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.
I agree entirely. Great post. I am going to use this as a reminder of my goals when I am feeling “homesick”.
I can’t wait to own my own home. I don’t care if I have to pay for my own maintinence – I am very DIY anyway.
Things I cannot STAND about renting apartments:
Loud neighbors. My downstairs neighbor likes unreasonably loud music at all hours and can’t take the hint even after the ten times I’ve made a noise complaint with the police.
My current building has a german roach infestation. My apartment is sparkling clean. Still find them. Absolutely disgusting.
No space. Ever. My closets aren’t big enough, my bedrooms aren’t big enough…I have no space in my kitchen. It is awful.
The laundromat in my complex charges 2 dollars a load. There isn’t another laundromat nearby for miles.
I’d sell my soul to have my own garage. To have room for my own washer and dryer. To have the bedroom I’ve always wanted, the kitchen I’ve always wanted…
I’d rather have to mow my own lawn, tend my own garden, fix my own broken stuff, and pay extra for the things I can’t fix than keep on with this.
There are very nice apartments near me, houses for rent, and townhomes as well…for 2k a month. May as well have a home. More space, more privacy, more freedom. Being a homeowner is more than just about the money.
Completely agree with you. I want a place to call mine and that I can change and do whatever I want. Privacy is precious to me. My home is my castle. I have no fear of “being trapped”, all my life I have lived in only 2 addresses. I like it. When I want a change I go travelling. I´m a kind of “Dorothy”, there is no place like home. And I can´t call a rented place “home”.
I like what you said about having a home vs. renting a apartment. I was thinking about selling my house to save more money and move into a townhouse with maintenance fee included. Even though I like the privacy of having your own home that you don’t have to deal with obnoxious neighbors making lot’s of noise or loud music all day see that’s the good benefits of owning your house. Thank you.
If yo are saving your money for a business, you may want to defer buying a home. You could buy a home to use as a rental and have a start of a business. Just an alternative.
Good points.
You wrote this post in 2012. I’m just curious if you still feel this way and wonder if you own your own business but do not own a home?
Great post. I like devil’s advocate approach. It’s great to see things for both ends—it can definitely help with making the right financial decisions.
You bet. I’m glad I could help!
If I buy an apt (NOT RENT, BUY), will I still have to pay property taxes?
Yes of course you do, you own the property, just because there are several others in the building doesn’t mean that nobody pays!
I agree that it’s not always the best option for people to buy a house. I’ve been paying my mortgage of $900+ for four solid years and you know how much equity I have? About $8k. I’ve paid over $43,000 in four years and then the housing market slumped.
I’m not “underwater” but if I’d been paying rent at $650 a month instead, I’d have saved $12k and wouldn’t have had four years stress owning and maintaining a home.
Good article, and food for thought for people considering joining the property ladder.
8k is good the only thing is if you had to sell, you have sales commission, seller fees, cost to make the home look good, repairs needed found on the home inspection. Ownership is great when the market in your area is clumbing. If not… not so much.
I’ll grant you it’s not for everyone, but just because you buy a house doesn’t mean you have to buy too much house or buy tons of furniture. We bought a smallish house (for the area we live- it’s 1100 sqft), and took our time furnishing it. Three years after we bought it, it finally feels fully furnished (and a decent amount of that stuff was from Craigslist) or hand-me downs.
I agree. I recently downsized from 4000 sq ft. You pay more money for it,interest, taxes,insurance, utilities, maintaining exp and furnishings. It really adds up.
It’s easy to only think about the mortgage payment when buying your first home. When renting, if something breaks, you simply call the landlord and have him/her fix it. If you own your home, any plumbing issues, appliance malfunctions or other problems fall on you. Also, when you buy, you’ll probably buy a larger place than you rented. Cooling, heating and lighting a larger area costs more, so your utility bills will be higher. You’ll also have more household chores when you own. You’ll need to mow the lawn, rake leaves and do other things to keep your home presentable. You could hire landscapers, but that’s expensive. When renting, the cost of landscaping and upkeep is factored into your rent. The bottom line, owning has many hidden costs that are easy to overlook when you don’t currently have them.
Mowing the lawn; utilities; landscaping; raking leaves; are NOT factored into your rent unless you choose an apartment or townhouse which is priced several $100’s over what a house of the same size would cost you. Your decision depends on your needs and your lifestyle; since everyone’s is different. Example: If you love pets, renting an apartment can be quite expensive and stressful for both you and your animal. Not only do you pay a non-refundable deposit, but you may have to pay a monthly fee for each pet; and there are always restrictions on the type or size of pet you can have. If your pet offends a neighbor for any reason, you may have to dispose of the pet.
As far as all that extra doe that goes to “maintenance fees”; landscaping; upkeep of the clubhouse & pool; parking lot; etc., the amount you pay is not necessarily contingent on the quality of the services provided or the timeliness of the repairs. You are at the mercy of your landlord and his schedule & budget. He may deliver a “repaired” AC unit rather than replace the broken one with a new one in the heat of the summer. Or you may suffer through the weekend or holiday because his “hired maintenance crew” is too busy or “unavailable until Monday”. Heaven forbid you create any damage to the home or unit you are renting. You are not allowed to repair the damage yourself; and your landlord can charge you $1000’s over what you could have paid to repair the damage on your own. In the end there is very little legally a renter can do when they are facing negotiations with property managers from a large corporation. Litigation is lengthy & costly even when you are in the right. If you want to save your credit & rental history, you have to pay your landlord’s fees. That’s why you OWN!
