My argument goes something like this . . .
Real property is an illiquid asset that’s expensive to buy, sell, and own. Though some people garner good returns from leveraged real estate, many ultimately land in bankruptcy. That’s what happens when you have too much debt and too little money.
Some folks view a primary residence as an investment. Not me. If it don’t make me money or it don’t save me money, it ain’t an investment.
In high cost of living areas (like the one I reside in), the gap between the cost to rent and the cost to own is so big you can fit my ego in it. I’ll take my chances on the cheaper option: leasing an apartment.
By putting the cash I save from NOT owning in a low cost, diversified, ETF (Exchange Traded Fund), I can earn a greater return on my investment with less risk.
Over the last 120 years, U.S. home prices outpaced inflation by a half a percentage point. That ain’t much. Especially when, as a home buyer, you’re responsible for repairs and maintenance. Ugh. No thanks. I’ll have no part in this home ownership madness.
Yep. I guess you could say I had a pretty stank attitude toward buying a house.
And then . . . I started writing this blog post.
After digging around Realtor.com a bit and tinkering with a few online mortgage calculators, I started to reconsider my position.
In the current interest rate environment, the idea of owning a home isn’t so ridiculous.
Buying a Condo
I am not a diva, but unless homelessness is an imminent possibility, moving to an urban ghetto or distant suburb aren’t options I’m willing to pursue. That means, if I can’t afford to buy in what I deem a suitable neighborhood, I’ll rent forever.
With that said, let’s assume I purchased a condo that’s similar in size and layout to my apartment. The hypothetical unit is located in the same area where I live now.
- Property Description: 1-Bedroom, 1-Bath, 666 Sq Ft
- Sales Price: $205,000
- Down Payment of 20%: $41,000
- Mortgage Interest Rate: 3.75%
- Term: 30-Year, Fixed
- Housing Payment (Principal, Interest, & Taxes): $923
- Condo Association Fees: $275
- Condo Insurance: $18
- Utilities: $157
- Electricity – $127
- Water – $30
- Effective Tax Rate: 18.64%
- Tax Savings: So minimal I won’t bother calculating them.
- Monthly Recurring Housing Related Costs: $1,373
Currently, I pay $1,075 for rent, electricity, and water combined. Renter’s insurance adds about $11 per month to the equation. So monthly, home ownership related expenses of $1,373 are only $287 more than my rent.
Assuming I could rent out my place for $1,350 per month, I wouldn’t lose too much money if I wanted to move out of the area or move into a larger space.
Still, I can’t count on the unit staying 100% occupied. Not to mention, the condo board may prohibit me from renting the place. Oh, and let’s not forget the ridiculous condo special assessments that pop up from time to time.
Buying a Single-Family Home
Although condos seem more affordable than single-family houses, their values grow slower in an up market and decline faster in a down market. And if getting rid of a home isn’t hard enough, on average, condos take longer to sell than detached dwellings.
- Property Description: 3-Bedroom, 2-Bathroom, 1,400 Sq Ft
- Sales Price: $500,000
- Down Payment of 10%: $50,000
- Home Loan Interest Rate: 3.75%
- Term: 30-Year, Fixed
- Housing Payment (Principal, Interest, Taxes, & Insurance): $2,483
- Homeowner’s Insurance: $166
- Utilities: $314
- Electricity – $254
- Water – $60
- Effective Tax Rate: 18.64%
- Tax Savings: ~$240 per month for the first year
- Monthly Recurring Housing Related Costs: $2,963 (Excluding tax savings)
Whoa. Almost $3,000? Even with the tax savings, I’d put $2,723 each month toward housing related expenses–about $1,600 more than what it costs to rent a small apartment.
Notice in this scenario that I went with a down payment of 10% instead of 20%. Frankly, I don’t have $100K lying around to tie up in a home.
Even if I were still working as a controller, it looks as if I wouldn’t be able to afford a single-family home.
BUT, what if I used my house more like an investment than a personal asset? Remember we talked about that earlier?
Offsetting the Cost of Home Ownership
Y’all know how I do. Before I signed the closing documents, I’d have an ad up in the “rooms / shared” section on Craigslist. Realistically, I could probably rent each extra bedroom for $700 a month. After taxes, I’d net about $1,140.
With my new backyard, I’d generate income doing something I can’t do as a renter: dog boarding. If I took in two dogs 50% of the time, I could earn almost $500 extra per month after giving Uncle Sam his cut.
With the additional $1,640 from renting my place to humans and non-humans, I’d close the gap between the cost to rent and the cost to buy.
Of course, my plan would only work if nothing in my house ever broke, my roommates always paid their rent, they never moved out, and dog boarding is as lucrative an endeavor as I hope.
In case you missed it, I quit my job at the end of 2011. Right now, I can barely afford to buy a mobile home let alone a property that’s permanently fixed to the ground.
So yeah, I still wouldn’t buy a home. Plus, you know how I feel about debt. I don’t care how many financial gurus lump a mortgage under the “good debt” umbrella. It’s a crap load of debt, and, personally, I don’t care for it.
Now, I can’t say I’ll never take out a home loan to buy a primary residence. Clearly, under the right circumstances, purchasing a home is a wise move. But until I replace the income I walked away from, I’m a happy renter indeed.
What do you think? Is it better to rent or to own?