It’s Financial Suicide To Own A House

Financial Fridays: It's Financial Suicide To Own A House

I am sick of me writing about this. Do you ever get sick of yourself? I am sick of me.

But every day I see more propaganda about the American Dream of owning the home.

I see codewords a $15 trillion dollar industry uses to hypnotize its religious adherents to BELIEVE.

Lay down your money, your hard work, your lives and loves and debt, and BELIEVE!

But I will qualify: if someone wants to own a home, own one. There should never be a judgment. I’m the last to judge. I’ve owned two homes. And lost two homes.

If were to write an autobiography called: “My life – 10 Miserable moments” owning a home would be two of them.

I will never write that book, though, because I have too many moments of pleasure. I focus on those.

But I will tell you the reasons I will never own a home again.

Maybe some of you have read this before from me. I will try to add. Or, even better, be more concise.

It’s Not An Investment

Everyone has a story. And we love our stories. We see life around us through the prism of story.

So here’s a story. Mom and Dad bought a house, say in 1965, for $30,000. They sold it in 2005 for $1.5 million and retired.

That’s a nice story. I like it. It didn’t happen to my mom and dad. The exact opposite happened. But…for some moms I hope it went like that.

Maybe Mom and Dad had their troubles, their health issues, their marriage issues. Maybe they both loved someone else but they loved their home.

Here’s a fact: The average house has gone up 0.2% per year for the past century.

Only in small periods have housing prices really jumped and usually right after, they would fall again.

The best investor in the world, Warren Buffett, is not good enough to invest in real estate. He even laughs and says he’s lost money on every real estate decision he’s made.

He’s a liar also. So I don’t know. But that’s what he says.

There’s about $15 trillion in mortgage debt in the United States. This is the ENTIRE way banks make money.

They want you to take on debt. Else they go out of business and many people lose their jobs.

So they say, and the real estate agents say, and the furniture warehouses say, and your neighbors say, “it’s the American Dream.”

But does a country dream? Do all 320 million of us have the same dream?

What could we do as a society if we had our $15 trillion back? If maybe banks loaned money to help people build businesses and make new discoveries and hire people.

(Note: Here is one investment…the way I’ve averaged 12.5% for the past 7 years – Learn more here)


Housing Is Not an Investment, Part II

Let me tell you the qualities of a good investment:

A) It’s not the bulk of your net worth.

Good investments are usually part of a diversified set of investments you make in your life, including the investment you make in yourself (acquiring more skills, having more experiences, etc).

B) It doesn’t require heavy debt

See above, i.e. $15,000,000,000,000

C) You can get your money back when you need it

From hard experience I know when I needed money most, it’s exactly at those moments I can’t get it. The house can’t get sold.

And the bank that was so friendly lending the money, starts calling within 12 hours of not getting their check. And then starts suing me.

Usually when I make an investment, I’m not the one getting sued. Except when I buy a house.

 

Is Renting Like Throwing Money Down the Toilet?

No, renting is like “making money.” And I will tell you how.

Let’s say you want to buy a $500,000 house at a 6% mortgage.

You put $200,000 down.

The entire house would rent for about $2500, give or take. So that’s 80 months or almost eight years worth of rent you just gave to the bank in a single check.

Do you ever get that bank money back?

No, because after mortgage debt (most of which cannot be written off in taxes), property maintenance, and taxes (which go up with inflation and are almost never considered in the price of the house), closing costs, buying costs, title insurance, property upgrades, etc. the homeowner might spend close to $1,000,000 in the lifespan of the house. Or twice that.

So instead of writing that $200,000 check in one day (as opposed to spreading rent out over eight years and the landlord is in charge of all maintenance, taxes, etc so you don’t have to deal with it), you could invest in yourself.

Can you get more than 0.2% a year investing in yourself?

I hope so. Simple example: If you take two or three courses in a month on WordPress development, you can take freelance jobs making $5000 a month.

I know 14 year olds doing that. Illustration, ghostwriting, 3D rendering, are other skills you can learn. And many more. There are 1000 ways to make more.

(Note: I teach some of the ways to learn skills and make money here.)

How much do those courses cost? Often nothing. But definitely less than a mortgage.

