Why you should make a home your first investment

Originally, this was to be a two-part series discussing the pros and cons of buying a home as opposed to investing. The purpose wasn't to pick a winner or loser, per se. (After all, one of the main tenets of Get Rich Slowly is that you really should do what works for you.) Instead, the purpose was to highlight the strengths and weaknesses of both options in case you were faced with a choice for some reason.

Holly Johnson's article should you buy a home or (invest?) was first; and she said that, if she had to make that choice, she “would invest for the future and forgo the house in a New York minute.” I intended to explain the benefits of the opposite side of the hypothetical.

But you stole my thunder! So many people made great comments in response to Holly's post that I thought it would be better to explain what was left over or unclear for some reason. We both started by looking at the past.

The (More Common) Way to Build Wealth

Two activities have stood the test of time throughout history as the best ways to make money:

  1. Trading
  2. Real estate investing

If you look at America's list of millionaires and what they did to get there, you will observe the most common path to millionaire status in America has been real estate.

Sure, you have the Warren Buffetts who did it by investing in stock, and you have the Zuckerbergs and Gateses who did it by starting new companies and riding them to fortune. But most of the lower profile millionaires built their wealth with real estate.

There is a reason for that. As my dad always used to say: “Everyone has to live somewhere.” The world's population is expanding, but Mother Earth isn't. So it isn't hard to see the math of supply and demand working in favor of real estate investing.

Limiting the Price for Shelter

Consider the precept that, if you want to build wealth, one surefire thing you can do is to limit your expenses. Look at your budget. What is your largest expense? Housing. Whether it's your rent or a mortgage payment, unless your house is fully paid off, chances are there is nothing you spend more money on than that. (Well, okay, if you're leasing two Ferraris and a Mercedes, your cars may cost you more, but then you admit you're not typical.)

Jeff nailed this concept in the comments of Holly's article:

My mortgage will end while rent never does. When I buy, I am locking in my price. Housing can go up and down in value but my mortgage doesn't change based on that, what I owe is what I owe, even when prices rise 20% or crash 20%.

When you think about your future, what offers you better security than having a shelter of your own choice … with no rent or mortgage payment?

Look around you at retired people who are living comfortably, and look at their finances. Nine out of 10 will have a paid-for home. Not only have they locked down the price of housing for the term of their mortgage, they effectively brought the expense down to zero as compared to rent once the mortgage is fully paid.

You can't get there if you don't buy a home.

Expense Conversion

To me, one of the biggest reasons to buy a home first is that it puts an (inevitable) expense on a track to become an asset. Like all investments, that difference usually starts out quite small, because in the beginning most of your monthly payment to the mortgage bank is interest. However, as time passes, more and more of that monthly amount transitions from expense to an asset, i.e., the equity in your home.

That, to me, is nothing short of a thing of beauty; and to my mind, it's the biggest single reason people who are secure in retirement got there.

The Concept of Leverage

Ec was one of the few that mentioned leverage as an advantage to buying a home over investing your money:

Secondly, the other big advantage of owning your own home is leverage. If you had 30k to invest in 1940, based on a typical ltv ratio of 80/20 you could buy a home worth 600k. Would you rather have 600k growing at a slightly lower rate or 30k growing at a higher rate?

But judging from the fact that only three comments mentioned it, I thought it would be good to explain the concept.

Most of us know that debt is more evil than good … except, of course, when it comes to buying a home. One of the big things that makes buying a home the first step in most people's financial security is that debt. Home mortgages are usually the cheapest loans out there, so the burden imposed by paying interest is relatively minimal.

How Leverage Works

Here is where the math becomes compelling, and it's rooted in (of all things) inflation. Home prices over the long haul have gone up in most places. That is something we love, isn't it? That appreciation is also called inflation … but it's the kind of inflation that works for us.

And leverage is how we make inflation work for us. Here's the math:

Let's say you buy a home for $100,000 (to keep the numbers round) and you put down $20,000. Then let's say that, over a 30-year period, inflation averages 3 percent. Chances are your mortgage rate will be a couple of points above that, say 5 percent. At first blush, that sounds like a bad deal, because you're paying more than you're getting in inflation-driven appreciation. But wait.

After the first year (again, just using rough numbers) you will have 5 percent of $80,000 in interest: that's $4,000. (It's less after taxes, but let's ignore that for the moment.)

