Why I may never own a home again
I thought owning my own home was the American Dream. In the U.S., this supposedly represents some form of success...a badge of honor. Nonsense!
I thought it was the American Dream. Owning a home. In the U.S., this supposedly represents some form of success...a badge of honor. It's your stamp of approval that you truly have made it in life.
Equally damaging, there also seems to be a stigma with renting. If you're successful enough, you own. If you aren't, you just rent. After all, anyone with a good job and decent credit score needs to own, right? Renting is second class; it's "throwing your money away". Owning is pride.
Pardon my French, but that is complete bullshit.
Before I move on, let's get this out of the way at the beginning. My intent with this article is not to "prove" that renting is better than owning if you care about your money (there are other articles out there that do that, like this, this and this). This blog post is about MY experience with owning and why renting may be a better option.
Now, let's continue!
The truth is owning your own home is an incredibly expensive proposition - more expensive than a lot of us think. Unless we just so happen to buy at the right time or intentionally pick a fixer-upper with the intent to renovate and eventually re-sell for a profit, we generally don't make money in the end.
I sure didn't. But then again, I bought at exactly the wrong time to the month. I bought a single-family home out in the suburbs in February of 2007, precisely when home values peaked before the real estate and mortgage crash. From the second I signed on the dotted line, I owned an incredibly expensive and immovable depreciating asset. I guess it was "dreamy" or something.
I told myself that I wanted to "build equity", not knowing exactly what that meant. I just knew equity was good. I thought it was an "investment". And quite frankly, I liked the idea of owning my own place. It was new and exciting.
And quite frankly, I needed something "new".
From the moment I moved out of my parent's place before college, I rented apartments, and I was tired of it. Hell, spend several years renting cheap apartments in cheap areas of the city and anyone would feel ready for something "better". It's a natural feeling. I wanted something that was MINE, damnit. All mine. It didn't have to be luxurious, but I had to own it.
And I got it. That depreciating asset was all MINE.
How expensive is owning a home?
I have written before about how expensive our jobs are. We pay a heck of a lot more money than we think to work (think about work clothes, food, cars, fuel, commutes, etc), and our homes work in much the same way.
Homes need appliances like refrigerators, ovens, stoves, and microwaves. Many have washers and dryers. Homes also need working plumbing. Lights need to turn on. Landscaping needs maintenance. Throughout our stay (and especially when we move out), walls need painting. Fixtures might need changing. In other words, maintenance - sometimes, costly maintenance - and as homeowners, we are generally responsible for 100% of these costs every time.
Homes are fairly expensive to buy and sell, too. Think realtor's costs if you use one. Lots of papers. Signatures. Fees. Taxes. And time - lots and lots of time.
Speaking of fees and taxes, U.S. News tells us of hidden costs involved with buying your own home, including home inspections, surveys, prepaid taxes, recording charges, appraisal and credit report fees, title costs and, in most cases, quite a bit more. Don't forget homeowners association fees, property and title transfer taxes and general "closing costs".
Most of us have mortgages when we own, and we pay insane amounts of interest over the years for the privilege of living in homes we own. Even low interest rates easily add up to tens of thousands of dollars, most of which we pay for first before we begin paying down principle. Worse, cheap mortgages and low interest rates encourage many of us to overbuy - hello, mortgage crisis!
It's easy to look past a lot of these expenses, especially if we are able to sell the house for more than we paid after living in it for, say, ten years. Great, the house appreciated! We made money, right?
Unless the home appreciated a LOT, we probably spent significantly more money maintaining the house over the years than we made during the sale. Add in the thousands we spent on mortgage interest and you've probably wiped out the appreciation without much effort.
Homeownership is not exactly the "investment" I thought it was. At least not for my primary home.
Let's take a look at a couple of examples:
I bought my home (that I am now renting out - at a loss) for $202,000 in 2007. Today, the home is worth in the neighborhood of $160,000 - if I'm lucky. This is after backyard landscaping and tiling the interior, along with stainless steel appliances and a whole new master bathroom shower. I probably put $40,000 into that home over the years, and that doesn't include mortgage interest I pay month after month.
My wife bought her house for $218,000 in 2011 and proceeded to drop $35,000 into the home, including a fire pit in the backyard, tile floors and brand new brushed nickel kitchen appliances. Today, the home is worth around $200,000.
Do the math. The numbers aren't pretty.
Even if I was able to sell my home for what I paid for it ($202,000), that in no way comes even close to making up for the money and time I put into that property. And now that I'm a landlord, whenever something breaks (like the microwave last month) or leaks (like the master shower the month before that), I foot the bill to do the repairs. Every. Damn. Time.
Worse, a few years into trying my hand with homeownership, I wanted to move! I no longer appreciated the longer commute that comes along with living in the suburbs. But quite honestly, selling my losing proposition just wasn't something that I felt motivated enough to go through.
All told (after down payment, interest, maintenance, taxes, fees and inflation), I am probably down close to $100,000 with that house if we include the lost opportunity cost along the way of moving and finding cheaper housing options...not to mention the potential return on my down payment if I had invested that money in the stock market instead of sink it into my home.
