Why Your House is a Rip Off

[oldtoyota]

I am Jim Collins fan and had not seen this one before!

http://retireearlylifestyle.com/blog/2014/01/31/why-your-house-is-a-terrible-investment/

[Bob W]

Oh my God that was awesome!     This should be required reading for everyone on this forum.   

But it still comes down to how do you convince someone that is paying $1,500 in rent that paying $1,000 in mortgage for a bigger nicer place is not a good deal? 

Plus,  as a former home builder,  I just find this article offensive!  lol 

Double plus,  you may be presenting this to the wrong crowd as MMM is firmly in the "own the home at the park"   camp on this one.    And by the way pay cash for it so a substantial portion of your investment money is tied up in it earning zero percent.   

Of course,  the answer seems to be, "well a home is not an investment."   "It makes me happy and is good for the family."  Hard to argue with that.  Kinda like saying a $60,000 SUV is not an investment. 

[Gone Fishing]

All good points, but the alternative (renting) isn't that great either.  Fact is, conventional housing is expensive.  The point should be not to buy more house than you need or justify upgrades by calling them investments. 

Where some folks can really break out is by building their own places out of salvaged and/or cheap materials.     

[CheapskateWife]

Wow...my jaw is on the floor.  Never, ever, ever thought about our home this way. 

Not to pick on So Close here, but there are a few other alternatives.  We are considering permanent RVing as our answer....but its going to be a nice one ;-)

[Timmmy]

Most of the time people are comparing apples to oranges when talking about renting vs buying.  Buying a 3500 sq foot plywood palace mcmansion starter castle house is a terrible investment compared to renting a reasonably sized apartment.  I think the key is to keep the house as a small portion of your net worth and don't buy any bigger than you actually NEED. 

[oldtoyota]

Plus,  as a former home builder,  I just find this article offensive!  lol 

LOL. At least you are "former."

It's true MMM paid cash for his house. IIRC, he said that might not be for everyone and that he just feels more comfortable having it all paid off. Others here would say leverage is the way to go.

[johnintaiwan]

I wish i could translate this article to Chinese and staple it to the foreheads of my in-laws

[oinkette]

This is why I don't understand people who include their house in their net worth. I certainly don't. Even if I sell it, I'll still need a place to live. So I'm just trading one liability for another.

But where I live my house, even with taxes, interest, maintenance, etc etc etc is cheaper than an apartment. So I went with the cheapest choice. The bonus is, I get to rent a room out, because more house for the dollar renting vs. owning, and come out even more ahead.

[deborah]

It is very easy to get put off anything by just listing the cons. In fact, if you just list the bad things that have happened in your life, you can usually end up believing your life has been terrible! On the other hand, we often only list the pros (of both home ownership and someone else's life) and we end up buying and being jealous!

If someone only looked at this list, they wouldn't buy any real estate (commercial, residential or their own home), so there must be a lot pf pros that the author has missed out - even if one of them if peer group presure!

[MrsPete]

I agree that buying the wrong house or buying too much house is a bad idea, but buying a house overall is a great investment: 

- We bought our first house the week we were married.  It was a small house in an economical area.  It cost 71K (we're talking about the 90s).  Over eleven years we paid that off.  It wasn't a financial difficulty, and at the same time we were able to max out our 401Ks, create an emergency fund, and save for two college educations for the two children who were born during those years. 

- Selling it WAS a bit of a hassle, but we walked away with money.  If we'd been renting all that time, we'd have had only a pile of rent receipts.  We had the use of the house all those years, and then we walked away with more money than we put in -- where's the problem with that? 

- We've never had a mortgage on our current house.  When we sell it, again we'll have money out of the house.  Because the area has grown up so much, the value has increased -- we will definitely see a profit when we sell.  We're planning to build a retirement house for ourselves in a few years, and our best estimate is that it'll "cost" our current house + about 25K.  That's easier to stomach than paying for the new build outright.

