Why buy a house?
I’ve got a question for the community out there. . . Why did you buy your house? I’ve had a lot of clients buy a house recently when they weren’t financially ready for it. When I asked them why they did it, I got the same standard answers I always get. “My parents said it was a good investment,” or “I was sick and tired of throwing money away on rent.” I understand the desire to own your home, but to me it has always seemed to be a lifestyle choice, not an investment.
The way I see it, there are advantages and disadvantages to owning your home, or renting it from someone else. When you rent, you don’t build up any equity in the property. That’s a major downside, but you are not responsible for the maintenance or upkeep of the property. If something goes wrong, you call the landlord and it is their expense to fix it. If you have a bad landlord, you move out. At worst you are out your security deposit. If the neighborhood goes downhill, you can move. You’re not stuck trying to sell it to some other poor schmuck. I think you get a lot of flexibilty with renting that you cannot get with home ownership. I even think that there’s a myth of your rent payment always increasing. When I lived in apartments or rented from landlords, my rent payments seldomly went up. When they did go up, it was because I was moving to a bigger place, or getting additional amenities. Since I’ve bought my house, my expenses have gone up every year. My mortgage payment (PI) has stayed fixed, but my home owners insurance and property taxes have increased every year. (Since I escrow, it feels like my mortgage payment is constantly increasing)
Home ownership does have one huge advantage, This place is mine and I can do whatever I want with it. That’s a lifestyle choice. I am choosing to pay more and deal with the maintenance expenses to live in a place that I can decorate however I want. I can financially afford to make that lifestyle choice and still accomplish my other goals, so it is an ok decision. However, I see more and more people putting their goals on hold so that they can buy a house. They delay saving for retirement, kids college, maybe even starting a family all together. Is there such a stigma attached to renting that people are willing to sacrifice everything just to say they own the roof over their head? Why are people so willing to put themselves in a tenuous financial position when they don’t need to? What is it about owning your home that is worth the stress, tension and potential martial strife? Is this just another case of I have to own my own home because that’s the way my parents and their parents did it?
Please sound off and let me know why you decided that owning or renting your home was the right lifestyle choice for you. Also, if you had to do it over again would you change anything? Would you buy a cheaper house or delayed your purchase for a couple of years? Would you have bought sooner? Picked a different neighborhood? Used a different agent to help you in your decision? Let me know.
4 Comments
Hey Rodger,
Great question!
I’m not sure I agree with everything, though…
First to answer your original question, my wife (then girlfriend) and I bought a house for a few reasons:
1. We wanted peace and quiet - not so easily gotten in apartments, until you pass $800/month or so in rent. This is enough to buy a small house in a reasonable neighborhood.
2. The usual financial reasons: No equity in renting, no deductions for interest, etc.
3. We wanted a place of our own.
My father always said that if you can afford to rent, you can afford to own. I would agree with that depending on what your demands are in location. Certainly, renting is easier from a maintenance perspective. I remember saying that I didn’t want to own a house because I didn’t want to mow the lawn. I was being a little stupid - the time I spend on those kinds of chores is a pittance to pay for the freedom and comfort that owning a home brings.
You mention people buying homes too early. I don’t know whether I fall into that category or not, but I suspect not. I think the real problem is probably that people are buying too much home - we all want a really nice, big house in a great neighborhood, but if you have to furnish it by IKEA (Sweedish for “particle board”) what’s the point?
Comment :: November 27, 2005 @ 111:57 am
Steve,
I agree with some of your points, but I think you missed the central theme of my discussion. Whether you buy or rent your home is a lifestyle choice.
Your first reason: peace and quiet is a lifestyle choice. I disagree that it is difficult to find a quiet apartment for under $800 / month in rent. I have lived in a number of apartments that were quiet and they were all under $800 in rent. I have also visited houses that were in noisey neighborhoods, so I don’t think you can say that homeownership gets you piece and quiet. Didn’t Shorewest do a entire comercial about the noisey neighbor that blared yodeling music on his stereo all day and night. I think if you spend as much time finding an apartment that fits your needs as you do finding a house you like that you can find a nice quiet place to rent. Also, if it turns out you’re wrong and the neighbors / neighborhood isn’t what you thought it was, you can quickly, cheaply, and rapidly move. Try to do that with a house you just bought.
I also disagree with your second reason. I think buying a house can be a bad financial decision. I think this is a myth passed down through the generations that no longer applies today. Our Grandparents (the Depression Generation) could only and would only invest in one type of equity. Real Estate. They were taught that the stock market was gambling and only a fool would trust his money to that scam. Also, in their day, investing was expensive, you had to use a full service broker and the comissions would eat up a large portion of your monthly or yearly investment. Furthermore, mutual funds really were not around, so you had to invest in an individual company which exposed you to a lot of volaltility and risk. So, the only way they could get an equity investment was to buy a house. The investment world is a lot different today. I think if you look at the true, fully-loaded cost of home ownership and the real rate of return that people would be shocked. Think of all the expenses in owning a house. Off the top of my head I can think of: the interest on the mortgage, property taxes, home owners insurance, lawn care, snow removal, replacing worn appliances, replacing the roof, replacing the furnace, replacing the water heater, windows, siding, gutters, style updates and remodeling. Not to mention the transaction costs when you go to sell your house. I’m sure that if you rented your home and invested the difference between the rent and the full cost of home ownership that after 30 years, you would have more money renting.
