Recently, I had a long discussion with an old friend on the subject of home ownership. Basically, his core idea is this: You should never own a home that you yourself live in. You might want to own a house as an investment and rent it out to others to earn income. You might even own a business that owns an apartment building in which you live. But you should never own a building that has a primary purpose of simply housing you.
Why? His argument is that the large investment it takes to own a home (or an apartment building or any other form of residential real estate) should return some form of income to you directly. You should not be continuing to sink additional money into that building, in the form of things like property taxes and insurance and maintenance, just to live there without getting money in return.
He brings up a good point, one that’s worth thinking about. Does it make sense for you to own the home you live in? Let’s figure it out.
Reasons why you shouldn’t buy a house
His argument basically breaks down into two groups of reasons. The first is financial – homes are expensive and don’t provide adequate financial reward for what you put into them.
Homes Are Expensive
Loss of Liquidity on the Purchase As soon as you buy a home, your money is locked down in that home. The only way in which you can extract money from it – while you’re living there – is to take on debt in the form of a home equity loan. That’s a lot of your money – likely multiple years of salary – that’s just sitting there. You can’t use that money for anything else, no matter what goals you have in your life. You don’t have liquidity tied up if you’re renting.
Closing Costs The closing costs associated with buying a home – the title fees and so on – can easily add up to 2% of the value of the home. That money just vanishes as soon as you buy. If you have $3,000 in closing costs on a $150,000 home, you’re effectively paying $153,000 on that $150,000 home. You’re already at a financial loss before you walk in the door. This cost doesn’t exist if you rent.
Sure, you can avoid some of these costs by shopping around and buying directly from the owner, but there are still costs involved in those processes (like title transfer fees) that are avoided when renting.
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Mortgage interest If you’re not writing a check for that house, then you’re going to be facing mortgage interest. Every check you write to the bank is going to have a portion that’s removed from it and slipped straight into the bank’s pocket without reducing your loan one little bit. Over the course of a long mortgage, even at today’s interest rates, the total value of the checks you write to the bank will be double (or more) the value you got out of the mortgage. $1 out of every $2 is just handed to the bank – for nothing. This cost vanishes if you rent.
There’s also the possibility of having to pay mortgage insurance if you go into the mortgage without a significant down payment in hand. That’s yet another drain on your finances that sees little return.
Property taxes Each year, some percentage of the value of your home is taken out of your pocket by the government. This amount ranges quite a bit, but it is usually in the area of 3% of the value of the home. That’s money that vanishes into the ether each and every year.
This cost, of course, doesn’t vanish when you rent. It’s rolled into your rent. However, it becomes an “invisible cost,” as you don’t see a big property tax bill arriving in your mailbox each year. You just write the rent checks.
Homeowners insurance All that your homeowners insurance policy does for you is ensure that you won’t suffer a huge financial loss if something devastating happens to your home. In exchange for that, you pay a pretty hefty bill each year, often in the ballpark of 0.35% of the value of the home. This money essentially just vanishes into the ether, only protecting you from a huge downside on your home “investment.”
Rental insurance is a pittance in comparison. You can ensure your property in a rental for a fraction of the cost of homeowners insurance. You’re not protecting yourself against the loss of the building, of course, but your possessions are covered and without any investment in the building, you can just pick up and move on.
Maintenance costs The average home requires about 1% of its value in annual maintenance. This includes the cost of maintaining the structure itself and the major appliances that serve it. Again, you’re just paying this money to keep things running. This cost largely vanishes if you rent.
Homeowners associations Many neighborhoods, particularly in suburban areas, have a homeowners association which requires a membership fee. This fee usually just takes care of a few community activities. This cost vanishes if you rent.
Opportunity cost With so much money tied up in a big illiquid investment and a healthy set of monthly and yearly bills – mortgage, insurance, property taxes, homeowners’ association, etc. – homeowners simply don’t have nearly as much money available in a pinch as non-homeowners in a similar situation have.