- Over the years we've had more space than a typical apartment.  Our children have always had their own rooms (painted in the colors they prefer) and a bathroom to share.  They've always had a yard in which to play.  In our second house we have a den and an office/playroom, which has been nice as the kids have grown up and have had friends over.  We've always had a larger kitchen and a walk-in pantry, which makes cooking at home more pleasant.  We've been able to have pets -- big dogs!  We've not put up with shared parking and neighbor-noise.  In short, we've lived in more comfortable spaces because we've owned a house.  It's hard to put a number on this.

- We've never moved to jobs in another location, so being tied down hasn't been an issue for us.

- Both of our houses have been solid brick homes with good windows, doors, etc.  At times we've had repairs -- a new roof, replacement of carpet -- but those things still don't add up to what we would've paid in rent over the years.  Nor have those chores been super-time consuming.  Being in the South, our taxes aren't horrible. 

- You can argue about investing the money you aren't spending . . . but most people aren't going to do that.  Most people are going to spend whatever they have. 


In closing, I agree that owning a mortgage isn't a great deal, but owning a house outright is a great investment.  Every couple years my husband is concerned about  being laid off -- knowing that our housing is paid for makes that possibility easier to face.  We could survive on just my teacher salary.  More than dollars and cents, the sense of security that comes with owning your home outright is priceless; having grown up a poor kid without a feeling that tomorrow'll be okay, that makes a big difference to me. 

[Franklin]

This is why I don't understand people who include their house in their net worth. I certainly don't. Even if I sell it, I'll still need a place to live. So I'm just trading one liability for another.

Because net worth = total assets minus total liabilities, plain and simple.  "A place to live" is an expense and has nothing to do with net worth.

[La Bibliotecaria Feroz]

I see the argument, but I still want to buy someday. I don't like someone else getting to make decisions about my home. They came in last week and ripped out perfectly good toilets and put in new ones that are awkwardly high for my short self and for our toddlers. Then they put horrible aerators on the bathroom sinks and now we get sprayed all the time. Just an example of the indignities of renting.

[Bank]

A house may or may not be a good investment - in that it may or may not offer a risk-adjusted return equivalent to or greater than other assets.  The jury is out on my own home purchase until I sell it, but it looks good so far.  I will say that my MORTGAGE is an obscenely good investment.  On an after tax basis we are paying the same amount of interest to "rent" the 3BR home we own as we did to rent the tiny one bedroom apartment we used to live in.  Even figuring in some higher return/opportunity cost on our down payment, the numbers aren't even close between renting and buying.  Of course, we took advantage of a slow real estate market, record low rates, and a high personal tax bracket, and bought an almost new home centrally located in a desirable city.

The message here should be to run the numbers on rent vs. buy.  To say you should never buy is as unfounded as saying renting is just throwing your money away.  I always rented until buying made more sense.  Then I bought.

[Bob W]

All good points, but the alternative (renting) isn't that great either.  Fact is, conventional housing is expensive.  The point should be not to buy more house than you need or justify upgrades by calling them investments. 

Where some folks can really break out is by building their own places out of salvaged and/or cheap materials.   

Agreed

[Bob W]

Wow...my jaw is on the floor.  Never, ever, ever thought about our home this way. 

Not to pick on So Close here, but there are a few other alternatives.  We are considering permanent RVing as our answer....but its going to be a nice one ;-)

Good choice!  We did it for 4 months while rehabbing our deep discount foreclosure.   Have friends that have done it for years.  Their spot rent is $200 a month.   

[James]

What a stupid article. It does nothing but ramble on with a list of fearmongering tidbits about home ownership, without anything resembling helpful advice. As if there was some wonderful alternative without any down sides. Very much like idiots who complain about capitalism without any realization of what other options exist. Doesn't matter how bad one option is, if the other options are worse. And that involves rational informed decision, not one sided attacks and exaggerations.


My comment has nothing to do with answers to housing, that is a nuanced and difficult question to be figured out with care and research by each individual. Just hate stupid articles like that.

[arebelspy]

I don't know how you've missed this if you're a JLC fan; he's had it on his site for years (link in OP is just a reprint).

I strongly disagree, and the reason why is simple: you can't compare a house to an investment.  You compare a house to the alternative: renting.

And lots of time owning comes out ahead.

The fact that it's illiquid, has high transaction costs, etc. versus your equities is irrelevant, if it comes out ahead of renting.

