I’ve been more than a little critical of home ownership before.
But I also believe in the importance of knowing our biases, and hearing both sides. So here today, in the interest of expanding my mind, I’ll play devil’s advocate… with myself… by presenting the most legit reasons to buy a home.
I’m taking real, actual, logically sound reasons for buying a home. Not the fake myths you’re used to hearing from realtors, bankers, the government, and other people who stand to make a lot of money when you enter the real estate market.
Terrible Reasons to Own a Home
First, a review. Despite what the world will try to tell you, these are not good reasons for owning a home.
1) You want a place but you don’t want to throw money away on housing.
This myth is fake news that would make Facebook proud. Between property taxes, mortgage interest, and routine maintenance, home owners can easily throw away hundreds of thousands of dollars, without trying.
In certain situations, home owners can even throw away more money than renters.
Who throws away more money depends on several economic factors, and not whether you check “rent” or “own” on your credit card applications.
2) You want to live in a great investment.
Wrong again. Homes that you live in are not investments.
Investments make money, and they go up in value over time. Homes cost thousands of dollars per year, and they return 0% per year, after adjusting for inflation.
3) You think your neighborhood is going to beat the 0% historical return of real estate
Still not the best idea. The often ignored truth about real estate gains is that they’re only realizable if you’re willing to move to an entirely different place. Think about it. If your home doubles in value because your city is booming, guess what? All your neighbor’s homes have doubled in value too.
In fact, real estate prices tend to run in a cyclical nature across entire states or countries. Meaning even if you’re willing to relocate neighborhoods, or even whole states, recognizing your real estate appreciation is probably harder than you planned.
To actually cash out a jackpot housing run up, you must be willing to:
- Make a drastic life change. Something along the lines of moving from a trending city to a sleepy rural town.
- Sell and drastically downsize to near tiny house levels (or a houseboat!)
4) You want a starter home
The idea here being that purchasing a home is a necessary step towards building the magical equity.
Of course, equity is nothing more than net worth in your living residence. Meaning the entire idea of “needing to build equity” comes with the giant freakin’ assumption that the only way to save money is to do so through real estate.
Obviously, a savvy investor will realize there’s a more efficient way to build wealth than through forced monthly mortgage payments. Mortgage payments, which especially during the first few years*, will go almost entirely towards paying interest to the bank rather than building equity.
*The typical mortgage takes 12-13 years before you start paying more principle than interest.
There are two big winners in the first home business, and it’s rarely the buyer.
- The bank, who collects an average of $4-5,000 in closing fees.
- The realtor, who’s 6% sales commission is a wonderful money grabbing opportunity between starter home and forever home.
There’s a better way to set yourself up to one day purchase the home of your dreams, and it has nothing to do with paying huge interest payments or real estate agent fees. It’s called investing, and if you need proof of its effectiveness, check my net worth updates.
Damn, I went and ranted against home ownership again. In an article that’s supposed to be about the benefits of home ownership.
Quick, let’s get to the positive!
5 legitimate reasons for owning a home
Ranked in order of awesomeness.
5) You love being handy
There’s a certain percentage of the population who loves nothing more than rolling up those sleeves and diving hand first into a clogged up toilet.
If you enjoy fixing things, or take a great deal of pride in using your DIY skills to make improvements, a home can bring a great sense of purpose. The best part, of course, is that a home always has something that needs fixing, so you’re sure to guarantee yourself an endless source of entertainment. If you’re into that sort of thing.
4) You need help staying disciplined with your savings
If you’re undisciplined saver, buying a home is the perfect savings vehicle for you. If you don’t stick to your home’s built in savings plan, aka a mortgage, you’re sure to receive several angry phone calls from your banker. Nothing like the threat of foreclosure and homelessness to keep your savings goals on track!
Most home owners convinced real estate is a great investment are actually impressed with the results of forced savings through a mortgage. Anyone steadily putting away $1,000 per month, every month, for years on end, is placing themselves in a much better financial situation than if they squandered their money.
A rising tide lifts all waters. Real estate is excellent at keeping the average person disciplined enough to save something for themselves. For already high savers, real estate has the potential to increase a high savings rate even higher.
3) You plan on raising a family soon
I’m not a parent yet, so don’t quote me on this, but I can’t imagine a worse situation than scrambling to find a new home for your family, just because your landlord decided to change the rules of the game.
Owning a home gives you freedom. Instead of worrying about rising rents, the only thing you need to get your grandpa-pants in a bunch over is the latest property tax assessment. And keeping those punk kids off your lawn, of course.
All this freedom means more stability. Putting down roots mean your kids can enjoy a steady place to call home. As a youngster, I really appreciated this part of family life, and I hope to provide the same stability for my future family.
2) Leverage
Only through real estate can you contribute 20%, or less, and immediately control an asset worth hundreds of thousands of dollars. This admittedly works much better with an investment property, but the concept holds true for a home as well.
