Why I’d Rather Shoot Myself in the Head than Ever Own a Home Again

(Photo: iStockphoto)

This is a cross-post from James Altucher‘s blog Altucher Confidential. His previous appearances on the Freakonomics blog can be found here.

I had only one friend on MySpace when I joined in 2005, Tom. In fact, everyone who  joined MySpace was friends with Tom. He welcomed us all to our new cyber home and made us feel as comfortable as possible there. Tom is Tom Anderson, a co-founder of MySpace, and automatic friend to everyone who signed up.

So, through a strange set of circumstances and coincidences, Tom just emailed me. A great crime had been committed against me and Tom Anderson, my first friend on MySpace, wanted me to know about it.

Somebody had disagreed with me. Tom sent me a link to a site, realtytrac.com. He wrote me, “Btw, saw a rebuttal to your home-ownership article today that I thought you might be interested in:”

Someone named Rick Sharga wrote a column there arguing against my recent column: Why I Am Never Going to Own a Home Again. It took Rick only about four lines to insult me, which shows he doesn’t read my stuff very closely. He said I would probably recommend that people buy “stocks” or my “fund of funds.” In other words, he’s suggesting that the only reason I could have an opinion is out of complete self-interest. I guess in most cases that’s how the world works, which is a shame. I have no self-interest at all in this opinion. I want to help people.

My theory is that complete honesty frees me from the shackles of stress, anxiety, financial insecurity, spiritual insecurity, and so on. Most people who read my blog think that I’m almost sabotaging my self-interest by revealing all that I do. In fact, it’s the reverse. My self interest is freedom in my head.

For instance, in contrast to Mr. Sharga’s opinions on my self-interest, I recently wrote a column: 10 Reasons You Should Never Own Stocks Again. And, I also happen to think most hedge funds are scams and would never run a fund of hedge funds again. So, all self-interest is out.

I legitimately believe people would be happier if they didn’t mortgage their lives away, if they didn’t fall into the myth of the white picket fence leading to happiness, if they pulled themselves away from the American Dream and found their own path to follow.

So Mr. Sharga starts off already being completely wrong by misrepresenting me to his readers. But that’s fine. People do that all the time.

Next he makes his argument with another highly intelligent point:

The context that Mr. Altucher lays out is actually more hysterical than historical. The notion that homeownership was some sort of deep, dark conspiracy foisted on innocent rubes by diabolical business owners to keep them permanently grounded (and therefore, unable to escape their low wage, dead end jobs) is just pointy-headed nonsense.

First of all, I do not have a pointy head. Its more of a square. But, it’s a fact that many early factories would often provide housing for  employees and then charge them for the “rent,” deducting it from their salaries. This was a standard technique  100 years ago. Often employees would get in debt to the factories, keeping them, in fact, “grounded”.

But lets get even more hysterical. Lets look at the trillion dollar banking industry. This was the best business in the world, until it wasn’t (2008).

How do banks make money? Very simply. By borrowing from you at cheap interest rates and then lending to you at higher interest rates. What? How do they do that? Well, when they pay you 0.5% on your checking account it’s as if they are borrowing from you at a very cheap interest rate. When they then turn around and give you a 6% mortgage loan, they are lending to you. They make money on the difference between the 6% and the 0.5%. It’s a great business and I often advise people to become the bank when they have that opportunity.

It’s such a great business, in fact, that banks have spent 200 years drilling it into us with billions in advertising that the “American Dream” is to own the white picket fence, the paved driveway, maybe borrow more to make an extension to the house. Put in a swimming pool. Tear down some walls. Nobody can ever kick you out. You’re not flushing your rent down the toilet. You’re owning! You’re keeping up with the Joneses (the most successful, yet mysterious, family in American mythology, that we all have to keep up with. What happens behind closed doors when the beatings occur, when little Bobby Jones cries himself to sleep, the Joneses will never tell us.) But, at least in 30 years you will own that home. You’ve fixed in a mortgage rate so inflation won’t kill you. And having your own home means you now have “roots.”

As Mr. Sharga says:

Simply going back to the beginnings of the U.S., the concepts of “wealth” and “land ownership” went hand-in-hand.

I guess that’s true. I can’t find it in the Constitution anywhere but the man knows what he’s talking about.

He also states:

[G]oing back to medieval times, the feudal lords basically were land barons; the serfs, the working poor of the age, were allowed to live on the lands in exchange for paying exorbitant amounts of money to the lords. However, much the lords decided to collect. Or you could leave (on your own, or in pieces). Sounds like a renter’s lot in life to me.

I’m a serf and always will be. I’ll never be a “feudal lord.” Fortunately, because of innovation, entrepreneurship, and the rise of economic growth throughout most of the world, the life of a “serf” right now is probably one million times better than any feudal lord could’ve ever hoped for back then. Here are some benefits of being a serf right now:

  • More cash. Renting usually does not require a down payment that uses up most of the cash in your bank account. You’re never going to see that cash again if you use it as a down payment. It’s just gone into an illiquid investment and when you most need it, that’s when you are most likely not able to get at it.
  • Less debt. It’s true a mortgage locks in your payment. But you’re greatly in debt so you are paying interest straight to the bank that has nothing to do with increasing your ownership. In many cases it will take 20 to 30 years before you stop paying that extra interest to the bank.
  • Less inflation risk. Property taxes often go up faster than inflation, whereas rent usually does not (by definition, since government calculated inflation uses rents instead of home prices).
  • No maintenance. Homeowners have to take care of all maintenance. Some years that might be nothing (unlikely) and some years that may go up much faster than inflation.
  • Less overall costs. When property taxes and maintenance go up faster than inflation it means you are probably not covering the costs (plus the mortgage) via renting.
  • More flexibility. In a global economy, opportunities can be anywhere. I like having flexibility.

