In a
recent segment of Yahoo Finance's "The Daily Ticker," James Altucher,
investor, author and entrepreneur, argued that owning a home could be one of
the biggest financial mistakes to make: "It is never, ever a good idea to
buy a house," he remarked, going on to state that, "The house is
totally illiquid, homeowners are trapped in a location, it's not easy to move
and taxes and other fees go up faster than the price of inflation." While
those are legitimate costs associated with real estate investing, it's
important to remember that no investment is perfect and without consequences.
Any decision, especially major decisions, involves careful research, planning
and negotiation, whether with your broker or with your significant other. As such,
it is highly irresponsible to make blanket statements such as
"never," especially when the numbers tend to disprove the original
thesis.
Under a simplistic comparison between rental and ownership costs (assuming no rise in tax and inflation costs), the linear savings trend from the resultant equation (annual ownership costs - annual rental costs = savings) aesthetically has a triangular shape. This is due to the fact that ownership costs for an equivalent home tends to be more expensive than a rental but at the end of a typical 30-year mortgage, the owner now ceases to pay for the house and is only left with upkeep and maintenance fees. In this scenario, it can be argued that from a strictly annualized savings perspective, a renter will save money throughout the life of a mortgage, but would see his or her savings drastically decline once the mortgage has been fully amortized.
Under a simplistic comparison between rental and ownership costs (assuming no rise in tax and inflation costs), the linear savings trend from the resultant equation (annual ownership costs - annual rental costs = savings) aesthetically has a triangular shape. This is due to the fact that ownership costs for an equivalent home tends to be more expensive than a rental but at the end of a typical 30-year mortgage, the owner now ceases to pay for the house and is only left with upkeep and maintenance fees. In this scenario, it can be argued that from a strictly annualized savings perspective, a renter will save money throughout the life of a mortgage, but would see his or her savings drastically decline once the mortgage has been fully amortized.
However,
this ignores some very obvious factors, namely, inflation. Very rarely do rentals
stay the same rate year after year. Instead, landlords often stick it to their
tenants, especially in high demand locales, and what is to stop them? The point
is, ladies and gentlemen, that greed, for lack of a better word, is good. And
there are many would-be Gordon Geckos out there that do nothing more than look
for excuses to jack up rents. So I would have to disagree profoundly with Mr.
Altucher : rental fees frequently meet and exceed inflation, which, according
to the government, stands at a mere +2 or +3%. And if you believe those
figures, I have a bridge I can sell you...
The other factor is equity. When you buy property and make monthly mortgage payments, you are building ownership shares into that property. After the life of the mortgage, you essentially own 100% of all shares outstanding, which, if the real estate gods smile upon you, could end up carrying a substantial premium over the initial purchase price. Even if a buyer is not so lucky, they would end up with an asset at the end of the mortgage period. The renters? They end up paying the next month's rent.
So when calculating cost savings, these important metrics have to be considered. Using another simplified example, assume that renting a modest family home costs $10,000 annually, while buying an equivalent home at a purchase price of $180,000 would have a mortgage cost of $16,000 annually. Also assume that property tax is incorporated into the higher total cost of ownership versus renting, and that rental fees go up annually at a very conservative rate of +1% a year.
In this scenario, the cumulative total savings of renting becomes negative before the mortgage is fully amortized. Since banks front-load interest charges during the first several years of a mortgage, a renter is only saving money during that initial phase. However, after that phase is over, the renter drastically sees his or her savings erode, potentially causing deep remorse over what might have been.
The other factor is equity. When you buy property and make monthly mortgage payments, you are building ownership shares into that property. After the life of the mortgage, you essentially own 100% of all shares outstanding, which, if the real estate gods smile upon you, could end up carrying a substantial premium over the initial purchase price. Even if a buyer is not so lucky, they would end up with an asset at the end of the mortgage period. The renters? They end up paying the next month's rent.
So when calculating cost savings, these important metrics have to be considered. Using another simplified example, assume that renting a modest family home costs $10,000 annually, while buying an equivalent home at a purchase price of $180,000 would have a mortgage cost of $16,000 annually. Also assume that property tax is incorporated into the higher total cost of ownership versus renting, and that rental fees go up annually at a very conservative rate of +1% a year.
