A week ago I shared that Girl Ninja and I plan to take the plunge and buy our first home in 2013. If you’ve been reading PDITF for more than a day or two, you’ll know I’m not a huge fan of the concept of home ownership. With this post I plan to summarize the primary reasons I think owning a home sucks, but why I’ll likely buy one anyway. If you are a renter, save this post, and email it to the next stupid person that tries to tell you renting is dumb.
“Renters throw their money away:”
I hate when people who own their home try to tell me my rent payments are like throwing money away. Is filling up my gas tank “like throwing money away”? How about buying a gallon of milk? No, it’s not. I pay rent, and in return get a roof over my head. It’s not rocket science.
If you have a $1,200 mortgage payment you aren’t making a $1,200/month investment. About $360/month goes to lowering your principal and $840 goes to interest (note: mortgage interest is deductible on taxes). Add another couple hundred a month for property taxes, $50 or so a month for Homeowners Insurance, and $120/month for PMI since MOST first time buyers don’t put 20% down.
All in, your house is costing you upwards of $1,700/month, of which only $360 is actually an investment, everything else is an expense. Oh, and don’t forget we didn’t even take maintenance in to account (word on the street has it appliances, roofs, and plumbing aint cheap).
You can tell me I throw my money away each month, only after you’ve recognized that you throw yours away too.
“It’s an investment:”
Sure. But at least be willing to admit it’s kind of a crappy one. Ben Stein says it best,
“[M]y wife and I bought our house in Malibu for $600,000 in 1990. It might have gone up by 150 percent since then, but in that span, the stock market has more than tripled on the Dow, counting dividends. Other indexes such as foreign stock indexes have gone up vastly more than that… [O]ver very long periods homes barely keep pace with inflation. Stocks, over very long periods, beat inflation by a large margin…”
Real estate just isn’t that great of an investment, it’s as simple as that. And I think it’s hilarious when people claim buying a house helps them diversify their portfolio Ummm, excuse me…. when did tying up a huge chunk of your net worth in to a single asset qualify as diversification? You ever put $200,000 in to a single stock? No, then why do you think putting $200,000 in to one house is any different?
“At least with a home you own something:”
Is that really true? Do you own your home, or does your home own you? Could you move tomorrow if you got a sweet job? Could you find a new place if your roof started leaking?
What’s more, sixty-six percent of home owners have a mortgage. That means 66% of home owners don’t own their homes, their lenders do. Thirty-one percent of homeowners are underwater; they couldn’t even sell their place for what they owe. The average length of owning a residence is seven years, not long enough for them to pay their mortgage off, and definitely not long enough to guarantee an increase in property values (::cough:: 2005-Present ::cough::).
As a renter, I have zero temptation to put more money in to my residence. As nice (and expensive) as hardwood floors might be, I couldn’t put them in even if I wanted them. If I owned the place, the only thing stopping me from upgrading anything/everything would be my wallet. Renting takes the temptation of renovating completely away. Forced savings for the win!
If you are a renter, hear this:
You aren’t dumb. Don’t let home owners make you think otherwise!!!!
Okay so now that I’ve gotten that off my chest let me share with you the two reasons I’ll still likely end up buying a house.
1) You can pay your mortgage off. When we buy a house we don’t plan to sell it (we might, but that’s not our intention when we purchase it). Whether it takes us 10 years, or 30, eventually we wont have a mortgage. When retirement comes, I’ll be able to breathe easier knowing I don’t have a huge house/rent payment each month.
2a) You can rent out all, or part, of your home. If we put enough down, our monthly payment would be small enough that the rent we could collect for the property would cover all the properties expenses. I pay $70,000 up front, but could have strangers pay off the remaining balance for me. And ten years from now, when rent prices have gone up, but my mortgage hasn’t, we would be making money . Passive income is sexy.
2b) I’m also fascinated by properties with Mother In Law units. Our landlord paid cash for his house and built a mother in law unit up top (where we live). The rent he collects from us covers ALL of his housing expenses on our place and his (taxes, insurance, and utilities)!!!!. Our 600sqft rental allows him to live in his 3,000sqft house for free.
In sum, a home is a home first, an investment second. And renting isn’t dumb, so quit saying it is.
I think there are so many reasons to own and not all financial! Home ownership is pride! Its a big deal! You dont have to worry about your rent increasing, you can paint, garden, own a tree!! I think i like being my own landlord! I hate to move and i can stay put as long as i want! 😉
Meh. It’s gonna take a lot more than pride to convince me to go all in on the single biggest expense I’ll ever incur.
You do seem happy though, and that is priceless.
Kids will be your biggest expense ever…
That’s true the more an area grows the easier it is for a property management company to justify raising someones rent.