I can’t wait till you’re able to plunk down 100% cash for a home…guess what you’ll get? A crazy deal, short closing costs, and instant equity (hopefully). Save it up, you’ll be a rockstar.
I wonder what percent of the population is going to be able to rent and also manage to save 100% of the cash required to out right buy their first home without a mortgage while in their 30’s or 40’s. Nearly zero. This article is applicable to nearly nobody.
I did it, and I’m 26. Admittedly, I save compulsively, my house is small, it’s located in a city in the Midwest, and there are 2 vacant houses on my street. But I’m in a nice neighborhood with a low crime rate. I can have a dog. I’ve reduced “hidden” home ownership costs by caulking, insulating, and using plastic window film in the winter. I use a reel mower, which has zero maintenance or operations costs and isn’t significantly harder to use than a gas-powered push mower. And I’m slowly replacing my front yard with hardy decorative perennials and native plants, so there’s no pressure to spend time and money on a “perfect lawn”. That being said, I enjoy working on my house. I enjoy the independence of not having a landlord, I relish my ability to hang pictures on the walls with nails, and the I like being part of my community. It could be stressful for some people, granted. And I don’t expect my house to sell easily or instantly when I move away. But I’m still saving for retirement and I have an emergency fund, so I’m not worried.
Good job Jen! Smart girl.
Thank you Jen…My daughter is 28 and I think it a great idea to own her own home.
I agree, Jeremy. Some of these rents (in NY) are about $1,500 for a studio! outside of Manhattan…with such rents…how in the world would ANYBODY be able to save-while renting. Not! No chance. This article/approach doesn’t apply to all. If you buy a small place initially–as a starter investment home, and live below your means, you 1) have a tax deduction as a home owner; 2) build equity; and 3) then flip/re-sell in a year or two and make some type of profit. Not need to live above one’s means and decorate the home entirely through ABC Carpet & Home!
You can be frugal.
Great post – always good to challenge traditional thinking. There are some counterpoints you didn’t list, but probably because “everybody” knows them 🙂 For instance, starting your own business: the statistics show 80% of them fail. That would wipe out the nest egg and potentially even leave you negative. Not saying, just saying… 🙂
One of the worst reasons to buy, yet an effective one, is it forces undisciplined savers to save. No, it’s not as profitable as just saving the maintenance and property taxes, but you do it. So the comparison is not to the best way, it’s against reality for, what, 70% of people out there.
I’ll fess up: I’m one of those people. I also one of those who let my employer deduct taxes at single zero in order to guarantee a refund which we could put into our savings account. Efficient? Heck, no. Effective? You betcha! Human nature is a strange thing, and some people are stranger than others! 🙂
Understandable. Some people are the way they are and that’s that.
Man, I agree on all of your points. Property historically has appreciated nearly equally to the stock market (check out the NAREIT index). However, homes appreciate less quickly because of all the maintenance and upkeep costs. You’ll make money on a home, but it’s not a great investment. Great piece.
Oh no? I purchased my very first apt. at age 23, (a foreclosure!) for $30K – in NY! and sold it at $110K…then used that to put a downpayment on another place I actually like, mostly everything about – mainly the layout and view. You can do well, if you time the market, buy at the right time, renovate, and then re-sell years later. I made money…while saving on taxes, and building equity and strengthening up my credit score. It’s great to be a homeowner…you can fix your home up the way you wish.
Kraig, I really agree! Home ownership isn’t for everyone. Also, owning a home is a lot of work and responsibility and it really commits you to staying in one place for awhile.
I agree. One of the reasons I have delayed purchasing a home.
While i like what you’re doing here, and agree with many points, I have to disagree about a couple of them. But, I know it’s nothing personal since I know you are playing devil’s advocate. While it may be cheaper over a 30 year period, not having a mortgage payment for an additional 20 (in retirement no less), would probably make the average cost lower than renting for the 50 years. Just a thought. Also, if you get the right house, you could always rent it out if you have trouble selling it. Other than that, I definitely agree about the house poor aspect.
You make some valid points. My soon-to-be-ex-wife and I have been trying to sell our home for 7 months now. Until it sells, we are stuck here. Neither of us can afford to pay two mortgages, so until a buyer comes along, we can’t do much. In fact, we’ve thought about renting our house to someone like you. 🙂
Kraig, this seems to be a trend among younger people who see being tied down to one place as a huge drawback of purchasing a house. As someone who currently rents, I don’t plan on changing that. I can’t picture myself being stuck in one place – I for one enjoy living in new places quite often.
There are definitely arguments for and against home ownership. The key is to realize it isn’t a black and white situation and you need to look at the pros and cons for you personally and make your own decision. We did and that led us to buy a townhouse well well below our max budget and allows us to put a crazy amount of money toward my girlfriend’s student loans AND it is three blocks from the beach. Depends completely on the situation although you make some valid points.
Awesome post Kraig! I’m planning to buy my first house with cash! But my first step is college without debt. I love all the reasons you give especially number 2. And when you rent you don’t have to pay property taxes o association dues either!
Chase
You do pay the taxes & HOA dues… it’s included in your rent price.
“Owning a home traps you in your location. I don’t like feeling trapped, especially in this stage of my life.”
I think people take this a little too far. You really aren’t trapped if you own a home, especially in today’s economy. There are a ton of renters. I know a couple who live in a suburb who were able to rent their townhouse while they moved to India for 2+ years. There are options if you want to/need to move away without selling your house.
I also know two separate families that are renting their current house and buying a second home. They are doing this because they don’t want to sell at the bottom of the market, but still want to move to a bigger home.
