I’m going to play devils advocate on home ownership today. Sure, it’s the American dream to own a house and all that, but far too often, young people jump into home ownership just because it’s cheaper than your rent payment that you’re “throwing away” every month. Well, you know what? Maybe we should all think a little bit past this month’s cash flow when we make a decision that could make or break our financial lives.
I’m 28 years old. I’ve been with the same employer for over 5 years, make an above average salary and I don’t plan on leaving the area in the next 5 years. I also am debt free and have 20% of a potential home’s purchase price in the bank on top of a healthy 6 month emergency fund. My point? I could buy a house tomorrow if I wanted to. Instead, I rent and don’t plan on changing that anytime soon. What if you were in my position? Would you continue to rent or buy? I’m betting many of you would buy, wouldn’t you? Well, here’s why I’m not buying a house anytime soon:
1. It Can Trap You There Against Your Will
Once you buy a house, you are stuck there. Unless you are independently wealthy, have your house paid off and don’t need the money from renting it or selling it, you are stuck in your house until you sell it. Selling a house can be a long, stressful process, even in a booming housing market, let alone a housing slump. I’m renting on a month to month lease and with a 60 day notice, I can be out of this place. A great example of this in action is my sister and brother in-law. My brother-in-law recently got a job that required him, my sister and my two nephews to relocate. Since they were renters, all they now have to do is give their landlord notice, find a new place to live and pack their bags. Moving out of town to pursue a bigger and better opportunity is POSSIBLE since they were in a renting position instead of owning a home, which they would now have to sell in a pinch. Owning a home traps you in your location. I don’t like feeling trapped, especially in this stage of my life.
2. It Is More Expensive Than Renting
This is where people are wrong. Yes, my rent is $725 per month. Yes, I could probably get a cheaper payment on a 30 year mortgage if I bought a house. BUT, that doesn’t factor in all the maintenance and upkeep that I would have to spend on that house. It doesn’t factor in the increased cost of utilities or all of the new furniture, new interior decoration and junk that I would “have to” buy to fill up the house. If I moved into a house today, I would fill up the living room and one bedroom, since that’s how much furniture I have right now. Sure, I could hit up the garage sales, but you know as well as I do, when I own my own home, I’m going to want that place to be nice. I’m going to spend money to make it that way. The bottom line is, owning is more expensive.
3. Your Capital Investment Isn’t Earning You Tangible Money
Sure, it’s sure great to be investing in something that is likely going up in value, but is a house really an investment? When compared against the stock market over the long run, home ownership has a far lower rate of return. It’s great when you get lucky and jump on a housing boom, but it sure stinks when you just bought a house before the market crashed. Many Americans are DEEPLY underwater right now in their homes. How is that an investment? Home values can go down just as they go up. It’s a risky asset to own and many times, people don’t make money from home ownership.
For that person who doesn’t buy a house, but instead invests that money as a lump sum down payment and some extra cash each month, they are free to invest in good mutual funds, rental real estate, starting their own business or anything that they feel comfortable investing in. There are all kinds of places to invest money besides home ownership. Throwing your money at a mortgage each month isn’t earning you any passive income. Maybe you could be spending that money in areas that can earn you passive income from it.
4. Owning a Home Can Make You House Poor
When you buy a home and a significant amount of your income goes to paying for it each month, you are what is known as “house poor”. Sure, you have a nice house and it sure looks fine and dandy on the outside, but on the inside, you are sweating over how you’re going to get the money to fill up your gas tank this month. Ouch, that’s not a position I want to be in. I’d much rather be renting a crappy apartment, knowing that I could write a check for a full year of rent without flinching. I’m not apartment poor. I can get out of here anytime I want with 60 days notice or I could turn around and prepay an entire year just so I didn’t have to worry about paying rent each month. It’s a great feeling!
5. You May Be Able to Buy Your House in Cash If You Wait
That’s right folks. When I buy my first home, it very well might be in cash. I mean, why not? After all this time renting, I have 35% in cash already so give me a few more years and I can definitely have 100% piled up. The bank account grows pretty quickly when you keep your expenses and lifestyle down. In 3 years, I’ll likely look up and say, whoa, I have some serious options. Which house do I want to buy? Good thing I don’t need a bank, because I don’t really feel like going there and handing them all of my private information so I can borrow their money.
How many people who are tied up in mortgages can think about buying a house with cash someday? I bet not very many of them. Why not? Because home ownership is more expensive that’s why. If it wasn’t, then even people with mortgages should be able to stockpile their mortgage equivalent in cash and pay off their mortgages within just a few years. No not 15-20, but five years.
6. You Can Use That Money To Start Your Own Business
Pretend you have $50,000. What runs through your mind? Buy a house, right? That’s what most people do. But instead, think about this. Use it to invest in yourself and start a business. Maybe instead of spending it to buy the little cafe downtown, you use it to live off of while you try to build a business from the ground up. After all, $50,000 can buy you over 2 years of full time salary (to yourself) if you live a modest lifestyle like I do. If you had 2 years to figure out how to earn yourself enough to pay your bills every month, could you do it? The older and more experienced I get, the more confident I am that I could do it. After all, I do much harder things in two years at work than that. If I focused for only an entire month at work on it, I could bring in twice that in business for our company, I bet. I bet a lot of you could start a business that at a minimum supported you too if you had two years to do it.
Starting a business with that money instead of buying a house with it could enable you to build something really great. In the process, you would be doing something you absolutely love everyday and may even become wealthy someday because of it. In addition, you will enrich the lives of others and be quite fulfilled. I haven’t experienced this personally, but I know many people who have and from what I hear, building a business that you’re truly passionate about is an awesome thing.