In other words, if you are a feudal lord today, you are laying out more cash than the renter/serf, and being caught in the spider web of escalating costs in every direction. Whereas the serf has only one payment, which is often contractually laid out for years. I have a contract that specifies my rent for the next ten years with my option to renew.

Which means that the serf can diversify his portfolio to a much greater extent than the feudal baron; plus, the serf can move more easily to take advantage of opportunities in other geographical areas, as opposed to the serfs of medieval times that Mr. Sharga compares us to.

That down payment that the feudal baron put out will go up in value only if housing does, and it’s completely illiquid and usually a major part of his portfolio (little diversification). And he’s flushing money down the toilet with interest (which usually doesn’t go up with inflation), property taxes (which often go up faster than inflation), and maintenance (which goes up with inflation).  The serf is flushing money with his rent payment. But he has more cash in the bank, a more diversified portfolio, and is generating liquid cash (hopefully) from other investments. He also has the cash to be an entrepreneur, move around to take advantage of other opportunities, etc. This (in my experience) more than makes up for the rent down the drain.

Some people, for their own personal reasons, like to own a home. I have nothing against that. Go for it. Just make sure it’s not because of the hypnosis provided by the American banking industry which props up the American Dream.

Mr. Sharga gives a parting shot at me:

For Mr. Altucher, the notion of homeownership seems downright scary. And he shouldn’t own a home. He probably shouldn’t own a car either — or a goldfish. He wants the combination of limited responsibility, someone else “taking care of things,” and the ability to move to Sri Lanka on a moment’s notice. And he wants his investments to all be liquid (so maybe I should re-think the goldfish part).

He’s  absolutely right about all of those things. I would never own a goldfish (disgusting) and I lease my car (well, my wife does. You need a license to own a car). And I love the fact that I can move to Sri Lanka at a moment’s notice, although I actually really like where I live right now. And owning a home is downright scary to me. Leveraging up 400% in an illiquid investment with no diversification is a scary concept to me and should be to any rational person.

I don’t like to quote people without their permission. But I’m grateful Tom Anderson pointed out that article to me because I think it misrepresents some of the things I said by implying I have self-interest attached to my opinion. Tom has already experienced great success as an entrepreneur and will continue to do so. As he states in his email to me:

The fact that I’m finding articles on realtytrac might give you some idea of what I’m up to.

Tom Anderson is going to succeed at whatever he sets his mind to. As for Mr. Sharga, I’m going to give him constructive criticism. He shouldn’t try to bring me down (“self interest”, “scared to own a goldfish”,  “hysterical”, etc) to make his point. That’s bad writing in general. He should read my 33 Unusual Tips to Being a Better Writer and the next time he lays out his argument I’m sure it will be better.

Will housing be a great investment? Who knows? There will be many great investments out there in the years to come. Innovation is not ending. A year ago nobody owned an iPad. Google is making cars that drive on highways without drivers, companies are curing cancer, and when I finish my teleportation machine, things are going to get a lot better around here.

 

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COMMENTS: 58


  1. Brandon says:

    What about the fact that eventually, you own a home? If I rent I rent forever. If I get a reasonable home with a reasonable interest rate and throw everything I have at the mortgage, I can be free and clear in under 15 years.

    Well-loved. Like or Dislike: Thumb up 22 Thumb down 12
    • Pj says:

      “If I get a reasonable home with a reasonable interest rate and throw everything I have at the mortgage, I can be free and clear in under 15 years.”

      Throwing “everything you have” at a mortgage doesn’t seem like much of a good way to live. And in that 15 years, how do you know what will change?

      I’m speaking as a homeowner, BTW, who realizes that like my student loans, I’ll probably be dead before either are paid off. Few people ever truly “own” their home. You overpay a variety of banks for the privilege of living on the land they own, and they can kick you off the moment you stop paying.

      Well-loved. Like or Dislike: Thumb up 23 Thumb down 1
      • JOHN B says:

        What is reasonable? Most people who bought between 2000-2007 are now underwater–with many having lost their entire downpayment.

        Home ownership has made many wealthy but a lot of luck is involved. Buying at the right time–if you happen to be the right age, with the ready cash, in the right locality etc.

        So while I don’t agree that homeownership never works–it certainly shouldn’t be a public policy forced upon us by the government, FNMA and lenders.

        Well-loved. Like or Dislike: Thumb up 16 Thumb down 1
      • Enter your name says:

        And that’s different from someone who invested in the stock market in 2000—how, exactly? I know of people who went bankrupt because they exercised their Silicon Valley stock options just before the bubble burst. Our newspaper profiled a poor guy who had a tax bill on a million dollars’ worth of options that were worth only pennies by the time he had to pay his income tax statements.

        At least he could live in his house while the bankruptcy proceedings were underway. The stocks gave him no such shelter.

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    • isaac says:

      Free and clear? Don’t forget that your going to be paying property taxes for the rest of your life. Remember that time changes things, and the area you live in now will not stay the same forever. Many old people find themselves unable to afford their taxes because the area they live in experiences growth and increases in home values.