Every investment in the world is judged by its SAFETY VERSUS ALTERNATIVES. A house investment is not safe versus the alternatives.

 

House Owner: It’s Good To Have Roots

The average house owner, owns their house for 4.5 years. Some own for much longer, some own for less. That’s just an average.

4.5 years are not “roots.”

Why do people move? Because jobs are no longer as stable as they once were.

And they are no longer in one or two cities but all over the country or world.

So the original reasons for owning a house (a guaranteed easy commute into an urban area where the jobs are) are no longer valid, as demonstrated by the increasingly short lifespan of house ownership.

This is a trend that is continuing forever.

 

Opportunity Cost

The other day my sink broke. How come? Because hair falls out in the shower, stuff gets put in the toilet that shouldn’t go there, food gets caught in the pipes, and a million other things.

My house is 150 years old. It used to be a hotel. Things break. Pipes crumble in the hands of the plumber.

I email the landlord, who calls a plumber, who gets new pipes that are paid for by the landlord. The landlord wasn’t expecting it but that’s what they signed up for.

Meanwhile, I read a book on the couch in the other room.

The same thing when Hurricane Sandy came over the river. People were canoeing in the street outside my house. The water filled two feet in my house.

“This is the first time in 100 years the water got this high,” the landlord told me. So he ripped up floors, cleaned out mold, fixed furniture, and took care of it.

This time I was upstairs reading a book.

 

Flexibility

Some people like to know where they will be in 30 years. They feel comfort in that.

When you rent, you never know if you will be kicked out eventually or if the house will get sold and you have to move.

So there is no judging here. But I like flexibility in my life. I like to know I can move. And in my area, so many houses are for sale, I always know I can find a good place to rent.

And with so many houses for sale, I know those people are stuck while I am not.

Will it always be that way? No. Things cycle. But America has a tendency to overbuild. And then people overbuy. And then rentals are available.

I always look at rentals. Right now there are better houses for less rent available within a mile of my house. But I like my landlord and house and I don’t blow a good thing if I have it.

I live right on the river and can watch the leaves turn green and in the summer there are giant parties in the park next to my house.

And on Sunday nights they show movies outside next door and the whole town shows up. I watched “Bladerunner”.

But I still want the ability to pick up and move at a moment’s notice if I want to. Freedom makes me happy.

 

Property Rights Are the Basis of America

Many people like to own real estate because of the word “real.” It feels more real than money.

Or stocks. Or bonds.

I get that. It is real. And in America, nobody can take your land from you if you own it.

But not many people own their land. The bank owns it. Hence the $15 trillion in debt.

And people will never own it (the 4.5 year average thing).

But this is a judgment call again.

I like to know I can live out of a single bag. I’ve been doing that all my life.

When I moved to NYC I lived out of a garbage bag. Before I got married I lived in a dive hotel. After I got divorced I lived in the same hotel.

I like feeling like I could lose everything and survive. Maybe this is why I have lost everything sometimes. But it’s also how I keep surviving and learning more each time.

This will sound corny so please skip to the next part: but property rights are not real.

Loving who you are and where you are and what you are doing is the only thing that is real.

Live in your heart and not your home and you will never feel lonely or the need to establish roots.

Share that love with the people around you. And then, they also, will feel less need for roots.

That is the best investment. That is the best return on investment. That is the best home to live in.

The America Dream has us chained us to the land so they can feed us like pigs in a trough with debt, with factory/cubicle jobs that we can’t escape because it’s so hard to move (until they kick us out with 2 weeks severance), with forced friends in our neighbors, with supposed roots for our kids even though the statistics show those roots are a lie.

Freedom is more important than a dream.


Everyone has the story. They have bought and sold three houses and made money on each of them.

I believe them. Perhaps many people are phenomenal investors.

Others live in a good, secure neighborhoods that they want their kids to grow up in.

I believe those people also. But I’ve also seen the pain they’ve gone through when jobs were not as stable as they thought or marriages are not as stable as they thought and that mortgage would’ve been nice in their hands instead of in the bank’s hands.

We need a little bit of breathing room in order to survive when the noose is put around our neck.

What Do I Do then?

