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The Money Pit: The Untold Secret of Home Ownership February 18, 2009

Filed under: Hot Topics,Life, Whatnot — indiakonstanze @ 2:28 am
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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.

Let’s compare:

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.

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77 Responses to “The Money Pit: The Untold Secret of Home Ownership”

  1. Tom Says:

    Hi, I like your site. I also surfed over from Patrick.net. First off, you are correct, a home is not a good investment, it’ll historically only keep up with wage inflation, over the long run. But you did neglect to mention the benefits of being able to write off mortgage interest, and the opportunity cost of what someone’s down payment could have earned them in another investment vehicle. Generally the tax write off benefits are highly overrated, so it does not overthrow your conclusion, as I’m sure you know. I will be glad to see the “buying a home is always a good investment” b.s. go by the wayside as this recession and housing correction (not crash!) continue. Keep up the good work! (btw, I’ve been to DeGray Lake State Park a couple of times….pretty, but hot and muggy in the summer! Hope you make it back to California on your own terms. Best, Tom)

  2. rodney Says:

    you should at least factor in the tax savings from owning a home for a fair comparison. this country greatly encourages home ownership with inappropriate tax benefits.

  3. test Says:

    test

  4. JR Says:

    I am a renter and looking forward to lower prices near me on the San Diego coast. So i am with you in your thinking, but I want to point out that the home debtor in your example did end up with a house after the 30 years, just as the renter saved $195K or so. My example would have used different figures and they really make a bigger difference in my area. In my area, the cheapest home was $900,000 in 2004. It was insane, and the average tract home was over 1 million, and nicer home were of course much more. I rented one house that the home debtor bought for 1 million $ in 2004, for $1500 a month. Then I moved to another house in 2006 and pay rent of $1550 a month. A similar house next door sold for $800,000 a month after I moved in. The home debtor probably spent $4500 a month in interest for the same type home I rent for $1550 a month. Then the home debtor put on a new roof, and hand gardeners and repair workers there every week. I’ll be the home debtor put $100,000 into the roof and other repairs over 3 years. Then he paid over $8,000 a year in property taxes (rent to the governent). He put down $160K when he bought it. He drove new cars every year and lived high on the hog. Recently, after about 3 years, He could not sell the house. The bank short saled the house. The debtor lost his down payment. I figure it cost him $442,000 to live there 3 years. Meanwhile, it cost me $56,000 over 3 years. In addition, I put the $5,000 a month I was saving into certain stock funds. I saw the house crash coming in 2004 and the dow crash coming after that, and bought funds that went up as the markets fell. I am in cash, now and could pay cash for a home, but I have learned so much that I know why Warren Buffet only owns one home, the one he bought 50 years ago. There are much better investments. A home is just a place to sleep and store your stuff. The less you put into it, the better. most homes are liabilities, not assets. I could go on and on, but basically, I don’t want to put more than $200K into a home on the coast and not more than $100K inland. Now I’m seeing homes down to $400K in my area, but I know they will fall for another 5 to 15 years. Some a few miles inland are $150K now, but we may see those prices again on the coast. We have not had news coverage of a big earthquake here in 15 years. When a big one hits, The news channels will run it for days and weeks and like 1995, people won’t pay much more than $150K for tract homes on fault lines. Then years afterwards they will forget about the fault lines, but by then, those of us who waited and saved, will have paid cash for a house to live in, not an investment.

  5. dp Says:

    Like is too short to be living in a rented house.

  6. dp Says:

    Life is too short to be living in a rented house.

  7. aksteve Says:

    GREAT post, im with ya 100%. I too paid the bank some money for the privilege to paint the walls and maintain THEIR investment (remember, they paid more into it than you did initially).

    “Owning” you home is a luxury, and certainly not a good investment and never was.

    NOW if you counter “uh, well my friend bought a house in SoCal in 1998 and sold in 2006 an made a KILLING”, well that theory only holds true if you skip town with the money and buy elsewhere. It would be stupid to buy back into the same market.

    All ballooning investments are unsustainable. So once the income to price ratio exceeds 1:4, you have an overpriced market. Next time you decide to buy or sell, just do that math.

  8. aksteve Says:

    …….Oh, and another thing: In my case I pay 6.25% interest + 0.8% annual property tax. So if my home value doesn’t appreciate at least 7.05%, Im paying more to leverage less and am losing money on the deal. In my area, (kenai peninsula borough, Alaska) home appreciate only 3.5%.

    So paying over 7% to maintain a 3.5% “profit”. Investment?