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    • ECSL says:

      What about all the extra cash you accumulated by NOT paying a mortgage?

      Well-loved. Like or Dislike: Thumb up 13 Thumb down 0
      • john b says:

        i don’t know about other folks here. but my mortgage is hundreds of dollars less a month than my rent was for a better house in a similar location. Of course I have to pay for repairs and insurance. But even with that factored in, it’s pretty much even money and I get to do what I want with the place.

        Not to mention where I live there are far better options for buying than renting.

        Renting definitely makes sense in many circumstances. But for many, it doesn’t make sense.

        Well-loved. Like or Dislike: Thumb up 9 Thumb down 0
      • Paul S says:

        People who give this advice bought at the right time. The rest of us know that what goes up, can also go down. Sometimes way way down.

        We bought in 2007 so our situation is exactly the opposite. Similar houses in our neighborhood rent for up to $1000/month LESS. And that’s HOUSES. The picture really changes when you think about apartments.

        The bottom of the rental market is way deeper (and more acceptable) than the bottom of the ownership market. Simply put: you can get better housing for fewer dollars by renting.

        Example: in my town a down-on-their-luck family can still rent a safe & clean 2BR apartment in an acceptable neighborhood for $500/mo, with another $1000 in the bank for deposit & 1 month rent. What kind of house can you buy in ANY town with $1500 on hand? A really scary one, that’s what (if it’s even possible). With an even scarier mortgage. And that’s pretending this is a rising market (which would make that $1500 gamble on a crazy ARM a “smart investment”) … decidedly not the case.

        So, obviously: YMMV.

        Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
      • scott garapolo says:

        what the… $500? seriously, bags are packed, i’m ready. where in the world do you live at that rate?

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    • Peter says:

      Even if you have paid off your house, there is the “cost of ownership” to consider. Say your home is worth $400,000 and the going interest rate you can get in a savings account is 5% (Here in Australia these are normal numbers – guessing not in the US).

      Sell the house and stick it in a savings account and you’d be looking at $20,000 extra per year in income.

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  2. Tank says:

    My respect for Freakonomics and everything I have ever been taught, ever, about smart money management are at odds. Leasing a car? My father would have a heart attack.

    Well-loved. Like or Dislike: Thumb up 17 Thumb down 3
  3. Nic says:

    Interesting post. I disagree on several of the points but interesting and thought provoking none the less.

    You mention several times about the serf hopefully having a diversified portfolio but mention at different times you don’t support investing in real estate, stocks, or hedge funds. In your opinion, what does the ideal serf portfolio look like?

    Thanks

    Well-loved. Like or Dislike: Thumb up 18 Thumb down 2
    • Steve O says:

      I am fairly certain Altucher is referring to “picking stocks”, which he (100% rightly) condemns as throwing away money. The average non-Goldman Sachs type investor should participate in the stock market via mutual funds, which are professionally managed or professionally designed. If you pick a simple target date fund with extremely low fees, you can sleep soundly knowing you’re putting your money into a better place than stocks or real estate. It might not be the best, but you’re managing your risk while still expecting a decent reward.

      Real estate, stocks, and hedge funds don’t really fit into the actual definition of ‘portfolio’ of Modern Portfolio Theory, although the word’s popular usage has changed. A well-diversified portfolio has several different asset classes, possibly including domestic and international stocks, stocks with different size companies (small/mid/large cap), commodities, and/or real estate (in the form of securities), in addition to different grades of corporate bonds, T-bills, and cash.

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  4. AaronS says:

    This is going to ramble, but several things came to me from this article….

    When I am introspective, I think that the REAL reason I am trying to buy my home…is for my son. I want him to have a “place” that can, perhaps, one day be his. It’s the old attempt to try to give your kids a boost. At the same time, if you can leave your children a wonderful, enriching childhood because you ARE NOT tied down, or a good wad of cash, that, too, is a wonderful legacy.

    I imagine that one cause for owning a home is that while us guys just need a bed (or maybe just a couch) to sleep on, our wives tend to require appropriate decorating, color schemes, and the such, which usually means you need to own the place.

    My ideal life, I suppose, would be to drive a pick-up truck across the country endlessly, having internet access at all times, able to sleep in the back of my truck or in a motel, as I see fit, and the such.

    Banks are in the business of BUYING AND SELLING MONEY. They “buy” your money for X percentage, then “sell” it to you for X+, taking the difference.

    Stores BUY your money–they pay for it with a new dress, a new car, a can of baked beans, or what have you. You think YOU’RE doing the buying, but they are, too.

    Corporations still seek to keep us in their “shanty towns,” still buying from the “company store.” How? They strive to pay you enough to keep you from leaving…and too little to let you quit. I can’t imagine a company giving its employees health insurance…unless they HAD TO in order to retain the employees’ services. Just as they can’t blithely charge more than their competitors, neither do they want to spend more.

    There is indeed a great freedom that comes with not holding on to things too tightly. You can truly follow your bliss to a great extent. But when you have to pay the house payment, car payment, and so forth, you are living on the manor and serving a feudal lord. They have made it very unseemly to live off the manor. Why, to do so is to be considered a drifter, a bum, a slacker, and so forth. But it’s called freedom, I think.

    I will give serious thought to what you have said. I mean that.