You can rent. Just like some houses are bad and some are good, some landlords are better than others. Like anything that is an important life decision, it takes research.

You can find roots with a good landlord. You can even paint the house and knock down walls and do whatever you want.

If you believe in housing as an investment, there are companies that just own houses that you can invest in on the stock market.

So you get all the benefits of a long-term investment in housing and get your cash out in five seconds if you need it.

But what should you do with all of that extra cash you have if you don’t own a house?

Maybe nothing. Having cash is a nice thing. It reduces stress.

But also you can invest in yourself. Or companies that are growing.

(Related: My Ultimate Cheat Sheet For Investing)

If companies aren’t growing, I can tell you that housing prices will go lower. Because housing prices depend on the stability of employment.

By definition then, companies will always grow faster than housing, in aggregate.

Average income for people age 18-35 has done from $36,000 to $33,000 in the past twenty years. While debt has increased 100x. Not good.

 

Why Do People Always Argue For Housing?

There’s something called “investment bias.” Your brain thinks, “I’ve just made the biggest investment of my life so it must be right.”

Your brain loves you. It doesn’t want you to think it made a bad decision for you. It’s scared you won’t use it anymore.

So it tells you, “that $200,000 down was the best decision you ever made. Everything else involves flushing money down the toilet, or no roots, or no stability!” So it’s hard to consider the alternatives.

It’s a lot of work to own a house also. Have you ever spent time in the Death Star? I mean Home Depot. That place is huge. And I only need that one special color of paint.

But where is it? The stormtroopers at Home Depot are never around when you need them.

And what about that “snake” that can clean my toilet. Where is it? And how do I use it? And is it gross? Why do they call it a snake?

It’s no wonder that plumbing is one of the highest paid professions in America.

And how long does it take to paint a house. Or who do I go to? And will they overcharge me if they pave the driveway?

Did I calculate that into my total cost of owning a house?

I like to sit in the garden area of Home Dept. There’s thousands of flowers and plants and it smells like dirt.

To be honest, that’s the closest I will ever get to hiking – sitting in the garden area of Home Depot.

I’m pathetic. And I flush my rent down the toilet. And I don’t have roots. And I refuse to fix my toilets or shovel my driveway or deal with my flooded basement. All I like to do is read.

And one day I’ll move. Maybe next to an ocean. And take a walk on the beach. Last week, a friend told me the sun sets in the West.

Maybe one day I’ll move to California. Five years until my youngest graduates.

I’ll sit on the porch and watch the sun set and have cash in the bank (I hope) while someone is fixing my toilet.

When the sun has 15 minutes yet to live that day, maybe I will feel like I’m falling in love.


Related Posts:

Why I Would Rather Shoot Myself In the Head than Own a Home

The Ten Commandments of The American Religion

  • Shirley Goff

    Hi James, Re sitting in Home Depot garden area, I think it smells like the chemicals they use on all their plants and the chemicals they sell to people. They feature the chemicals in displays right as you walk in, and they don’t offer customers advice on alternatives to using chemicals on their lawns and gardens. They have said they will sell organic plants, but they haven’t yet and probably won’t.

  • Kenny

    James. All the financial people that I read says real estate is a bad investment. What about actually being the landlord? Is actually owning the rent houses a bad way to go? The way I look at is, yes I’ll be $200,000 in debt..but if that debt is making me $2,000 a month..that can’t be bad right? I mean thats a 12% yearly return.

    Again, I just get confused when everybody says that real estate is bad..but those numbers don’t lie. Please help me out with this.

    • infocyde

      That assumes you will have renters that pay, will be long term, and will take care of the property well. These are assumptions often broken. Even good tenants move and then you will have a break in your income stream. Not saying a bad investment but your simplistic formula misses a lot of variables…I just named a few.

      • drm

        Renters? I had a beach house. Every time I rented it was like having a fire in the house. Yes, damage deposit does not pay for broken doors, the changes they made with paint, animals, friends of friends, etc. I heard a story of a college professor that rented her house when she when on sabbatical. After a few months..no rent. few months later..after several calls…neighbors complained of a “funny smell.” Renter was a hunter and like to dress his kills in the bathroom and the garage. Yea, they made money on that deal.