  9. anon Says:

    You’re forgetting to take into account your assets at the end of 30 years
    rent: interest earned on the 195, 645 (+ the 195,645 itself)
    home: worth 497,588, assuming that the house increase is 3% a year (the same as the inflation rate on the insurance). Over 30 years, 3% return on housing is at the low end of what’s generally been expected over the last 100 years or so.
    Amount of interest you’d have to earn to break even as a renter:
    301,943, or about 10K a year on average. That would require some nice investing on your part (doable, but not guaranteed).

    Conclusion: if home appreciation is on the slow side, and you invest your money wisely, you can break even as a renter.

  10. islander Says:

    You’re being generous to homeowners.
    $1200 hardly buys a washer-dryer. A fridge and stove? Appliances barely last 10 years these days.
    Hot-water heater or furnace, installed?
    A new roof would chew up several years of that budget.
    Who keeps the same kitchen for 30 years?
    What’s a new fence cost?
    Add a 2nd or 3rd bathroom for your teenagers?
    Develop a basement?

    Money. Pit.

  11. Working Class Schlep Says:

    I’ll start off by saying I’ve rented all of my life and I’m 40.

    Renter’s insurance runs me about $300 a year. Also, where I live, rents for a three bedroom house (size I need for my family) run around $1,300 and up (it’s what I’m paying now).

    Not all houses are in subdivisions requiring association fees and I would never live in one- too many busy-bodies. We plan to do our own landscaping and groundwork so we won’t be paying extra for that outside of a new lawnmower. at our rental we already do our own shoveling and snow blowing.

    I do think you left out a big problem with renting in the current market- many rentals are actually for sale and/or in pre-foreclosure. It’s becoming more common for renters to suddenly get eviction notices or have real estate agents doing showings. What’s to say your landlord won’t lose his or her job after you move in and then things go sour? In Maine, where I live, some people paid to have heat and hot water included only to have it turned off because their landlord didn’t pay.

    Again, I’ve been on the sidelines during the bubble, waiting to buy. But I did want to add some cons about renting. I think both suck right now. : )

  12. RR Says:

    I certainly agree with your point and for the most part your right in the center bullseye. However, lets not forget that we, as Americans, are hard wired to own homes. You know, go to college, meet someone, graduate, get jobs, get married BUY a house, get a dog, have 2 kids …. and so on and so on. The thing that most renters fail to do in many cases, is put that $195,645 away on top of normal savings, which is usually pretty close to zero.

  13. Stephen Says:

    Read: “The Truth About Real Estate Appraisal” and you’ll understand the true fraud of real estate.

  14. Thom Says:

    This is the best review of home ownership that I have read in years. You nailed every point. I knew this already so I recognise it but frankly 99.9% of the public do not. You are applauded for this piece, brilliant work.
    Funny, these suckers bullied into being “owners” laughed at those renting over past nine years – who is laughing now?

  15. pfar Says:

    I’m a happy renter. However your analysis, while a good one, is flawed. You need to add in the tax deduction for interest expense. In addition there is a subjective variable. Rentals are typically not the same size and format of home layout that a house tends to be. At least on the high end. While the $ analysis you ran shows a differential, in real life its not as clear a difference. Thus why the rent vs buy spread is so wide.

  16. T Says:

    Your argument being correct very much depends on what rent prices do or did and what property prices do or did and if you bought low and sold high. I ran through my historic rent numbers and found the volatility to be much greater than implied by your argument.

    Our rent was :- 1025, 975, 830, 905, 715, 1050, 1175- and in 2000 it all went to hell in a hand basket… We started at 1355, then it was increased to 1410, and towards the end of the year it was increased to 1550 where it stayed until 2002 when rents increased to 1775 and in 2005 to 1825. Rents increased to 1835 and then 1995 when we went month to month. We moved to a smaller even more expensive location and rent went up to nearly 3000/mth. btw, as horrific as that was, it was a far better deal than what the mortgage would have cost

    The most expensive place we could have bought at the time we started renting was around 150K and had a HOA fees due… but it didn’t matter because we didn’t have ANY savings so we couldn’t have bought anyway. That 150K dump of a condo is now a 550K dump… and about 15 years older.

    Your argument that as a renter you would save money doesn’t seem to be borne out by my real numbers. Once your state income taxes are about that of the standard deduction – a good start if you are to actually afford high priced property, your property purchase on an interest only loan, especially if home does not have a HOA fee, is massively subsidized. The richer your income, the more outrageous the debt, the bigger the subsidy.

    I have always rented… but I disagree that this has saved a lot of money. When the bubble caused property prices to go up, it caused rents to go up too. Your model should allow for that. Your model should factor in the cost of being forced to move house by a landlord who gouges on the rent because they know they can – pay more to stay put, or pay in time to move next door to where it is a lot cheaper for signing a lease. It should better factor in the hit of inflation too.