In the same year, your home will have appreciated by $3,000 (3 percent of $100,000). You may think you made 3 percent, but no, that's not correct. You only invested $20,000 of your own money to get appreciation, so the real return on your money for that first year was ($3,000 ÷ $20,000 =) 15 percent!

How many investments give you that?

That is an over-simplification to be sure, but the purpose is to show in math what so many people know in their gut: Your home is often your best investment.

Why not make the best investment first?

The Tax Break — a Possible Misconception

Uri brought up one of the more widely known advantages of home ownership:

Let's not forget about the favorable tax treatment that residential homes get. there's the mortgage interest income tax deduction, which will be highest in the earliest years of the mortgage – those savings can be put right in your investment fund. And there's the capital gains tax exclusion for the first 250K (500K if married) of gains. of course, some financial investment instruments get favorable treatment, too.

Many people like to hold out the income tax break you get in the United States as a reason why buying a home is a better way to go than saving for retirement. It's true, for many people, the deduction you get for income taxes is a help — but it's often not as big as you might think.

If you file a simple tax return, as most wage earners do, you simply take the standard deduction and the mortgage interest deduction disappears.

Also, if you are fortunate enough to make a lot of money, the mortgage interest deduction fades away.

So, in practice, the tax break is not quite as powerful a reason to go the route of buying a house as proponents make it out to be. But, under the right circumstances, it is a help.

My wife and I have always had the tax benefit because we never made that much money and because of other things, like charitable donations and stuff like that, which allowed us to file itemized tax returns every year where we got the deduction for interest.

Rent Inflation – the Ultimate Wealth Killer

Unless you inherited a dwelling which has been paid for, you are going to have to pay for a place to live. If you don't buy, you will have to rent. We know two couples in California who have been renting the same place for more than 20 years.

During that time, their rent has close to doubled. If they had purchased, their payments would not have doubled. Even if they took out a 100 percent loan at the time when those were common, and the rate was variable, their payments still would not have doubled.

Inflation kills renters' wealth and puts real dollars in the pockets of homeowners — a double whammy. To my mind, that's a compelling reason to make a home your first investment.

Caveats

But there are a couple of caveats to consider…

  • The moment you begin selling and buying homes, that math goes out the window, because the transaction cost in selling and buying real estate will often turn that equation upside down. Therefore, if you plan to move a lot early in your life, it may make more sense to start with a focus on your retirement savings.
  • Also, the math becomes quite unattractive if you begin your home ownership at the top of an economic cycle, because that puts a serious damper on that long-term appreciation. (I made that mistake and paid dearly for it, which is how I know.)

If you avoid those two caveats, I believe finding a way to buy that first home as soon as you absolutely can is most likely going to be the anchor of your investing career.

Are you in a position to leverage your home? Would you do it? What conditions prevent you from making a home your first investment?

More about...Investing, Home & Garden

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Beth
Beth
4 years ago

Interesting counter point to Holly’s article – but I wonder how many people can make their home their first investment? I started investing as soon as I started earning money. (Savings bonds for my university education starting when I got a paper route). I started investing for retirement when I got my first full time job. I don’t disagree that home ownership is part of a part of financial security – and I certainly don’t plan to rent forever! It’s just that most people I know were investing in RRSPs long before they bought a home so I question the… Read more »

Steve
Steve
4 years ago
Reply to  Beth

I agree with this comment 100%. I think it might just be a problem with the title, as I don’t actually disagree with the article. However, treating a home as an investment is a bad idea unless you are investing in rental properties. The problem is not so much “the price could go down” as it is the mentality. As the article actually goes on to explain, a house is somewhere to live, it is not a get rich quick scheme (be very careful with leverage…it is not free money). It’s been about 7 years since we all learned that… Read more »

phoenix1920
phoenix1920
4 years ago
Reply to  Beth

For me, I bought my first home within two years of graduating college. I was not investing in stocks at that point because I was saving for a down payment. I did not invest when I was paying my way through college because my college jobs were limited to ones that would not interfere with my success in college. However, once I bought my house, I immediately shifted and invested in the stock market. Children came years later. I was desperate to get a house because the market was good and in my town, I could buy a house for… Read more »