    Well-loved. Like or Dislike: Thumb up 25 Thumb down 5
    • Nicole says:

      “I imagine that one cause for owning a home is that while us guys just need a bed (or maybe just a couch) to sleep on, our wives tend to require appropriate decorating, color schemes, and the such, which usually means you need to own the place.”

      …you have got to be kidding me.

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    • Deanne says:

      Just a thought about “buying a house for your son.” My parents bought a lovely house in the suburbs where my brother and I grew up. Now it’s a big house, designed for four people that is lived in by two people who work 45 minutes to an hour away. They’re still paying down the mortgage so they can’t afford to move closer to their work, and while it was a nice place to grow up, neither my brother nor I have any interest in living in that house. While it’s a nice idea to have a house that you can pass down in the family, there’s a good chance your kid will want to grow up and have his own home and his own experiences (unless the home is a vacation home in which case everyone wants it!).

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  5. Mr. J says:

    And never never never buy a timeshare. Many of the same reasons apply. Many of the same hustlers will talk you into a home and/or a timeshare.

    Hey, Hilton has hotels for you to rent, anywhere you want to go. No muss, no fuss.

    And the rooms that rent for $3,000 a night come with some surprising extras!

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    • Dude says:

      I own 3 timeshares – use 1 at least once a year and rent the other 2 out to cover all of the maintenance/taxes. Deposit the week with a resort company and you can stay anywhere on the planet – It just makes sense for a family of 7 or more with friends in tow – you can’t stay in a 3 bedroom condo for 7 days for under $600 (approx fees per unit per year) with that many people. Cook your own meals – have privacy in each bedroom… endless possibilities AND they’re deeded property! My kids can have them when I’m too old to enjoy them anymore.

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  6. Imad Qureshi says:

    I decided long ago that I won’t buy a house until late in my forties for the following reason

    As you mentioned rent is cheaper (no property taxes, owners pay taxes on property they won’t own until 30 years, no maintenance expenses – landlord pays for all maintenance, I don’t have renters insurance either – If I am a home owner, I’ll have to pay insurance, and finally Mortgage is generally higher since I will hopefully buy my dream house, although I don’t rent my dream home).

    On the other hand I disagree with you on not investing in Stocks (without reading your article). Yes there is some risk, but if you invest prudently, chances are you’ll do good in the long. Save money for kids College and then buy a house with rest of savings.

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  7. Hauke says:

    Once your teleportation machine is ready, I will think of buying a house. Because then I can live whereever I want to live in the long run but don’t need to think of moving for a job or other committments that are bound to a location (like family, favourite sporting locations or such).

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  8. SomeCallMeTim says:

    I own a townhouse, so I have the best and worst of owning and renting.
    The Best:
    – Price for a 2,100+ SqFt house was 40-60% of a similar size single family home in my neighborhood
    – Because the price was so low, the portion of my assets frozen into the property is relatively low (it did not hurt that I stayed well below the amount the bank said I could “afford”)
    – Although I still owe on it (and will do so for another 14+ years), it is mine to do with as I wish. I have renovated the kitchen and much of the 2nd floor to match my desires and tastes. Renters frequently do not have that option.
    – For better or worse, tax laws still favor ownership over renting. Although my mortgage and association dues exceed what I was paying for an apartment half the size of my townhouse, tax deductions bring that cost to within 5 or 10%.

    The Worst:
    – Although the Association is responsible for maintaining the outside of my townhouse, I am still paying for it in the form of monthly dues. Granted, part of rent is money the landlord theoretically saves for maintenance, so dues are simply the equivalent of rent. However, my Association is underfunded and the property is in need of significant maintenance/renovations. Funds to improve the property need to come out of my and 100 other pockets. I am on the Board of Directors and see the need for the repairs and the funds, but cannot convince the required 63 other homeowners to agree to pay more. So, the repairs remain undone, and the related liability remains.
    – Whereas if I rented and my landlord refused to do repairs I could break my lease (or not renew it) and leave, turning over a townhouse is a lot harder, and sales in the community are sloooooooooow.

    There is another factor that makes owning desirable for me: I hate moving. Moving sucks. Because I am in a stable job/company/profession and will probably not need to move to another city for employment, planting roots in my owned (mortgaged) home just makes me feel better. As AaronS stated – it is my “place”.

    Funny thing is – if I did not own right now, I might not buy. The uncertainty in the economy makes renting a very, very logical choice, and Mr. Altucher’s arguments come much more into play. But as I own already, I will keep it. And whether I buy again depends on where I move to and why…. I would have no problems buying again in the right situation.

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    • lylebot says:

      I also own a townhouse—bought last month, in fact. My mortgage and property taxes are not much higher than what I’d be paying in rent for a similar-quality (but smaller) space. I have a 15-year mortgage and a low interest rate (under 4%), and I can easily pay it off early while still having more than enough left over for a diverse portfolio of investments. Maintenance will be an issue, of course, but it’s very hard to see it becoming enough of an issue for me to want to go back to renting. The only real question is what property values are going to do in my neighborhood, and I don’t really have a sense of that yet.

      I’m sure my circumstances are not common, but neither is a 10-year lease.

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  9. cooljames says:

    I agree with everything that the author says, but disagree with his overall “never own” theory for two reasons:

    1) Permanent proximity
    My house is right next to the nicest park in Seattle. I have access to a huge number of facilities, including sport fields, beaches, swimming pools, etc. This location is such an asset, I would rather build a bigger house on my current plot of land, which leads to my 2nd point…

    2) Ability to customize
    Our home is nice, but not ideal. There’s a lot I’d like to change, and I have the funding. So, rather than move and move and move until I find the perfect home/landlord balance, I’m just going to remodel my house to be exactly where I want to live forever.