The only relevant thing is to compare the math on renting versus owning in your area.

Sometimes it makes sense to own.  Sometimes it makes sense to rent.

But to say "a house is a bad investment, you should always rent" is as dumb as saying "throwing rent money away is bad, you should always own."

Both are flat out wrong.

I like Jim, but this particular article is just silly.

[partgypsy]

as an investment a house can be a good or poor investment. This is really a case by case basis. Like Mrs. Pete we bought our house for 74K in late 90's. We did put a lot of work in it, and do agree it needs continuous work. Thankfully my husband generally is a homebody and enjoys this kind of work. Part of the enjoyment was to be able to customizing our house for our needs and wants. I think we've spent 60K over the years. However our neighborhood has become increasingly desired, for exactly the same reasons that we picked it; it is a nice neighborhood in a priority zone to a magnet school, in a walkable neighborhood (we often joke if we had to buy now we could not afford our neighborhood). Estimates for selling our house are over 200K. Rentals in this area are primarily 1 or 2 bedrooms, and rentals for houses in this neighborhood would cost more than what we pay for mortgage and property tax. Maybe someday we will move, maybe we won't but either way this is more cost effective than renting something comparable, and once our mortgage is paid off our housing costs will be less than renting.

[Johnny Aloha]

I like a lot of the stuff Jim writes, but not this article.  Of course it's based on his experiences, which have to be put in perspective: high COL area, not much appreciation, very high property taxes, and a relatively large/old house that requires regular maint.

There are a whole lot of people, in many other areas of the country, whose house makes more money than they do each year. 

Regardless, the best rent vs. buy is highly dependant on specific circumstances and location.

[Gone Fishing]

This is why I don't understand people who include their house in their net worth. I certainly don't. 

What we should say is total net worth is not a good indication of how much consistent cash flow one can generate from their asset base. Which is obvious any time you see someone that is house (or land, or just stuff) rich and cash poor.  I include my house in my net worth, because I can sell it and use the proceeds for just about anything I want.  I would just have to come up with a living arrangement, but if I was adventurous enough, that could be close to free.  What I don't do, is include my house in my income producing assets, but I might include a portion of my equity if my plan was to downsize and invest the difference.  One might also consider a reverse mortgage. 

   

[slugline]

There are some people out there that strongly believe owning a house is a 100% can't-lose investment, and if you read Collins' article with those people in mind, it makes a lot of sense. It's not like owning a stock or bond where you passively enjoy return on investment. I think it's more like managing an operating business (Home Sweet Home, LLC?) for economic gain.

I view ownership not as an investment, but as a way to take control of my housing costs and improving my cashflow in the long term (in a city where owning makes financial sense versus renting after a few years). In Mustachian terms I also think there's a parallel between buy-versus-rent and the insource-versus-outsource-for-services decisions we make in our lives.

[Helvegen]

I'll echo that it really depends on your circumstances and local market.

In my case, I'd be an idiot to buy. I pay $1100 for rent for my SFH. For an equivalent SFH, the mortgage would be around $1500.

YMMV...

[Beric01]

I don't know how you've missed this if you're a JLC fan; he's had it on his site for years (link in OP is just a reprint).

I strongly disagree, and the reason why is simple: you can't compare a house to an investment.  You compare a house to the alternative: renting.

And lots of time owning comes out ahead.

The fact that it's illiquid, has high transaction costs, etc. versus your equities is irrelevant, if it comes out ahead of renting.

The only relevant thing is to compare the math on renting versus owning in your area.

Sometimes it makes sense to own.  Sometimes it makes sense to rent.

But to say "a house is a bad investment, you should always rent" is as dumb as saying "throwing rent money away is bad, you should always own."

Both are flat out wrong.

I like Jim, but this particular article is just silly.

I took it as an attack on the idea of home ownership as in investment, not on home ownership itself. Frankly, home ownership doesn't deserve to be called an investment, unless you're renting out the house. It's an expense.

With that being said, it totally depends on your area, as well as your career, family, future plans, etc. I'm in an extremely expensive area to own, I'm single, I might change jobs at some point (and I value being able to bike to wherever I work), and have little need of space (99% of all houses and condos are just too much square footage for me). So owning would insanity for me. For other people though, it might be different.