Elizabeth
Elizabeth
4 years ago

My current retirement plan is purely investing, absolutely no real estate at all. I don’t want to be stuck in one place for a while and I’m not interested in the home maintenance. Obviously not going into the details here, but I am in the minority! Basically everyone who can afford a home buys one. I just find it funny that there’s even an article written about this because it’s how 99% of the population thinks and operates already. I found the other article interesting because it challenged common views, whereas this one just seems to reinforce most people’s current… Read more »

lmoot
lmoot
4 years ago
Reply to  Elizabeth

Although I agree with your points about the concept of one’s home as an investment being a common one, I don’t think there really isn’t enough discussion about how to make it more of an active investment, one which you take over more control and rely less on the market value. Most people who think of their home as an investment are projecting similar concepts as the stock market. As home prices go up, the value goes up, inflation, and so on. There are so many more ways to make a home a premeditated, smart investment that doesn’t involve simply:… Read more »

Elizabeth
Elizabeth
4 years ago
Reply to  lmoot

Thanks for the reply, and you do have a great point. I, too, believe that while buying a home is very commonplace, people just assume that buying a home is automatically a great investment when you could actually do quite a bit more to make the investment work even better for you. Renting or buying depends on so many factors that someone could probably spend their whole life going through all of the scenarios. Add in a few emotions, and the whole thing gets even more complex. I guess I was just pointing out that most people are already set… Read more »

Steve
Steve
4 years ago
Reply to  Elizabeth

I agree with you. Another caveat is the logistics of what sized home to get. If this is your first investment, hopefully it’s coming when you’re fairly young, e.g. if you choose to start a family down the road, you still have future children that haven’t yet been born. What size home do you buy? One that fits you now, with your current lifestyle? One that fits all of your future kids, hoping you already know the size of your future family down to the person? If you purchase a home as your first investment, you’re either paying for more… Read more »

Elizabeth
Elizabeth
4 years ago
Reply to  Steve

Absolutely. I can’t stand the concept of a “starter home”. It’d be so much better to save (and maybe invest) your money until you get to the point where you’re really ready to commit to something. You would be doing better than if you had to deal with all of the fees associated with buying and selling homes, and would be even better off if you managed to save the difference between owning and renting in the meantime! I have a friend now who bought a starter home, lived in it for a few years, he family grew, and then… Read more »

lmoot
lmoot
4 years ago
Reply to  Elizabeth

See I feel the complete opposite, even though I know a lot of people would agree with foregoing a starter. I think ladder climbing can prove to be a big win in the real estate game. It may make more sense if you’re dealing with a married couple who are actively /trying to have kids. But even that is a little pie in the sky thinking. Divorces and infertility happen. Even if they do eventually have those kids 4 or 5 years down the line, they’ve been paying utilities, taxes, insurance, and furnishings all this time, on a larger than… Read more »

lmoot
lmoot
4 years ago
Reply to  Elizabeth

*so sorry for all the grammatical errors. You all should know me by now. I’m at work ninja typing incognito-like in a super minimized window.

zoranian
zoranian
4 years ago
Reply to  Elizabeth

“Starter” homes can be great as long as you use them appropriately. For instance, we bought a “starter” home that I ran the numbers on and we would be able to sell for what we put into it within 2 years. We stayed there 4.5 years, paying less than we would to rent. With some capital investments and paying a bit extra in principal, we were able to sell when we moved for job reasons and able to put 20% down on our “real” home. We could have lived in the starter home for much longer if needed, but ending… Read more »

Erin
Erin
4 years ago
Reply to  Steve

Or you just need to be more flexible about your concept of what you “need.” My husband and I are DINKs, buying a two bedroom home. For now the second bedroom is our office and gets us a write-off on our taxes; in the future it could hold up to two kids, which I don’t think we would go beyond given our ages, location, and income. Will they whine about sharing a room? Sure, but whatever. Kids have been sharing since permanent houses were even a thing, so they’ll deal. And in the meantime we’ll be very happy to have… Read more »

phoenix1920
phoenix1920
4 years ago
Reply to  Elizabeth

From what I’ve heard, the philosophy of renting is gaining lots of traction with younger generations, so I’m not sure you are in the minority. It is also more popular in large cities where buying is too expensive. As for the article, it makes a lot of assumptions, including that the person wants to be able to move around a lot and is needing their abode to be easily liquiduated. There are also a few false assumptions–like renters not paying property tax or repairs. We all pay–just, with renters, it’s not line-itemed on the bill. If a city raises its… Read more »

Jeff
Jeff
4 years ago
Reply to  phoenix1920

“From what I’ve heard, the philosophy of renting is gaining lots of traction with younger generations, so I’m not sure you are in the minority. It is also more popular in large cities where buying is too expensive.” Be careful with that assumption. I’ve seen a lot of articles claim such by looking at statistics, however when someone decided to actually survey people in that age group it was found that over 50% want to be homeowners but simply can’t afford it in the current economy. That sentiment is very common among my peers, very few outright prefer to rent… Read more »

Beth
Beth
4 years ago
Reply to  phoenix1920

“We all pay—just, with renters, it’s not line-itemed on the bill.”

