home.
A house is an asset that dictates life decisions rather than facilitating them. If I owned a home in Boston, I might not have moved to Australia 9 years ago. In short, a house is an anchor. For people searching for stability that is a good thing. For me I see it as a limiter of options.
Buying a house has come to mean so much more than simply acquiring a place to live. It is fraught with emotion. We treat it as a signifier of adulthood. An indication that you’ve made it. Most people will continue to strive for this milestone.
But if what is driving the decision is the near universal view that there is no other way to build wealth there are other options. What worked in the past may not be the best path forward and personal circumstances may dictate a different approach.
How a house fits into my personal financial statement.
A house is an asset that goes onto your personal balance sheet. But if you take out a mortgage it is also a liability, and any liability will also negatively impact your cash flow into the future. Since your primary residence is an asset that generates no inflow of cash there is no offset.
But a house also meets a basic human need since you live there. And while I don’t have a 30-year mortgage I do need a place to live for the next 30 years. I have an implied liability with negative cash flow built into my life if I continue to be a renter.
We can call this a wash from a cash flow perspective. But like many real assets a house also depreciates. And that depreciation has a real cost. Repairs and general upkeep are a constant drain, and many homeowners choose to undergo periodic renovations to enhance the value of their home. In many cases these renovations simply maintain the value of the house rather than enhance it. The consensus seems to be that you spend at least 1% of the purchase price a year just to maintain your home. I have none of these expenses as a renter.
I get told constantly that renting is throwing away money. I have some objections to this characterisation because I am simply paying for something I need. Under this definition spending any money is throwing it away even if it is spent on a necessity.
Semantics aside you are obviously building up your equity with each mortgage payment. But I have a feeling that most people don’t run the numbers.