The point of the article is that it's not necessary to own, and it may not be financially wise to do so either.

[oldtoyota]

This is why I don't understand people who include their house in their net worth. I certainly don't. Even if I sell it, I'll still need a place to live. So I'm just trading one liability for another.

But where I live my house, even with taxes, interest, maintenance, etc etc etc is cheaper than an apartment. So I went with the cheapest choice. The bonus is, I get to rent a room out, because more house for the dollar renting vs. owning, and come out even more ahead.

I would love to buy a home with an apartment that I could rent out. That would be the best of both worlds (the owning/renting worlds).

[Elderwood17]

I strongly disagree, and the reason why is simple: you can't compare a house to an investment.  You compare a house to the alternative: renting.

And lots of time owning comes out ahead.

Agreed. 

We have had our house paid off for a while and that changes the dynamics considerably.

[Elderwood17]

One other factor is what has been called "the pride of ownership".  Don't normally put a value on pride, but I admit I enjoy making modest home improvements, putting in a garden, having the stability of a set neighborhood, etc, etc.   harder to get those things while renting.

[MoneyCat]

All the arguments against buying a home are really silly.  Do you honestly think you have more freedom as a renter?  In my neighborhood, the average house has increased in value by about 1500% over the past thirty years.  If you rent for 30 years, your rent will increase along with the increased property values.  When you buy, the mortgage payments stay the same until it is paid off and once it is paid off you only pay the property taxes (which you pay anyway as a renter). 

The biggest difference is that you can make money off property by renting it to other people, such as by dividing your house into two apartments or building a mother-in-law apartment with a separate entrance to rent out.  When you retire, you can sell the house and move to somewhere cheaper (like a Southern state.  Their taxes are extra low, because they don't value education.) 

If your house isn't gaining value at a rate higher than inflation, then you need to move out of the ghetto and move into a neighborhood that doesn't have dollar stores.  This article is ridiculous.


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[HappyRock]

+1 Rebel, except for your last sentence

All the arguments against buying a home are really silly.  Do you honestly think you have more freedom as a renter?  In my neighborhood, the average house has increased in value by about 1500% over the past thirty years.  If you rent for 30 years, your rent will increase along with the increased property values.  When you buy, the mortgage payments stay the same until it is paid off and once it is paid off you only pay the property taxes (which you pay anyway as a renter). 

The biggest difference is that you can make money off property by renting it to other people, such as by dividing your house into two apartments or building a mother-in-law apartment with a separate entrance to rent out.  When you retire, you can sell the house and move to somewhere cheaper (like a Southern state.  Their taxes are extra low, because they don't value education.) 

If your house isn't gaining value at a rate higher than inflation, then you need to move out of the ghetto and move into a neighborhood that doesn't have dollar stores.  This article is ridiculous.


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To say this article is ridiculous isn't exactly fair, a lot of people could learn from this. The truth is there are markets out there where renting costs less than buying, plain and simple. This article is also good for non-mustachians to get a good counter-perspective.

I have friends who bought more than they could really afford and are paying for it now. This advice would have been very useful to them.

You simply can not argue about and say buying is better, or vise versa. There is only one logical answer : Look at the numbers, pick the one that costs less in your area.
It really depends on your market, and the actual property itself. Though in my experience, in a very expensive housing market it is usually better to rent.

Buying can be bad if its done wrong, or it can be a very good idea. Obviously im not factoring in personal lifestyle choices, just explaining the point of this article.

I'm assuming you don't follow JL Collins or else you would probably understand why he wrote this; he experienced a lot of these problems during his time owning a house

[Eggman111]

If your house isn't gaining value at a rate higher than inflation, then you need to move out of the ghetto and move into a neighborhood that doesn't have dollar stores.  This article is ridiculous.

In the long run, it is unreasonable to expect that house prices will go up faster than inflation. There's only so much money people have to spend on housing. The past 30 years have seen a race to the bottom for interest rates, not to mention other factors. That can't go on forever.

Of course, there are up and coming areas with opportunities, but to classify anything else as a ghetto is way over the top. If anything, ghettos have more room for prices to increase.

