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Bias For Clarity

Bias for action. Gets things done. Go-getter. Traits companies big and small look for. And for good reason, you're being hired to do things! However, action is a secondary step that often overshadows the primary step, direction.   Clear direction is the foundation that enables our actions to takeoff. Without it, we're stuck in the mud.  Striving for clarity is an underrated skill. Having the courage to ask ( seemingly ) obvious questions, and to check in, making sure we're all on the same page. "O bvious " questions are a low risk, high reward way to add value. At worst, you'll add confidence to our actions. At best, you discover a misalignment that saves us from a dead-end.  The more people, the more clear we need to be. The bigger the initiative, the bigger the risk of reaching the finish line, only to realize expectations were off.  Success is always uncertain. But we can be certain about what we want and what everyone's job is. Things that can be clea

You Pay Rent, You Pay Rent, Everybody Pays Rent

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One of the major reasons people strive for a fully paid off house is the dream of living rent-free. The idea that homeowners don't pay rent is somewhat true, like golf being a sport.

Rent is money exchanged to use something without receiving residual value. A familiar example is paying your landlord to use their property. You get a place to live, but when your lease is over, you don't own anything. This is explicit rent, it's obvious and easy to calculate.

Another, less obvious type of rent is implicit rent. Implicit rent is not directly paid to anyone. It's expressed and paid in the form of opportunity cost.

Opportunity cost is the cost of choosing one option and forgoing another. Like when the Portland Trailblazers decided to draft Sam Bowie (choice) ahead of Michael Jordan (opportunity cost).

As a homeowner, you have a lot of capital tied up. Your capital could've instead be invested in the stock market. The growth you could have experienced is your opportunity cost.

The opportunity cost is essentially rent you're paying to yourself, hence implicit rent.

Below is a simple formula to calculate your implicit rent:

Implicit Rent =  After-Costs Home Equity (Home Equity - Transaction Costs) x Expected Portfolio Return

Example 

  • House valued at $500K
  • Average realtor transaction costs are 5%
  • Expected return of stocks is 7%

Annual Implicit Rent would work out to be:

$500K - ($500K * 5%) x 7% 
$33,250 

Leading to a Monthly Implicit Rent of:

$33,250/12 Months 
= $2,771

You end up paying a monthly rent of $2,771 to yourself. If you can find a comparable home to rent for less or even slightly more (given all the costs associated with homeownership), you'll want to consider renting. There are many benefits that come with renting that could make it a better choice for you.

Homeownership can be great option for the right person. It all depends on your goals. Just be aware, if your goal is rent-free living, homeownership is not your huckleberry. 







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