Great post with valid concepts! I’d like to comment from a homeowner’s viewpoint. We want to move to another state & must sell our house to do it, and YES, it’s a pain! On the other hand, our home has appreciated a lot which is awesome for us. Also, I suggest anyone buying a home learn to DIY. We have replaced windows, added a room, fixed plumbing and when concrete. Classes in this stuff are cheap & sometimes free, & a lot of fun if you’re so inclined. The more you learn, the more creative you get & it can be so rewarding. And lastly, we have never over-spent on our furnishings or on heating or cooling. In our area, our monthly costs are lower than renting by about five hundred a month. I totally see your points, but I wouldn’t like to see owning get a bad rap.
Barbara,
It sounds like home ownership has been a blessing for you and that you’ve enjoyed the work that you’ve put into your house and the outcome of that work. It’s also great that you have been able to control your spending on things like furniture. I do agree that home ownership can be a good thing too. It’s just that I hear most arguments against renting and I don’t believe renting is as disadvantageous as people make it out to be. For me, it has allowed me to get where I’m at and will likely allow me to get where I’m going.
I agreed, most of the comments and the author are quite extreme. We all want a speedy result, a bump in a road is too much of a hassle. There is no standard rule how complete a home is furnished, it is up to every owner. Only buy in a great neighborhood, because that is your exit strategy. I think a home purchase is an important step to be financially independent, a mortgage is a tool to hedge against inflation, rising interest rates. You basically lock in your “monthly rent” for the next decade. Renting isn’t throwing money away, but owning is playing heads up. Of course 20& down payment is a must. I let go the convenience of calling a landlord to fix any day.
Thanks for the perspective.i have been back and forth on whether I should say in my current rental situation or buy a house…so far everything in my comfy price budget makes me depressed. I am feeling pressured by first time buyer grants and articles stating now or never is the time. Being a single mom adds stress. I might change my mind in two years on where I want to live…or maybe not..but waiting makes me feel like in a year I’ll see houses twice as much and wish I’d have plunged earlier.
Lis,
It really comes down to can you afford it. Are you out of debt? Do you have an emergency fund? Do you have at least 20% to put down in addition to your emergency fund?
If so, go for it if it’s that important to you. If not, I’d recommend waiting.
Don’t let people pressured you into this. It’s a huge decision that should not be made by others. Good luck!
Thanks for writing this Kraig. I am currently getting out of debt. This article was right on time!
I’m going to have to disagree on the statement that owning is always more expensive than renting. Yes, there are maintenance and utility costs on top of the monthly mortgage payment… and many people are tempted to buy more house than they need “because they can”… but it’s really up to the individual to budget for these expenses and assess whether it’s affordable.
A few points to consider regarding long-term benefits of homeownership: A mortgage is fixed for the full 30-year term while rent increases at the discretion of the landlord. Once the mortgage is paid off, that monthly expense disappears entirely (as another poster noted) while a renter continues paying full rent forever.
Also, homeowners can deduct property taxes and mortgage interest every year. Renters cannot – even though they’re paying someone else’s mortgage and taxes. Most homeowners also receive homestead exemptions that landlords do not.
In summary, there are benefits to both homeownership and renting. The key is to live within your means in whichever situation you prefer.
I think that the argument that after 30 years, things become much better because you shed P+I is true only if one has a crystal ball and can somehow foresee having the house for 30 years. Most people who buy a house think they’ll never move, but the average time of residence in any home is something like 5 years.
If you sell your house every 5 years, the value proposition for owning looks much worse. The sobering reality is that people generally don’t think they will move every 5 years, but statistics bear out that most people do.
I would disagree that the average person moves every 5 years. There are approx. 330 million people in the US and if you look at the US Census statistics only between 25 to 35 milion move a year (this includes the kids) and it is a large percentage of the SAME people moving again.
Also if you look at the housing bust cycle of the last 5 years who are the winners..the folks that had been in their homes for 10 to 15 years who aren’t worried about prices because their loans have been paid down considerably.
It’s interesting that you speak negatively about the “they” in the housing and IRA arenas and yet you quote the “they” in the moving statistics.
Personally I don’t give a rat’s behind if you ever buy a house but at least use some decent statistics or admit that you are using the same “they” that you disagree with in other areas.
Sadly at 29 you are part of the “me” generation and I hope you don’t find that your “me” is lonely long after the mortage would have been paid off.
Good luck to you!
Tabitha,
You chastise Greg for misusing statistics, but your “statistics” are a murky cloud of half-remembered figures that are incoherently presented, you cite no sources, and you use the term “winners” like you’re speechwriting for Donald Trump. If you’re going to form a thoughtful critique, come prepared or don’t show up at all.
The fact that you throw in a tired, unoriginal, baseless insult directed at “millenials” whilst attributing OP to the wrong generation, (and misspell “mortgage”) should automatically disqualify your argument. Heard of the term “intellectually dishonest”?
Good luck to YOU, Tabitha.
My small home has been paid off for 20 years. I recently retired and have the option of paying cash for a villa in a much nicer location, but property taxes and dues are HIGH. I’m struggling with this decision because a more expensive place might be harder to sell; and, like you, even at my age, the prospect of higher bills and more maintenance costs make me feel trapped.
Who the heck ever stays in the same home for 30 or 50 years? Even my relatives too scared to leave the small Midwestern town they grew up in, they move every 7-10 years even though it’s in the same area.
I have relatives in Florida with windstorms insurance and taxes that run more than their mortgage.