    What it boils back to for me, and I doubt I’m alone in thinking this: money isn’t everything. I’d far rather enjoy my life and maintain a stable and desirable property than live with the uncertainty of renting. If I never move again, and I live in the perfect home, that’s perfect for me even if I don’t have as much of a nest egg to retire with.

    Stability first, comfort second, money third.

    Well-loved. Like or Dislike: Thumb up 16 Thumb down 6
  10. L says:

    One note I’d make is that higher than expected inflation is good for home owners with a fixed mortgage rate as it lowers the real cost of the loan.

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  11. Allan says:

    James:

    You are right to suggest that renting has advantages for some persons such as yourself. Do you agree that owning also has adavantages for some persons? For example, in the same way that you derive pleasure from helping people, I derive pleasure from owning my home.

    Cheers.

    Allan

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  12. James says:

    I have to disagree. Not just the intangibles, though they’re important – for me a house, and especially a garden, is not a cause of stress, but an antidote to stress – but the financial wisdom.

    Maybe we should start elsewhere, with the car leasing. I’m not an expert on this, but AFAIK it’s pretty difficult to lease anything other than a brand-new car. Which I think means that your lease payments are going to cost about as much as buying that car outright, on a loan, no?

    Just to put some real numbers in here, I see that I could lease a new Honda Civic for three years at $2600 down plus $189/month. After three years, I’ll have spent a total of $9404, and will have to shell out about the same again for another lease. Alternatively, I could do as I did, and pay $8500 (cash) for a used Honda in 2003, and still be driving the same car today (with reasonable expectation of doing so for at least several more years), with my only cost being the interest/income from not investing that $8500. Seems pretty obvious leasing is the worse option, doesn’t it?

    Much the same applies to the house. If one takes care not to over-buy, or to buy at the peak of a real estate bubble, then it seems that the costs of ownership can easily be less than renting. Last I looked, a house similar to mine (but on a much smaller suburban lot) would rent for around $1000-$1500/month around here. I pay just over $1000 for mortgage, insurance, and property taxes. Currently about $350 of that is going to principal, plus I save maybe a couple of hundred on income tax, which is not all that bad a return on a downpayment of about $30K. And in another 15 years or so, I’ll be able to live here for no more than the cost of property tax & insurance.

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  13. Novemberrose says:

    I was a renter for 10 years. I was certain that I would always be a renter for all the reasons cited in the article…until… neighbors brought bugs into the building and the landlord was slow, v e r y s l o w to react. I’d had enough!

    I purchased a small home and though at first it was scary and overwhelming, I now understand why people love homeownership so much. First of all if there is something wrong I am the landlord so I can make sure any issues are addressed promptly and effectively (without raising my blood pressure). That alone is a wonderful feeling.

    Also after only three years my mortgage is less than rent on my apartment would be (that’s nice too). The only thing I really dislike (aside from shoveling, but hey at least that gets done now) is knowing that if I want to relocate that I’ll have to go through the arduous and slow process of selling. Prior to homeownership I was a bit of a vagabond, but still it seems a small price to pay to be free of lazy landlords and sharing a roof with irresponsible (and occasionally theft-prone) neigbors.

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  14. Mike B says:

    You seem to be making the HUGE assumption that anyone not foaming at the mouth will ever give you a long term lease. As you put it a long term lease allows the renter to have substantial advantages over the landlord…but basic economics tells us that this sort of free lunch cannot be expected to last as landlords will find ways to ensure that their rising costs are passed onto the renter. No market participant is going to rent you a house if it means losing money and if they do be prepared for the house to get foreclosed on.

    You might think the informal market might pick up the slack for the diligent (ie renting from friends, family or folks with special circumstances), but these people don’t tend to be up on the whole landlord as a job thing and such arrangements can end up in court very fast. In fact most online resources actively dissuade people from trying to casually rent their properties as they say it is usually much more work and risk than it is worth. So there you have it, your whole strategy revolves around finding someone who is too stupid or too naive to get the proper value out of their properties.

    Here is a more realistic assessment. Renting means generally short term leases that will last 5 years if you are lucky with 1-2 being standard. Even if your lease is long term there will be wide latitude for the rent to be increased, possibly as a mechanism for the landlord to get you out of the property. I live in a non-rent controlled city and I have never see any firm leases beyond two years. The market is robust so without a significant premium the landlords know there will always be someone to fill whatever units they have available.

    So not only will short term leases complete negate all of your cost control benefits, it also means that you face the risk of having to get up and move every year as well as find a new place to live. Also forget about any sort of upside gain. If a new park opens or a mass transit line is put in you’ll either get a huge rent increase or the place will get sold.

    Long story short if one does their research into locations with lots of potential and makes sure not to buy into a bubble you have a very high likelihood of having your housing investment pay off, not to mention the potential for sweat equity if other investments or jobs aren’t paying off.

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    • profguy says:

      That was my question — the author has a TEN YEAR lease deal??!?? Where do you find those?

      I rent a house myself, and feel OK about that. There are somethings I’d customize if I could, and that’s a but frustrating, but then I add up things like not being the guy responsible for doing emergency repairs on the gutters during an ice storm, or not having to replace the furnace, and I can live with not having exactly the cabinets I’d want.