Yes! Thank you! I hate it when people say “you’re throwing money away on someone else’s mortgage.” Yes, part of my rent goes towards my landlord’s mortgage, but it also pay for property taxes, maintenance (including snow removal and lawn care), repairs, replacing things like appliances, building management, some utilities, some insurance, etc.

You can’t compare a rent payment with a mortgage payment alone.

Boris
Boris
4 years ago

I appreciate the article, but I would like to make a couple of comments. First we have to be careful in realizing the cost of interest. When talking about appreciation of the house we have to take the cost of interest in account. In your example the first year the house appreciated $3000 due to inflation, which is correct. However, we have to also see that the cost of getting there is $4000 in interest cost. This means that the return on your investment is not that great at least not in the early days of the mortgage term. If… Read more »

PacificNW2015
PacificNW2015
4 years ago
Reply to  Boris

Boris, perhaps my math is incorrect and please correct me if that is the case, but in your example the difference between what you paid for the house (down+mortgage+interest) and what the house is worth is $68K. Divide the $68K by the total purchase price of $175K and you’ve netted a 38%.

phoenix1920
phoenix1920
4 years ago
Reply to  Boris

By the same token, most of the costs that landlords pay are also a part of the cost of the rent. A significant number of apartments and homes for rent take into account that the landlords of those properties are also paying interest. Just like a landowner will ensure their property tax on the property and all other costs–like repairs, etc–are also taken into consideration. Landowners are typically in the business to make a profit, and depending on the place you rent, often include additional costs, such as an apartment manager, a maintenance worker, a book-keeper, etc. I was surprised… Read more »

David
David
4 years ago

Great article. I entirely agree with the premise. I would add one caveat, though. Even when a home is entirely paid for, there will still be monthly (and yearly) outlays. For instance, we own a townhome that, once paid for, will still incur about $300 in monthly expenses for the HOA, taxes, and insurance. I’d budget another $150 (or so) for maintenance and upkeep (though our HOA covers roof and siding replacement). So, we’re still looking at an average monthly expense around $400 to $450 for the home. In a rental, all of this is rolled into the price. That’s… Read more »

Tony
Tony
4 years ago

I’m having a hard time figuring out how this can be considered an investment, maybe someone can help. Purchase Price: $250,000 Costs: Down Payment: $50,000 Mortgage Principal: $200,000 Mortgage Interest: $130,000 Taxes ($5K/yr. @ 30 yrs.): $150,000 Maintenance ($5K/yr. @ 30 yrs.) :$150,000 TOTAL COST (over 30 yrs.): $680,000 So to break even in 30 yrs. you need to sell that home for $680K? What type of investment is that? Appreciation is all well and good, but if you’re not selling the house it’s meaningless. The housing market can also depreciate, which means you have no guarantee of that 3%… Read more »

lmoot
lmoot
4 years ago
Reply to  Tony

That’s the type of investment of someone who didn’t do their research, or did not intend their home to be an investment. There are many other numbers that pan out much differently (including my own). Would you invest in anything else without doing the proper research? A house is no different. Or should be no different.

Glorified Plumber
Glorified Plumber
4 years ago
Reply to  lmoot

Interesting, I agree with you that it is the investment of someone who did not do their research. Yet, this scenario represents a LOT of people purchasing houses. Wherever this fictitious house in this fictitious example is, there is still a lot of homeowners… who made this horrible investment. I agree with the OP of this comment here… so many homes are financially, not good investments, or at a minimum, the math is “fuzzy” and depends on a lot of assumptions we’ll have to wait 30 years to find out are or aren’t correct. Yet, despite this, renting immediately gets… Read more »

uri
uri
4 years ago
Reply to  Tony

you haven’t factored in the savings on rent. at $2000/month for 30 years, you’ve paid out $720,000. “Appreciation is all well and good, but if you’re not selling the house it’s meaningless.” i disagree. you can access the equity with a mortgage or reverse mortgage. imagine you buy the house at age 32 and you’ve paid it off by age 62, when it is worth $680,000. you can then get a reverse mortgage on it and access most of the equity, investing it in the financial instrument of your choice and live off the proceeds until you pass away at… Read more »

uri
uri
4 years ago
Reply to  uri

i meant to say “whatever else you *invest* in can also depreciate.”