Warren Buffet.
LOL!!! touche @ Sue
My husband bought his first home about 3 years ago. He bought a very inexpensive condo. We have decorated the condo on a budget and it looks great. It actually has been a blessing to own this home. I feel it was cheaper for him to make this purchase than to rent a bedroom in someone’s house. Over time, the amount that he paid for this condo will probably equal the amount he paid in rent. I’m happy to have this condo because we soon will have this place paid off in a few years. Then we can turn it into a rental unit! Best choice he made was to buy this cheap condo. 🙂
Jodi,
Good for you two. Buying a cheap property sure beats an expensive one, in my opinion. But, it does seem like a hard thing to do when you know you could buy more than that. Congrats on being able to pay it off soon and turn it into a rental unit.
Take care,
Awesome, Jodi! Have you paid it off yet?
I have the same plan. I plan on buying 4-5 condos for $80-90k a piece and I should be able to pay them all off within 5 years (buying and paying off one at a time), then turning them all into rental units and moving into my dream home afterwards. The five condos could generate around $60k a year and investing that money over 15 years would translate into millions. (assuming they were always occupied)
As if you can’t lose your shirt starting a business! Best advice? Buy an affordable house, pay it off as soon as possible, use equity to buy and rent another, thereby owning your home while it’s helping you own a rental. That’s business sense.
jaja dabor,
Thanks for stopping by and for offering your thoughts. Of course, there’s no one way to succeed in business. Real estate is certainly one way that many have success with. And yes, you obviously can lose your shirt in business. But, you can also succeed.
Take care,
Another practical post about managing your income! Great post Kraig. I really love the way you tackle one on one the reason why not to buy a house. I agree with your opinion. Thanks much for the very informative article.
Good Points, As a single handy person, I plan to buy a home and rent a room and basement out while I use the master bedroom. Using your home for extra income while living there makes the payments no more than renting, except the payments go into building equity.
Good Points, As a single handy person, I plan to buy a home and rent a room and basement out while I use the master bedroom. Using your home for extra income while living there makes the payments no more than renting, except the payments go into building equity. It’s about knowing when to buy, and getting a strategic location you feel will appreciate well.
Hi Kraig,
really got into this kind of analysis. Especially here in Germany many people recently went crazy about home ownership disregarding the side effects.
It would be interesting to compare renting an apartment vs. buying and apartment (not a house). Does this change rent vs buy? What do you think?
Best regards,
Martin
Martin,
Yes, that would be an interesting comparison. Around here, we’d call an apartment you can buy a condo. Condo’s always come with the baggage known as “association fees”, where you end up paying what would be close to half (or at least a third) of the potential rent price in fees that you’ll never see again. Even if you pay the condo off, you still pay those fees.
Therefore, buying a condo is really just buying a way to lower your rent by half or a little more. I just don’t believe that’s that big of a deal. Digging in and doing the actually analysis would be a fun thing to do sometime. Thanks for the idea. I may do a post on it in the future.
Take care and talk to you soon. Glad to hear from another international reader. Hope things are well over in Germany!
The only thing if you are already buying and
you get promoted to another location you usually get a relocation package and the company pays for everything in eluding selling
your home. To me buying is better. If you get a
new home you can get a home warantee that covers things for awhile. Thanks,Kay
Just out of curiosity your original post was in 2012 and you were on track to pay cash for a house. Still trucking along with the self-discipline, have you moved, are you looking at moving, is it working out for you?
I tend to agree on the investment side. You can certainly make more “investing” in something other than a home. (It really comes down to how risk averse and disciplined are you, as the person making the decision) As you have pointed out its really a personal decision folks come to. For me, I have seen it play out a few times now… …homes are not really a good “investment” the appreciation is pretty slow and with the additional costs and improvements don’t bring a lot of real “resale” value. It is enjoyable and use has been good, so certainly I have no regrets or complaints. In my first home after 8 years I really had a small loss on it, not a gain as we “outgrew” it. Which is again a personal perspective. (I grew up with 4 brothers and a sister in an 900 sqft. home and we turned out just fine.) On my second home it was about the same. While I sold it for what I paid for it (11 years earlier) I had done quite a few improvements. From a purely $$ perspective I could have waited 5 of those years, invested and paid cash. (The math does show it would have worked out, I know because I looked at what it would have taken to pay it off in that time and it was possible.) I just chose not to pay the house off and spent time and $$ on other things like family vacations and other life events. On the second home it was a little stressful selling the home and moving to another state for a much better job opportunity, but in the end it all worked out. I do like your debt free approach because it certainly does give you the freedom of control and that IS pretty priceless and a $ goes a lot further when you tell it where to go. 🙂
jbird,
Two years later, I still live in the same apartment I did back then. I chose not to buy that house in cash, but instead used that money as my foundation to escape a job I didn’t want to continue in.
I chose last year (in 2013) to walk away from a job that was bringing me down every day and focus full time on starting the business I dreamed of. One year later, it’s growing every single month, with last month surpassing my expenses by over $2,000. I’m now in track to be profitably independent and it was all possible by keeping my costs low and not spending all the extra money I had.
Thanks for sharing your story and thanks for stopping by! Have a great holiday weekend!
I agree that owning a home is not for everyone but if you properly plan and have your finances in order then home ownership can have its advantages. Take for instance my home I pay less for my home per month to include taxes than what the going rent is for a place the same size.
Michael,
Thanks for stopping by. That’s really my point (that home ownership isn’t for everyone). Yes, it can certainly be beneficial is you plan appropriately for it and do it right.