      The downside is the 1 year term. I’ve been in my house 5 years, and twice the landlord has thought about putting the place up for sale rather than renewing. While the guy seems to get now that the market is down and staying that way for a while and so isn’t inclined to sell anytime soon, the possibility is still annoying. As the previous poster noted though, finding anyone willing to do anything more than 1 year deals is essentially impossible.

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  15. David Henderson says:

    Nice points, but I must take issue with your usage of serf. A serf for all intents and purposes was a slave except that the medieval Roman Church forbade Christians to own other Christians and so the concept of serf came into being. A slave is bound to a person whereas a serf is bound hereditarily to the land. The concept you want in place of serf is peasant. Peasants were tenants and could move as freely as they could afford whereas serfs could not leave without the landowners permission.

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  16. Enter your name says:

    I’ve been disappointed that these posts and discussions fail to account for, or even mention, imputed rent. It works like this:

    * In 2004, I bought a townhome for — with a 10% downpayment, and including all the fees and interest over the entire life of the mortgage, accounting for income tax deductions — about half a million dollars.
    * In 2034, assuming very moderate inflation in housing costs, I’ll be able to sell it for — about the same half a million dollars that it cost me. I will (eventually) get those half-million dollars back, tax free.
    * I will have paid an average (in current dollars) of $4000 a year in fees and property taxes, and about $4000 a year in insurance and maintenance expenses. (The homeowners’ association does nearly all the work for me, so maintenance expenses are high.)
    * This means that my actual net housing expense for 30 years (the part I don’t get back when I sell the house) was the $8000 a year I spent on taxes, insurance and maintenance.

    The alternative (based on local rents for comparable properties) is this:

    * Every year, I pay (in current dollars) $17,000 in rent — almost exactly what I’m currently paying for principal + interest + taxes + insurance right now. Over the course of 30 years, this is — about the same half a million dollars that I am using to buy the place.
    * I could have invested the downpayment at some medium-risk level, in which case (in current dollars/accounting for inflation) I’d have earned about $33,000 before income/capital gains taxes.
    * At the end of 30 years, I can sell my “rentership” for nothing. Those half-million dollars are permanently gone.
    * In year 31, I’m still paying $16,000 in rent—double what I would pay that year if I had spent those half-million dollars buying the place. It takes less than five years to wipe out the $33K I earned by investing the downpayment.

    I grant that housing is illiquid, and that the people who think they’re going to be millionaires by buying a home are generally greedy idiots, but you can’t live in an index fund. Your monthly rent is one of the costs of your investments.

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  17. Sam Collett says:

    As a large portfolio landlord I guess that means I’m a Feudal Baron with Serfs paying their rent and while they may have diversified interests and be able to move to Sri Lanka at a moment’s notice, there will also be another serf waiting to take their place. The reason – regardless of whether you have a mortgage to pay, or rent to pay, housing costs money and it is the actual cost of that housing which grounds you, which roots you, which forces you to go to work.

    Whether you buy into the ideal of white picket fence (although those don’t really exist in the UK) most sensible people want a safe and clean place to lay their head at night after a hard day’s work. Whether you have a mortgage or a landlord, either way you owe money for it every month. The ideal is to not have either – that way you really are free. No debt and no landlord – that’s what dreams are made of IMHO!!

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  18. Tristan says:

    A good article and I like the thinking.

    A hypothetical. Imagine your article was so perfectly written that it convinced everyone in the world of its principles. Imagine then that no-one owned houses and everyone rented.

    How does that work? Who would own and maintain the houses for the renters to rent in that world?

    I mean to convey this in a neutral tone. I have no desire to convince anyone of anything. I simply find the thought interesting.

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  19. Joe says:

    “You need a license to own a car”

    One does not need a license to own a car.

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  20. Dave says:

    Brandon as long as you have to pay property tax, you never own the home.

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    • Enter your name says:

      Nonsense. You have to pay tax on your car every year; do you think it’s somehow not your car?

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    • James says:

      Also, property taxes are (at least around here) considerably less than rent would be. (Obviously, since landlords have to pay the same property tax on their rental properties.) Mine run around $100/month, and I don’t think you’ll find a place to live (except maybe a cardboard box in an alley somewhere) that costs less.

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  21. mfw13 says:

    I think you miss the point of home-ownership if you only view it through a financial lens. Part of the joy of owning a home is that it is yours (assuming you make all your mortgage payments), that you can do whatever you want to it, and that nobody can tell you otherwise or kick you out. Yes, maintaining your home takes work, but many people find that aspect of homeownership to be quite enjoyable…after a day sitting behind a desk in a suit and tie, nothing beats changing into an old pair of jeans and getting your hands dirty.

    With renting, on the other hand, you are always subject to the whims and rules of your landlord, completely dependent on them to fix problems for you, and never knowing if a raise in your rent or an eviction notice might be just around the corner. Renting is full of uncertainty and instability, whereas home ownership brings an element of stability that is often otherwise lacking in many peoples lives.

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  22. Kristjan Korjus says:

    What about this logic: “Markets are efficient, therefore renting or owning property are equally good.” ?

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  23. Dave C says:

    Where I live in the US, most rentals are apartments in densely populated areas, and owning usually means a single-family home in a less densely populated area, so for this area, renting vs owning is, aside from the financial aspects, an apples vs oranges comparison.