    I once complained that renting cost us about twice what colleagues were paying for their long time mortgage – and how that impacted hiring of new people. We were told tough luck for being so stupid as to rent rather than buy while prices were cheap for california – that was our choice live with it – and that most people coming to the area would be selling from elsewhere or would be new graduates who could suck it up. As to the real geniuses minting money from their property empires – well I hope they are still stuck with them or that the bank has reclaimed them. I do not wish the arrogant aren’t I clever bunch and aren’t you stupid bunch anything good at all.

    Interesting side note: where we started renting – the 1025, 975/mth place, went on to convert to condos. The starting price was around 300K and quickly became as much as 450K. I don’t know what the resident incentive was. The 300K 1b units are now trying to sell for around 190K+ and the 450K units are trying for 265K+ (sold in 2004 at 400K) Many of these units have been foreclosed on – but those are even cheaper.

  17. tkami Says:

    Tt a modest 2.5% inflation or rent increase
    Yr 1 rent 800.00/month 9840.00
    Yr 10 rent 1000/month 12000.00
    Yr 20 rent 1278.92/month 15730.72
    Yr 30 rent 1637.13/month 20136.65
    for a total rent of of $432, 000

    Not lets say you end up paying $600,000, no lets say $700,00 in total over the 30 years for the house that you bought for 200,000 Also although histocially false, but for argument’s sake lets say the house does NOT appreciate at all, i.e it only keeps up with inflation i.e. , lets say 2.5% as same as the example above you will be able to sell it at least 400,000after 30 years. So your total cost will be 700,000 – 400,000 = $300,000

    i.e. even if you buy a house for 200,00 and do not expect any real appreciation you still end up spending
    432,000-300,000=132,000 less over the 30 year.

  18. Mick Says:

    Sounds good. But, What about tax returns on mortgage interest? pls update adding that in!

  19. MikeinMiami Says:

    Make sense for sure. The average person that takes out a 30 year mortgage is screwed. Now with 40 and even 50 year mortgages, oh my…

    My parents bought a brownstone in NYC for 47,000 in 1967. Today even at a reduced rate its worth 2.1 million. They have lived rent free for over 40 years, as they paid cash so the argument goes both ways.

    I think if you have the cash and can buy a place outright then go for it, if its cheaper than renting in 10 years. Why 10 years?! For some its a personal preference and they would prefer to buy rather than rent.

    The sad thing is most broke asses shouldnt be buying even at 5 percent interest.

  20. Quixote Says:

    Astute–but I’m certain the unRealtors will point out that you neglected the income tax break on mortgages.

  21. Franco Says:

    There are many good points here. The economic benefits from renting over buying are largely related to avoiding overpaying for a house and avoiding realtor fees on selling. In the past few years and probably for the next few years, renters will come out on top. If house prices revert to normal levels vis-a-vis income, the economic advantage will dissipate. Keep in mind that the landlord bears all the costs of home ownership (except for realtor fees since they’re not buying and selling) and is going to pass these on to the tenant. If they don’t they’ll go bankrupt. So, over the long run, rent vs. buy costs should be about the same except for the realtor fees which are not insignificant. Currently, many people who are renting homes waiting for the market to come back are doing nothing but shielding renters from the inevitable market decline. (Newflash for people waiting for the market to “come back” – the market is coming back – back down to where it should be. It will not go back up for years.)

  22. Your math is off. I’m not sure where you are living, but your numbers are not the same as my area. A *comparable* home in the same area for Western Washington (Lake Stevens) would cost 1300 per month to rent vs 1600 per month to buy, using a USDA loan, or a FHA loan with 20% down (both 30 year loans).

    The 1600 per month includes payment, interest, insurance, and taxes. Yes, the cost of taxes will rise, as insurance will too.

    The cost of rent rises in our area much faster. For the first year a much smaller, less efficient *townhouse*, not a house, was $850.00 in a bad area. It went up to $895.00 after the first year. This is a small increase compared to my last two apartments in the general vicinity.

    Compare that to the homeowner who’s monthly payment does not change. Also, don’t forget, homeowners can write off their interest, lowering their tax liability.

    When there is a great disparity between a mortgage payment and rent payment, for a comparable home in a comparable area, i.e. apples to apples, then one should not buy until the price of the home comes down.

    However, in our area, after the tax write off, and after several years of rent increases, the gap is quickly closed, leaving the homeowner with not only the lower total payment, but a paid for home. Even if there were no tax write off, the constant mortgage payment is beneficial over time.

    Also, by the time I reach 60 (in 30 years), the money you saved renting will not be enough to purchase a home. I highly doubt prices will not climb in the next 30 years, along with rents, insurance, and salary. This leaves your 13.5 year statistic skewed.