    • figseattle

      You’re forgetting the monthly mortgage payment you have to make on the $500,000 home. If you put down $200,000 you’ll have a mortgage of $300,000. Monthly mortgage payments and property tax payments instantly deplete the monthly rent you receive. In fact, when you have a renter fail to pay, you’re paying that mortgage out of your own pocket.

  • John

    Gee, why couldn’t someone have told me that 20 years ago, I would have saved a boat load of money, all this time I thought it was bad timing…..

  • drm

    Very true but did you also mention opportunity costs? My house took 5 hours per weekend, at least, of yard work. Every Saturday morning. Mowing, raking, painting, etc. As a consultant, in round numbers, $100/hr? $500/weekend times 52 weeks per year (yes winter shovel snow, etc) $26k per year. More? Ugh. then divorce? ugh

    • kdk22

      not all homes require work to that extent.
      and if you can work more at your job to produce said cash at 100/hr, you can hire out your maintenance and profit. Likely those hours spent working on your home take away from you TV time, where you’re not making money anyway.

  • Neal

    I have been considering selling my apartment for the similar reasons that James outlined.I bought it 11 years ago to live in and then for the rented past 2 years. I rent a house close by as I needed a larger place to accommodate my partner and her two kids. Since I bought my apartment I have paid $28,000 in mandatory building repair work and upgrades, another $11,000 apartment repairs and (needed) renos. This is not including condo fees, taxes, insurance and (rental) management fees. Also, $100,000 went to my ex to buy out her portion of the increased market value of the place when we split less than 3 years after we moved in. That is not to say it has not gained value in all that time but when calculating the costs and the stress I prefer to remain a renter.

  • Dago44

    Hard to argue this, real estate is tricky, but the problem is, rents are at historic highs. We’re in the process of buying a bigger home. Yes, it’s going to cost us more in all the ways James describes. But the rent on a comparable house would be much too high. The bottom line, if you want a nice place to live, and you want to rent, your rent is going to be considerably higher than a mortgage payment on a similar property.

  • James, its sounds like, you are advocating against going into debt to buy a house, rather then buying a house in cash, and no debt. I have a question, after you made your $10million, why didn’t you just buy a moderate 500k house, before you spent it all in a single summer? JOsH

    • Doug Keefe

      I don’t want to put words in James’ mouth, but I think he has suggested that the opportunity cost in home ownership isn’t worth it to him. Cost of on-going ownership (maintenance, etc) along with time commitments, and lack of flexibility all add up to reasons to not own a home even in cash.

      If he had the $500k in cash he could invest it in something that would generate a larger return than a home, therefore a better use of his capital.

      • Pranshu Thakkar

        I agree with Doug Keefe,
        James is telling of himself.
        And he is telling that invest in which gives you big returns.

  • Paul

    Can people really make $5K per month after taking only a few WordPress courses? That seems too good to be true. I’m not staying that investing in yourself isn’t better than buying a house…it just seems like this particular example was a bit of an exaggeration.

    • Sam Browne

      It would depend somewhat on the talent of the individual as well as having a bit of marketing wherewithal (also pretty easily achievable by reading a book or two on website design for conversions and copy writing) but this is not remotely an exaggeration. Even $10k per month would be pretty achievable, building sites for $1k – $2k for small businesses requiring approx 6 – 10 page sites.

    • Haley

      Yes, this is doable. I have a friend who charges $2k a week to build WordPress sites and she is always busy with clients. She started her business 1 year ago.

  • Ted Scarborough

    Friends and family do not like to hear this. They will fight you over it. That is how well programmed we are. The largest real estate organization has a commercial that claims kids that live in houses make higher grades in school! Think about that one.

    Bring up the subject with some friends and try it out for fun. See what happens.

    My pool is a hole in the ground i pour money into and new siding is in my near future. I too wish i had learned this 25 years ago. I may be able to convince my wife before retirement, but I doubt it. She wants the empty bedrooms for when the kids come home to visit!

    • derp

      “the largest Real estate company” is Keller Williams, they don’t advertise.