    Renting usually means living in a building where:
    1) Landlord can terminate lease at least once a year
    2) Neighbors can have loud parties (which may be a positive externality for someone who is 22, but it is a negative one for many others). This is not Switzerland.
    3) Pets can be regulated. You can be evicted for having an unapproved pet
    4) Often, the best schools are in communities which have very little supply/choice of rental properties.
    There are exceptions – occasional houses in the suburbs for rent, often in less desirable locations (on noisy streets).

    With all renting you are subject to the personality of your landlord. While my state has good legal protections for tenants, as a “peasant” (aka not rich, not a lawyer), the bar for any redress is fairly high.

    Fundamentally, renting puts you far more at the mercy of others, subject to much greater uncontrolled externalities.

    As an economic comparison, a valid comparison of rent vs buy would need to price these externalities into the model.

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  24. Howie says:

    You wrote:

    “Which means that the serf can diversify his portfolio to a much greater extent than the feudal baron; plus, the serf can move more easily to take advantage of opportunities in other geographical areas, as opposed to the serfs of medieval times that Mr. Sharga compares us to.”

    Hang on. A renter can’t “move more easily” unless he can get out of his rental agreement. That contract is usually renewed every 6/months to a year, which means rent goes up every year in a competitive environment like NYC or DC which also means his payments are no more predictable than any other costs such as home maintenance. I guess you could sign on for a 10 year lease with an option to renew like you said you did but I’ve never heard of such a thing and the terms of your lease are not made clear in your post. If, in fact, those terms give you the absolute freedom to up and leave on a moments notice, well, good on you I guess. But is such a deal offered as a matter of normal practice in every location? My (granted, limited) experience says no.

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  25. CTModerate says:

    I’m a homeowner, but I happen to agree with you 100%. Homeownership has been pushed as some sort of Nirvana in this country and renting as something to be avoided. What has been the result of this philosophy? Wild swings in the real estate market. I’m someone who likes to own a home and will probably always own, but I think that ownership has been the financial downfall of many who would have been much better off renting.

    How many people bought into that “starter” 1 bedroom condo only to see prices fall and they’re left with property worth less then their mortgage and a growing family? I’m sorry, but those people would have been better off shelling out a monthly rent.

    The problem is, of course, that ownership mania has meant that rental housing is usually not as desirable. Builders focus on building units to be sold, not rented, so rental stock tends to be outdated and run-down.

    If we could get some decent rental units built, and provide proper incentives for renters, I’m sure we’d see the wild swings in the real estate market curtail, which would benefit homeowners like me.

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    • Enter your name says:

      I agree that “starter condos” are usually a bad idea for young couples. Real estate transactions are expensive, and moving is expensive (in both time and money). If you’re going to buy, you should do your best to buy a place that you could realistically live in for years to come. A one-bedroom condo might be perfect for an older person or a determinedly child-free couple, but it’s not appropriate for someone who will need to sell in two or three years.

      I knew someone who bought a large home in the early 1970s. They were newly married and hoping to have kids. The size of the mortgage payment was initially frightening. However, fifteen years later, the $250/month payment seemed trivial, the home had proven large enough for three kids plus a home-based daycare center, and unlike all their friends, they’d never incurred any moving expenses.

      That worked well for them. But if you aren’t in that situation—if your job moves around frequently, if you currently can’t afford a house large enough to accommodate the family size you expect to have within a few years—then you really should be renting.

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  26. pk says:

    I agree with all of the points about the convenience, etc. of renting over owning, but from a financial/economic standpoint, isn’t it a bit silly to argue that the cost of property taxes, maintenance, and the like are born exclusively by homeowners and not renters?

    It seems to me that from a market perspective, each of those costs are simply factored into the price of a rental.

    Another factor to consider is the tax consequences of renting v. home ownership, because the mortgage interest deduction is pretty significant.

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  27. Rich EconStat says:

    The title of the article over simplifies dramatically: economics is about supply and demand. The title could be: “why I don’t want to own a house whilst there are many people willing to rent me one for what I consider a sensible price”, maybe adding an addendum that points out that I need to also have the support of a pro-rental government (eg one that limits price increases and imposes contract standards).

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  28. Jeff says:

    When you pay rent, you are paying the landlord to cover what he pays in for: mortgage, property taxes, insurance, repairs reserve – AND PROFIT for the landlord himself. I just do not see how you can possibly think renting can be cheaper than owning? No landlord would want to rent out a place at a rental rate where they would be taking a loss. So the single payment you make in rent is covering all the costs you’d be paying if you owned, plus some extra that the landlord is taking for himself.

    Also by renting, you are subject to the whims of the landlord. Want pets? Maybe the landlord doesn’t allow it. Want to paint your bedroom walls green? Gotta get the landlords “OK” first.

    It makes more economic sense to own once you can afford to make the downpayment & closing costs of the loan.

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  29. BrianDawg says:

    Best advice I ever got in one of my business classes was to “run the numbers.” There is nothing that is the best advice 100% of the time.

    My mortgage is hundreds of dollars cheaper for month for a waaaay bigger house and a waaay bigger yard than I would I have been able to find in the same area. Is that the case for everyone? Nope.

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  30. Katherine says:

    You must have never had a horrible landlord. I find many to be demanding, rude, you have to harrass them and threaten them with legal action to get maintenance work done, it’s very hard to rent with pets, they sell the house out from under you, you have to move house more often than you would if you owned your house. And I say this in a country that has decent renting laws that protect tenants.