This is usually the place where people mention the tax break that you get for owning your own house. While this is definately a break for the wealthy, I don’t think it is a break for the average home owner. First off, you have to get over the standard deduction of $10,500. If you don’t already have $10,500 in deductions, some of your tax break is going to help you clear that hurdle. Secondly, it’s a tax deduction, not a credit. This means that for every dollar you pay the bank in interest and the county in property tax, the IRS allows you to deduct it out of your income. If you’re in the 25% bracket, this means you get 25 cents. If you are in a lower bracket, you get 15 or 10 cents. I’ll gladly have you pay me a dollar if I only have to give you a quarter. So I don’t think the tax argument is a valid one either.
Your third point is also a lifestlye choice. You want the comfort of owning a place of your own. That’s fine, but back to my original question, is that a choice that should cause you to stop funding all of your other goals, like retirement and kids college, and other fun things?
Let me know if this makes sense to you. I’ll comment on the rest tomorrow.
Comment :: November 27, 2005 @ 210:30 pm
Steve,
I apologize in advance for the length of this comment, but I really wanted to take a look at your father’s statement that if you can afford to rent, you can afford to own. I disagree with that on 2 fronts.
The first front is on supply and demand. The rental market, and the amount of rent that someone pays is based on the laws of supply and demand. When the real estate market is hot and a lot of people are looking to buy houses, the cost of a house increases. Accordingly, the number of people looking to rent an apartment or duplex decreases. This reduces the demand for apartments and rental homes. This means that if the landlords want to keep or attract renters they will have to keep rent prices level; reduce rent amounts; or add extra amenities like heat, cable, or other things. This means that while rent may be affordable, due to the demand for houses, the cost of a comparable house may be out of budget for the family. Obviously, it is not a straight correlation and there are times when house prices and rent costs increase together, but typically that is because an area is experiencing large population growth or economic expansion. In your typical southeastern Wisconsin community, that has not been the case for some time.
The second front I disagree with your father is from an analytical budget standpoint. Let’s compare the two transactions side by side:
Renting an apartment: Upfront cost: 1 months rent and security deposit. This would be about $1,300 for your average 1,000 square ft 2 bedroom apartment. In a down rental market, it could be less, but that would be average.
Buying a house: Up front cost: Depends on how much you put down, whether or not you qualify for first time home buyer programs, etc. For the purpose of this discussion, let’s assume that we want to keep our monthly mortgage payment the same as our rent payment and our up front costs as low as possible. Let’s assume that we are putting no money down and only have to pay closing costs. Without paying any points on the mortgage, closing costs are going to be around $3,000. There are other upfront costs, like a home inspection, but we’re already at double the up front cost, so let’s move on.
Renting an apartment: On Going Costs – Once you move in, you have to pay your rent, and utilities. In my experience, water and sewer are included in the rent. Also, the heat and electric bills are lower in an apartment than in a house because you get some benefit from your neighbors. For this discussion, let’s say that it’s $650 in rent and $75 / month for utilities. To keep it fair, we also need to add in about $15 / month for renters insurance. Total ongoing cost on a monthly basis: $740
Buying a House: On Going Costs – This gets a little difficult to quantify, but lets make some assumptions. First, since we live in Wisconsin, we’ll assume that property taxes are 2% of property value. Secondly, we’ll credit ourselves back the portion of the mortgage payment that pays off the principle of the mortgage. This is a nice forced savings program. Lastly, we will assume that Homeowners insurance is going to be about $300 per year. With those assumptions in place, our mortgage payment with escrow is going to be about $735. ($581 PI, $153 Tax, $25 HOI) We get an $85 / month credit since that is what goes to pay back the principle of the mortgage in the first year. For utilities, we’ll assume an average of $175 / month. That includes $50 / month for water and sewer (The average bill for a family of four.) Finally, since we’re homeowners we’re responsible for all of the maintenance and upkeep on the house. This is a difficult number to determine, because it is going to depend on the quality of the house when we purchase it. To keep this straightforward, the IRS allows landlords to depreciate their rental property at 3.6% each year. For us, that works out to $270 / month in maintenance costs. So, total ongoing cost on a monthly basis: $1,095 + $85 forced savings = Total out of Budget $1,180.
That’s a difference of $440! A 59% increase over renting! That’s just for the pleasure of owning a $92,000 house. Considering that the median home price in Milwaukee is 216,800 and the median price for all of Wisconsin is $161,800, I’d say you are not living in the average home. Also, if you are looking for a tax break, you’re not going to find it here. Even with the mortgage interest and the property taxes you paid on the house, you still need over $2,700 in federal tax deductions before you exceed the standard deduction.
Conclusion: Owning a home is a lot more than just making the mortgage payment. There’s the maintenance, property taxes and increased bills that come along with it. Most people just compare rent to mortgage payment. That’s when the house turns into a financial prison. I don’t see how you can say that if you can afford to rent that you can afford to buy.
As always, please let me know what you think.
Comment :: November 29, 2005 @ 310:44 pm
I bought my first home as an investment 1 year ago, sold it and made a prfit of #25k now I am in the process of buying 2 more. The main reason for doing this is not just to make a profit, but to make enough money to beable to afford to buy a nice home in a decent area to bring my child up in. I have found that there is a ton of money in real estate and it is fast money. Heck, if any highly aggressive sellers in the Wisconsin area read this, feel ree to contact me, not only will I buy your house, but I will show you how to make some good money buying and selling. I am 31 years old, grew up in poverty, only made it to the ninth grade, my dad use to kick my butt on a daily bases, and a whole lot more to keep me down. Now I am well on my way, not there yet, but well on my way to actually doing something with myself. If I can do it, anyone can… Stay in the realestate game!
Comment :: February 11, 2006 @ 46:28 pm