Your money is much more liquid if you rent because you can invest in other things with much higher liquidity, such as the stock market. It’s much easier to just tap out a stock investment if a great opportunity comes along than to utilize your home in that way.
Poor investment diversity (unless you are rich) Since a lot of your net worth is tied up in your home, your money isn’t well-diversified. A healthy portion of your net worth isn’t just tied up in real estate, it’s tied up in a single piece of real estate in a single location. That’s very poor investment diversity. If your local neighborhood degrades or there’s a natural disaster, your investment just fell through the floor, and because you weren’t diversified, your whole net worth just fell through the floor. Renting allows you to be far more diverse in your investments.
This doesn’t apply if you’re incredibly wealthy and your home represents only a fraction of your net worth. Of course, if you’re in that situation, you’re in a different league of investment advice altogether.
Possession encouragement If you own a home, you suddenly have a lot more room for stuff, which you’re likely to then spend money on. You have many more rooms to fill with stuff now, after all. Not only does this cause you to spend your money on stuff, it’s also going to mean much higher moving costs should you ever need to move. On the other hand, when you rent, you generally have a bit less room (so there’s less space to accumulate possessions), but not so little that you miss out on important possessions.
Homes devour opportunities
The second argument that he uses to oppose home ownership is that they devour opportunities. Home ownership makes demands on your time, energy, and flexibility that forces you to miss out on lots of opportunities.
Maintenance time You have to spend time maintaining your home, something that you leave to the owners when you rent. Tasks like changing furnace filters, mowing the yard, and so on are all left to the property owners in most rental situations.
If I totaled up all of the maintenance time spent on our home each year that goes beyond what I would need to do in an apartment, it would be well into the mid-three figures in terms of hour count. That’s literally weeks of time spent on things like mowing the yard, cleaning out gutters, replacing filters, repainting, fixing cabinets, and so on.
Stress Home maintenance and upkeep issues can be really stressful. There’s nothing like the sinking feeling of watching your basement flood and knowing that a ton of property value and expense is piling up. With a rental property, you just move your stuff out of the way and move on with life. Plus, there’s the ongoing worry that arises from any element of your home that may need repair in the near future. With a rental, you just call the landlord.
For example, in 2005, our apartment flooded. We simply picked up our possessions off of the floor and someone else took care of the whole problem for us with no additional cost. When it was done, we put our possessions back in place. It took perhaps half an hour of effort and very little stress once the initial shock wore off.
In 2010, we had some minor flooding in our basement. We spent hours running fans, diagnosing the root problem, figuring out what we needed to do to fix it, and so on. It wound up involving examination of city water drainage plans and, eventually, legal action. This gobbled down many hours of our time and added a ton of stress to our lives.
Possession accumulation Along with the expense of having more possessions, you also have to deal with all of those possessions once they’re in your home. It’s easy to move from an apartment where most of your possessions can fit into a car or a small moving van.
With a large home, your possessions will likely fill up a large rental truck or you’ll be dealing with selling off or giving away a lot of possessions. Remember, the more space you have, the more likely you are to find endlessly creative ways to fill it.
Stuck in place If you own a home, it’s a lot harder to just pack up and move across the country due to opportunity. Not only do you have more possessions, you also have to deal with unloading the house that you have, plus you have a lot of resources tied up in that house which may hinder your ability to move. The same is true with the flexibility needed to start a business or something else along those lines. The time needs plus the money needs of a home become an albatross around your neck.
On the other hand, if you just live in a rental situation, you can just walk away at the end of the lease, change your address in a few necessary places, and find a new place to live. You can sometimes do this in the middle of a lease depending on your agreement. It’s far easier than dealing with moving on from a home.
So, why own a home at all?
I’ll be the first to admit that, even if I don’t agree with every point listed above, there is certainly significant merit in quite a few of the points. There are certainly many different reasons for not owning a home, as homes come with a bunch of extra costs and do present some challenges.