[RyanAtTanagra]

All the arguments against buying a home are really silly.  Do you honestly think you have more freedom as a renter?  In my neighborhood, the average house has increased in value by about 1500% over the past thirty years.  If you rent for 30 years, your rent will increase along with the increased property values.  When you buy, the mortgage payments stay the same until it is paid off and once it is paid off you only pay the property taxes (which you pay anyway as a renter).

How much has the stock market increased in value over the past 30 years?  By buying a home, even if it's paid off, you have all that capital tied up in an asset that on average rises with inflation at best, most likely lower after factoring in costs.  Instead of spending 300k on a home, you could invest that in the stock market and use the $1000/mo in passive income on rent, and that $1000 would also increase with inflation, same as your home.

Granted, I plan on buying a home soon for all the non-financial reasons mentioned so far, but I know it may not be the best financial choice.  I read that article a while back and it really made me rethink all the assumptions on home ownership.  I agree with those that said Jim isn't trying to argue against home ownership vs renting, he's arguing against it as an 'investment' which is what a lot of people seem to view their home as (like their new car, or furniture).

[Fuzzy Buttons]

What we should say is total net worth is not a good indication of how much consistent cash flow one can generate from their asset base. Which is obvious any time you see someone that is house (or land, or just stuff) rich and cash poor.  I include my house in my net worth, because I can sell it and use the proceeds for just about anything I want.  I would just have to come up with a living arrangement, but if I was adventurous enough, that could be close to free.  What I don't do, is include my house in my income producing assets, but I might include a portion of my equity if my plan was to downsize and invest the difference.  One might also consider a reverse mortgage. 

Same here.  I'm just starting to get a handle on tracking my fiances, but right now I'm calculating two numbers.  Net Worth = Assets - Liabilities.  And, Stash = Net Worth - Home Value.   So I'm using Stash as my guide to FI, and that includes my mortgage but does not include the home backing up that loan.  Then my progress towards FI is Stash / Yearly Expenses.  So owning my home reduces my Stash by quite a bit.  But it also reduces my Expenses by quite a bit, and that helps balance it out.

I agree the article is all negative, only focuses on the value of a home as an investment, and is predicated on lots of assumptions that accompany a high cost of living area.  But one negative to owning a home that he doesn't mention and that I would include from personal experience, is that owning temps you into spending more to "improve" the property.  The regular maintenance of a home is well documented, but even optional expenses can increase if you don't have the willpower and sense to avoid them.  I know I never would have considered putting quartz countertops into a place I was renting.  :(

[Jack]

There are a whole lot of people, in many other areas of the country, whose house makes more money than they do each year.

This is almost impossible. If you go by the rule of thumb that, to be affordable, a mortgage shouldn't be more than 3x your annual income, then it means the house would have to be appreciating 33% per year (non-compounded). I don't think properties even in Silicon Valley or Manhattan are doing that!

That said, my house has appreciated something like 70%-100% in about 5 years, which is pretty darn good. It was also completely expected since I bought in a gentrifying area near the bottom of the housing crash. I would be very disappointed if it had a return on investment only equal to inflation, but that's because I bought where and when I did with the specific intention to beat the average!

[gnomemom]

I loved this article.  I wonder about some of you naysayers - how old you are, and what point at your life you were in when the housing bubble burst in 2006-7-8. 

We live in a high cost of living area (Chicago Suburbs).  We have walkability, my DH has a very short commute (2 miles).  We have excellent public schools.  We live in a tiny (1200 square feet) house that was built in the 1950s. 

We paid top of the market prices in 2006. 

We put 20% down, and we live simply despite the high cost of living (no debt except the mortgage, older cars, the short commute, no cable - long before any of this was fashionable or mustachian).  Yet - because of bad market timing (which can happen to anyone) - we'll never get the money out of this house that we've got in it.  And because it is 60 years old, it constantly needs something. 

If we'd invested that 20% we put down and found our family a nice rental = we would have had all the benefits of the neighborhood - the good schools and walkability and short commute - and none of the hassles and expenses of home ownership (landscaping, plumbing, bathroom and kitchen remodels, a broken window, weeding, a fence, the list goes on and on and on and on and on).