In this scenario, the cumulative total savings of renting becomes negative before the mortgage is fully amortized. Since banks front-load interest charges during the first several years of a mortgage, a renter is only saving money during that initial phase. However, after that phase is over, the renter drastically sees his or her savings erode, potentially causing deep remorse over what might have been.
Even
with ownership costs being 60% higher, the slow and steady strategy that is so
often bandied about by the Wall Street compounding-interest geeks actually
works better in real estate. Not only are you reasonably assured that your
investment will essentially pay for itself after a few decades, the real estate
market is not subject to the same kind of "desperate volatility" as
the stock market. The reason is obvious : people need somewhere to live. They
don't necessarily need to have a mutual fund.
But I will give credit to a sentiment expressed to Mr. Altucher, who stated that there is no obligation to follow the American Dream, which, as he noted, was originally a marketing message by Fannie Mae. Certainly, there are serious ramifications to buying real estate, ramifications that if not soberly researched could lead to years of regret and financial burden.
First, you must be absolutely sure that you wish to lay down roots in a particular city because you will financially lay down very deep roots indeed! Unlike renting, you cannot simply pack up your bags and leave if the new upstairs neighbors decide to use their floor as a tap-dancing studio. Real estate and its associated procedures (including advertising fees and broker commissions) are extremely illiquid and slow.
Second, you must absorb the comprehensive definition of the term "ownership." While buying a house carries a lot of pride, it also entails responsibilities. There are no more concierge services for when your lights go out or your toilet gets stuck : you're on your own. Those who have become accustomed to the perks of renting may want to go through a mental reality check before plunking down their hard-earned money.
Finally, you must perform due diligence on the market in which you wish to reside. Unlike stocks, if there literally is blood on the streets, a contrarian tactic is hardly appropriate. Remember : you are living there! Buying a house in a rundown neighborhood, especially in an area of declining demand (think "white flight"), has the potential of paying off but is more likely a disaster waiting to happen.
When deciding between buying and renting, it comes down to personal preference. If you are the type that enjoys life on the go, buying may be considered too restrictive. Even if you are sedentary by nature, if you are engaged in a career that may involve moving to a different location, purchasing real estate could be more of a hassle than you bargained for. Ultimately, the needs of the individual have to be balanced with the financial rewards that typically come from responsible ownership.
But I will give credit to a sentiment expressed to Mr. Altucher, who stated that there is no obligation to follow the American Dream, which, as he noted, was originally a marketing message by Fannie Mae. Certainly, there are serious ramifications to buying real estate, ramifications that if not soberly researched could lead to years of regret and financial burden.
First, you must be absolutely sure that you wish to lay down roots in a particular city because you will financially lay down very deep roots indeed! Unlike renting, you cannot simply pack up your bags and leave if the new upstairs neighbors decide to use their floor as a tap-dancing studio. Real estate and its associated procedures (including advertising fees and broker commissions) are extremely illiquid and slow.
Second, you must absorb the comprehensive definition of the term "ownership." While buying a house carries a lot of pride, it also entails responsibilities. There are no more concierge services for when your lights go out or your toilet gets stuck : you're on your own. Those who have become accustomed to the perks of renting may want to go through a mental reality check before plunking down their hard-earned money.
Finally, you must perform due diligence on the market in which you wish to reside. Unlike stocks, if there literally is blood on the streets, a contrarian tactic is hardly appropriate. Remember : you are living there! Buying a house in a rundown neighborhood, especially in an area of declining demand (think "white flight"), has the potential of paying off but is more likely a disaster waiting to happen.
When deciding between buying and renting, it comes down to personal preference. If you are the type that enjoys life on the go, buying may be considered too restrictive. Even if you are sedentary by nature, if you are engaged in a career that may involve moving to a different location, purchasing real estate could be more of a hassle than you bargained for. Ultimately, the needs of the individual have to be balanced with the financial rewards that typically come from responsible ownership.