      • Ted Scarborough

        “organization”

  • Marjan

    All sounds very well, but what if you already own a house? And have owned it for over 25 years? Selling and then renting seems a pretty darn bad deal when that means (more than) doubling your monthly housing costs. Also, rents keep going up, while a mortgage’s interest rate is often fixed for 5, 10 or more years.

  • Star-Lord

    Much appreciated. I get a lot of judgement for living in a small apartment. I don’t fix anything, don’t mow or shovel, and have a pool that someone else cleans. All of my stuff can fit into the smallest U-haul and if my job changes I can move where I need. That is freedom.

    4 more years until my youngest graduates, then I may have to join you on that beach.

  • LX5

    Isn’t the argument for owning that in times of inflation rents will increase rapidly? Owning can be viewed as exchanging uncertain future rent payments for a down payment and mortgage payments for the period of ownership.

    Other home ownership issues involve the children’s school system, who your neighbors are ect… The system is set up in many places to make it impossible to rent and be in a good school system.

    Another advantage of investing by owning a home is residential real estate is one of the few businesses that the typical person knows anything about. So it makes sense in the invest in what you know sense.

    The real question is if you had say a $100,000 down payment. Should you buy a $500,000 home or do something else with the $100,000?

  • It’s very situational and market dependent. Often renting is the better choice but it can also be worse depending on the market.

    All of your assumptions are based on this 0.2% increase model which makes as much sense as saying that the average price of a website has of a website has historically only increased X% per year. Yes, if you just throw a random dart and buy property based on nothing more than randomness, sure, you’re going to get a 0.2% return on your money.

    You can not say that real estate in Los Angeles, San Fransisco, or New York has historically produced a rate of return of 0.2%.

    However, if you actually did some research, purchased in a neighborhood that had a high potential for price increases, and bought intelligently, your returns are expected to be much higher than 0.2%. Remember, that 0.2% number includes people who own property in Detroit and other areas seeing massive home price devaluations.

  • I know mine is just one data point but let’s look at a real world case.

    I purchased my home 14 months ago. House was listed at $330,000. I purchased it for $310,000. It’s in a highly desirably neighborhood in a market that took a beating during the financial crisis starting in 2008 but has been recovering nicely for the last several years.

    I purchased the home with a VA loan which means I did not have to put any money down. I think I paid around $6K in total fees for inspections, loan origination fees, etc.

    Prior to buying this house, I was renting a house in a similar neighborhood for $1600 a month. My mortgage (with all taxes, insurance, and fees) is about $1750 so owning my home is costing me about $150. Probably less since I had renter’s insurance which isn’t factored into my monthly rent cost.

    A little over a year later, comps in my neighborhood are $340,000 so I have a paper profit of $30K.

    According to most of the projections I’ve seen, my home is expected to rise in value 5% a year for at least the next year or two due to the severe devaluations the market saw during the financial crisis. As long as the local economy continues to grow, there will be enough demand on this type of home where I believe those projections to be true in the short run.

    Obviously, it’s probably not the best idea in the world to have all of your net worth in real estate but, for me, the extra $150 a month between my mortgage payment and what I would pay in rent is a worthwhile tradeoff for the potential upside.

    That’s why I said in my previous comment that it is situational and market dependent. For me, it makes sense.

    • Doug Keefe

      Congrats on the gains.
      Something that isn’t touched on much in the article is the use of leverage. You were able to purchase your home with no money down. Which is a fully leveraged investment backed on the asset. There are really no other financial instruments that allow you to directly achieve a fully leveraged investment. So most people are over-leveraged and under diversified and don’t realize the risk this presents.
      There are always exceptions though, sounds like the timing has worked in your favour!

  • Grinch’s mom

    Have you checked out Tiny Houses? That’s the way to go! You can take your house with you! Total FREEDOM!

  • @drm: The “my time is worth $X per hour” a false argument used over and over again. Your 5 hours a week is only worth your consulting rate if you can book yourself 24 hours a day, 7 days a week. If that is the case, sleeping is costing you $800 a day. Reading and responding to this blog post probably cost you $25.

    Most people aren’t booked 24 hours a day 7 days a week but the argument is a convenient (and bad) way for people to justify costly expenses. Oh, I could be earning $100 an hour so paying $Y an hour for some service is actually saving me money.