Best wishes!
This post is spot-on. I wish that I had thought like this before purchasing my home. I have had to relocate and haven’t been able to sell it, and no matter what I do, I’m going to lose money on it. We’re renting it out now, but it’s a pain because we have to pay when things break down or need maintenance. I for one agree that the $ is best spent on pursuing a business if you’re so inclined. Who cares if the business could fail? We need innovation and out of the box thinking, and thank goodness the younger generation is willing to pursue it instead of sinking good money into a stupid pile of bricks.
Sally,
Thanks for stopping by. Like you mentioned, home ownership can definitely have its downsides and I appreciate you sharing your story to tell others what can happen when you buy a home without being fully ready or understanding these downsides. Glad to hear your support for starting a business and investing in it as well.
Take care,
Great great article!! Many of your points have been my argument for years as to why we need to keep renting. I am married with two kids and we live in a town home that we are renting but we are considering purchasing home. We are debt-free and we already own a business. We’ve always believed in doing everything debt free, but we’ve been looking at buying a home lately and also because our family is kind of tight in this home now. We thought about buying for more space and to have a yard for the boys and things like that. But I struggle with that because I’ve always wanted to purchase a home that debt-free but we can’t do that at the moment. And like other posters have said, we’d have to get a bigger home which will increase expenses. I love being able to call the landlord and have them fix whatever is broken. Coming across this article has really helped me in thinking about that again and believing we can do it. We’re Dave Ramsey fans but i might get your cheat sheet to see some of your ideas on saving $$. Thank you!
Marcia,
You’re welcome. Glad I was able to help you in thinking your situation through. It sounds like you’re doing great. Keep up the great work!
Talk soon!
Got to say I completely disagree as a 35 your old who has rented his whole life and now owns a property. You can argue backwards and forwards about the benefits of mobility etc etc., and there are good points made about that, but financially, if you are sure you’re staying at least about 5 years, renting when you can afford to buy makes no sense.
You simply say owning is more expensive without having owned and seem to assume that if you rent you’re not bothered about making the place nice, or worse that everyone who rents has a furnished apartment. A good bed is expensive whether you rent or buy!
As we say, you are going to buy a house in your lifetime – make sure it’s yours (i.e. not your landlords).
Let’s compare apples with apples. I’m assuming no inflation to keep it simple. Also assuming no ambition to “upgrade” for whatever reason.
Say you earn $ 2,500 a month and could afford a rent of $750 per month. But – you could also afford a $600 a month mortgage for a $150,000 house, including interest at todays low low rates + $150 per month rainy day repairs and home improvements budget. You have the same spare cash to invest or spend as you want.
You rent – in 30 years you retire and have effectively burned $270,000. We have to assume you have crazy nice landlords who replace everything that needs replacing, never increase your rent and pay for improvements you want (new tiles, paint etc.) and don’t cost you legal fees in disputes. They sure as hell don’t ask you to leave and incur you unwanted moving costs. Unlikely, but let’s assume.
You retire and continue paying your rent until you die, from a much reduced income.
You buy – assuming interest rates stay the same (like we assumed rent would stay the same), you will pay $600 until you have paid it off. That’s the way a mortgage works – in real terms you pay less as you get older and earn more, taking inflation into acount. After 25 years you have paid $180,000 for a house that was worth $150,000 at the time of purchase. You have also saved and spent $45,000 on essential repairs, maintenance and improvements.
For the next 5 years until returement you pay zero mortgage. But you still pay $150 into the repairs fund. So, that’s an additional $9000 over 5 years. Total expenditure $234,000 for a well-maintained $150,000 house.
But as you would have paid the same renting, even though you made a loss too, you are at least 150,000 better off than if you rented, right?
Wrong. Even in a slow market your house has increased in value over 25 years. let’s be conservative and say it doubled. Remember this is over 25 years, not 5. My parents’ house gained 8x its value when they sold it – but lets not go crazy in the modern market. So, actually your investment of $ 180,000 + 54,000 over 30 years has gained you an asset worth $300,000.
At retirement you pay no rent or mortagage anymore, just the $150 a month into the repairs pot. I can swallow that. Or you sell and live off the proceeds (why not travel the world). Or you rent out your big house and rent a modest apartment with cash to spare. Or why not just leave it to the kids or charity. Someone you like wins.
Remmeber income was the same, so you still have as much cash to invest as the next guy who rents. Heck you could even save for a deposit for the step-up house, just like you could save while you rent.
After renting for 30 years = loss of $270,000
After living in a house for 30 years with a 25 year mortgage = profit of $66,000.
That’s 336,000 reasons to buy rather than rent. And this comparison stops at retirement. I’m sure most people hope to live an extra 30 years after retirement. Suddenly I’ve got half a million reasons to buy…
Saving for a deposit of 10, 20 % makes a lot of sense and will get you a better deal. But saving 100% is not as good as it sounds.
Interest rates are low now – you’re not going to get much interest on your savings. Stocks are not exactly a magic carpet ride right now, or generally unless you know what you’re doing. There are other options of course. But say you’re saving for a $ 150,000 house – in 10 years you’ve done reallly well and saved the full amount, plus with some good investments have an extra $10,000. But those $150,000 houses are now worth $190,000. You are always playing catch-up with the housing market. Plus in those 10 years you’ve spent $ 90,000 on rent. If only you had that now!
Every month’s rent is indeed money burned, like it or not (I rented for 17 years). If you can, and it makes sense for you and you have a stable job and income, buying with interest rates so low makes a lot of sense.
