I’ve read a few posts people have written about why owning a house, to live in yourself, isn’t a good idea.
This is not just ‘not a good idea’: owning a house is the worst financial decision a family can make. Some cultures force-feed girls. Some cultures cut hands off thieves. Our culture tells people it’s a good idea to buy a home. Pretty tame in comparison.
There’s other stuff that the other posts missed, so I wanted to finish the picture.
This is a monster of a post, so if you don’t have time, read a section or two and come back later, or sit down when you have 30 minutes to avoid the worst financial decision of your life.
If you don’t like finance, skip to the “Flexibility” section, and just take my word: the finances will kick your butt. Also, learn to like finance, because being poor isn’t awesome.
The best way to understand an long-term real estate investment is through the cash flows.
If you invest in Google (2001) or Apple (2006), then you can imagine the company miiiiight double next year, but your house won’t.
When you buy a house, you have an initial cash-flow of 20% for a down payment. This is cash that cannot be invested in other things, and most importantly: isn’t in cash.
I’m going to use Chicago numbers for homes: They’re more stable (midwest real estate is more cash-flow focused vs speculative pricing swings, think Phoenix or Las Vegas) and they still have high prices (Sears Tower/Loop).
According to Zillow.com, the median home price: $239,000 for the neighborhood of Norridge Park, a middle class town near Chicago proper, with a comparable 3 bedroom single family home renting for $1995.00/month
Let’s talk about OWNING.
Down payment is the first large cash outflow.
You put 20% of the total value down and sign up to have someone else pay the rest of the 80%.
You buy a home in Chicago, and you’re going to be paying $47,800 to just get your name on it.
After that, you’ll have an annual property tax bill of 1.84% (Chi standard) – $4397.60.
Remember, when your property tax is 1.84% of home value, as your property increases in value, so does your property tax. Also, the rate has gone up 50% in the last 5 years.
The typical maintenance rate is 2%. You should save 2% value of the house per year to pay for (roof, HVAC, plumbing, driveway, gutters, drywall, foundation and a whole lot more). If the house is older, put double that, but let’s be conservative.
If you don’t actually spend the money, you should allocate the money in case next month your roof starts leaking or your basement floods. By the way, you better be sure that the insurance is going to pay out (you understand and bought the right kind…right?), if not, you’re on the hook for whole kit-n-caboodle.
Average Illinois Homeowners insurance: $847 per year
Closing costs, including bank fees, prepaid interest, escrow fees: $6,519
Edit: I forgot to include title insurance, which is $200-$1000, so I’m not going to recalculate everything, but notice that it’s actually worse against owning. And if you don’t get title insurance, you might not actually own the property you just spent 3 months and thousands of dollars trying to buy.
Year one cash flows:
So year one, owning the house, cash flows come out to $92,700.89 of total cash leaving YOUR POCKET.
Renting the exact same house would cost $24,000 per year, plus a $2000 security deposit, and $100 renter’s insurance.
Year one renting: $26,100 out the door.
Year one owning: $92,700 out the door.
Renting would leave $66,600 in your bank account because you didn’t own.
I’m not even going to consider the opportunity cost of what else you could invest that in here.
Let’s look at year two.
If you’re quick on your feet you noticed the principal went up and interest went down.
They don’t equal each other until about 15 years in. If you plan on moving in less than a decade, the huge majority of what you’re paying is interest (“Renting is just throwing money away!” lol).
And remember, that principal you’re paying can only be recovered if the property remains, or grows in value.
If the property decreases in value that equity turns to smoke. #2009
Year two comes around, and things get closer: Owning has the edge by about $540, assuming a 2% increase in rent.
No brainer right? Sure you take a hit on the first year, but the trend changes direction!
The payments are (barely) smaller, but you constantly have to worry about price swings of the underlying property (and if the price of your property goes up, so do property taxes).
What happens if you bought a condo in Vegas in 2006?
Your payments sure were lower!
And now you’re underwater a quarter mil.
When you rent, you’re paying $540 per year for the privilege of not-caring-at-all about what happens to the market price of whatever real estate asset you live in.
Are you a professional real estate investor?
Then you might havea good understanding of where the market is going and competing with them is a good idea.
When you buy a house, you’re competing with thousands of real estate investors, hedge fund managers, and REITs.
Do you think you’ve got a leg up on them?
If your day job is not ‘professionally investing in real estate’, I’d think twice about stepping into the ring against billionaires.
Do you really think you’re going to beat the market when you casually invest because you ‘totally can see your kids playing in the yard!”
“Buying a house because you need a place to live is like buying a restaurant because you need something to eat.” – Jack Sheppard
There was a real estate development at the university I went to, that was built on a former Westinghouse factory.
