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Ask the Readers: Don’t Buy a Home?

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That title may sound extreme, but the sentiment seems to be a growing trend amongst some extremely intelligent personal finance bloggers.

When intelligent people make intelligent arguments, we can learn from the discussion. I just hope I can hold my "other side." You, as always, will be the ultimate judge.

Who is deciding that owning a home may not be right for them?

Miranda Marquit says she may never own a home again. James Altucher is more certain.

My inspiration for writing this post comes from Evan from My Journey to Millions. A couple of weeks ago, he expressed a mild disdain of his current home ownership situation. (My font can't show the sarcasm that comes with the link.)

However, the best article I've read against home ownership comes from Jim Collins who writes Why Your Home is a Terrible Investment.

The Case Against Buying a Home

Those authors all agree about the typical headaches of home ownership. It's work. You have to fix stuff. Or worse, pay other people to fix stuff. And that stuff never seems to be cheap.

I find Evan and Collins take of home ownership from an investment perspective most most interesting. Collins creates a list of 20, yes twenty(!) things that a bad investment would have. They include: illiquidity, high commissions, leverage, never paying dividends, requirement of paying interest, immobile, lag inflation, fragile, heavily taxed. You should definitely read it.

The points he brings up are all correct and extremely defensible...

... but...

Why I Think you Should Buy a Home

As with everything in personal finance, opinions are... personal. Marquit writes that owning a home is a problem when a new job opportunity comes up forcing a move. Conversely Evan stated the stability of home ownership in raising a family is one of the benefits.

I'm usually "all-in" on one side of any argument. I don't like to be wishy-washy. However, in this case, I can certainly see both pros and cons.

Allow me to tell you my own home ownership disaster story... and then still make an argument for home ownership.

A little more than ten years ago, 2005, my mother expressed concern about the real estate market. My brother had been trying to save money for a down payment for a home. Whatever he seemed to save was negated by the rising cost of homes. If he saved $20,000, the price of homes went up $30,000 meaning that he "lost" $10,000 by sitting on the sidelines. My mother's concern was that home ownership would never be attainable at the current rate of rising prices. A few decades before that she bought the home we grew up in for around $24 in beads.

What a shame it would be lose out on the American Dream forever!

Around this same time, my roommate got married and started down the path of starting a family (selfish jerk, right?)

These two circumstances lead to my mother helping me (well completely financing a down payment) for a condo costing nearly $300,000. Things were awesome as the value appreciated above $300K.

However, as we all know, the bubble burst. The value dropped to around $175,000. I had "lost" over $100K, some of it was even my own money (as opposed to my mother's).

What a disaster of epic proportions, right? Not exactly. And here's why I think you (or most people) should buy a home.

I found a wife, we moved to San Francisco, and I rented the property. It's been rented for almost 9 years now. I lose money on it every month from just the mortgage. It's a headache being a landlord. I spent $8,000 putting a new heating and cooling unit in it last year.

Wait this isn't convincing you, is it?

The value has increased from that low to above $230K. It's still less than what I paid for it, but the mortgage is under $170K now. I have nearly $60,000 in equity.

That's some serious forced savings. Would I have taken $6000 a year and put it into savings or investments? I like to think I would have. However, I'm not so sure.

I have refinanced it with a 15 year mortgage and I'm 3 years into it. The money going to principle is growing and growing to the point where it is nearly $1000 a month. In 12 years, I'll certainly have some repairs to make. However, at that time, I'll get around $1500 a month after expenses... which could cover my car payments or other expenses I have.

My wife has a similar story with her condo that she bought before we met.

We even bought an investment property together at a market low in 2012. That property is up around 20% in value and our equity just seems to grow with it. (We are even making money each month even with the 15-year mortgage.)

I've laid out a financial case for being a landlord. It's easy to claim owning a home is better when a renter is financing a large part of it.

However, what about our purchase of the home we live in? I humbly suggest you consider the alternative. Few people are handing out free living arrangements, which leaves renting a home.

The "investment" in renting a home is worse than buying a home. You never build up equity. You are subject to increases in rent that may surpass inflation. If you don't like that, I hope you enjoy expensive moving costs. If you have a family, let's hope that move isn't out the city and school system. You might not have to fix anything, but you can't change things either.

Finally, the real American Dream, financial freedom may become the unattainable. Let's presume your rent is $2000 a month today. That's $24,000 a year. Using the rule of 4% (or more accurately the the rule of 25), you'll need to save $600,000 to throw off the annual income for that rent.

What's worse? That $2000 will likely be $3000 in ten years due to inflation. Did your $600,000 investment grow to $900,000 in that time while you drawing it down to pay for your rent? I hope so.

This is certainly a valid path to financial freedom. The intelligent people that I mentioned above, surely know this.

Personally, I'd like to be on the receiving end of payments and I even with compound interest, saving a half million dollars seems like a lot of money.

Now it's time for you to weigh-in. What do you think about buying a home?

Posted on June 29, 2015.

This post deals with:

... and focuses on:

Real Estate

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2 Responses to “Ask the Readers: Don’t Buy a Home?”

  1. This is a nice article. I have personally rented, and not owned, since I moved around every say 2 -3 years or so. But if I settle in a place for say 10 years, owning would definitely trump renting.

    My issue with many articles on buying vs renting, is that they do not compare apples to apples. That is the case in the article from JCollins. Many also assume they will be investing the money in the stock market. And yet, they still need a place to live.

    If someone can live in a place for say a decade, owning usually trumps renting from a financial perspective, assuming we are comparing rental vs ownership of comparable size housing units. However, if you are not handy at all, or want to move every 3 – 5 years or so, owning could be a terrible headache that you should avoid.

  2. Marcel Rosa says:

    All of you have a point, really. I love buying a house too, but fixing it is really a real pain. And of course, the unstableness of the market. Thanks for the nice article and opinion!

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