Glorified Plumber
Glorified Plumber
4 years ago
Reply to  uri

Likewise, if his rent was $1,000, then his all in rent cost was $360,000, and he could have invested the difference.

The US is full of situations of high rent low cost to buy, low cost to buy low cost to rent, high rent high cost to buy, and high cost to buy and low rent situations.

You can’t just arbitrarily decide that this was a situation where the rent was similar to the mortgage and thus the financial decision to buy was supported.

uri
uri
4 years ago

i was not arbitrarily deciding that rent was 2K a month. i was pointing out that tony was failing to take into account the critical factor of savings on rent. i arbitrarily chose the 2K figure as an (unreasonably low, most likely) example to illustrate the point. i agree entirely with your point that whether it is better to buy or to rent depends on assumptions about a lot of things – changes in the buyer’s income, rent inflation, real estate appreciation, etc. if rent stays very low, perhaps as the result of decades of historically low inflation that also… Read more »

Tara
Tara
4 years ago
Reply to  Tony

Don’t forget, you have to count average “rent” against you’d pay if you didn’t own a home. Meaning, yes, you could invest that money and make more money, but you’d also be paying at least $15,000 a year in rent (for a 3 bedroom unit in a low cost of living area–much higher in expensive cities) if you didn’t own a house. In 30 years, if the rent never increased, that’s $450,000. So yes, take the $450,000 minus the $680,000 and you end up with $230,000. And more than likely, rent would increase so you’d be paying even more. I… Read more »

William Cowie
William Cowie
4 years ago
Reply to  Tony

Valid points, Tony. I think they’re incomplete, though. Even if the expenses you list are true (mine are lower, but that could be an aberration), the number above has to be compared with the missing alternative: renting. I happen to live in a neighborhood where the $250K price point seems to be the norm. Those houses rent for around $1,500 per month. Over 30 years, ones’ rent will add up to $540,000… assuming zero rent increase. That, of course, is unrealistic. With a (low) 2% per year increase, that total grows to $730,000. According to the S&P/Case-Shiller U.S. National Home… Read more »

Beth
Beth
4 years ago
Reply to  William Cowie

Yes, but what does that rent include? Property taxes? Insurance? Repairs? Replacing appliances? Over the long lifespan of the house, how many times does a person redecorate or renovate? Updates don’t stay updates for long when styles and trends change.

I sort of feel like investment costs are being overlooked here.

phoenix1920
phoenix1920
4 years ago
Reply to  Beth

The OP already figured that taxes and insurance were in the total price. I had to redecorate more when I was renting because I had to move more often. Over the years, I have had appliances go bad, but craigslist has amazing deals. Rent goes up and the landlord will put repair costs into the rent. Perhaps this was just my experience, but our rent went up about every other year when I rented before we bought our home

Rosta
Rosta
4 years ago
Reply to  Tony

What would be rent for such a house? If it is $2000 per month in average durign 30 years, then the expenses are paid by not paid rent. And you have house.

Eric S
Eric S
4 years ago

I have another caveat — this doesn’t work if you live somewhere that either has an unstable job market or one industry town (anyone who bought a house in Detroit in the 80’s will tell you this), or if you live somewhere that real estate is unreasonably expensive (see the Bay Area, Boston, New York, DC, etc.). In the latter case, you either lose a large part of your investment in commuting time and costs and possibly lose money when the market sinks and nobody wants to live that far out, or you buy a hovel, and spend all your… Read more »

Melissa
Melissa
4 years ago

Great post, William! I did a similar post not too long ago about why my fiance and I are buying our next home instead of renting. My fiance is lucky enough to own his own home right now, and it’s doubled its price within 5 years.

While not everyone can buy during a bust and sell during a boom, the other reasons you mentioned are also why we’re buying our next house. Rents can (and do) go up, landlords can be jerks and refuse to fix things – none of this is a problem when you own your own home!

