Why I May Never Own a Home

A warped house built in 1497 in Germany

A warped house built in 1497 in Germany.

 

Life is more enjoyable when you set clear, quantifiable goals for yourself. When you have quantifiable goals there is a sense of purpose and reason infused into daily choices that serves to simplify your life. No longer are you saving $200 per month for the sake of saving, you are saving $200 dollars per month so that you can buy that blinged out diamond studdded ipod case that you’ve been coveting. You’re no longer working out to “be healthier” ( a vague and unmeasurable goal) you are working out so that you can gain 10 lbs of muscle and shred to sub 15% body fat. The gym is full of people without notepads. Why is this? Do they honestly remember what weight they lifted on their last similar set a week and a half ago? Are they making progress towards a goal or haphazardly doing what everyone else is doing? There is a great book on health related goal setting and progress tracking by Tim Ferriss called the The 4 Hour Body. For those interested in automating their finances, saving a boatload of cash over their lifetime, and developing an honest budget to achieve your goals I recommend Ramit Sethi’s I Will Teach You to Be Rich. I owe a lot to the influence of both of these authors, they have helped me reengineer my life.

Ramit points out that people tend to take it for granted that owning your own home is a good investment and that renting is throwing money away. How many times have you heard someone say that if you are renting you are simply making someone else rich? It’s what Ramit calls an invisible script – an underlying assumption about the world that people hold as true without any real proof. Of course, this last housing bubble and subsequent economic downturn has got many people questioning the viability of real estate as an investment, and rightfully so. Considering your first home purchase will possibly be the largest transaction of your life to date, it is worth spending some time to honestly reflect and run the numbers on what you are doing. Regarding the assessment of wether you are even financially able to own a home I will quote Ramit:

“In the olden days, this meant that your house would cost no more than 2.5 times your annual income, you’d be able to put at least 20% of the purchase price down, and the total monthly payents (including the mortgage, maintenance, insurance, and taxes) would be about 30% of your gross income. If you make $50k per year before taxes, that means that your house would cost $125,000, you’d put $25,000 down, and the total monthly payments would be $1250 per month. Yeah right. Maybe if you live in the Ozarks.”

Sound realistic? Not where I’m from in California. You’d be lucky to find a livable 2 bedroom condo for under $350k in a desirable area of San Diego. As an engineer making $80k/year gross by the old rules the max I should spend on a house is $80k x 2.5 = $200k. $200k will buy you a garage attached to a house in San Diego. To buy the $350k livable apartment I’d need to save $70k for the down payment and my monthly mortgage payments would be $1,800, including  taxes. Add 30% for insurance and maintenance and the monthly cost rises to $2,340. If there is an HOA, that must be tacked on as well, and we can assume $200 a month (this is conservative, especially if you live downtown where condominiums are at 30% occupancy and HOA’s are in the $600-$900 range). Also, consider that of your $1800 mortgage payment, a certain weighted percentage is interest. This percentage is greater at the beginning of the loan and less nearer the end, tilting the risk away from the bank and further onto the home owner’s shoulders. So if the transaction goes through you could be paying $2540 per month (remember that is with a 20% downpayment) to live in an ok condo where you are building equity. You are locked down to this location for awhile, your mobility is reduced. Now consider this: we could group insurance, taxes, interest, maintenance, and the HOA into a bucket called “throwing your money away”. That money is what you are paying for the privilege of being able to deposit equity into a home. Assuming interest is 50% of your mortgage at the beginning of your loan term the “throwing your money away” bucket looks like this: Interest $900 + Insurance and Maintenance $540 + HOA $200 = $1,640. Holy crap I almost just spit out my carne asada.

In this very realistic example you are paying a whopping $1640 per month for the opportunity to deposit $900 per month into an “investment” that has historically not outperformed the stock market. So don’t feel bad if you are renting for less than $1640 and depositing $900 per month in the stock market – you will probably be wealthier in 30 years than your peers who did the opposite.

The point of all this is not to bash people that decide to own homes – if that is your goal and you can afford to do it than have at it. The point is to question those invisible scripts that inform your decisions, especially your large, life altering decisions. Don’t feel bad if you are renting and you enjoy the simplicity and mobility that renting offers – these are huge undervalued benefits that tilt my preference towards renting. And please, please! Run the numbers.

  • Agreed for the most part that buying a house isn’t a great investment if your sole goal is to turn a profit. Let’s examine my numbers: Purchase price 389k with 81k down=308k loan. Loan payment per month about 1500 plus another 500 into an escrow account for property tax and insurance. 65 a month for the HOA (sorry San Diego you got hosed) for a total of around 2100 a month. Compared to renting a comparable house (3Br/2Ba) in the area for around 1500 a month. Over 30 years, I pay 756k versus the renter, who pays 540k, plus I’m out the initial 80k for a total of 836k. Although theoretically my house is worth much more than 389k in 30 years, I would certainly have made more money by investing the extra 600 a month even in a conservative growth account at just a few percent.

    BUT… Home ownership does have some advantages, depending on your employment situation, life goals, and near future plans. I don’t consider our house entirely as a monetary investment; I consider it primarily as an investment in our quality of life, future, and happiness. We have security in not having to move every several years, and although I enjoyed switching things up in my younger days, now that I can’t move all of my worldly possessions in the back of an ’88 Honda Accord, not moving sounds awesome. I love my job and love living here, so mobility isn’t a driving factor for me. I also found that I really enjoy and take pride in renovating, improving, and maintaining our house. Putting in wood floors, tiling, painting, a new roof,staining the deck, mowing the lawn, pruning roses; I take much more enjoyment and pride in those things than I did as a renter. Plus as an engineer I enjoy doing the work myself and learning about plumbing, electrical, carpentry, etc. I like actually having done the things I’m telling someone else how to do. Not always great, like when the sink leaks and I hit the hardware store, lay on my back for three hours, and bust all ten knuckles instead of picking up the phone, but for the most part, I take great satisfaction in having a nice house and making it nicer with sweat equity. We also love our neighborhood and neighbors, and while you can be a part of neighborhood as a renter, I feel more a part of our community as a home owner because we all have a vested interest in maintaining the condition of our properties and quality of life in our hood.

    Ultimately the decision to rent or buy comes down to where you are in your life and the financial feasibility of either situation. For us it made sense to buy for financial and other reasons; everyone’s situation is unique and there isn’t a right or wrong answer either way. Like Brandon says, crunch the numbers and consider your situation. To me 600 bucks a month more than rent doesn’t seem that outrageous when I think about living in our home versus the rental we lived in before we bought. Just don’t ask me to multiply 600x12x30years and I’ll keep thinking that way….guess that means you’ll be richer than me and can afford to take me out for a beer next time you visit. Best of luck on your trip mate

    Love ya, RT

    • Brandon

      I love it man, thanks for posting. There are so many angles to the conversation and I can see why you or someone in your position would definitely buy. There are so many *hard* to quantify aspects to home ownership vs renting. For example, I like the freedom from chores and location independence that renting gives, while you enjoy the home improvement, stability and community aspects of home ownership, which I can totally understand. Those things don’t always equate to dollars and cents, they are just things that are valuable to be aware of when you are considering buying vs. renting. I wrote this mainly with the intent to point out to those people renting that can’t afford to buy that renting is not always “throwing money away” or “making someone else rich”, as I have heard many people refer to it.

      Thanks for putting such a thoughtful, well written response together, you had me cracking up.