Many people have said “What do you think of the idea of me buying a home?” Here is some advice.
There are many reasons to not buy a home:
- Cash Gone. You have to write a big fat check for a down payment. “But its an investment,” you might say. Historically this isn’t true. Housing returned 0.4% per year from 1890 to 2004. And that’s just housing prices. It forgets all the other stuff mentioned below. Suffice to say, when you write that check, you’re never going to see that money again. Because even when you sell the house later you’re just going to take that money and put it into another down payment. So if you buy a $400,000 home, just say goodbye to $100,000 that you worked hard for.
- Closing costs. This is about another 2-3% out the window. Lawyers, title insurance, moving costs, antidepressant medicine. It adds up. 2-3%.
- Maintenance. No matter what, you’re going to fix things. Lots of things. In the lifespan of your house, everything is going to break. Thrice. Get down on your hands and knees and fix it! And then open up your checkbook again. Spend some more money. When you rent and the dishwasher doesn’t work, call the landlord and he fixes it.
- Taxes. There’s this myth that you can deduct mortgage payment interest from your taxes. Whatever. That’s a microscopic dot on your tax returns. What’s worse is the taxes you pay. So your kids can get a great education. Whatever.
- You’re trapped. Let’s spell out very clearly why the myth of homeownership became religion in the United States. It’s because corporations didn’t want their employees to have many job choices. So they encouraged them to own homes. So they can’t move away and get new jobs. Job salaries are a function of supply and demand. If you can’t move, then your supply of jobs is low. You can’t argue the reverse, since new adults are always competing with you.
Ugly. Saying “my house is an investment” forgets the fact that a house has all the qualities of the ugliest type of investment:
- Illiquidity. You can’t cash out whenever you want.
- High leverage. You have to borrow a lot of money in most cases.
- No diversification. For most people, a house is by far the largest part of their portfolio and greatly exceeds the 10% of net worth that any other investment should be.
- Trapped, part 2. Some people like to have roots. But others like things to change every once in a while. You can pick up and move anytime when you rent.
- Rent. People will argue that the price of the mortgage, maintenance taxes, etc is all baked into the price of rent. Sometimes this is true. But usually not.
- Psychology. Look at your personal reasons for wanting to own. Do you feel like you can’t accomplish something in life until you own a house? Do you feel like it’s part of getting married and “Settling down”, i.e. creating a nest for your future children? For you, is it a part of becoming an adult. Is this what your parents taught you? Examine the real reasons you want to own and make sure they are coming from a good spot in your heart.
- Your time. Do you really want to spend all that time working on your house? Is this where your time is best spent towards creating a happy and fulfilled life for yourself?
- Choices. When you rent you always have the choice to leave. To live wherever in the world you want whenever you want. Adventure becomes a possibility even if you never take advantage of it.
- Stress. For some, owning a home equals stress.
- Cash is king. If you like cash in the bank and like having access to it, rent. Owning means it is all tied up in one illiquid investment.