Continuing where we left off during the most recent post … several people contacted me to say that I’m wrong. Just plain wrong in stating that, “paying monthly rent is no more throwing money away than is paying mortgage interest and property taxes.” These folks insisted that rent payments are akin to flushing dough down a Texas sized sinkhole.
I thoroughly appreciate the feedback. Because a broad spectrum of opinion is always welcome. Sharing different perspectives furthers discussion, prompts us to consider alternate points of view and re-examine our own. So in the spirit of stepping back, let’s take another look-see.
Have You Considered This and That and This and That and …
Let’s go back to the starting point: should you buy or rent (to be clear, this post is referring to your primary residence)? But let’s not seek an answer just yet. I know its tough sometimes, to just sit with uncertainty. And it feels good, a sort of sense of completion or achievement, when picking a side and saying we’re either for or against.
Still, like many issues in life, this issue does not readily lend itself to an across the board, simplified black or white answer. Because any answer to the question of, ‘should you buy or rent’, is going to depend on evaluating so many factors, and these factors are entirely dependent on your particular situation.
Pay rent and it disappears.
Pay a mortgage and you’re building equity in a valuable asset that will eventually be paid off, allowing you to live mortgage free.
On the surface, no contest. Buying wins. So now it’s time to dig a little deeper.
Rent money, yes, it disappears, doesn’t go toward building worth in an asset. So is renting a lose-lose proposition? Aside from sending money into a void each month, do renters reap any financial benefits?
Short answer: yes. Longer answer: Renters don’t incur ongoing expenses such as property tax, maintenance, repairs, and mortgage interest (know that a significant portion of mortgage payments goes toward paying interest, not principal; if you have a mortgage, look at your statement. It will show exactly how much of your payment is allocated to principal, how much to interest). Nor do renters tie up a hefty lump sum in the form of a down payment. As for the building equity angle, true, renters don’t build equity in their home. But that’s no reason in itself to shun renting.
Smart renters take hold of the money saved on property tax, maintenance, repairs, and mortgage interest, and put that money to work in investments other than residential real estate.
This is where renters build their equity. And this is precisely why renting is NOT on par with being sucked into a deep space black hole. Because renting allows for the opportunity to invest and generate equal or higher returns than that generated by owning residential real estate.
Screeeech! That was the sound of a U-Turn. What if renter doesn’t pursue the opportunity to invest elsewhere? Then opportunity is lost and renter is clearly behind the financial eight ball as compared to homeowner.
Home Is An Investment
Is your primary home a good investment? After all expenses, will you come out even or ahead on the money angle when the time comes to sell?
It depends. It depends on your specific situation, how long you stay in your home, whether you bought at the top, bottom or middle of market, the bucks you spend on repairs and renovations, mortgage rate … and on and on. Oh, and really importantly, it depends on the particular piece of earth on which your home is situated.
Meaning? Historically, residential real estate is an investment that keeps pace with the rate of inflation (i.e., returning gains of 2-3%/year). So if your non-real estate investment returns exceed, say 3%/year, then you’re building more equity than the home ownership crowd.
But that’s an average. Real estate is a local game and you have to know your local real estate market. Take San Francisco. If you bought a home in San Francisco sometime in 2008 or 2009 that you still own today, the value of that home likely doubled or more. This, of course, far, far exceeds the historical average return. Heading north, a detached home in Vancouver purchased by a young family back in 2001 would have tripled or quadrupled in price according to today’s insane values. Who needs the heartburn of stock market swings when you have bricks and mortar trucking along at a healthy clip?
Screeeeech! Sure but there wasn’t much dancing in the streets in the good ole’ US of A back in 2007-09 when Wall Street shenanigans brought the red, white and blue house down. More like unbridled panic among many real estate investors, fretting alongside stock market investors. But, like the stock market, if you didn’t sell during the dark days, you’re sitting pretty now.
Okay, so play the long game and you’ll be fine, maybe double or triple or smack a home run on your house? Not likely for most of us. There will always be certain cities that ‘outperform’ others when it comes to investment returns; and there will be certain time periods that we look back on and say, ‘if only I would have bought at the market bottom’. But over the long haul, property prices are likely to conform to their historical average.
So how do we know in advance what city or time period in which to buy a home, to get the most bang for our buck? We don’t. And if you proceed on the assumption that home prices, wherever they may be, eventually regress to the mean, then you can expect (with no guarantees) a 2-3% rise in value during your ownership period.
Home Is Not An Investment
All this talk about renting vs. buying, which one is the better investment, which option costs less or more. Well, there will always be people on both sides of the discussion, convinced that one or the other is the best way to go. But because of all the variables involved, it’s not possible to provide a one size fits all answer.
Not only that but, whether or not to buy a home, a place to live and grow and find peace, is not, at its heart, an investment decision. Rather, it’s a consumption decision. And imbedded in this decision, in addition to financial means, are your values.
Because the most satisfying housing decisions are those made in alignment with our values … and our needs, goals and budget; not market trends and crystal ball gazing at investment growth down the road.