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Is Homeownership a Good Deal?


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Homeownership has a good PR department.  2-in-3 householders in the United States own their own homes.  In 1900, less than half owned their homes.  It is sold as “The American Dream” but it’s not necessarily a smart financial move.  You might be better off renting.

My realtor friends will have to forgive me for taking this arrow out of their quiver:  When you buy a home you are not investing, you are spending.  I’ll show you what I’m talking about.

Buying a home is like having a really expensive car and renting a home is like having a really inexpensive car.  Both get the job done, but you pay more for luxury that comes with an expensive car.

I Have Rented – Now I Own
I’m the king of my castle.  I can pretty much do, or not do whatever I want to it.   That’s pretty cool.  But that coolness comes with a price.

I am keenly aware that saying I “own” my home or “bought” my house is a bunch of baloney.  What really happened is this: I signed an agreement to pay $X on the 1st of every month to live there.  If I ever stopped paying, I agreed to leave.  That sounds a lot like “renting”.

There’s more!  Unlike renting, I also agreed to fork over a down payment of tens of thousands of dollars cash to get this deal, pay thousands yearly in property taxes, and pay for all repairs.  I’m pretty much locked into this deal for 30 years – unless I decide to sell it and hopefully make enough to pay back what I owe.

Being the master of your domain has privileges, but also expenses.  So why do it?  This is where folks usually say, “It’s a great investment” and “You get to write off the interest.”

“You Get to Write-Off the Interest”
About that interest write-off:  Yes, you have the ability to write off the interest that you pay on the loan each year.  That is better than nothing!  If you are in the 25% tax bracket and you buy a house because you want to get 25 cents back for every dollar you give away in interest, I have a better deal for you.  I will give you 50 cents for every dollar give away to me.  Deal?  The write-off is still a losing proposition.

If the interest you got to write-off was a tax credit- that would be a good deal because you’d get back a dollar for every dollar in interest.  But this is not a tax credit.  The interest you get to write-off is a tax deduction.  There is a big difference.

“It’s a Great Investment”
Yes, it can be.  If I sold my primary residence right now, I’d make at least $250K profit and not pay a penny in taxes on that $250K as allowed by law for a single person.  The IRS tax exclusion is $500K for a married couple filing jointly.  My story is unusual.  My parents’ story is more the norm.

A Real Example of Not a Good Investment
My folks owned the home I grew up in.  In 1967, my folks bought their home for $37,000.  In 2009, 42½ years later, we sold it for $187,000.  That’s FIVE times what they paid for it!  Sweet, right?  That’s a 4% annual return.  Not too shabby!  I think it would have sold for maybe $20K more in 2006, pre-Great Recession, but it didn’t.

Looking at it strictly as an investment, if my folks took $37,000 in 1967 and simply kept up with the rate of inflation, this inflation calculator says they would have had $237,661 in 2009.  The inflation rate is roughly what people can earn in bank account interest.

Here’s the historical rate of inflation in boring text and in slightly less dull graph form:

$237,661 – Value of $37,000 from 1967, adjusted for inflation in 2009
$189,000 – Sale price of home in 2009
$ 11,220 – Realtor fees for selling the home
$57,881 –  Cost of being a land baron instead of a renter – about $1,400 per year

Property Taxes
The value of my folks’ house in Ohio went up 4% a year, so their property taxes went up 4% a year.  Your property taxes may be calculated differently.  In 2009, the property tax obligation was $4,700 a year.  Renters don’t pay property tax.

Maintenance
Stuff breaks.  I don’t know exactly what my mom and dad paid, but even if there were only $1K annually in repairs, my folks would have spent $42,500 in maintenance.  Renters don’t pay for repairs.

Insurance
Renters’ insurance is cheaper than homeowners insurance.

More Pros and Cons:
It’s hard to make the math work that buying home is a better investment than renting one – unless you have an accurate crystal ball and buy and sell at the right times.

One upside to owning is that you know what your monthly check to the bank will be, assuming you got a fixed rate mortgage.  A renter’s monthly housing expense can increase.

Homeowners do not have the flexibility of movement that a renter has.  They are locked in unless they sell.  What if they sell during a down time like my folks’ home?

If you decide to try your hand at homeownership, you might look for a duplex, a place with a guest house, or an in-law apartment so you can have someone cut your expenses by paying you rent.  That can be a huge benefit.  If you buy and don’t like it, you can rent out the place, and downsize by renting a smaller place for yourself.

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