Most notably, leverage on a home allows you to get ahead of market madness, and avoid becoming priced out of a location. Real estate prices in Denver increased more than 50% in the two short years I lived there. Buyers who leveraged up to buy real estate now own property that those of us who sat on the sidelines won’t be able to afford. Even if a crash occurs, there’s no guarantee the correction will bring prices down to previous lows.
Leverage allows you the upside (and the risk!) of exposure to larger assets that you otherwise could not own.
1) Hedge against inflation
The granddaddy of all homeowning benefits.
When you rent, you can expect your rent to increase every year at a rate at least equal to inflation.
When you agree to a mortgage, you are effectively locking in your “rent” payments at the current year’s prices. Bonus points if you can secure a mortgage at historically low interest rates.
Inflation causes prices to double every 25 years or so. Meaning by year 25 of a mortgage, your living costs are basically 50% off!
Once you own the whole place free and clear, your “rent” drops all the way down to zero, ignoring ongoing ownership costs such as taxes and maintenance.
So, Rent or Buy?
Well, the New York Time’s rent vs. buy calculator is a good place to start.
But even the calculator’s set in stone number isn’t perfect. In reality, the answer depends mostly on intangible and emotional factors.
- How long do you want to live in an area?
- How much do you value your flexibility vs. stability?
- Are you a disciplined saver, or do you need a little help staying on track?
- How much do you enjoy free time versus the pride of maintaining something you own?
- Somebody, please… think of the children!
- Etc.
So there, my most level headed and open minded take on the subject yet.
Now if I could just get my hands on that Money Wizard guy, he’s a real smart ass and I’m sick of arguing with him…
Related Reading:
Really Great Post!
I can certainly attest to the 3rd reason why to buy a house. I’m 25 year old guy, divorced father of two, and two weeks ago, my landlord told me to leave the property that I have been renting for 5 years because he wanted to move back in. I have always been somewhat skeptical of homeownership, but being kicked out on a 45 days notice with 2 kids aged 5 and under really irked me to the core. Luckily I’ve tried to be savvy over the years and have over 100K in net worth, so I was able to snatched a really great place within the same neighborhood (because of the kids school) in no time and I’m now moving in a couple of weeks. So #3 really is something to consider.
On a side note, #4 of why not to buy house is a bit dated given today’s rates, which granted won’t last forever. My new mortgage was signed at 2.4% fixed for 5yrs, and at that rate, you pay more principal than interest on your very first year of owning.
Wow, thanks for sharing your experience about #3. Sorry you had to experience that, but I’m glad you were able to find a great place. It’s amazing how a little bit of savings can give you so many more options.
That’s an extremely low interest rate. I’m assuming it becomes variable after 5 years?
After 5 years the term expires along with the rate. I can then decide to sign under a new variable rate or fixed rate term, with the same or a new lender, and for whatever time period I decide (doesn’t have to be 5 years, I just felt it was best this time around).
I chose fixed at 2.4%, but the variable rate offered to me before signing was 1.9%. I’m in Canada though, where the central bank has yet to raise interest rates like the Fed in the US, so rates are still rock bottom (although higher than they were last Fall (you could snatch 5-year fixed for 2.1%)).
Any rate below 2.9% means that you will pay off more principle than interest the very first year of ownership. It takes a rate of about 6% to reach the 12-13 years you used as an example. I wholeheartedly agree that there are huge costs involved in owning a home and its a terrible way to build equity relative to other means. But the actual interest cost is now comparatively small.
Great post! People often thinking owning a primary home is an asset when it’s really a liability. There are always good reasons to own or rent, but owning is certainly a better financial move over the long-term. It’s even better if you can figure out how to make someone else pay for it.
Yep, housing is definitely consumption. It’s just consumption that is (sometimes!) a little better than other types of consumption.
That depends on what area you live in; renting or owning can destructive to your bank account. The concrete jungle is overrated! Get out of the city, buy some land and build your own home for a fraction of the cost over a 30 year mortgage.
Good read. I like your writing style. I would be curious to hear your thoughts about home ownership in rural areas. My wife and I bought a new, 840 sq foot condo for $170k in a small town in Manitoba. After a tax incentive, we pay $750 in property taxes each year. Owners who rent out condos in the same unit collect between $950-1100 in rent each month.
Any thoughts?
Did you see the rent vs. buy calculator from NYT? Plug your numbers in and take a peek.
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Good post. The other benefit to owning a home (with a mortgage) is having the option of claiming income tax deduction on the mortgage interest & property tax. Having paid off my loan in full, my main regret is being unable to deduct the mortgage interest at tax time.
Yes, I almost added this one to the list. Although you have to be careful about spending 1 dollar to save 50 cents.