The market has FINALLY recovered to the point that we are no longer underwater. 

If we ever sell this house, I will always rent going forward. 

[deborah]

I loved this article.  I wonder about some of you naysayers - how old you are, and what point at your life you were in when the housing bubble burst in 2006-7-8.

Sometimes I wonder whether anyone remembers anything other than the 2008 problems - like paying 18% interest on a mortgage, or high unemployment, or high inflation rates - and I wonder how they would cope.

[bateloomer]

I haven't read the post but did just listen to Jim giving an interview to Joshua @ radicalpersonalfinance.com.  They talked about this `house = bad investment post` for the duration.   It's podcast #9.  Perfect to fall asleep to.  whoops!  Hey podcasts do the job for me :)
 

[Beric01]

I haven't read the post but did just listen to Jim giving an interview to Joshua @ radicalpersonalfinance.com.  They talked about this `house = bad investment post` for the duration.   It's podcast #9.  Perfect to fall asleep to.  whoops!  Hey podcasts do the job for me :)
 

Linked here - thanks for mentioning!

[Frugal_Red]

The truth is there are markets out there where renting costs less than buying, plain and simple.

This is the dilemma I am going through right now.  Manhattan is one of those places where the normal rules of buying real estate get altered somewhat.  I would like to buy a place, but when compared to my rent and location ($900/month in Upper East Side), it just does't make sense. :-( Most Condos and Coops in my area have a monthly maintenance fee that is that much if not more!

[SnackDog]

I rented two of the most fabulous homes of my entire life while I was in college in Austin.  Both were purchased during the 80s real estate boom and both were rented to me by owners who could no longer afford to live in Austin and were nowhere near making their mortgage payment with the rent I paid.  One was a custom home in the hills designed by a famous architect.  The other was an amazing 1940s stone bungalow on a wooded acre in the center of town.  Both owners lost money on their homes for about 10 years and sold after owning about 15 years.   

On the flip side, so to speak, I also had a friend who moved to Austin right after the real estate bust and purchased a new dream home on Lake Austin for about $2 million less than it cost to build.

Real estate can be a huge money pit or a great investment, depending on what and when you buy (and sell).  Renting can be a great idea or a dumb one.  It all depends.  Anyone who writes off real estate as a bad idea in all cases for all people is nuts.   Anyone who owns a house and neglects to consider the "hidden" costs of maintenance may also be fooling themselves.  In all purchases, be frugal: consider all the alternatives for your spending and understand how they may affect your future.

[2ndTimer]

He doesn't even get into another obvious problem with homeownership, that it ties you to one place.  Our best opportunities have all involved a cross country move.

[fartface]

Ok, well it was probably mostly "luck" but housing has been good for us. We purchased our first home in 1998 for 133K. Sold it in 2004 for 198K. The 65K profit plus equity we had in it went towards our second home.

Purchased our 2nd home for 250K. Lived there six years and then rented it for 3 1/2 years. Rental income + gain on the sale equaled a profit of 50K.

We paid 350K for our third and current home. The kids love their schools, friends, and the neighborhood -  we're also close to work. I'll make the best of it 'til I can sell (about 7 years until the youngest finishes high school). I do count this towards my net worth.

Even if I sell in seven years and 'only' get my 350K investment back, I will have lived here for less than $700/month (this includes property taxes, interest, and insurance) due in large part to the fact that 115K of it was paid for with profits from my other two homes.  A 2500 square foot home with three car garage close to work, bike paths and amenities in a top rated school district for $700/month is a pretty good value for a family of five and therefore I'm ok w/the cost of owning vs renting.

[bacchi]

I loved this article.  I wonder about some of you naysayers - how old you are, and what point at your life you were in when the housing bubble burst in 2006-7-8. 

The housing bust really influenced a generation. That can be seen whenever someone starts a "I paid off my house" thread. We have crazy low fixed interest rates so...congrats?

With roommates and an apartment out back, I've made a lot of money on my house. Ten years after purchase, the PITI is now cheaper than renting. Location matters.

I have all housing expenses in spreadsheets. One of these days, I'll add and subtract and figure out just how much money I've made.