Tom S.
Tom S.
4 years ago

One essential point to be made is that some people are in essence just renting the homes they own. If at the end of 10, 15, 20, 25 years you have no equity in your home because of using equity to pay for trips, cars and college education you have just been renting. This was abundantly clear in the 2008/2009 recession. I am all for paying down or paying off a mortgage as soon as possible. The interest payments stop and and when I go to sell the house all the equity, regardless of the the value of the house,… Read more »

ALR
ALR
4 years ago

Is the math on the LTV example correct? 30K is only 5% down on a 600K house.

Mike
Mike
4 years ago

$30k gets you $150k at 80/20. $600k would be 95/5.

freebird
freebird
4 years ago

If I was starting a job fresh out of college, I don’t think buying a house would be my first investment. I think I would sign up for my company 401k before settling down. Of course if my employer offered to match my mortgage payment, I would choose differently!

Bryan@Just One More Year
[email protected] One More Year
4 years ago

I agree with William that buying a home with 20% down is a great way to leverage a large cost item as a home. This provides a great return on your money in the first few years. Skip forward many years and the math starts to work against you. This audience has a frugal mindset, so it makes sense to pay off the mortgage as quickly as possible. Right? The problem is that you start locking up equity in your home that you are not directing toward other investments that provide much better returns. Sure you could have a reverse… Read more »

Mysticaltyger
Mysticaltyger
4 years ago

This was a good piece, but some important caveats were missed: –You have to buy a house you can actually afford. That almost always means taking out a loan for less than what the bank says you can afford–usually a lot less. –Having a paid off mortgage is great. But this article neglected to mention taxes, insurance, and maintenance costs never go away–and these are significant costs. Even if you can do a lot of the maintenance and repairs yourself, it takes a lot of time–and you may not always be in a position to do these things in the… Read more »

Elisabeth
Elisabeth
4 years ago

We did buy our home at the top of an economic cycle – the height of the bubble in 2005. However we did not buy more house than we could afford, and we bought knowing we planned to stay put for at least 5 years. Our home value has more than bounced back. Along with our other investments it dropped a little in the downturn, then rocketed past where it had been before. We are now considering modifications that would allow us to rent out a room, as rents in our area have skyrocketed as well. I may not be… Read more »

Lynn
Lynn
4 years ago

As homeowners with full-time careers, the largest expense that my husband and I face every month isn’t our mortgage, it’s childcare.

Katherine
Katherine
4 years ago
Reply to  Lynn

Agreed. But one thing I keep telling myself is that childcare is temporary. And maybe one day when we’re not paying it, we’ll be flush with money to invest.

DP @ Someday Extraordinary
DP @ Someday Extraordinary
4 years ago

Wish I would have bought earlier in my career, but the arguments for renting definitely ARE valid. Just the ease of moving and having no maintenance responsibility was almost enough to convince me to keep renting. However, it all depends on how you view your home. I personally don’t view my home as an investment . . . it’s our home, and that’s it. Although, if we are lucky enough that it appreciates significantly, I would definitely consider selling.

Anyway, good write up! Keep up the good work!

-DP

lmoot
lmoot
4 years ago

Finally had a chance to read the article at lunch. Great points William. Your father is right and I wish more people considered the fact that real estate will never be obsolete. Population is outta control and continues to grow from people being born, living longer, and immigration. It is the perfect industry. Everyone needs it, and it’s a non-renewable source. And unlike in a majority of stock investing, alot of real estate investing is common sense and simple planning and strategy. You have more control which to me equals freedom to make as little or as much as you… Read more »

Beth
Beth
4 years ago
Reply to  lmoot

I think that’s a really important distinction. I don’t think I’d consider my principle residence to be an investment per se, but a rental property would be another story.

Katelyn
Katelyn
4 years ago

I large motivator for me buying a home is that rent in my area has gotten out of control. I was living in a 285 sqft studio for $1000/month (this sounds expensive, and it is, but is totally normal for downtown Seattle) when my landlord announced that rent would be increasing to $1200/month. I had not planned to buy until I had at least a 20% down-payment saved. But even with PMI and HOA dues (which luckily include property taxes and utilities), my monthly mortgage payment on my 700 sqft 1 bedroom condo is $1300/month. I get 2X+ the space,… Read more »

stellamarina
stellamarina
4 years ago

Just want to add on the wisdom of Suzie Orman….Do not take out a second mortgage on the house you live in. I have seen several families lose their house in our town because of this…..big ideas for remodeling or family functions and ended up with a monthly payment they could not afford.