That doesn’t mean the case is fully one-sided, though. There are many reasons why home ownership does make sense for many people. Here are several reasons.
Stability You don’t have to deal with being tossed out at the end of the month or suddenly at the end of your lease due to a change in perspective of the landlord. You are the landlord. The only reason you’d have to move out is if you didn’t pay your bills. Owning your own home is stable in a way that rentals simply cannot be, since you’re making the ownership decisions.
For example, in our family, it’s very advantageous to be living in the same location for a long period. All of our children know our home address cold and can find their way home from anywhere in a two or three mile radius if it were necessary. If we moved constantly, that stability would be completely lost. They also feel very comfortable and secure here – this is home to them.
No rent There are quite a few costs associated with homeownership, but there’s a big cost associated with renting – rent itself.
If you own your home, you’re not writing a rent check every single month. Sure, you have other expenses – property taxes and so on – but a year’s worth of rent will blow those out of the water if renting a place of comparable size (or even a smaller place).
No rental insurance Yes, you have homeowners insurance, but you get substantially more “insurance for the buck” from homeowners insurance in the case of a total loss (in my experience having had both types of insurance over the years). Rental insurance isn’t all that cheap for what you get.
Structural freedom If you want to knock out a wall that doesn’t support a load or paint all of the walls fuchsia, you can do that in your own home. If you want shag carpeting, you can do that in your own home. If you want to combine the living room, dining room, and kitchen, you can do that in your own home. If you want to separate the basement into two bedrooms and a rec room, you can do that in your own home. In a rental? Not so much.
Sure, you might find a rental home here or there that will allow you to make major changes if you so choose, but they likely won’t allow you to make any changes that the landlord perceives as potentially damaging to the ability to rent the property in the future. You can’t make it entirely your own.
Home value appreciation One of the things that offsets the cost of home ownership is the fact that the home you buy will usually appreciate in value over time. Unless you are extremely unlucky and buy into a collapsing real estate market, your home will go up in value over time and, in many markets, will do better than inflation.
We’re not in the rocket ship that was the 2000s any more. Your home is not going to double in value in three years. That doesn’t mean that it won’t steadily increase in value in the future.
Home ownership isn’t for everyone
The real truth of the matter is that home ownership works better for people in some situations and worse for people in other situations.
Here are two contrasting life examples that will show you what I mean.
If you’re a single entrepreneur who has a small number of possessions and wants to be able to jump on opportunities, owning a home is a horrible choice. It provides more space than you need. It gobbles down time and resources that you personally could better use elsewhere. It requires a great deal of additional effort should you choose to move. It just doesn’t add up. This describes the situation I likely would have found myself in had I not married Sarah. In that situation, renting makes sense.
If you’re a married parent of three with a significant number of possessions and a fairly steady career path, home ownership makes a lot more sense. You want the things that home ownership provides – steadiness in terms of location, but flexibility within the walls, and plenty of space. This is much closer to describing our family as it stands right now, so home ownership makes sense for us.
In twenty years, when our children have moved out and Sarah and I are essentially retired, will a home still make sense for us? Probably not. I could personally pare down my possessions to a couple of bags, a dresser full of clothes, and a small pile of board games that could sit on a shelf in a corner. When I’m “retired,” I’m going to want to travel or even move at a moment’s notice. I’m going to value flexibility in terms of location much more than I do right now, and I’ll value abundant space a lot less.
The difference in these scenarios is the type of life one wants to lead. Different lives have different demands, and for some lives, rentals make more sense. For others, home ownership makes more sense.
In the end, your financial goals should be centered around the kind of life you want to live. Which of those stories sounds more like you? Do you value location flexibility or stability? What about the rest of your family?
You can make financial arguments all day long about home ownership versus renting, but it really comes down to picking the option that really matches the way you want to live and making the best outcome financially from that situation – shopping around, finding deals, and so on.