Ready to hear something that will blow your mind? You’ve been sold a lie! A lie about home-ownership. Home ownership is NOT what people mean when they’re talking about investing in a home.
To be fair, who did you hear this advice from?
The real estate agent?
The bank manager who approved your mortgage?
I’m sure those are all well-meaning, and probably successful people. But are they what comes to mind when you think “successful investor?” NO WAY JOSE!!!
A lot of people carry huge mortgages. Most of that mortgage debt is on their primary home. But is it worth it? Let’s have a look.
Wait. Is he telling me home ownership is bad?
I’ll start by saying I own my home, so in no way would I tell you that homes suck. (Actually, I own several homes. But that’s a separate story.)
There are all sorts of touchy-feely reasons to have one – especially if you have kids – that have nothing to do with finances. (Although there’s a pretty awesome calculator that helps make that decision.)
All I want to say is don’t assume that home-ownership is the pinnacle of financial success. It’s not.
The first home I ever bought was an investment
I bought an investment property while I was still renting myself. The numbers were just too good. Everyone told me I was crazy. Everyone was dumbstruck that I was still renting a crappy apartment when I could afford to buy. But whatever. The apartment was fine and that property is still a goldmine. And as a bonus, that experience led me to become Mr. Stealth Wealth.
My real estate portfolio – crucial lessons over 9 years of investing
Mortgage magic – the extra spice that superjacks your investments
Why you need to refinance your mortgage NOW (And how to do it)
A tale of two relatives.
The apartment-renting uncle
I have an uncle in his sixties who rents a one-bedroom apartment. (He’s widowed, so that’s kinda sad, but I think he’s okay now.) He works part-time, pursues random hobbies, and travels five times a year. (Pre-covid, anyway) … He’s basically a poor version of who I aspire to be.
He’s a few years from retirement, and he’s researching which country he might expat to. Even with a part-time job, he has enough income and enough in savings to maintain his lax lifestyle. Total freedom.
The home-owning cousin
At the same time, I have a cousin who’s in his thirties and currently single. He bought a house because it seemed like the right thing to do at his age. He has some hobbies but spends a significant amount of time doing this like cleaning his gutters and complaining about his neighbors who don’t clean theirs.
He has this huge house with a backyard, a basement, and a few guest rooms, but realistically he doesn’t use any more space than my renting uncle. He’s also always making additional payments to pay his mortgage off faster, and don’t even get me started on that.
Before buying this place my cousin had a sweet apartment that was weirdly cheap and allowed him to walk to work. But someone planted a seed in his head that he should be at the home-ownership stage now, so that was that.
Again, I’m not here to tell you where to live. I just don’t want you to feel like you’re some sort of loser if you prefer to rent just because your high school math teacher with a desk full of whisky and regrets sold you the home-ownership myth.
The home-ownership myth
I can’t tell you how many times I’ve heard this advice:
“If you’re renting, you’re just throwing your money away. It’s better to own.”~ Bumper sticker on a VW bus I saw once
I even remember going through the calculations in high school math. Hmm. the payments for a mortgage and for some lousy apartment are almost the same – but at the end you get to keep the house. Sounds like a no-brainer!
Except those payments are not almost the same! Home ownership comes with some serious additional costs! And when you work out the numbers, you’re not necessarily coming out ahead.
This really hit me when I was adding up my living expenses for my taxes last year. Yes, my house is an upgrade from the 650 square foot apartment I was sharing with my wife a few years ago, but that upgrade had some hidden costs:
- Insurance – didn’t have to pay that before
- Property taxes – always a welcome surprise!
- Utilities – definitely cost more in a bigger place
- HOA fees – (getting my lawn mowed doesn’t come for free I guess)
All those additional fees are transient, they don’t contribute to my principal or the value of my home, and they add up to what I was paying in rent. So there goes the argument that at least your payments are going for something you own in the end.
Plus there’s also:
- Maintenance – painting chipped walls, repairing leaks, replacing the washer and dryer… sheesh!
- Big maintenance – new roof, new driveway, new walls…
It adds up! And you better have an emergency account for those!
Debt is good
Readers here know that I am a big believer that a leveraged mortgage is my secret weapon to building wealth.
So what gives? Having a mortgage is good? Owning a house is bad? What’s this guy talking about?!
So is a home an investment or not?
Well, it comes down to this question…
Does it bring you money?
In my area, the smallest and cheapest house I could find sells for $650,000, but it’s a townhouse so I’d have to pay HOA fees on top of all the additional expenses. (A small detached house goes for at least $900K)
Or I could rent the same house for $2400/month which includes HOA fees, insurance and taxes. (I won’t count utilities and maintenance for simplicity.)