Buy but buy well. If you’re handy, buy a run-down house and make it your own and make a profit. If your less handy, do the same but get that price right down, renovating comes with unwanted surprises. Have a budget and add 20% to it.
Invest in your own start up business rather than buy a home? Sounds like me when I was 28, too. Then you start to realize that a house has drastically more intrinsic values than just money, especially with a family and kids. It’s your castle, the place you raise your kids in, the place you improve with your own blood and sweat. It’s a real home. At 28 you still desire impermanence and that’s ok, but eventually you’ll grow to understand the value of durability and long lasting commitments. You’ll realize that dropping your family, friends and city to take a job across the country for $10k more per year isn’t always the best decision. That, plus no matter how you look at US home values it’s a steady line up unless you only look at the bust several years ago. To each his own, but also understand that the vast majority of start ups fail fast, when my house is still gaining equity and your rent goes up.
This presumes OP wants children. Spending upwards of $200,000 on a home because “it’s your castle” isn’t a valid argument for buying a home. Of course, if you’re someone for whom money isn’t an issue, I can see buying a home for a vapid notion such as this, but please don’t try to insist that other people use this faulty reasoning.
Your response also smacks of ageism. “At 28 you still desire impermanence”. Perhaps your mind changed as you aged; it is absolutely wrong of you to presume OP will age the same way you did. If this is an attempt at mentorship, perhaps you should consider a concept called empathy. People are allowed to have different opinions, worldviews, and beliefs than you.
I also would like to see statistics that back up your claim re: US home values being a steady line up. Without hard data, this is little more than a sales pitch. I have read pieces that contradict your claim; if you’re going to make this argument, it is essential for you to back your claim up with facts.
Now where I agree with you that a home can provide stability—if one plans on staying in one location for a while and wants children. Not everyone wants this, and not everyone SHOULD pursue this end.
What is the purpose of your including the last line about your house gaining equity and OP’s rent going up? To inflict insult? Why make it personal? OP is not writing this to shame you, he is simply speaking to an audience of people on the fence about buying a home.
Please consider that while you are entitled to your opinion and worldview you are absolutely not in a position to shame others for thinking differently than you.
Here in the UK, ever since the early 1980’s owning property has been an obsession thanks to one Margaret Hilda Thatcher. I suppose it’s nice to have a stake in your own lives but like many have highlighted it comes with a huge risk. Is that risk worth taking?….No!.
Hi Karl,
Thanks for offering your thoughts. It is a huge risk and I believe more people should see it as such.
Take care,
Karl is right about the UK obsession. I recently retired and sold my house. I bought a flat with the money and spent my savings on doing it up – still a little way to go. Now I’m stuck, albeit in a lovely flat. It’s a good job it’s lovely because I can afford very little socialising, every penny is counted. I have adult children who live in the South of England. I’m seriously considering selling up and renting – and maybe getting a bit more enjoyment out of life! I can’t sleep for thinking of all the pros and cons. Thank you for this article.
The article really missed the boat on the tax benefit of deducting the interest paid on your mortgage. I know some people that can outright purchase a home in the DC area with the money they have in the bank and they don’t even do so because they want to take advantage of the tax benefit from deducting the interest on their taxes.
You are right, and John is right about the Extra expenses owning a home causes, such as plumbing, electrical, appliances, central heat & air. When renting, you can’t necessarily have an issue fixed in a day, but at least you’re not paying for it. Then, there’s the time issue. No one has enough time these days. If you own a home, there goes any time you thought you had. . . You gotta take care of the outside of the home as well as inside. You got to mow the lawn, weed eat, rake the leaves, and anything that goes wrong with the outside of the house.
I own a home now, but from reading this article, I’m thinking about renting an apartment, and renting my house out because I can rent it out for $100 more than I pay monthly in mortgage.
Clearly this article doesn’t apply to people who live in Big cities like Los Angeles, San Francisco or New York. Unless you’re wealthy you’re not saving close to a million dollars in cash in 20 years. A lot of us Southern Californian’s enjoy our beaches and our weather way too much to give it up to move to some cheap place in the middle of the Midwest. So this article doesn’t apply to us. In Los Angeles you’re not going to find cheap rent unless you live in the ghetto and looking over your shoulder every time you step outside.
I am a single woman in my mid-20s who has no children or other family besides my Mum. My retention of employment in my current job is dependent on extension of contracts. I live in a capital city in Australia, and even buying a unit as a single person is almost prohibitively expensive, plus public transport costs are also high, especially if one has a long way to travel to work. In my current situation I see no point in buying a residential property, as there is no one to inherit the property when I pass away and I think it’s easier to leave a rental property than to try to sell a property in a hurry. I’m also not someone who would want to spend my free time renovating a property. For me, renting is the only option if I never marry or have children.
*Disclaimer* I do not have an amazing job, nor have I received a huge pay raise since buying.
I thought all this until I bought a condo.
In the past year I have travelled just as much as I did before. Live exactly the same lifestyle. I am not house poor. I can pay all my bills and still buy everything I need. AND believe it or not, I save too! I have two pension plans going. Do I look for sales on household items and food? YES! But that is just a good practice anyway. I am proud of my little space and I take pride in it because it is MINE.
I am planning to work abroad for a year – I will rent my condo out. See! I’m not even trapped in the same city.
I think this article would be better written by someone who bought and regrets it.
You don’t *know* what homeownership is like. You are just projecting every god awful thought (and I know because I’ve had them) about owning a place.