Westinghouse had polluted the land, so to make the development break even, they had to double the amount of units, making it 6 stories tall instead of 3 like they planned.
When you buy a house, you’re putting yourself in a position where you could be held responsible for the pollution someone who owned the land before you.
Hopefully, they didn’t have any roofing shingles underground, or live near a dry cleaner who was sloppy and polluted the ground. (Here’s an EPA fine, without cleanup costs for $208,000)
“My land can’t be worth nothing!” – Guy who didn’t know how expensive environmental cleanup and EPA fines are and is now broke.
Here’s where we stand: 92g out the door on day 1, with zero promise you’ll get it back from increasing prices in housing (the prices always go up…until they don’t) and the potential to lose a ton of money (#Underwater), and a rare chance to be a huge negative: for the life of me, I can’t see owning being a good financial move.
Owning: 0 Renting: 1
Did you find out you moved next to a drug dealer or a fraternity after you moved in?
Are houses selling right now, or is it 2009?
Put your house on the market, watch it sit for 9 months, and then take a low-ball offer because you’re sick of living there and just want to get out.
Sorry if you just lost six years of savings…
Are you renting?
Pack your stuff and leave the next day, then sublet it on craigslist ASAP. Put it at 80% of the rent you’re paying and it’ll be subleased overnight.
You’ll take a small financial hit: that’s your Idiot Tax, lesson learned.
Within 3 days you don’t live next to a drug dealer, and you pay for that mistake for a hundred bucks a month until the lease ends.
What if instead of a crappy neighbor, you decide: let’s move to Barcelona!
Do the Drug-Dealer Shuffle™, and you can be on the plane before the weekend.
But what if?
At my last job, a guy with three girls under 18 months (oof) was moving to a new city to open an office and was selling his house.
Because money was so tight (commissioned salesman, with no sales), he didn’t get the cheap insurance in case some appliance broke between the buyer accepting and the actual closing, it’d be covered.
The week before closing, and three weeks before he left for a new city, the water softener ($1500) and A/C ($800) both crapped out, and he was on the hook.
This is what owning a house does.
You’re on the hook for everything.
I rent: the only thing I’m on the hook for is a new toaster.
Luckily I’m a man with means (lol).
Flexibility: no brainer.
Owning: 0 Renting: 2
Oh boy, finance wasn’t close.
Flexibility wasn’t close either: are you more flexible having a ton of cash in the bank, or a property you have to manage?
Let’s see how day-to-day life changes if you rent or own.
When you rent an apartment or house, like I do, I have a full-time, 24/7 on-call maintenance staff.
They shovel my sidewalks, mow the lawn, do the landscaping, fix my toilet, drain my bathtub when it won’t, fix my dryer and seriously anything I need besides vacuuming my apartment.
“I went to the Home Depot yesterday, which was unnecessary; I need to go to the Apartment Depot. It’s just a bunch of guys standing in an empty building going “Hey, we ain’t gotta fix shit.” – Mitch Hedburg
I don’t have to fix anything. I hire people to do that for me.
Congratulations! You’ve just accepted a $0.00/hr job offer for the following positions:
- Washing Machine Repairman
- General Handyman
If you don’t know how to do any of those, don’t worry, you can pay other people to do your job for you!
Just remember, you’re on call 24/7 for these jobs.
Huge freeze coming through? Hope your water pipes don’t burst!
When I had my office job, every single salesman (only people with houses) had to miss at least one full day of work because of burst pipes over the winter.
So they were:
- Stopping making money,
- To go spend money on repair parts,
- To work for free.
Sounds like a sucker’s bet in my book. (The pipes burst in a girl who worked there apartment complex too, and she just drove over the ice and went to work while maintenance cleaned up the mess.)
Are you sick of hobbies like relaxation, reading and having sex?
Have you tried “Paying to do labor?”
PS: I didn’t include the financial and storage cost of all of the equipment you need to manage a house like lawnmower, weed whacker, snow-blower, plumbing equipment, carpentry equipment etc.
We’ll call that a gimme, because I don’t know where you’re living and how much of Your Responsibility you’re willing to pay someone else to do.
Owning: 0 Renting: 3
Does this mean that you can’t make money in real estate?
Thousands of people make damn good money in real estate.
But are they hustling and flipping houses, rehabbing apartment complexes, buying REO SFR’s in bulk to unload to rehabbers or any other of a 100 ways to make money in real estate.
They are not buying and living in single family homes for 10 years.
There’s two ways to invest: like a professional or an amateur.
When you decide to invest as an amateur, don’t be surprised when professionals wipe the floor with you.
And don’t be a dummy.
Don’t buy a house.
Until next time,