So if I were to buy it, that’s:
- $130,000 down payment,
- $2200/month in mortgage payments. (At 2% interest over 25 years)
- $700/month (at least) for HOA fees, insurance, and taxes
So by buying, you’re paying $2900/month but in the end you get to keep that $650,000 property!
If you’re renting, you’re paying $2400/month. You’re saving $500 in comparison, but you don’t own anything.
But wait! What if I were to take that monthly $500 I’m saving and invest it in the stock market? After 25 years at 10% growth (which is the historic average), I would have $664,000. Hmm.
And if I were to invest that $130,000 down payment too along with the $500/month?
$2.23 Million dollars!!!!
(By the way, the numbers seem relatively equivalent right now because the rates are SO LOW. But when rates go up to say, 4% – which is still considered low, those monthly mortgage payments will go up to $2700 and the difference will be even more stark.)
What about appreciation though?
So the real argument about your house being such a great investment is the appreciation.
It goes up in value like crazy! You know that crummy $650,000 house I was talking about earlier? That’s my house! And I bought it for only $325,000 seven years ago!
Hoorah! Over 10%/year in returns! What a genius! Best investment evaaaa!!!
But really… How are you going to get that money? Sell your house? Then what? Buy another house? That house also appreciated at over 10%/year. So has everything within a 4-hour drive from here.
If we wanted to move out, there’s no way we’d find anything for under $900K for a pretty average home. It wouldn’t exactly be a “savvy move”.
So unless you’re prepared to move somewhere far far far away, or drastically change your way of life – you can’t exactly capitalize on that investment.
And I live in a unicorn city with crazy real estate inflation. Most houses just appreciate at inflation rates anyways.
(Meaning, if that $650K house keeps inflating at 10%, which is not very likely, after 25 years my humble home will be worth $1.685M. And if its value rises with inflation at about 3%, its value will be $874K… And I dare not think what the HOA fees will be by then!)
And speaking of inflation…
There’s also lifestyle inflation
See all those numbers I just mentioned? Throw them out the window! Because when most people are buying a home, they’re buying a dream. And they OVERSPEND!
Basically, most of us get way more than we need just because it’s there!
I mentioned I could rent my home for $2400/month, but realistically I could have skipped all that and just rented a 2-bedroom apartment for $1600 – utilities included!
People often spend 40% more when they buy a house than when they rent! 40%! That’s insane! You bet your butt I could put that extra $800 to good use!
And just for fun, let’s look at the numbers.
If I were to resist all lifestyle inflation and invest that $800/month with no initial money down – I’d have over $1M at the end of 25 years!
So what do you get by owning?
Well, we just covered that appreciation is kind of a wash.
And we just covered that you’re basically spending as much on extra costs on top of your mortgage as you did in rent.
And while I guess you could technically think of it as “investing”, I hope you’re not looking at your home as the only wealth-building strategy.
So what do you get?
I view it as fixing your living expenses.
If values were to rise drastically, your “transient fees” (taxes, insurance, etc.) hopefully won’t increase too much like they could with rent. (Just look at New York and California.)
That can be comforting.
And what do you lose?
Mr. First-world-problems over here, but I associate my home as kind of a hassle.
- Every leaky faucet or chip on the wall – that’s a to-do list for my weekend.
- Last year we took on some long-term traveling, but the thought of paying for my vacant house drove me up the wall. Those payments don’t go away when you go away.
- Tried to find a short-term renter when you’re gone – that’s a hassle too!
And the worst part is the risk. If you enter some financial difficulties, you still have to make those payments. Or else they take that house away.
Remember my uncle from earlier? As soon as he has a change of heart, he can just give two-months notice, leave all his worldly possessions at the curb, and take off.
That’s essentially the life I aspire to.
So what’s the solution?
How do you get the best of both worlds? How do you lock in your living expenses while also having renter’s freedom while also minimizing your payments?
Own a REAL investment property. Remember the test for knowing if it’s a good investment… Does it bring you money?
Nothing brings money like being a landlord.
Own a home but rent out your basement. Better yet, get a duplex, a triplex, or a quad. You get to own the home, can expense the hell out of it – since it’s mostly an investment, and pay very little in “fixed fees” if you split it up properly.
Bonus points: if you travel, your house is still being paid for!
Maybe it sounds easier said than done, but then you’ll get to righteously say “My home is the best investment I’ve ever made.”
TL;DR – home ownership is not the best investment in the world
- The argument that renting is like throwing money away IS WRONG. You’ll spend just as much on transient fees as you did on rent ON TOP of your mortgage
- The argument that your home’s appreciation is an investment IS WRONG. You’re not gaining anything by buying in because everything around you appreciates at the same rate
- If you spend less on your living expenses by renting and invest the difference, you could come out on top.
- Better yet, get the best of both worlds by being a home-owner but renting out a chunk of your home.
And I’d love to hear from you in the comments. Have you fallen for the home-ownership myth, and what do you think of that advice now?