  23. dean marshall Says:

    Great blog and so, so true. Home ownership is all part of the myth of the American Dream. We buy into it because some so-called expert says we should. True, some people made money with the “bubble” because they were gaming the system and riding the wave of hype associated with it, but not now. I don’t think people realize that home ownership is a form of indentured servitude in that for the life of that 30 year mortgage your interest, taxes, insurance and upkeep are guaranteed to help sustain the jobs and livelihoods of a whole slew of people only remotely connected to your actual home. It’s a benign sort of parasitic relationship that gets lost through all the “smoke and mirrors” blather of ownership and equity building.

  24. Tom Says:

    “Let’s compare:
    30 years of home ownership: $584,850
    30 years of rental: $389,205
    The renter saves $195,645 over 30 years.”

    If this comparison rented an equivalent house, and accounted for the value of the paid-off house for the buyer, the buyer/owner would come out on top. It is possible to make a case for renting, but you didn’t do it with these numbers.

  25. MacG Says:

    You forgot to factor in the government bailout you receive for being a mortgage owner.

  26. Alex Says:

    Hi, Good article, but you’re missing a facts that’s even a BIGGER argument in favor of renting. Your numbers are reasonable. But you’re calculating the “Savings” you accumulate from renting simply by adding them.

    If you take the “Monthly Savings” between Rent Vs. Mortgage [ say $500 ] , and simply put them towards a simple / basic / conservative investment [ money market / mutual fund ] , then at the end of the 30 years the money you’ve saved is probably more than TWICE your estimate, which will buy a better home, or equates to 25+ additional years of rent.

    However, to also be fare to the argument of owning : If I don’t really care about traveling and I know I want to stay in my town Regardless … and with the current crash / crappy market, by the end of 2009, the amount to RENT a decent townhouse will be Almost be equal to Owning it [ calculating everything : mortgage + tax + insurance + … ]. Assuming your ONLY investment will be the 20% down payment. Once those two numbers are equal or close [ Rent Mortgage ] , then Owning is defiantly a better deal.

    Try this link, it’s a really good calculator that does a good comparison & tells you the “break even” point, and when it would be better to RENT Vs. OWN.

    http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=3&ref=patrick.net&oref=slogin&oref=slogin

    Thanks, Alex.

  27. Ian Says:

    Great post but you forgot one thing.

    Even if the house doesn’t appreciate, at the end of the 30 years you still own it.

    So subtract $205,000 from $584,850 gives you $379,850, a bit less than the rental cost.

    Yes I know you’ll lose 6% selling it, blah blah blah. But at a minimum this shows that you certainly aren’t throwing money away by renting, PLUS you get all hose other benefits of not doing maintenance (which you are grossly underestimating) and the mobility to move when your latest job is outsourced to India.

    I’m a big believer in renting, and my link above goest to a rent vs. buy calculator that I built.

  28. Randy Says:

    Interesting to note but your estimates are for non-bubble regions. In bubble zones, like eastern MA, it’s more like 2x rent = average mortgage payment.

    So from that perspective, not including a lot of the overhead, if the typical rent is $1200, then an equivalent mortgage payment would be $2800 or approaching $900K for the life of the loan.

    So from that perspective, one can buy an entire house, out right, at the end of one’s career for retirement w/ money in the bank. That’s what I intend on doing.

  29. Anon Says:

    Nice analysis. Only 1 thing is missing. The amount of tax you are going to save on your mortgage interest payements is not captured. So the final balance will not be ~195 K

  30. Ram Says:

    You have not factored int he tax breaks for property taxes and interest paid.
    You have not factored in the fact that the rents will increase over time.

  31. Mike Says:

    Great article! You put the “rent vs buy” argument into such a clear and logical perspective. I love the way people trumpet home equity (and chastise “money flushing” renters) but never mention such home ownership bugaboos as property taxes, maintenance, insurance, and mortgage interest. And now that homes are actually losing value, tell me–what is the advantage of buying right now?

    That’s another thing I tire of hearing: “now is the BEST time to buy!” Ask someone who makes that argument to tell you why, and they’ll likely say it’s because home prices can only go up from here, or because interest rates are historically low . However, people have been saying those EXACT SAME THINGS for the past six years.

    You can’t tell me that rising unemployment and mounting foreclosures–among the other troubles plaguing our economy–won’t continue to exert downward pressure on home prices. That’s especially so because home prices are still too high when compared to what most people earn, or what it costs to rent.

    Again, great article. I’m going to bookmark it.