Frank
Frank
4 years ago

Good job William. And as a pair of articles, particularly with all the comments, this was a great discussion. Really shows what GRS can do when its hitting on all cylinders. A lot of websites stop with the rent vrs. Buy calculus. But this is GRS. I hope there is now a third article coming out that explains how to best manipulate either situation! Taleb in Antifragile has a marvelous theory about skipping prediction/forecast and going straight to dealing with the possible outcomes. People spend way too much time arguing over unknowable inputs and rounding errors and fail to prepare… Read more »

Vanessa
Vanessa
4 years ago
Reply to  Frank

Yes. Some of us will have to be life-long renters for various reasons. Are we completely screwed? Would be nice to know.

Mysticaltyger
Mysticaltyger
4 years ago
Reply to  Vanessa

No, renters are not necessarily screwed. If you save and invest a portion of your income every month, you will not be screwed. But it can’t be a skimpy amount. You’ll need to be investing 15% for retirement (if not right away, you need to get there within a few years) and maybe another 10% in savings accounts until you get that built up to at least a few months’ expenses. Then you can take most of what you were putting in your savings account and put it toward your retirement funds. Bottom line: If you rent, but still save… Read more »

Sanjeev
Sanjeev
4 years ago

Good Article William ! I agree some of your points and disagree some of the points. To me, a house is a place to live and enjoy. I do not look at the house as an investment. Yes, if I have other rental properties besides my house,then I look at them as investment, not the main residence. To me, it’s like this, I buy a pant and a shirt to wear and enjoy, I do not buy thinking them as an investment. Same with the house, I live there and enjoy. My goal would be to pay off as soon… Read more »

Kayla
Kayla
4 years ago

Some of these comments make me lol and the article itself makes me question the quality of this blog. Yes I am in the 20 something generation that just graduated and rents. Almost everyone I know wants to own a house myself included. Almost every older person I know thinks renting is throwing your money down the drain. Also everyone I know has made money on their house in their eyes which if they did the math over the years probably was a lot less than they think. Look at this: I rent for 1050 per month and the same… Read more »

phoenix1920
phoenix1920
4 years ago
Reply to  Kayla

I don’t think the article is at fault–if you live in an area where the rent is THAT much cheaper than owning, that is a location-specific situation. I have generally found that the friends I have known who had to pay a lot more on a mortgage than on rent were getting into much bigger house than their apartment was. You should absolutely look at what homes in your area that are equivalent are selling for, and of course, you should not buy a mortgage at the top end of your budget. For our family, we bought a “starter home,”… Read more »

L
L
4 years ago

Ummm, are we forgetting that leverage works BOTH ways?

Saying leverage is awesome for a 1st investment is like saying it’s a great idea for someone just staring out to buy stocks on margin. Sure, you can *probably* juice your returns that way, but you can also lose a lot more money than you have!

uri
uri
4 years ago
Reply to  L

in theory, yes. in reality, if you make a bad home investment, it is very unlikely you’ll lose more than the house. in some states, i believe, mortgage loans are non-recourse, meaning if you are foreclosed the lender cannot try to collect beyond what it gets in the sale. in states that so have recourse, as a practical matter lenders never seem to go after the debt unless they have reason to believe the borrower has a lot of money kicking around. so with a mortgage loan you get the benefit of the leverage without much of the risk.

L
L
4 years ago
Reply to  uri

Well true, but losing “just” the house is a huge ding to your credit and a pretty traumatic experience for most people.

Even if in a less drastic scenario, say someone puts down $20% and a few years later is forced to sell their house at just a 10% loss. That 10% is 50% of the downpayment amount, not even counting transaction costs. So a relatively common scenario leads to losing half of your money because of leverage.

uri
uri
4 years ago
Reply to  L

good point about the credit rating, although i suspect most people who are at risk of losing their houses have already taken a large credit hit by missing payments (on the house and otherwise) and the impact of the foreclosure is marginal. apart from the credit rating, there’s the fact that many lenders will not give a mortgage loan to someone who has undergone a foreclosure in the last X years. nevertheless, i think it is generally possible to get another loan about 3 years after foreclosure. besides which, difficulty in getting a second mortgage loan if the first mortgage… Read more »

uri
uri
4 years ago

i’m hoping that the pro-buying people can clarify why they think a 20% down payment is better than a lower one. since one of the main benefits of buying is leverage, why leverage at 4-1 when one can leverage at 19-1 or more? since i think we all acknowledge that the stock market appreciates at a much higher rate than the housing market, wouldn’t it make much more sense to put 5% down on the house and put the other 15%, if you have it, in the stock market? i know you need to pay private mortgage insurance until you’re… Read more »

phoenix1920
phoenix1920
4 years ago
Reply to  uri

Isn’t PMI removed at 20%? When I first bought my house years ago, we had to pay PMI for the first year, until our worth in the home met a certain percentage, but that was over 10 years ago, and I can’t recall the percentage.