Property taxes vary from state to state and can truly effect the affordability of the home now and in the future. One can say we will be renting from the government forever 🙂 Of course utilities and insurance also usually tag along with property taxes corresponding to the overall value of the home. One should think about these factors before the mortgage is even paid off. I hate how taxes, insurance, and utilities are not talked about more often. Oh and the maintenence too…such money pits…
Of course I’m happy to say I only pay 200 a month for taxes and insurance now that I have no mortgage. I wish my utilities and maintenance costs were that cheap!
So i hear you saying my $1,700/mo estimate could be pushing $2,000 :). Why would I buy again? Haha.
As long as you can make sure your taxes, insurance, utilities, and maintenance end up cheaper than renting you will be better off. Not easy but possible. Also I think you will NEED a bigger home for all the babies you two will be having 😉
Hi Ninja! I am a fairly new reader and I enjoy your blog very much.
Here is my story about home ownership: (Sorry, it is a bit long)
1. I bought the 2 bedroom apartment I am currently living in for about USD 75,000 in Istanbul. At the time I did not know that was an all time low real estate market. It was pure luck. I was able to pay for it within 15 months because I had sold another piece of estate and made real good money that year. So, I own this apartment free and clear, There is no mortgage on it. Today it is worth about USD 195,000 because the property in this area sky rocketed. Mind you I am neither a financial nor a real estate guru. God was watching out for me I think.
2. I bought another 2 bedroom apartment in 2011 in another city since I was temporarily living there and the rents were extremely high. I had quiet a bit of savings and paid USD 70,000 from my pocket and took out a small loan, not a mortgage because when you take out a mortgage and pay it early there is a 2% penalty in this country. The loans I took had slightly higher interest rates than a mortgage. I am saying loans because it is actually three different small loans. My sis and her husband are in banking and they took advantage of promotions in small loans and optimized the interest rate for me. There is around USD 12,000 in total left for me to pay. I am currently renting the apartment out and it is covering half of my debt payments. In May 2015, I will be free of that debt too.
I do not expect the second apartment to appreciate so much in value but, it is in a nice place where there will be plenty of renters. It is part of my passive income and I do not want to sell it in the next five years or so.
Why I rent.
1. $922/month covers everything and I get to swim in an indoor pool.
2. Buying in my city, $922/month will get me, uh, nothing.Not even in Cracktown.
3. $1222.month might get me a place in Cracktown.
4. No debt, big fat bank account. Lots of money for investing. Just not with a house.
I am commenting as a mortgage professional. All great points! That said, there needs to be a point of clarification. Even with a mortgage you OWN your home not the bank. The property is titled in your name and the bank has a LIEN.
Thanks for these points! ITA, especially with 1 and 2. We have rented for 5.5 years and will continue to for another 1-7 years (most likely 5). And we’re stashing lots of cash in the meantime.
I think about renting all the time. I have a bit of wanderlust and more than once my current house has brought my dreams of moving (again) to a screeching halt. But I guess once it’s paid off, I could rent it out and move. Hmmm.
So, you probably went over this already, but I’m extremely forgetful…but why are you buying a house then? Why not just rent a house?
I like owning my home, and my mortgage is the exact same of renting a place where I live. Renting does have it’s positives though!
As I’ve mentioned no doubt too many times, I own shares in a cooperative apartment complex 50 miles east of New York City where I pay a personal (adjustable) mortgage on my own unit as well as monthly maintenance charges to the coop corporation. Literally speaking, this isn’t home ownership since I do not actually own my apartment; however, I have all the tax advantages of home ownership and am responsible for all internal maintenance; while at the same time my monthly fee to the coop covers all property taxes, structural and exterior maintenance, and a share in the complex’s underlying mortgage. And so it’s a kind of hybrid situation between owning and renting.
Right now the complex is split 60/40% between renters and shareholders, and although purchase prices in nominal dollars are about the same as when I bought my unit (meaning that adjusted for inflation, prices are lower), no one can get a mortgage here these days since the banks all want to see over 50% shareholder ownership before they’ll lend, and we can’t get over 50% ownership because no one can get a mortgage.
Speaking personally, however, at this point I’ve been there 23 years and I’m paying a good deal less than if I rented a comparable unit in the same complex – which means this was the right choice for me.
Is your mortgage going to be paid off in 7 years? Is the interest you pay enough to use as a deduction on your taxes? How about the maintenance fees, deductible? Sorry for being so nosy 🙂
1) The mortgage is technically up in 2019, but I could accelerate it and pay it off in 3-4 years or so if I wanted.
2) Part of the maintenance fee includes my property taxes and my share of the underlying mortgage, so that’s always deductible so long as I cross the standard deduction threshold. (Which I always do, since I have charitable contributions and NY state refunds). Otherwise not deductible.
3) Nosy is fine. Better than being ignored.
We are also planning to buy a hose in 2013 Q4. I am hoping prices and interest rates don’t rise too much in one year! We are aggressively saving for a down payment.
Renting costs the same as a mortgage here.