Beats the pants off spending a rent dollar in order to save nothing and to have nothing in the end to show for it.. Renting is where you pay a premium to enjoy temporary, impaired use of property.
That’s one negative. There’s positives too – renting typically frees up capital for investment, for example. And the premium to rent varies widely across the countries. In some areas, the homeowners are actually getting a raw deal.
Millions of renters have no capital – they are truly rent serfs. Also, the premium to rent increases over time, as principal and interest payments remain fixed over the life of most mortgages, while rents just go up and up and NEVER end.
There are many things homeowners can do that renters cannot. “Try doing THAT with rent.”
Again, you sound like a smart guy. So I have to ask, what are you doing to make your situation better?
Nice post! The list of reasons to own a home is indeed thin. One related to #3 is school district shopping – there are few to no options to rent in our town, so if we want to be in this school district, we’re kinda bound. It is ridiculous, but we view it as the best solution to an engineering problem – others we’ve known opt for cheaper digs and private schools. As soon as our youngest finishes high school, I’d like to sell our house and buy a tent 🙂
Haha, I proposed a houseboat, but tent is taking it to another level!
I don’t think I could ever stomach the private school bills, so I see myself taking your strategy in the future.
Re: there are few to no options to rent in our town
That is a local FEATURE, not a bug. Incumbent homeowners intentionally wrote the zoning rules to minimize local options to rent. Outsiders are pretty much forced to buy if they want to live there and send their kids to the great local schools. Note that those incumbent homeowners have essentially created for themselves market conditions that promote increasing property values.
Where do you live? You sound pretty unhappy with the situation. Why not move?
A positive for a house over an apartment: I don’t hear my neighbors using the toilet.
And I can turn my stereo up really loud when I want.
haha true, both definite positives.
Or in my case, wouldn’t have to feel guilty for the downstairs neighbors when my new dog starts romping around.
Taking the Robert Kiyosaki stance on housing…nice! The easiest way to turn your house into an asset is to buy a duplex/triplex/quadplex, live in one unit, and rent out the other units (aka house hacking). This helps to minimize housing expenses, provides several tax benefits, opportunity for appreciation, and the tenant pays down your mortgage and builds equity for you.
House hacking might be the ultimate money hackl! I’d love to do it if I can find an affordable duplex in my area.
Every income property is someone else’s asset property. I’ve read several of Kiyosaki’s books and he seems to have nothing to say to the suckers who are funding their landlords’ retirement.
er, every income property is someone else’s OUTGO property.
Love how you separated the article and talked about both sides of the coin.
I will be the first to admit we bought a house VERY quickly. We got married and bought a house within a month of turning 23.
Although we purchased at a young age we bought a very modest home that has been working out great. I would have rather continued to live with our parents for another year and really save a ton of money.
When we were first looking a buying a house we had no idea just how big of a commitment is. Luckily as a married couple, we are a great team and work great together. Having two incomes is HUGE. We hope to stay another few years while we start our family and get a nice return after selling. So far the market is dictating that our house should sell for $20k more than we purchased it for. Well, see.
For the average person putting 10% down on a 30-year mortgage, buying vs renting is a puzzle that may or may not turn out in their favor. For a person with great credit who has the ability to put 20% down on a 15-year mortgage and still have enough income left over to save 20% or more towards retirement, buying over renting becomes a no-brainer. The only reason to not buy in the latter scenario is if there is a high probability of needing to relocate within 5 years.
As a single guy, I was against buying for a while in case I get married and want to buy at that point. But after looking at the numbers, 20% down on a 15-year mortgage with a low rate is such a good deal that I’m starting to feel like I’m “throwing money away” on rent unless I downgraded from my already modest apartment. I could buy a nicer house than rent, and still increase my net worth quicker owning the house, even after taxes and maintenance. Add on the possibility of renting out a room to a friend or using Airbnb and the math becomes so in favor of buying over renting that even if you have to relocate for work or something in less than 5 to 7 years after buying, your net worth will still be higher than if you had rented even considering the frictional costs of selling.
For #1 of why you shouldn’t own –
“Between property taxes, mortgage interest, and routine maintenance, home owners can easily throw away hundreds of thousands of dollars, without trying.”
I disagree because when you rent, you’re paying these expenses on behalf of the landlord through the monthly rent payments.
Jack
Possibly, but not always. It depends on the landlord’s intentions and the economic environment. Not all landlords are after positive cash flow.
I’m with Jack on this one.
“Not all landlords are after positive cash flow”
Even if it wasn’t positive cash flow that they were after, most landlords would at least try to break even. This means that the renter would cover all pass-thru expenses for the landlord(mortgage principal AND interest, insurance, property taxes, etc.).
Travis
There’s also the possibility that the property is paid off, but why wouldn’t the landlord try to get market rate for the property? I guess it could be a friend or relative who is renting it out to you? If that’s the case, then yes, the renter would be ahead of the game by paying below market rent. Unfortunately, most renters aren’t renting from friends or family.