uri
uri
4 years ago
Reply to  phoenix1920

my situation is that PMI is reduced once we cover 10% of the sales price, and eliminated once we get to 20%. the question is, wouldn’t it make more sense to put down 5%, invest the 15% and pay the PMI rather than put down the 20%? for example, if you buy a 250K house and have 50K lying around, you can put down 50K and borrow 200K for 30 years. At 4% fixed you are paying about $950/month. or you can put down $12,500 and invest $37,500. you would be borrowing $237,500, which works out to about $1135/month principal… Read more »

Jerome
Jerome
4 years ago

I am surprised that after graduation somebody would want to buy a house. I think it is financially much more beneficial to use the years after graduation to develop your career: work hard, learn a lot, get broad experience, get some foreign experience and do whatever is important in your line of work. As this takes a lot of time and energy and as it is important to be flexible during this phase of your life I would always rent as small as possible after graduation and save as much as possible cq. get rid of any debts. I would… Read more »

phoenix1920
phoenix1920
4 years ago
Reply to  Jerome

Your choice (well-developed career with apartment v. underdeveloped career) is a false choice. This depends significantly on your career. Many careers have state licensing requirements so those careers as a whole are not involving employees who flit in and out. Other occupations are dependent on building a business/clientele. If you are working as a store manager in a rapidly expanding retail corporation, it may not be wise to buy a house. If you are entering a profession where your company has to build a clientele and network in the community, you want to put down roots. In my field, most… Read more »

chintan
chintan
4 years ago

I bought a House six months ago. I just want to know it is advisable to pre pay the mortgage ?

uri
uri
4 years ago
Reply to  chintan

as i see it, the only material advantage to prepaying the mortgage is getting rid of private mortgage insurance. this is assuming you have a standard fixed rate mortgage and are not trying to refinance. so if you are pre-paying, prepay only the amount it would take you to get to 20% equity in the purchase price of the home. i would analyze it as follows: 1. figure out how much PMI you pay every month between now and the time you are 20% vested in the house. 2. use an excel spreadsheet to figure out the expected return if… Read more »

Simmon Yau
Simmon Yau
4 years ago

I think you’re completely missing the fact that you have to pay home insurance and property taxes in addition to the interest %. If you calculate everything in, renting is usually still a better deal than owning a home. Owning a home is great if you want a better quality of life or if you happen to live in a place where your home value will appreciate very quickly such as NYC or SF.

Jerome
Jerome
4 years ago

I am a physician, I know all about state-licensing and I know that it can be a real burden. And I agree with you, job-hopping is not part of the development of a career. But moving to a new job or company after a couple of years can be very beneficial for the development of a career. I think it is impossible for somebody fresh from college to know exactly what part of their chosen profession is best suited for them. And even if they think they know, there is no way to guarantee that a first job fits that… Read more »

cfox
cfox
4 years ago

The cost of owning and maintaining a home is a fixed cost. It is either paid by you as a homeowner or your landlord pays it. If your landlords pays it then they are transferring that cost to you through higher rent in addition to the profit they want to make off of the property. This is the reason I think it is better to buy a home assuming you will staying 5+ years in the same location.

Beth
Beth
4 years ago
Reply to  cfox

How is the cost of maintaining and owning a home a fixed cost? Property taxes usually go up. Insurance goes up. Utility costs go up. Repairs might be higher some years than others. A mortgage payment may be a fixed cost but the rest of it isn’t. Based on some of my friends’ experiences, house are full of surprises — especially the older ones! (Knob and tube wiring — surprise!) I don’t mean to sound critical – I’m wondering if there’s a way to budget so that these increases and surprises equate to a fixed cost. For instance, if you… Read more »

Brian Robben
Brian Robben
4 years ago

Good points here that drive the discussion on investing in stock market or housing. I’m still undecided, but this article helped me reflect on the topic further, which is all I can ask. Thanks!

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