    I don’t disagree with you that people need to assess their situation rather than just assuming they should own a house regardless, and I did read and enjoy both this and the earlier article.

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  31. Christopher Thorpe says:

    Doesn’t this ignore that in a free market, the costs associated with home ownership should be passed onto the renter? So, regardless of how long your lease term is—in Australia, it’s usually only 12 months, with the option to continue at the end of each year—the landlord should charge out the property at a rate that they can not only afford, but also covers their expenses.

    Do you actually gain anything by renting? Perhaps location (easier to rent than buy an inner-urban home), but there should be almost no difference between the cost of renting and the cost of purchasing a home, with the favour tipped in terms of purchasing once you factor in profit.

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    • Enter your name says:

      The point is that the landlord’s expenses may be dramatically lower than yours, largely because the landlord might have bought the property 20 years ago. The list of expenses does not include the landlord’s unrealized gains on investment (i.e., the fact that the house is now worth three times what the landlord paid for it). You have to buy at market rate, but the landlord’s expenses were determined by the previous market rate.

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      • Ben says:

        The fact that landlord had cheaper costs 20 years ago is irrelevant. He will rent out at the current market rate- unless he’s being generous. At most, this gives him a competitive advantage over newer developers.

        Think about it.
        In whatever you do for a living, would you accept an argument from your boss or customers that you deserve less than the going market rate for your product or service because some good fortune of yours has given you lower expenses?

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  32. Richard K says:

    Rick Sharga works for a company in the mortgage industry.

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  33. fred wollman says:

    i generally agree with much of what is said. i am 30 yrs in the financial services industry. i own (or should i say, the bank) owns my home. in fact the mortgage is equal to the home’s value. i feel the home is “paid for” in that i have sufficient assets to pay off the mortgage if i choose. however, i can make the payment every month, so the plan is to keep my money in investments of my choosing and continue to “rent” the bank’s money.
    my son and his wife are in the process of purchasing their first home. generally, speaking i attempted to talk them out of it. they are young, one of them is looking for first post-college job and i feel that making a committment to a home and mortgage will severly limit their options for the future. but what the heck, i didn’t listen to my dad either.

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  34. Mr. Sensitive says:

    There’s an equation you can either make up on your own or borrow a template that will tell you whether the financially rational decision is the Rent or Buy. Why not?

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  35. Ben says:

    I see a hole in the logic. Yes, an owner has all sorts of huge expenses. However, most rental properties turn a profit. This means, that if you are renting, you are not only paying for all the costs of ownership, but a premium as well.

    Renting makes economic sense under a limited range of circumstances:

    1) You believe the value of the property will decline.
    2) You’ve lucked out and found an owner willing to rent out his property for less than the market value of the rent.
    3) You do not expect to remain at the property long enough for the amortized value of one-time costs associated with buying to drop to the reach the cost reflected in the rent,

    or

    4) You personally value the intangibles associated with renting (easy mobility, lack of risk, etc) as higher than increased costs associated with rent.

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  36. Nat Reader says:

    Brandon talks about being free and clear in 15 years??? What? That is no longer true. We bought before the run up, put down 20%, got a great rate and now our house is underwater. If we could sell today (which we cannot without paying $80,000 to sell it) it would sell for $150,000 less than we bought it for and that does not include any home improvements.

    From estimates where I live it will take 15 more years for the house to get back to what it cost to build in 2003. I have already been in it for 8 years. That is 23 years to get back to what the house COST! As in no gain. I would sell and get back what I paid MINUS cost of realtors etc. So after 23 years I will have lost $$ living in this house.

    Home ownership is a pipe dream now. It is not what it used to be. It is a sink hole of cash that no longer gives any returns other than giving a place to live, which you can do by renting. In my city you can rent a house twice the size of what you live in for less $$.

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  37. Not Buying says:

    So some other things to consider … most people will say, well I have kids so I need to buy a home for the kids. Wrong. Your kids are temporary visitors, someday they will fly away leaving you with a big giant box to keep your stuff in. Kids are not good reasons to own a home.

    Here is another reason I hear.. well when I retire I will have a home paid off. This means my monthly expenses will go down. Yeah, for a short period of time until you get old enough that you can’t mow your lawn, remove snow, pull weeds, fix household stuff, etc. Then you get to put out a monthly fee for all these tasks. Plus you still have to pay out to fix everything that breaks, that you normally wouldn’t do as a renter.

    Here is why renting is a good idea, for me.. I am NEVER going to be in one place for the rest of my life. Life is full of changes. When im newly single and out of mom and dads house, I get the smallest cheapest dive I can rent. When I get married, I upgrade. I may shift around, going from one job to another. Then when we have kids, need more space. When the kids leave, downgrade I don’t need as much space. When I get too old to care for myself, I need more expensive place to live (assisted living, retirement community, etc.).

    Plus don’t kid yourself. You never really OWN your home. You basically pay for the house (through renting from the bank), and then you will forever pay taxes on your property. You are given permission from the government to live there as long as you pay your taxes on time. Don’t give me the BS about .. its a deductible. Because for most people that never really amounts to much of anything. Thats like saying, hey im going to spend $200,000 plus interest so I can get a $2,000 tax deductible every year that will give me back basically nothing. Whooppeee..

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