I’m not looking forward to the maintenance!!!
for us it was definitely a better bet to buy than rent. We pay in a mortgage every month what we paid in rent, and with 3 kids, we can’t go back to living in a run down 2 bedroom apartment anymore. Plus things like a fenced in yard for my 2 autistic boys to run in safely is priceless.
Housing maintenance is a bitch though!
And it depends on how much house you buy. Our family lives in a 3 bedroom, 1 bath 1300 sq ft house, which is only 100 ft more than our last apartment.
I think some of those numbers are a bit skewed to angle the tone of the post to what you are looking for. Based on everything I’ve seen from you, I think there are a few things that aren’t entirely true. One, you will put 20% down on a house. So, no PMI. Two, you can afford and will likely take a 15 year mortgage. Three, you have great credit so you’ll get the best interest rate. These things together will take the $360 number that you figure is going back in your pocket (out of $1,700), and wil transform it something like $750 out of $1,500 (assuming you don’t pay PMI which thus lowers your total payment). Your example skews the numbers to where your payment only puts around 20% of your payments back toward your net worth, where the reality will put 50% or more. Also, your numbers hint that your total expenses ($1,700 – $360) are somehow higher than your current rent, where the more realistic numbers that I presented actually would bring your ‘expense’ to $750, which is lower than your $1,200 rent number.
Maybe the numbers you’re showing are for more ‘typical’ people who will have to pay PMI and who will take a 30 year note and maybe not have great credit, but for YOUR personal situation, you WILL make out from buying. Don’t pretend otherwise.
“Principal” is what you pay down on a loan. “Principle” is something you teach your kids.
Lol. I love a good grammatical error. (I’m such a nerd – it makes me happy to find errors, especially in newsletters from my kids school :P)
Just buy a house and zip it. I need security in knowing you are staying in Washington. 🙂
Considering this is what San Diego prices are….
I think it’s safe to assume we’ll be staying put for the foreseeable future. $500k for 820sqft…. crazy!!!!
Yeah renting vs. buying has always been a good argument starter. It makes even LESS sense to buy here in Australia seeing as the wage vs. house prices are so ridiculous. For some reason though that doesn’t seem to stop anyone… We also don’t get to write our interest off as being tax deductible 🙁
On the plus side, now that you’re going to be paying off a mortgage you can grab some tips off me! 😀
I completely, 100% agree with you on this. My husband and I rented until just this summer when we bought our house. The reasons we bought a house had nothing to do with finances (we wanted more space, room for kids, our own home, etc.), although of course finances were involved in our decision. But while we rented and while we searched for our house, we had dozens of people telling us the same things you mentioned in your post and I would respond the same way. It always fell on deaf ears though so I gave up. Home owners seem to close off their brain to these points as a way of making themselves feel better for their decision.
I’m a renter, and I probably always will be. Ok, probably not always, but without a better paying job, or another person, I’ll never be able to afford a mortgage. I’m in no rush to buy, as I’m not entirely sure this is the city I want to stay in.
I also like that my apartment includes utilities, so I don’t have to worry about it.
I own my home, but I did a lot of work to find the right one with the right economics. I found a great deal on a great condo in a great neighborhood. I rent out one room to a roommate, and my monthly cost is less than my old apartment. I also had saved up enough for 25% down.
I plan to keep it for cash flow once I move on, so it is going to be a good money maker for me in the long haul.
My husband and I are currently renting. We sold our home in MN that we owned for 3 years to relocate back to WI. We were fortunate enough to sell it and walk away with only $20k. We lost all of the $150k that we put down on it when we bought it.
So after 20+ years of being homeowners we have nothing to show for it. We will be renting until we build up a very hefty down payment. I really don’t mind renting! There are no worries really 🙂
Rich people always own real estate. They usually do not have a mortgage. It is passed down from generation to generation. Real estate if just one asset in your portfolio.
I own my home. We may have a chance to move to another major city next spring/summer. I’m considering getting tennants into this house, and renting ourselves in the new place because the market is taking a downturn. Hopefully the rent I could collect from this place will pay for the rent I have to pay in the new city.
Been reading your site for a while but haven’t commented, great post! I currently rent. Home prices in Toronto, Canada are insane compared to wages. A house is NOT an investment, its a money pit! I have owned one before, and it was a money pit. Your main residence can’t be considered an investment…or it shouldn’t be – unless you’d like to go through another mortgage meltdown like what was experienced in the US. Renting is the way to go right now. If house prices ever come back down…then maybe I’ll consider buying.
I freaking love this post.
Your points are valid for any age, but really make sense for young people. I’m 20 and still have 18 months of school left. I have no idea where my education and career will take me. Maybe I’ll stay in the town I grew up in. Or maybe I’ll move halfway across the country. Way too many people jump into buying a house when they are not close to being ready.
I just did the math on how much of an investment my first home was:
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