  32. Frank Says:

    I’m with you in general, but you’re leaving out tax incentives for home owners, i.e. the tax deduction you can take on the interest, which effectively reduces the $230,400 interest by whatever your income tax rate is, let’s say 25% or roughly $57,100. The savings of renting over owning over 30 years are now $138,545.

    The other thing you’re ignoring is inflation. Assuming an annual inflation of 2%, this compounds to 81% inflation over 30 years. In other words, what you can by for $1 now will cost you $1.81 in thirty years. That means two things:

    1. You’re rent increases that you’ve put into your calculations are likely not increasing your standard of living, since they don’t compensate for inflation.
    2. You’re $138,545 savings in 30 years will not buy you nearly as much as you think because in today’s dollars they’re worth only $76,544.

    The one thing we’re not factoring in for an even more accurate picture is that the money you save earns you compounding interest over the 30 years. So my estimate is too negative.

  33. John Davis Says:

    You’re forgetting about the tax deductions, which would put something like $100k back in your pocket over that 30 years. As for equity, it depends on where the market is when you buy. Some parts of the country (e.g., Murrieta, CA) are within 5-10% of the bottom, and buying at the bottom will get you equity beginning in only a few years.
    You’re also forgetting about the very long-term benefits of buying – when you kick the bucket, sock that house away in a trust fund, have a property manager handle the landlord duties, and your kids will get to milk that cow the rest of their lives.

  34. Diomedes Says:

    Good article.

    One thing you may want to consider adding as an addendum is the cost of selling a home and moving.

    Virtually no one nowadays stays in their homes for the full duration of their mortgages. Many move due to job losses or transfers or the need to ‘upgrade’. That adds quite a bit to the overall cost since realtors charge ridiculous amounts for home sales. (6% commission)

    Furthermore, it generally costs more to move a whole house since there is quite a bit more stuff.

  35. […] [BB] The untold story of home ownership […]

  36. K Says:

    “I’ve got $195,645 to burn.”

    According to your math, the home owner will own a home worth $205,000. If he sales even with agent fees and land transfer taxes he would still be slightly ahead of you. And it is highly unlikely that after 30 years his home would still be worth that. It would most likely be 50-100% more just taking into account inflation. The money you saved would lower in value due to inflation but property usually keeps its value.

  37. Alex Says:

    Those who rent must rent from somebody. That somebody must make positive cash flow from the property, >6-8% ROI, else it’s pointless. That means the renter is paying more to live in that property than the landlord is paying to own (and maintain) that property, its taxes, insurance, interest, etc. Why would you rent a house for $1200/mo when you can own it for $800/mo and call it yours (after 30 years). Not so smug…

    Oh, and you left out tax benefits.

  38. Sam Says:

    You also earn interest on cash that you hold and accumulate over time, you pay interest on the mortgage loan.

  39. Richard Says:

    I don’t know what the interest deduction amounts to over 30 yrs, but it should be part of the equation. Another consideration–no landlord will ever evict me from my purchased house. Not trying to change your mind, though.

  40. A Says:

    Correct me if I am wrong but with your hypothetical situation of rent vs buy. Don’t you have a home worth 410,000 paid free and clear at the end of 30 years?

    30 years of home ownership: $584,850

    30 years of rental: $389,205

    The renter saves $195,645 over 30 years. But does not “own” a $410,000 home.

    They are really missing out on 410,000 – 195,645 = 214,355 in value.

    Seems worth it to me (and most people). But 205k doesn’t sound like an overpriced house. You also didn’t meantion any tax savings on all that interest over the course of 30 years (probably another 100k).

    I agree with most of your other points. Unfortunatly that 205k house is still selling for 410k right now, at least in my area, and that is down from 700k.

  41. AdamCO Says:

    In a proper market, renting costs 10-15% more per month than paying a mortgage. This holds true in many midwestern markets. Cincinnati has houses that rent for $750 that can be bought for $65,000 (which would carry a mortgage payment of just under $400). This is the reason why I assume many people bought houses before they were such an “investment.”

    Your assumption says the opposite–that a mortgage is probably higher than rent. For where I live (the intermountain west), everything you say is spot on. I rent for $725 and the mortgage plus costs on a similar place is well over $1100. So I try to save the difference for when prices are lower. And if prices are never lower, I’ll keep renting and have a bunch of cash to spend on whatever.

    I liked the post though, keep it up.

  42. dr Says:

    Well, renting is a good deal, but the only thing you left out is:
    If the homeowner sells the house when paid off, lets say for a small gain on the original price of 205000. Lets make it 284850 to make it easy, The actual cost of “renting the home they bought” would be 300k over the 30yr period wheras the true “renter” paid 389k. Using your numbers its better to own in that scenario.