It’s not being shackled to a house and having no life OR renting a ‘crappy’ apartment and having all the freedom in the world.
This article is terribly misleading and just FALSE. I am very glad I didn’t see it this time last year when I was just about to buy.
Well, good for you, but perhaps your disclaimer should have mentioned that your parents are wealthy, because given the content of your post I’m inclined to believe that’s how you were able to afford such a lifestyle.
I would submit you don’t know what homeownership is like, either. It isn’t an objectively shared experience that all people go through in exactly the same fashion. You criticize OP for engaging in a false dichotomy; you should consider you have created one of your own.
Dumb… Rent in my area for a 3+ bedroom is 1500 month. Buying a home in my area with 3+ beds 2 bath 1 acre and full size garage with some repairs (which I can do easily and with less money) around 300-500 a month. Plus my property tax would be around 450 a year. I have more independence and room for raising a family… why the hell would i rent in this economy…Plus if your single then great you can afford to rent and save for a house. Yet I’m not single. I have 4 kids work two jobs just to keep up with rent and fees and all the crap my landlord throws at me.
A caveat about deducting mortgage interest and property taxes: this only has value if those costs EXCEED your standard deduction. For some reason, this doesn’t register with many people.
Example: Currently, the standard deduction for a married couple is $12,600. You get to deduct that whether you rent or own – it’s a given.
Alternatively, you can itemize your deductions, which is when your property taxes and mortgage interest come into play. Let’s assume you pay $833 in interest every month and $2600 annually in property taxes. You could deduct $12,600 per year, which is exactly the SAME as the standard deduction. Itemizing your deductions ONLY has value if you are paying for MORE than $12,600 for those costs.
In some markets, which have expensive housing and high taxes, the costs are high enough that itemizing makes sense. But, in many parts of the US, people do not pay more than $12,600 in property taxes and mortgage interest each year, which means that they would do just as well without the house (and taking the standard deduction).
The problem with renting is that you cannot always choose a good realtor to rent with. It really depends on the area you need to live close to, and depending on your job, you may not have many options of who to rent from and where to relocate to. The job market is so poor that there is really next to nothing in job opportunity that would allow me to relocate somewhere where it is cheaper to rent. Our rent is $900 a month, and with a child we really have to rent a 2 bedroom apartment. Rent is not getting any cheaper either. It has gone up dramatically, and that is also a worry, as wages are not going up to meet inflation. We live here because its only an hours drive for my husband to get to work. I would ideally like to own a house but it is almost impossible for us to get a loan from the bank. And houses have to be in absolute perfect condition/ pretty much new to obtain a bank loan. Yet we are hemorrhaging $900 a month just for rent. We have had to maintain the apartment ourselves, including repairing the leaking tap to the kitchen sink that was not just dripping, but it was completely running constantly and needed fixing. We kept telling the realtor about it, going down to the Realtors in person regularly, as well as constantly phoning… nothing ever gets done. We had a leak coming through our bedroom ceiling from the upstairs apartment, and they never replaced the dirty stained ceiling boards, the people who live above us party constantly and broke a window to the back entry way. For a long time we had the winter air coming through it, and it it was so cold that a cup of water froze solid in our bedroom. The rental conditions here are totally unacceptable. I would much rather rent to be honest. And they can be really screwy about giving you back your deposit when you leave a rental. If we owned our own home, even if we wanted to eventually move again, we would have the equity to do so instead of flushing $900 down the toilet every month!
Hi Debbie,
after reading your post I could not help feeling astounded and wanting to reply to you.
Surely, if the landlord (or, in your case, the estate agent) doesn’t do anything to fix problems arising within the property you should be stopping paying rent until such problems are resolved!!
correction: i would rather own than rent
for my past experience…u should by a property when you are young…you will equity and capital appreciation over the time..they is always a motivated buyer and this is a tangible investment which u have control over it..
What I’m trying to figure out – and would love your help on, is all the ‘gotchas’ in tax law and other benefits one obtains owning a house. It’s really hard to do the math here, and I suck at math…
A home doesn’t appreciate at the same rate as investments (usually) BUT when you sell a home you pay $0 tax on it for a good amount of increase in value. Of course, if you go and buy another home that costs more it’s probably more or less a wash, but there is some value in the $0 tax vs capital gains or worse if our government increases capital gains rates in the future, plus bumping you into higher tax brackets.
When you apply for things like college loans I believe a parent’s home is not calculated in networth. If you’re renting, you’re going to have a lot more of your money in the stock market and not be eligible for the same types of loans and scholarships. Not sure how true this is or at what point of income it doesn’t matter anymore, but I imagine there are gotchas like this that represent savings we don’t calculate in owning a house.
Still, it may be cheaper to rent – I’m not sure. I may end up a lifetime renter. I didn’t think I would be, but I can’t figure out why I should buy a house.
Well renters actually help out people who buy investment properties. Effectively the more renters, the higher the rental prices in the area and the more likely your investment property is positively geared. This works for me.
I still think buying a house is better. You own something and if you are a handyman you can pretty much do everything by yourself so no it’s not more expensive.
I am currently trying to decide if I should buy. Rents in my area are outrageous (NJ) and rising steadily. Raises are non-existent. I don’t have 20% down but I NEVER will…so do I just rent forever? There is nothing left to cut in my budget, I don’t travel, I don’t eat out. I don’t have pets. Buying will be cheaper for me by $300 a month. That’s including HOA fees and taxes, etc. I’m in my 40s and living in an apartment that’s like a dorm. It’s depressing.
