Never Own A Home Again

images (43)

Home ownership has often been considered a critical component of the “American Dream,” as an unwritten privilege living in America bestowed on its financially secure citizens. In the wake of the housing crisis, few are asking whether the dream was real or not, but rather are asking, when will we be restored our proper rights as citizens – our right to once again own our own homes? The home ownership dream has pervaded as more of a myth than a reality and this will always be the case, regardless of how the current crisis shakes out.

When making the decision to buy versus rent a home, people generally consider several factors. First, they compare rent vs mortgage – which costs more on a monthly basis? But there are more components to the monthly cost of ownership. Below is a list of costs that are baked into your rental price, but added to a monthly mortgage payment.

  • Your insurance premium.
  • Property taxes (which is usually higher than any tax deduction you get from your mortgage interest)
  • Maintenance (pipes break, electricity problems, etc)
  • Utilities (utilities and maintenance for renters is often reflected in the rental price already but its NOT reflected in a mortgage when you own)
  • Yardwork, pest control, remodeling, etc (again, rents usually have this built into the price but mortgages don’t)

Lets also not forget those initial costs that always seem to add up to more than you expect:

  • Real estate agent costs (6%)
  • Closing costs (usually 5% of loan amount)
  • Initial remodeling costs

Not to mention that you are completely out of that cash after making your down payment. You will never see that cash again. Even if you sell, home owners usually roll over that initial downpayment into a new house for tax purposes. Cash is king and I prefer having my cash in the bank.

Okay, so when you buy you spend more per month and your initial costs means that the house would appreciate 10-20% on day one in order for you to break even. But thats said to be okay because you have the house as an investment, right? Forgetting about the recent decline (housing prices will go up again at some point) and forgetting about all of these extra costs which you are never going to make back,

  • is housing a good investment?

Between 1890 and 2004 (when housing prices began being tracked up until the peak of the housing boom, so I am giving zero credit to the decline in housing prices which have made these numbers a lot worse), housing went up a dismal 0.4% per year versus 8% for the stock market (source: Social Security Advisory Board).

“But real estate is an asset as opposed to throwing money away renting”. Rather than spend $100-200k+ on a down payment for a house (which is like throwing money away since it is completely illiquid as long as you own the house) you can put that money in a portfolio of diversified REITS (REZ is an ETF of residential REITs, for instance) if you truly believe in housing. You can do it with some leverage as well if you believe in the idea (like 90% of Americans do) that you should leverage up 200% the single largest investment in your portfolio (your house).

As an investment, housing represents:

  • No diversification
  • No liquidity, particularly in times of stress
  • Way too much leverage for a significant chunk of your portfolio
  • Huge initial sunk costs, extra monthly costs, and huge time costs to deal with the investment.

It’s also a lot more hassle to shovel your own snow in the winter.

Enjoyed This Post? Get Free Updates

  • DP

    Absolutely correct.
    The paradigm of home ownership as a means to wealth creation became obsolete with our parents generation. We no longer stay in one location for 30 years, work the same jobs for 25+ years, or have 3+ kids. Home ownership is overated. Mortgage tax breaks will dissappear. When your kids leave for college will you enjoy paying property taxes for schools you don’t use anymore? Most states have laws to protect a renter from increases for home improvement and other abuses. Landlord or slumlord? Big difference.

    There are other options beyond the skanky apt complexes. Toll Brothers and the rest of these companies also make townhouses etc, and offer them as rentals. All the benefits of an owner – less hassle, lower cost, money in the bank not the bricks.

  • DP

    Absolutely correct.
    The paradigm of home ownership as a means to wealth creation became obsolete with our parents generation. We no longer stay in one location for 30 years, work the same jobs for 25+ years, or have 3+ kids. Home ownership is overated. Mortgage tax breaks will dissappear. When your kids leave for college will you enjoy paying property taxes for schools you don’t use anymore? Most states have laws to protect a renter from increases for home improvement and other abuses. Landlord or slumlord? Big difference.

    There are other options beyond the skanky apt complexes. Toll Brothers and the rest of these companies also make townhouses etc, and offer them as rentals. All the benefits of an owner – less hassle, lower cost, money in the bank not the bricks.

  • Liam42

    I have a friend who sold his parents home (after they passed away) for $600,000. Granted, it was in a very expensive East Coast city with an Ivy League college. His parents paid $2,500 for the house in the 1940’s. I calculated that if the new owners held the house for the same time period and they achieved the same return on their $600,000 the house would have to sell for $12 million dollars. I thought at the time, “there is no way that house, or any house would sell for $12m unless inflation was rampant”. The appreciation in housing is over. If there ever was one.

  • Liam42

    I have a friend who sold his parents home (after they passed away) for $600,000. Granted, it was in a very expensive East Coast city with an Ivy League college. His parents paid $2,500 for the house in the 1940’s. I calculated that if the new owners held the house for the same time period and they achieved the same return on their $600,000 the house would have to sell for $12 million dollars. I thought at the time, “there is no way that house, or any house would sell for $12m unless inflation was rampant”. The appreciation in housing is over. If there ever was one.