  43. indiakonstanze Says:

    This is an excellent point, Diomedes. Part of the reason owning a home makes no sense for me is my tendency towards nomadic living. I just like fresh surroundings every few years, and I want that change. When you rent, it’s easy to pick up and go. Not so when you own. It’s true–I don’t think many people fulfill a 30-year mortgage (let alone a longer term). My husband talked our realtor down to 4% on commission to help get us out of here for less, but it’s still a $7,000 bill I’m stuck with.

  44. indiakonstanze Says:

    Thanks, Mike! 🙂 I agree…until homes fall to prices that the average person can afford (3x a yearly salary), it will not be a good idea to buy. Even so, when my husband and I bought, our house was only $5,000 more than 3x our combined salary. And we’re still in the hole, what with property tax, repairs, etc. Renters of the world, unite!

  45. indiakonstanze Says:

    Good reminder, Ian. I truly do think renting is the way to go…because even when you own your home after 30 years have gone by, how many more maintenance issues are going to crop up in a now-older home? I’d much rather pick up the phone and call a landlord to come and fix my leaky roof than fork out the cash to fix it myself. Some people might call that lazy, but that might just be my way of “outsourcing labor.”

  46. indiakonstanze Says:

    Your situation sounds like where my parents live. They bought for around $225,000 in ’93 or so, and watched values skyrocket to $700,000-$775,000. Did they sell? Nope. Now houses on their street can’t sell for $315,000. In any case, the Little Rock market is sooo different from the California market. I’ll still be happy to get out of it. Thanks for your comment!

  47. indiakonstanze Says:

    I like the way you think, Sam.

  48. indiakonstanze Says:

    No, I’m not so smug because I’m about to take a $30,000 loss just to get out of my house. But here in Little Rock, you can’t own anything for $800 a month that you can then rent for $1200/month. Not possible. Maybe in another market you could, but this one just wouldn’t support it. Rents in the neighborhood I’m in top out at about $1100, and the mortgage payment alone is about $1275, plus $3,000 yearly property tax, plus maintenance expenses.

    Tax benefits? That will be the subject of my next post. They haven’t done me any good at all in the first two years of owning a home–I’m still in the hole at the end because of property tax. The deductions aren’t what people think they are, unless you’re paying a ridiculous amount of interest. If you have good credit and got a good interest rate, you won’t beat your standard deduction by much. Trust me. It’s happened to me two years in a row.

  49. indiakonstanze Says:

    The tax breaks aren’t what people think they are. I’m working on a follow-up post that details this. In my first two years of owning a home (all interest, basically), I’ve barely beat my standard deduction. My husband and I are left looking at each other saying, “What tax benefits?” Basically, if you take your standard deduction and donate a sofa, you’ll come out the same as if you owned my house. Others might pay more interest, but for my situation and my interest rate, the tax break hasn’t happened at all.

  50. indiakonstanze Says:

    Thanks, Mike! I appreciate it. I just wish someone had warned me about property tax. I probably wouldn’t have bought if someone had sat me down, walked me through the math, and told me how much I would “flush” away in property tax each year. Spread the word!

  51. indiakonstanze Says:

    Dean, you rock. Indentured servitude is exactly what it is. It’s a con. I’m so convinced of this. I was never happier than when I was in an apartment, but it was the stupid pressure from everyone…family, friends, society, whatever…that made me feel like I had to buy, or I was doing something wrong. At least I’ve seen the light.

  52. indiakonstanze Says:

    Jacob,

    You’re right–rents will vary sharply by area. Here in Little Rock, they’re still dirt cheap. You can rent a house on several acres for $500-$600 a month (not the world’s nicest house, but very livable and without neighbors). But in California, where I used to live, rents went up sharply, like where you’re describing.

    The tax break for mortgage interest did not work for me at all. My interest rate is good and low, and even after deducting a full year paying only interest, we didn’t beat our standard deduction by much at all. So for us, that was a benefit that never existed.

  53. indiakonstanze Says:

    Hey Mike…so true! My parents bought their first house for about $30,000 and sold it for $175,000. They just happened to time it right, and make out like bandits. For most of us, that would never ever happen, especially not now. I’m with you…if you can pay cash, awesome. More power to you…buying could make sense. But if you are living from paycheck to paycheck, or have less than $25,000 in the bank, it just doesn’t make sense.

  54. PDuff Says:

    I think it really depends on your individual circumstances. For example, I bought a relative out of a duplex that both pays for itself and throws enough money off each month to pay for my mortgage on my primary home, so I essentially live for free. Were I to rent my home instead, even before the tax advantages I would be paying at least 1/3 more; with the tax advantages I’d be paying twice as much. A few years ago I bought a vacation home that I rent enough that about 1/2 my costs are covered, and write-offs plus deductions take care of most of the rest. My plan is to have everything paid off in 20 years (a bit early) so I can live cheaply, make my vacation home my primary home and enjoy what I estimate will be at least $5,000 per month in free cash flow. And that assumes I won’t be trading up into larger income properties. After all, nothing’s better than having good tenants help me pay off my mortgage!