Lost $40,000 in equity in a house due to divorcing during the housing crash but thankfully I am a champion bill-payer so we were not under water and still walked away with $12,000 after only 7 years there.
I’ve decided that a single family home would be a bad idea because most are in bad shape in my price range – old east cost stock that no one can afford to take care of. I may go condo so the “outside” building is taken care of by my fees and I have less to worry about. So tired of loud, rude neighbors and no space. It feels risky but exciting at the same time. Lots to think about.
My wife and I bought a small home in a great neighborhood 30 years ago. We both had 30 year careers working for the government. We are now retired with a good income, money in the bank, free healthcare, a home that is paid off, and most importantly a healthy stable family. If you work hard, make yourself valuable your superiors notice and you will be blessed. If you do it wrong you need to stop and begin doing it right. Do for others more than you do for yourself.
When it came time for me to move to a new area I did what my brother recommended (wise man). He said make a pros and cons list reference rent vs. buy. You will come to the conclusion that is best for you personally.
Slezak,
Good response. You are spot on. It differs for everyone, depending on your situation. Thanks for sharing your view.
Take care,
Yes is true what you said about renting is always going up after your contract ends and if you want to re sign the contract when renting but if you are buying a house I t really doesn’t go up much only taxes may go up depending on other things in your area where lived. But I use to live in a apartment for 9 full years and all I was doing is paying more every 6 mos. when renewing my contract my rent keep going up that’s when I decided to move into a house to call it mines, plus you have more privacy; only thing with a house is a lot of responsibility to maintain and you never knows when things will damage then you have to repair it that yes can be costly, but I do love my privacy in owning a house. My only question is does buying a townhouse with maintenance better than living in a house doe the maintenance includes indoors as same as outdoors; that’s where I am confuse. Thank you for any response appreciated.
I’m having this debate right now. I currently share an apartment with my bf for 2k month. However things are rocky between us and neither of us feel comfortable signing another year long lease (landlord won’t do month to month). I can’t find an apartment for the price of what my part of the rent is that I would want to live in, but I did find a nice condo that is about what I pay now in rent. I’ve always had the same viewpoint as you on buying. I wanted to wait until I got married and found my forever home, and just save and have no maintenance until then. Now i’m finding myself mid-30s and don’t know if I’ll ever find “the one”. Should I rent a place I don’t love, or pay a little more to own a place I enjoy, but may only live in for a few years???? I think I could rent my condo once I moved out, but I’m just not sure it would be profitable enough.
Hey Courtney,
Great to hear from you. Honestly, if you’re in a position to buy (meaning you have the money), I’m fine with you doing that. I would just recommend having a good down payment and still having some money in the bank afterword in case of emergencies.
Either way (if you’re in good financial shape), you will be fine. Let us know how it turns out. 🙂
Kraig
I totally disagree.
My wife and I have always been good savers but we only really made the big breakthrough after we bought our home.
When we were renting it took us over 10 years to save about 100k which we then decided to put down as a deposit for a 250k house.
We then took on a tracker mortgage with the options of being able to make overpayments without occurring any penalties and in the following 7 years (from when we bought the house) we actually managed to completely pay off our mortgage (as we were still able to save every month even after paying the mortgage).
As of now, the house is worth 415k, which means that in the 10 years we were renting we “made” (saved) 100k, whereas in the 7 years we owned our home we actually “made” 315k ( the value of the house minus the 100k deposit we had at the start).
And needless to say, from now on, with both the words “rent” and “mortgage” out of our dictionary, life will be a stroll in the park…
Renting vs owning? Not even a contest…
Kraig, good article but what city and state do you live in, where you have month to month rent? In my state they don’t do month to month rental options anymore, you have to lease for a year. They consider it guaranteed income, so people in my state are trapped in rental housing because the lease is for a year, but you are charged on a monthly bases. Rent for a studio starts at $800+ . Cost of living constantly goes up, unless you have a high paying job/career saving money while renting is impossible.
I’m a single mid-50’s woman, life long renter, tenant at will (month to month). Never married, came close but did not and now I feel I need to buy property yet I love the freedom of renting. I looked at a small single family house over the weekend (which sold within 2 days) and although not having a yard per se, I would be responsible for maintenance, upkeep and all related bills. This just sounds stressful to me. I do have a sweet boyfriend but he is flat broke, not particularly handy and without going into a lot of details, I just don’t see his income situation changing….I cannot depend on sharing expenses with him…I would be supporting him if we lived together and I’m not sure I’m up for that or it might eventually ruin our relationship.
I still have very cheap rent for a popular east coast city. Through a lifetime of living frugally, my current net worth is about 1.2 million in in cash/mutual funds and retirement funds. It sounds like a lot but where i live and for my age group (especially for people who bought years ago), it is probably average. One reason for buying is I am tired of the comments of “owners” asking me how long I’m going to live in “that apartment”. Some have stopped asking yet I feel a continual social pressure to have a better place where I can “entertain”, etc. And yes, that would be a nice lifestyle change but honestly, I’m not that interested in decorating and furniture shopping – although I would do it if I buy.
The other thing is I want to retire young, at 62, and have the freedom to travel. I am self employed and thus have no benefits or protections. I’d stay in my apartment but the walk-up is a few flights and I can see the writing on the wall (hello, knee pain). I keep going back and forth and I can’t seem to make up my mind which is the best option at this point in my life. If there is a housing market “correction” (and I think there is one on the horizon), this may change my thinking as it will be a better opportunity to buy, as opposed to now which seems to be nearing the top of the market.