How is a home an investment?
For a while now, I’ve been stunned to see people debating whether owning a home is better than renting. It seemed obvious to me that it was. Then I realized some people were buying a home mainly in hopes of cashing in on it: if they couldn’t sell it at a profit at some point, they considered their money wasted and felt they’d have been better off renting.
Of course, that presupposes that renting is actually cheaper in your area than owning. Where I live (in a major US city), renting is actually more expensive than buying because even during the bubble, there were more people fighting over apartments than there were potential buyers bidding up the house prices. That alone is enough to convince me owning is better in my situation.
But should you ever regard your home as something that’s intended to profit? I don’t think so. Here’s my reasoning – take it for what it’s worth, because it may be worth what you’re paying. 
The bulk of my monthly expenses goes to housing – that’s by far my biggest monthly payment, and it always will be unless I own a home at some point. If I own a home outright, my monthly expenses will instantly be cut by about one-third. That’s less income I need each month (or the more I can put into savings). That’s less money I need for retirement, which is really important for me because my family is long-lived – the odds are I’ll live to be nearly 100, and heaven knows what rent will be on a crappy efficiency by that time. No one’s going to want me working for them when I’m 96. In order to retire or even survive past 65, I have got to own a home.
A home may drop in market value. Your retirement accounts may plummet. Your utility bills may skyrocket. But the value of a roof over your head that you own flat out, that no one can repossess from you, is almost inestimable. Of course, you need a house that’s in an area you like. You need one that’s not costing a ton in upkeep. But if you get one that’s not working out or find the neighborhood deteriorating, you need only sell before the market gets too rough and the equity you’ve put into that home will be the downpayment on your next, better home – and if ownership is your goal that’ll be a decent amount of equity.
Making money on homes is tricky and can backfire anytime the market turns around. That doesn’t mean you shouldn’t try – so much depends on your circumstances. But owning a home for the purpose of cutting your monthly expenditures by a third or even a half is almost guaranteed to be a good thing financially.
And yes, I want to hear your thoughts, even if you disagree!
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My husband and I have been battling this. Before we were married, we both were renters. Not sure whether it’s nesting taking a hold or the inevitable chain of marriage then house, but we’ve both been pondering buying a house. In our research, we came across a great calculator on the NY Times site http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html#
While a house hopefully is an investment (increasing in value over time), we wanted to know whether it was a savings compared to renting both in the short and long run. This calculator works some math magic and does that. It’s definitely interesting to see how long we’d have to stay in a house before it’s a real savings over time compared to renting our current apt. We’re not sure we want to be in these jobs in this current area for the next 20 years. It definitely cooled our urge to buy.
I’m with you…this is a no-brainer.
A home is a tangible material asset; a roof over your head, and (usually) a bit of land. What that’s worth can be debated…but to compare it to renting, where you acquire NOTHING in terms of tangible assets? What kind of comparison is that?
Renting is flushing money down your toilet…I’ve known this since I started doing it.
One caveat…while I agree that the greatest value of a home is that no one can throw you out of it to die in the street…that is contingent on a decent government respecting people’s rights to own their homes. Recent eminent domain rulings do not encourage me that this is the case, here in America.
V, that’s an interesting calculator. For me, it says it would be worth it in 7 years… but that’s not even taking into account that renting is more expensive than a mortgage for me.
Jay, you’re right there. Did you read about the recent Prop CA passed to protect people from eminent domain? It had originally been forwarded by some landlords, but what it REALLY did was end rent control (what pathetic scraps of it we still have). It was lack of rent control that enabled my recent landlord to effectively evict/rob everyone by raising the rent WELL over market value – a $600 increase per month. Anyway, someone wrote a second prop that contained JUST the eminent domain stuff AND a clause that if both props passed, the original one was null and void. The anti-rent control prop failed and the other prop won. But I admit I haven’t studied it in any detail.
Renting vs. Buying really depends on rent prices in your area, housing prices, and downpayment available. I live in the most expensive city in Canada…and the math (not my heart) says renting is the more frugal route. Albeit, I don’t consume my savings, but rather invest them for the time when buying becomes preferable due to my increased downpayment savings. I programmed this calculator tool: Rent Vs. Buy Calculator to help. Again, this decision is really geographically determined. If I lived in another (less expensive) city, I would probably buy.
That’s a great calculator, Squawkfox! However, it says my mortgage payment would be almost $500/month less than my rent, but says in 11 years I’d profit $4k by renting? Because it figures I could make more money on my downpayment money by leaving it in the bank.
But even though I’m in a rare rent-controlled building, my rent can legally and will most likely increase 4-5% every single year. In 10 years, I would be paying 60% more per month than I’m paying now.
So I replaced my current rent with the median number between what I now pay and what I’d be paying in 10 years, and now it says I’d be ahead $81k by buying. I think that’s closer to the truth.
Hi Jen! Thanks for taking a look. Based on your excellent comment I’ll adjust the rent calculation to allow for a yearly increase by percentage. There’s some pretty complex math going on in this tool. ;D
There sure is, and yours is much more comprehensive than most. Great job!
Interesting blog and post!
One thing to be said about renting: mobility. My husband and I have been moving every 1-3 years to different cities. Buying and selling that quickly, if you don’t have the means to own multiple homes, is not the best option mostly because of selling/realtor costs. There is also time put into showings even if you sell privately to save agent costs.
Depending on the market and city, renting is not as simple as throwing your money away. We have always ended up in areas that would, looking at straight monthly payments, be far more expensive to buy than rent. Our money sat in a mix of savings account and low-risk retirement funds. With our most recent move, we decided to travel for almost half a year overseas… That’s not easy to do if you are committed to a mortgage.
Outside of that, timing is key. Many people could have saved $$$ if they rented for a few more months and not bought when prices were sky-high. Also, if you can put more money in downpayment, commit to a shorter mortgage, or get a lower interest rate, you will gain huge financially. Timing is everything here too, so sometimes renting a little longer makes sense.
If you want to stay in one place or you don’t play the what-if games of how to make the most of your investment, this post is dead on. More people need to realize the long-term gain of home ownership!
Renter, good point. If you’re moving frequently, renting can easily be the better option. In your case, where you’re not living in areas where renting is more expensive, it makes complete sense.