  55. Sarah P. Says:

    I am a 12 year old girl, and my dad is a real estate investor. He has taught me so many things about todays world. Acording to him, it is a great time to buy right now. Finally, there are properties that acually pencil. (Meaning they will cash flow after PITI 100% financed.)

    There is a big difference between owning investment real estate with cash flow versus owning your home. Your home is not meant to be something that puts money in your pocket every month. It is a place to live. People need to understand this before they buy.

    Again. if you want to make real money in real estate, it is in investment properties; not your homestead.

    I plan on buying investment properties when i turn 18. I guarantee no matter what the market does, I will be rich by the time i am 30.

  56. Frank Says:

    First of all what about taxes? If you make decent money, say 100K a year or better, your ass gets pounded by Uncle Sam. What are you going to do? File short form? Bend the fuck over. You have essentially two choices, pay the interest or pay the tax. You math is faultly, but with India as the first part of your id, figures.

  57. indiakonstanze Says:

    Good lord, I make nowhere near 100K a year. I pay interest and tax…interest for two years so far on a home that’s lost 30K in value, and property tax to boot. The tax deductions for mortgage interest did not help at all…that’s another great myth. If you manage to make the system work for you, great. But it doesn’t work for me.

  58. indiakonstanze Says:

    Hey Sarah…best of luck in your investments! For me, I wasn’t so much looking for a home to be an investment…I just didn’t want it to suck so much money out of my pocket. If I wanted to wait out the market, I could hold onto this property and perhaps not lose as much money in the short run, but the strange thing is…I never truly felt at home in my house because I knew how much it was costing me. I worried about my dog drooling on the carpet or the walls, or scratching the baseboards…I worried about depreciation and damage more than I enjoyed the color of the cabinets or the pretty windows. So for me, buying just didn’t end up being the smart choice. But I hope you’re wealthy and ready to retire at 30, as planned. 🙂

  59. Randy Says:

    All the posts here indicate that there are a lot of non-RE bubble areas left in the country, sans the major coastal cities.

    In metro Boston, there are practically no places, outside of bad neighborhoods, where one can buy, where the going rent is anywhere near a typical mortgage payment. This includes the so-called starter homes. All mortgages are nearly double rent and when you factor in the taxes/maint, 2.5 or above.

    This is known as a real estate bubble and essentially forces many to either short sell, when their jobs move out of state, or take a huge risk, waiting years to re-coup their equity losses. All and all, it simply isn’t worth it. If a person is ask to move, he should be able to sell his place w/o losing his shirt. That isn’t asking for too much. In a market like this, it’s better to rent until a typical mortgage, in a non-Dodge City neighborhood, is within 1.2 to 1.4 against its going equivalent rent, and then, if you factor in inflation, Federal tax savings, etc, it’s not a bad idea to own than to rent.

  60. Rick Says:

    How about the fact that after 30 years, and your house is paid off, you pay a mortgage to NOONE. Outside of property tax, and insurance, you pay nothing a month to live there.

    As a renter, you will be paying SOMEONE ELSE, until the day you die. and it will only inflate in cost.

    Sorry dude, I still don’t see the logic of not wanting to be a home ower for the first 30 years, and I certainly do not see the logic of not wanting to own a home 30 years later. People do not just drop dead at 50-60.

  61. tommy Says:

    You are a duesche bag. The renter does not save $195,645. It makes no sense. After 30 years the house owner will have property worth $200,000 plus the appreciation the owner gets on the house after 30 years.

  62. tommy Says:

    nice title though.

  63. Jeeman Says:

    Come on, you compare owning a home to renting an apartment? Two totally different modes of living. There is a price point at which renting makes more sense than owning. That is where we are at currently. There is also a point where owning makes more sense than renting. You have to run the numbers, and factor in the fuzzy factors of:
    1) You can’t get evicted when you’re making payments on your mortgage.
    2) You can enjoy more satisfaction of “owning” something rather than borrowing something that belongs to someone else.

    But those 2 probably add up to a 10% premium to rent. Just to blanket statement say “renting is better than owning” is just as misguided as “it’s always better to own than to throw your money away on rent”.

  64. Sarah P. Says:

    India, I agree with what you’re saying about worrying about what happens to your home, like when your dog trashes . It is something to worry about but it’s not that big of a deal.