Travis
There is a difference between “market rent” and “positive cash flow”.
A landlord may be counting on investment appreciation to counter negative cash flow; however, any landlord not getting at least positive cash flow won’t stay a landlord for long unless they’ve got really deep pockets.
Your point still stands. If you’re renting, you’re still paying for property taxes, mortgages, etc., just doing it via the landlord.
What you get from renting is avoiding responsibility for acquisition, maintenance, and disposing the property, and location flexibility.
BTW, If you give a relative a cut off the rent, it counts as income for them if the IRS ever catches you.
Better explanation than I had time to give. Thanks for the comment!
“BTW, If you give a relative a cut off the rent, it counts as income for them if the IRS ever catches you.” WTF kind of comment is that? ;] no it doesn’t. If a person makes $1,500 a month, and rent is $500; anyone giving anyone a break on rent still has $1,500 in the bank. That $1,500 has already been taxed; free and clear! If you have a source, please share! Thanks
Hey Billy–thanks for challenging that.
I was mixing it up with how the IRS treats below-market loan rates for relatives (the gap in interest counts as a gift, which gets taxed after an annual threshold is surpassed).
What it does do is limit the deductions to not exceed the rent and cause each below-rent day to be counted as a “personal day” for determining how much you can deduct which also may also turn it into a personal residence, which may nix mortgage deduction if it’s your 3rd home.
https://ttlc.intuit.com/questions/2608518-if-the-fair-market-value-for-my-rental-is-1160-and-i-m-only-charging-1000-then-i-m-not-charging-fair-value
http://laporte.com/laporte-blog/tax-services/tax-consequences-of-charging-below-market-rent
https://www.irs.gov/taxtopics/tc415.html
https://www.irs.gov/publications/p936/ar02.html#en_US_2016_publink1000229900
https://www.law.cornell.edu/uscode/text/26/280A
https://www.irs.gov/pub/irs-wd/0121070.pdf
How’s this for a reason to own:
Property taxes are higher on rental property than on an equal-value owner-occupied primary residence in 36 states, according to the Lincoln Land Institute. For example, in Michigan, the school property tax rate on rental property is 4x the rate on an owner-occupied primary residence of equal value, or over $1,000 per year.
Thanks for looking at both sides of the argument. I think it comes down to personal preference. We live in Denver where you mentioned the appreciation. Bought a townhouse end of 2013 for $197K, now worth $325K. At the same time rents have been increasing so I am saving hundreds a month vs. what rent would be for the same place. Also will have it paid off in 5 years before we retire a little early. Want that hedge against rent inflation in the future as well.
My wife and I are now 14 years in to our 30-year mortgage and our decision to buy was originally justified by your ‘reason #1’; as a hedge against inflation. That said, in addition to hedging our housing costs all these years, eliminating our monthly payment by paying off our mortgage (on track for late this year, yahoo!!!) will do two things for us. #1, it frees up a big chunk of cash from our budget every month that we can use to pay for college – even at market rate – when the first of our kids starts in 3 years… and #2, it significantly reduces the risk that an unanticipated change in our circumstances (loss of employment, injury/illness/death, economy tanking, etc.) would put us in a position where we had to move, upend kids from their routines/school/social network, etc. Essentially, it helps us to solidify our stability; a priority for both of us.
I would probably feel differently about throwing money at our mortgage if we weren’t able to max out our 401k and various IRA contributions in parallel, but we’ve been able to do that by rejecting lifestyle inflation all of these years and embracing a frugal mindset. So, why not pay off that pesky mortgage? I know it’s becoming ‘old school’ to think that way, but it’ll bring peace of mind and free up dollars for upcoming expenses so why not?!!
Despite the reasons listed above, I do not understand why someone would want to rent (long term). Buying a house might be expensive, but it’s a helluva lot cheaper than paying rent until the day you die.
Not here in Hawaii, rent is as much as a mortgage payment.
Great post! But I still like it more for the reasons not to buy a home than the reasons for buying a home. I especially take issue with positive reason number 4. My feeling is if you are not disciplined enough to save your money, then you are not disciplined enough to own a home.
I totally agree but #4 on the legit reasons list makes me nervous. Stuff can go wrong quickly when you own a home and non-savers could be screwed.
It’s good to know that you don’t have to worry about rent rates changing when you own a house instead of renting. My wife and I are expecting our first child soon, and we want to make sure that we are financially secure and free of random expenses like increased rent when the baby comes. We’ll be looking further into our options for purchasing a house for our growing family to accomplish this.
I agree that you should not buy a home for most of the reasons society says you should. I always laugh when I come across reason #4, “buy a house if you’re not a disciplined saver”. In my opinion, if you’re not a disciplined saver, then you should not buy a house.