I will now reveal to you, my dear readers, the secret about owning a home that no one in the whole freaking world will tell you: IT IS COMPLETE AND TOTAL BUNK. It does not make you any money. It will always cost you money. Don’t believe me? Keep reading.
First off, the people who say it’s a great investment do so because: (1) they think paying rent is like flushing money down the toilet—you don’t own anything and you’re not building equity; (2) they have no nomadic instinct whatsoever, and (3) they care deeply about paint color and/or the kind of tile on their countertops. Now, let me prove mathematically, why these arguments are all HOOEY.
Rent vs. mortgage: Okay, we all know that you pay a crapload of interest on your mortgage, and you pay it up front. You do not pay interest on rent. If you buy a house for $205,000 and had no interest and a monthly payment of $1200, you would pay off your home in 171 payments (14.24 years). But that doesn’t happen. Instead, following the strictures of my own home loan, you pay $1200 bucks a month for 30 years at a fixed rate of interest. That’s an extra 16 years of payments, for a total of $230,400 that you pay over and above your principal. That means you’re paying $435,400 to own your home in 30 years. At that rate, it has to more than double in value just for you to BREAK EVEN.
Now, let’s not forget about homeowner’s insurance. Mine currently runs about $650/year, and it goes up by about $50 a year. Even if we say the price rises $50 every three years, you will pay $23,850 in 30 years of ownership IF you have no claims that cause your rates to rise more than my built-in inflation. This brings our 30-year total to $458,850.
And we also have the delightful surprise known as property tax. My property tax is about $3,000/year. Some urban areas run as much as $10,000/year and rural areas as low as $800/year. If I use my own tax amount as an estimate and assume the amount due every year does not change. I will pay $90,000 in tax over 30 years. Our grand total is now $548,850, just for the bare minimum a homeowner has to pay.
This is not including homeowner’s association dues, maintenance fees, landscaping, yard service fees, remodeling, refurbishing, appliances, etc. Over 30 years, you have to expect some of that. How much? I have no idea, but $1,200 a year seems a VERY low estimate ($100 a month for lawn service/maintenance and association dues). So let’s throw another $36,000 in the pot, for a revised grand total of $584,850, all for a house that started with a $205,000 price tag.
Still with me? Now let’s compare this to an apartment. My rent will likely be a bit less than a mortgage payment, but just to be generous, let’s say I increase my standard of living throughout that 30 year period. Let’s use $800/month for five years, $1000/month for ten years, $1200/month for 15 years. That gives us $384,000.
Renter’s insurance will cost me about $120/year. Let’s use the same metric for judging this potential cost increase as we did for homeowner’s insurance, just to be fair (an 8% increase every 3 years). This puts us with a 30-year total of $5,205. Not too shabby. This boosts our total to $389,205.
With an apartment, we have no property tax, so nothing is added to our total. We also do not have homeowner’s association dues, maintenance fees, landscaping, yard service fees, remodeling, refurbishing, appliances, etc. Some eager beavers might beg their landlords to let them repaint, but let’s just say you’re content to call the manager when the toilet clogs and that’s it. You have no additional costs added to your total.
30 years of home ownership: $584,850
30 years of rental: $389,205
The renter saves $195,645 over 30 years.
Now, for those who say the benefit of buying is to have a rent-free place to live after their mortgage is paid, that $195,645 saved could either (a) buy a decent house in a lot of parts of the country, in cash, if that money were socked away over 30 years; or (b) pay for 13.5 additional years of rent at the $1200/month price.
If you buy a house when you are 30 and live there for 30 years, you are 60 when your rent-free livin’ kicks in. If you had rented those 30 years, your 13.5 free years would get you to age 73 and a half. Not too shabby. In those 43 years of renting, you would never have had to fix your own roof, toilet, stove, or refrigerator. You could save just as much, if not more, of your remaining paycheck as a homeowner could, giving you at least the same (if not more) savings to see you through from age 73 and a half to death.
Equity? Good luck getting that in today’s market, and good luck pulling it out of a bank when you want to use it. With markets tanking right and left, you can no longer count on an easy $30,000 whenever you feel like it. For that matter, good luck getting the steady 4% a year increase in value I projected to try and make my home’s value double just so I could BREAK EVEN on my investment.
And what happens if you want to move? If you rent, all you do is ride out your lease, and lose a portion of your deposit ($100? $200? Unless you let your dog crap on the carpet, you’ll probably get most of it back). If you own, you have to hope your home has appreciated enough to compensate for the commission you will need to pay an agent. After all, in some parts of the country (mine), agents will blackball “for sale by owner” homes, thus forcing you to pay them if you truly want to sell. Add in closing costs (full or partial, depending on your agreement with the buyer), and you might be even more screwed. Plus, if you want to buy again, you have to have another down payment…don’t tell me you didn’t save another $20,000 in between the insurance and property tax and general repairs?
So. We have established that renting does not flush money down the toilet…in fact, it saves you enough to buy a home, eventually, or rent 13.5 years longer for no extra cost. It allows you to move at will, without paying an agent $8,000 every time. It does not allow you to tear down walls and paint everything pink, but hey, if I want that, I can do it when I buy a house at age 60 with all the money I’ve saved in renting for 30 years.
So the next time I’m at a party and someone asks me why I don’t want to own a home, I will direct him or her to this blog posting and smile smugly. Then I will pay cash for the cosmetic surgery that erases my smug smile lines; after all, I’ve got $195,645 to burn.