Just imagine if I was "throwing my money away on rent" this entire time instead.
Is renting a viable alternative?
Though home ownership is relentlessly expensive, renting isn't all roses either. Landlords can be inconsiderate and aggressive. They can drag their feet with repairs. In worst cases, they can also be downright untrustworthy. There is no getting around the fact that these circumstances can suck hardcore.
But then again, living in a downtown condo in a big city, or a beach-front property in Miami, could be financially impossible for many of us without renting. In my experience, opening up our minds to renting instead of buying enables location prominence without the hefty costs of mortgages and association fees. Renting can enable living in more desirable locations with far, far fewer residual costs. No mortgage interest. Very little maintenance beyond basic cleaning and small repairs. No buying and sell fees. And you can leave whenever the hell you want.
What happens when we lose our jobs? Or your city turns that quiet street in front of your property into a busy thoroughfare? Or divorce? Or...renting gives you options. It also gives you an out.
And if something breaks, your expenses don't increase. If you need a new water heater, the landlord sees a spike in their expenses, not you.
My wife and I enjoy moving around a lot. We love to see new things and live in new areas. Renting offers the incredible flexibility of moving. Don't like your neighbors? Find a new place to rent once your lease is up. Want to live a little closer to the ocean? Again, walk away after your lease expires. Have a crappy landlord? Got a new job? Want to try something different? All you need to do is up-and-leave. No need for extensive renovations, finding a realtor, staging your home or paying fees. Just leave.
Perhaps the biggest negative with renting is, well, rent. While your rent stays consistent for the duration of your lease, nothing prevents the landlord from raising the rent once your lease is up. However, many landlords won't raise rent on good and dependable tenants, and even if they do, renters always have the option of leaving and finding a less expensive place to live. My wife and I like this freedom.
Isn't renting just throwing your money away?
The idea that renting is akin to simply throwing your money away is interesting...as interesting as it is false, in fact. Renting is only "throwing your money away" if you believe that the taxes, fees, insurance and maintenance that comes along with a mortgage and home ownership is money well spent. I do not.
Imagine a landlord who pays ALL taxes and fees associated with the home that you rent. All maintenance is on them, not you. He or she pays insurance, too, along with any homeowners association fees. If the roof needs repair, they fix it, not you. Microwave stops working? They fix it. Mold in your closet? They fix it. Ceiling fan stops working? You guessed it...
That sounds like a seriously good deal to me.
In fact, invest that same amount of money in the stock market instead of footing the bill for typical home ownership and I'd argue that you'd be money ahead, and by a large margin.
Of course, there will always be exceptions to this rule. Sometimes, ownership can be cheaper in the long run, but in my experience, those situations are very much the exception rather than the rule.
Homeownership is not all bad
Of course, there are plenty of positives to homeownership. Even with these costs, owning your own home clearly provides maximum flexibility to renovate and change your home so it suits your specific needs. Most of the time, we can't paint the walls in rental homes or apartments. We can't add a backyard deck, build a basketball court, or blow out interior walls for a more open concept look. Largely, our hands are tied.
For those who are handy and skilled at home renovations, buying "short sale" homes and other fixer-uppers can turn incredibly lucrative for the home buyer, but naturally, you need to know exactly what you are doing to make money flipping homes. But, it does happen - every day.
Many will purchase homes with the intent of renting them out. Of course, the same money concerns apply: mortgages, taxes, fees and maintenance required to upkeep the house. Even if you're getting enough in rent to cover the mortgage, any renovations, homeowners association fees and property taxes can deeply cut into rental profits.
If you plan to stick around for a while in your home (more than 10 or 15 years), owning your own place might be more advantageous. It still may not be cheaper, but the peace of mind of knowing your rent will never increase might be worth it in the end.
The bottom line - we no longer think of homeownership as an investment. like I did before I bought my first home. While it is possible to make money in real estate, it usually doesn't "just happen". Homes generally don't appreciate out of thin air, and even when they do, the home's appreciation often gets buried underneath piles of taxes, fees and maintenance costs.
Owning our own homes is an incredible expense for most of us, and I learned first hand over the years of just how expensive this proposition truly is. Both my wife and I paid through the nose for the privilege of owning our own homes, and after all these years of homeownership, it just wasn't worth it for us.
In the end, I wish that I had never purchased my own home. Even if I hadn't bought at exactly the wrong time, I still would have lost an incredible amount of money over the years...money that I could be living off of today - retired.
In the interest of full disclosure, we do own our Airstream RV, but that is also the nature of the game with full-time travel. And we paid 100% cash to avoid interest and loan fees. Once we settle down in the future, we will once again determine whether or not to rent or own. My money is on rent!
Please note: I understand that in some cases owning your own home can be more financially desirable, and I also fully realize government subsidies can help ease the burden of mortgages. In no way was any of this blog post intended to criticize those who own. Rather, it details why homeownership has been a losing proposition for my wife and me and extols the hidden virtues that renting provides. For us, renting would have been a smarter move financially.
What say you? Have you made money in real estate? Would you consider renting a place instead of buying to avoid cost of ownership?