Monday, April 9, 2018

Want to Be Rich? Don't Buy a House

How Renting—Not Buying a House—Can Make You Rich

People always say that buying a house is an 'investment,' rather than 'throwing your money away on rent.' After all, a house goes up in value over time. But if you rent, you end up with nothing, because your landlord has all the money!


Good investment? Or black hole of time, money, and worry?
Good investment? Or black hole of time, money, and worry?


My own parents say this as well (they're homeowners, of course).

But a few years ago, right around the time I started this blog, I read a very interesting piece that says quite the opposite: owning a house is NOT a good investment. In fact, a house is a terrible investment!

In his very well-done post, Jim Collins plays it out logicallywhat are the characteristics of a good investment? And what are characteristics of the worst investment you could possibly design?

And which scenario does home ownership resemble?...

A question worth pondering...is it right for me to buy a house?
A question worth pondering...

So, if people can routinely make such an irresponsible claim as calling a house an 'investment,' I figured I'd make the exact opposite claimand actually back it up instead of making the hand-wavey claim that you'll "end up with something to show for it."

When you rent a house or apartment, you pay:
  1. rent. 
    • If anything goes wrong or breaks, you tell the landlord or apartment manager, and then don't worry about it. 
    • If you move out and the place sits empty, it's the landlord's problem, not yours.
    • Taxes are going up on property owners? Not your problem.
    • The property sits in a flood plain? Heavy rains have the river running high? Eh, move across town.
    • A neighbor sells his home for well below market value, thereby lowering property values for everyone on the block? That's too bad for the landlord.
When you buy a house, you have to deal with:
  1. property taxes
  2. the expense (and hassle) of fixing or replacing anything that goes wrong
  3. maintenance and upkeep, including something as simple as mowing the lawn, which costs time and gasoline, plus the cost of a mower
  4. the cost of insurance against fire, flood, vandalism, etc., PLUS the risk that something will happen to your home that the insurance company will not pay
  5. paying interest. Since most people cannot pay the entire cost of a home upfront, they usually borrow money and pay interest on top of the cost of the house itself!
  6. paying the fees of the real estate agent, and/or closing costs
  7. the risk that something out of your control will scuttle the value of your home (for example, if somebody builds an ugly cell phone tower next door, or a noisy highway is installed nearby, or a street gang moves into the neighborhood, or a giant sinkhole opens in the middle of the street outside your house)
  8. the opportunity cost of maintaining the freedom to drop everything and get a higher-paying job (or a more fun job, or to seek a life partner, or to go on an extended vacation etc.) elsewhere in the world
  9. the opportunity cost of having your money tied up in a house
  10. eminent domain.
To illustrate point 9:

Suppose I give you $500,000, with the condition that you do one of 2 things with that money:
  1. Buy a $500,000 house, or 
  2. Allot $50,000 for 10 years' worth of rent in a modest apartment and invest the remaining $450,000 in a low-cost index fund.
Using the inflation-adjusted historical rate of return of about 7%, you can expect that $450,000 investment to roughly double over 10 years, to $900,000. Don't trust my math? Check out this calculator and input the information listed here.

Do you expect a $500,000 house to be worth $885,000 in 10 years? And that's after incurring such costs as property tax, home owner's association membership fee, repairs, or basic maintenance like cutting the lawn or heating/cooling the house...

HA! If you believe that, boy, have I got a deal for you on a bridge in Brooklyn! My finder's fee is modest; I promise...😂
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Clearly, not all investments are created equal!

This doesn't mean buying a house is wrong, but it DOES mean that there are often-overlooked limitations along with the benefits of owning a house. My example assumes, for instance, that you'll be a savvy, disciplined investor, instead of taking the money out to go on a scuba-diving expedition in the Maldives and a round of high-life gambling in Vegas...


Looks like a nice place for a relaxing vacation
Looks like a nice place to go scuba diving!

Since I've enumerated the costs of home ownership, it's only fair that I list the benefits: stability, the freedom to modify the interior of your residence without having to get a landlord's approval, and having equity in a physical piece of property.

Note that if you want to modify the exterior, however, such as building a garage, you may find that local zoning regulations or noise ordinances pose an obstacle...

The costs I listed above, however, are often hiddenthat is, until you actually buy a house! By the time people realize what a PITA home ownership can be, it's usually too late: the sunk cost fallacy has taken hold, and they justify their purchase by calling it an investment.

Don't be afraid to question conventional wisdom and zig where others zag. It just might make you rich...
When it comes to money, what the crowd does isn't necessarily best
When it comes to money, what 'everyone else' does isn't necessarily right...



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