  • Ind595

    I own several rental units, mostly studios or 1 bedroom apartments. Out of the 22 units I now own, all are paid for. The income I generate from my “free & clear” properties covers all my monthly obligations, with money left over for “discretionary” spending, such as fine wining & dining, travel, etc.. I have applied the same logic to owning property as what is being preached here about wealthy stock owners who never ever sell their holdings. I’d probably have to take a substantial loss on some of the properties I bought during the mid-2000s, at the peak of the market, if I was foolish enough to sell at today’s market prices. But guess what? I am not selling. My combined rental income is such that I can ride the current real estate market recession in relative comfort. In fact, I am busy buying more properties at a fraction of the price they fetched 5-6 years ago. In most cases, the properties I bought recently were priced at a 50-60% discount to their previously recorded sale price! In essence, I am dollar-cost-averaging my real estate holdings while at the same time boosting my ROI. The properties I own bring me a tidy 8-10% cash-on-cash return on my investment, not bad in light of what you’d get in a bank CD or savings account these days. Despite all the naysayers, I consider real estate an excellent long-term investment. The cash flow is predictable, the risk is negligible (unless you must sell in a down market) and there is long-term appreciation potential to boot.
    It is easy to berate real estate if you are one of those who borrowed too much or over encumbered yourself during the easy-credit-boom-time era. Real estate is a great investment if you use leverage judiciously.

  • Ralphfisher

    For 99% of the people, James Altucher is correct about the travails of home ownership. However for the sake of argument I’ll take a counter position or two:

    I lucked out and bought a house for $40,000 cash in 1995 3km from my office in Lutz, Florida. I bike to work every day and use a Corrolla car only for going to court only and seeing my girlfriend.

    In my opinion it costs about 5-10% of the cost of the house per year for upkeep. For me that’s at least $2,000 per year. Since I have a well for water and I use gas for cooking, wood for heating and solar for most of my electricity and hot water, my utilities are only about $50 a month.

    Of course I’m paying $500 a year in taxes and $900 a year for insurance. For lawn care, I mow my own lawn instead of belonging to a fitness club.

    I agree with Janes that my house isn’t a viable investment. Zillow says my house is worth $80K (after 16 years?). I’ve done much better in stocks and bonds. However I like living there. I particularilly like growing food in my yard (tomatoes and oranges). In sum, ownership is working for me: it costs $500 a month overall for a crib that I own.

    Another point for ownership, though a bit cynical: People who own homes with mortgages can stop paying those mortgages, hire a lawyer and bank the mortgage, tax, maint. and insurance cost of home ownership 3 years or more while they are in a foreclosure case. James would appreciate this strategy since its a bit unorthidox and might make up for the insane cost of home ownership for most people.

    • autotech101

      Here is another factor right now you can buy a house for mortgage payment, tax, and insurance payment of $630 a month for a 4 bedroom 2042 sq foot place or I can rent the same house for $1200-$1300 a month. If I pay what I would in rent to a mortgage It would be paid off in 13-14 years

  • RobbieR

    Just responding to your Japanese point. Owning v. renting is pretty divisive here but even those who prefer ownership tend to argue for it in terms of individual freedom and lifestyle choice rather than financial merit. Ownership was gaining ground with lots of home makeover shows on TV and magazines selling the idea of a beautiful home – a lot of people increasingly wanted to buy into having just that one little corner of their life perfect and untouchable. The tsunami put paid to all that though. A lot of construction companies around here have folded as their clients have pulled out and committed themselves to renting. Some families in Tohoku are out there with $250,000 mortgages with nothing to show for it and an upcoming bill of $400,000 if they want to rebuild. Home insurance doesn’t cover major disasters in Japan so they’re screwed. I’m hoping they get amnesty on the original debts.

  • Luc

    James… if I may ask you, could you write more about REITs? I have been wondering about this for a long time: buy real estate vs buying REIT. I have done well with my Vanguard REIT. I bought at the bottom and it is doing pretty well now. However, the real estate market has not recovered yet so I don’t understand how my Vanguard REIT has done so well.

  • Ian

    It is nice not having a landlord, and not having anyone to answer to so long as you make your mortgage payment.  The independence is of having your little castle where you can retreat and tell the world to fuck-off is quintessentially American.  Finances aside, I like that.

  • Blissful State

    I actually own (most of) a home, but have rented it out as I can’t afford to live in it or sell it. I am using the rental income to pay for something smaller in a rental apartment. My tenant covers her own utilities. I’ve been stalled at this point for about a year now. Truth be told, after 15 years of home ownership, I prefer renting. I think you’re onto something Mr. Altucher.

  • Cameron

    One very large issue with your concept. If you are purchasing a home to live in, your payments are very reasonably spread out with a decent down payment, however if you do not intended to live in the home and are using it as an investment property, your down payment is substantially higher usually a minimum of 70% of the home’s value. That being said, why would you rent, giving someone who owns the house you are living in money that you gain zero value from, this article emphasizes this whole “cash is king” concept, but that is saying you shouldn’t invest in anything. Sure a home is not liquid compared to many other investments, but you should have a diversified portfolio. Once you have paid of a home (and I am aware, that is no short time period) you own it, and instead of selling your home when you decide to move, if you live within your means, you can make the down payment on a second house, move there, and sit back and rake in the cash… Actually never mind, please do sell your house if you own it, and continue to hand over your money to folks like me.

  • http://www.LoganMohtashami.com/ Logan Mohtashami

    Housing is the cost of shelter to your own capacity to own the debt, not a investment. However, it’s people own free will and choice in a Free country to make that own decision. As long as it’s looked as the cost of shelter you don’t get yourself in too much trouble.