  65. Nice post! Keep it real.I have looked over your blog a few times and I love it.

  66. Kami Says:

    Do you really think that landlords who rent out their property don’t take all that into consideration plus some???? I know I sure do! Besides, your numbers are off. Unless you had a no money down mortgage on $205,000 and a rate of 6% (absurd, currently!) for thirty years, there is no way your payments would be $1200 per month! Property tax and home maintenance is inevitable, but property values are not. How about the folks who bought their homes for $6000 fifty years ago and are now selling for $200,000?? Sorry pal, being a home owner is better financially (at least nearly all of the time) and more free and more satisfying:)

  67. indiakonstanze Says:

    All I know is that I’m a renter now and have never been happier to be free of all the ridiculously time-consuming and expensive tasks that go along with being a homeowner.

    And no, the numbers aren’t off. My monthly mortgage payment was indeed $1200. I spelled everything out, including my down payment ($10,000) and the split between first mortgage and second (home equity) mortgage. I did indeed have a rate of 6% on that first mortgage, acquired in late 2006.

    As for property values, I’d like to see a home purchased in the ’60s for $6,000 sell for $200,000. But it’s just not that cut and dried. How much money in yearly maintenance and upkeep and refurbishments would have had to be spent in order to merit a price tag of $200,000? How much property tax has been paid in those fifty years? Surely combining all the insurance, interest, property tax, maintenance, and renovations would come close to nixing a profit.

    Plus, is any home that old really going to sell for that price in this market? A few years ago, sure. A year and a half ago, maybe. Now? I’m not convinced.

    I’m glad you’re satisfied with it, but as for me, I just couldn’t accept it.

  68. Mitchell Says:

    While this is great, it ignores the danger of inflation. If inflation starts skyrocketing (something quite possible due to the current fiat printfest) your mortgage payments go down in real dollars. Guess what happens when your lease runs out during a period of high inflation?

  69. indiakonstanze Says:

    Hey Mitchell–thanks for the comment! In response, I would say this: I dare say that no inflation-based rent increase is going to equal the $3,000 I paid a year in property tax when I owned a home, plus the extra $900 per year extra I paid in homeowner’s insurance as opposed to renter’s insurance. If renting suddenly costs $3,900 a year more than it did before my lease expires (that’s a $325 a month increase), the solution is not owning a home…it’s leaving the country entirely.

  70. ben dover Says:

    How much were rents 30 years ago?

    should give you an idea where you’ll be paying 30 years from today.
    Where I live rents have easily doubled so your $1500 per month will become $3000 per month.

    for short term satisfaction renting looks good but in the long run this is pretty bad advice you’re giving.

  71. indiakonstanze Says:

    Where you live is not where I live. Rents have not doubled here in the past 30 years. If they do double where you live, there’s a very easy solution: live somewhere else. In the south, you can easily rent a house for $400-$600/month. Not a McMansion, but a regular bungalow-style house. Even if this *were* to double, it would still be well below what you’re referencing at $1500/month. I pay nowhere near $1500/month now–my husband and I split rent on an $850/month apartment. You can’t beat $425 a month…even if that were to suspiciously double, it’s still a far cry from a mortgage, plus homeowner’s insurance, plus $3,000 a year in property tax.

    Sorry, Ben. No dice.

  72. But wait.... Says:

    But wait, aren’t you paying all those extras (prop taxes, insurance, etc…) with your rent? I seriously doubt the landlord is renting out the apartment at a loss. Someone has to pay those fees, and I’m sure it’s part of the money you pay in rent.

  73. indiakonstanze Says:

    Sure, I bet it’s all built in there somewhere. But look at it this way…I’m splitting it with dozens or hundreds of other people. When you own a home, every dime falls on you. All $3,000 of property tax. All $900 of homeowner’s insurance. Just right there, you’ve got almost $4,000, or a third of a year’s rent for me. Even if my rent includes, say, $100 for the owner’s property tax and $50 for insurance, it’s *still* going to come out cheaper than paying for it all by myself in a home.

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  76. kp Says:

    I was with you until you basically said that in the end as a homeowner you end up with nothing. Whereas as a homeowner after the 30 years you still end up with a house. And you said that you may just “break even”.

    Breaking even sounds pretty good as now you will be able to get the “breaking even” of $435,400 back in selling your home. Even if your not “making anything” that still is more than the $195,645 you say the renter now has.

    So as I understand it you left out that in closing the tallies are:

    Homeowner: $435,400

    Renter: $195,645

    If you tried going to your landlord after 30 years and asked for at least the amount you paid in rent to be returned you would get a blank state.

    I’m wondering why you left this out.

  77. george carlin Says:

    this is a great article everything you said was spot on


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