I never understood those who prefer to rent and avoid taxes, maintenance and the other "joys" of home purchasing/ownership.
When you rent, you are also paying to cover those costs on a monthy basis to the landlord plus his profit margin. The diffence is that at the end of 10/20/30 years, you're still paying rent with nothing to show for it.
Am I missing something?
A considerable amount, yes, all of which is rooted in the predictable cashflows associated with owning a home. Unlike what the banker and real estate agents tell you, a home is not an asset. A home is a depreciating property that provides a necessary utility and whose existence would be completely consumed by its use if no effort is put into its upkeep. I always roll my eyes when I hear "Your home is your biggest investment..." on the radio or TV. Aside from not needing whatever they're peddling, this statement is so far from truth as to be laughable. But very few people laugh.
What are these recurring cashflows?
(1) Taxes. Even on a home not encumbered by debt, the state has the power to claim deed to your property simply for failure to pay taxes. I've got friends in some of the ritzier suburbs of Columbus who pay the equivalent of $500/month or more in taxes. Some are paying closer to $1000/month in taxes. Think that's not "rent"? Think that you'll have "something to show" for paying these taxes? Think again.
(2) Repair, maintenance, and improvement. Houses deterioriate and do so fairly quickly. A shallow shingle roof will only last 20 years; better shingle roofs may last 30. Mechanicals may be severely degraded or completely nonfunctional in 20 years. In 50 years, many foundations need repair or shoring. Windows, doors, floors, and fixtures all wear out.
How much are these cashflows? Unless your home is new, you should plan on budgeting between 1% and 3% per year for these items. (A new home only defers these expenses, but they will be upon you sooner than you realize.) The first time you quote this figure, those who can do a little math in their heads immediately protest. "Those values are much too high!" These protests are only the product of inexperience. Suppose you own a 50-year-old 1000 square foot ranch with a full basement and detached 2.5 car garage in, say, Columbus, Ohio. Current value of the home: $100k. Cost of some work:
(1) New roof: $3500.
(2) Sump pump installation. (Code didn't require them in 1960 and footer drainage degrades over time.) $7500.
(3) Suppose you have some old cast iron drain pipes that are plugged and then corroded due to repeated use of alkaline drain cleaner. Plumber time is about $100/hour. A simple repair will easily be $300.
(4) Air conditioner: $2000.
(5) Furnace: $1750.
(6) Repair and resurfacing of above-grade cinder block foundation: $1000.
(7) Asphalt driveway sealing: $250 each year or every other year.
Add these things up and you quickly see that 1% is probably low. These costs go up with the size of the house, which also have higher value, so plan accordingly.
The upshot? If you turn tax, insurance, and repair, maintenance, and improvement into a monthly cashflow, you're going to find "rent" written all over your spreadsheet. Suppose you buy a home and...
... pay interest on it for 15 to 30 years.
... pay property taxes for 40 years.
... pay insurance for 40 years.
... pay for repair, maintenance, and improvment to maintain a certain standard while you live there
... pay a bunch of money to renovate the home prior to its sale
... and finally sell the home.
What do you think you'll "have to show" for it? You'll have some money, yes. But was it worth it? The answer to that is answered by an analysis of alternatives. And the spreadsheet would show that you paid *many* times over the purchase price of the home to live in it for 40 years. In short, you paid rent but you simply didn't realize it, choosing instead to deceive yourself that you're doing something financially beneficial. Well, probably not.
Your statement said "... except you're still paying rent." You are always paying rent, even if you own. Furthermore, the silliness of this statement should be obvious in the scenario I outlined above. If you sell the home, you no longer can live in it. Guess what? You'll be spending "what you have to show for it" on another property or... renting!
The idea that rent is wasting your money is believed only by the innumerate, which is to say, most of the American population. Rent is only waste if there are other smaller cashflows that could provide similar utility. You can become quite wealthy renting your entire life because your ability to build wealth is not dependent upon home ownership but rather, what you do with the money that you *didn't* spend on housing.
Even if your house shows a net positive return in four decades net of inflation (which is highly unlikely), it will be small. Furthermore, if your paid-off house is the largest store of wealth you have by the time you retire, you're in deep doo-doo. House as an investment. Bah! Humbug!
My wife has a cousin in his early 20's who just got married. In January he told me he and his wife were looking at condos to "stop wasting their rent". We had a very lengthy chat about the things he must assume to make this statement and how they aren't true. I encouraged him to keep renting because he doesn't know what life will hold for him in the next few years and mobility is far more impactful to his long-term wealth than any home he could buy right now. He smiled when I told him it was easy to get caught up in the excitement of the purchase, especially the dreaming of what it's like to be with your bride in your new house. I told him that this doesn't change whether you're 24 or 44. But don't get caught up in it. It will suck his current and future wealth away faster than he realizes. We'll see what he does.
My name is on the deed to two homes, one of which I call my residence. I bought very little home and now that we have three little guys who didn't exist when we bought the home, it's more crowded than it was when we bought it. Still, we choose to be content with what we have, knowing that our frugality provides freedom to other things with our money, including build true wealth outside of the house.
G