    I’m willing to bet that of all the people who claim doing housework costs them $500 a week (or more), that very few of them books an extra $26K a year in revenue by not doing the housework.

    And I guess if you rent, they shovel the snow for you? Where is that landlord? I want in on that.

    Even when I’ve rented homes with pools, either they jacked up the rent to cover the cost of hiring a pool guy or it specifically stipulated in the rental agreement that I was responsible for keeping the pool maintained. The cost doesn’t magically disappear. You’re paying it in the price of the rent.

    • chaig

      You have a point, you can’t really make that argument about your billable hours and taking that to the bank, you just can’t.

      But I’m curious, how valuable is your weekend to you? Sure, I probably couldn’t bank much more money working a second job on the weekends, but I don’t want to, because my free time is actually precious to me. Owning a home is a second job on the weekend, that you don’t really ever get paid for.

      I’ve never shoveled snow, or mowed a lawn, or fixed a clogged toilet in a rental. Hell, I have a friend that won’t even get on a ladder to change a light bulb. He calls the landlord for that, and the landlord does it for him!

      Now, you might argue that those maintenance and service costs are all just added to price of the rent, but I’ve worked as a property manager and I can tell you that for many landlords, they lose money at the end of the year. Maybe it works out for them in the long term, over 10, 20, or 30 years, but definitely not in the short term.

  • bamboobob

    Renting is bad. Live with landlord rules and cheap repairs. On your own home and do want you want.

  • chaig

    “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 around going, ‘Hey, we ain’t gotta fix s#*t.'”
    – Mitch Hedberg

  • Kevin Roth

    Is this meant for city folk or people in the burbs and beyond?

  • DJ4060

    James, there is one small point you left out regarding home ownership. There is no such thing in the US except in a few isolated locations. I submit that in all these other jurisdictions that do have a property tax it is not possible to own a home even if you paid off the mortgage. Just stop paying that property tax and see what happens. You will be evicted by the government and replaced with a new “tenant” that will pay the rent (property tax) The USA long ago adopted the 1st plank of plank of the Communist Manifesto. So from an ownership point of view you can never actually own a piece of property unless you are in one of those isolated jurisdictions that does not have a property tax.

    • VoiceofReason

      Sounds like you don’t know much about tax laws, but for the sake of the argument: if you pay off your home before retirement, your SSI will more than cover your property taxes and basic cost of living. Also, if you fancy yourself an investor, your investment portfolio doesn’t stop earning income when you stop clocking in for a living. To put it bluntly, if you lose a home that’s fully paid off its because you’re a fucking moron.

      • Brian Campbell

        What? “fucking moron?” Ad Hominem ring a bell? And exactly what is your expertise in SSI? None what so ever right?

      • Maenad

        That’s not true at all, and is precisely why California has tax law of Prop 13, people who free and clear owned their homes could not pay the tax increases. (Prop 13 had many bad consequences, but long term owner occupied taxation limits isn’t one of them.)

    • Where I live there are no property taxes after 65 if you make under a certain amount or live primarily off of social security. So you most definitely own your home at that point. If you’re home is paid for that means you have no housing costs beyond utilities v.s. the cheapest rent being about $700-900/mo (unless you want to live with a lot of roaches in something that is probably a fire hazard).

      • Kristian

        That can always change with a mob vote, and judging by this Bernie sanders culture I’m sure that lack of tax is a relic that will go by the way side. Old folks are a minority that my generation (the millennials) will be happy to shit on to benefit ourselves.

      • Could you please tell us the city you live to verify this law.

        • We might have some city/county property taxes but they are MAYBE $1000/yr on a $350,000 home. A home in that price range is easily a $2400/mo rental right now. Which would you rather have at age 65?

          The maintenance cost argument is also a pointless argument. I’ve lived in a home I’ve owned for the past 12 years. Over those 12 years I’ve my annual maintenance budge is maybe $2000. But its the type of stuff that a landlord may very well make you pay for yourself anyhow. When my grandmother hit a point on her house where maintenance was becoming a factor she simply rolled all of the equity into a brand new garden home. She’s had no more that $1000 worth of maintenance per year for the past ten years.

          I think my problem with the entire rent/owning argument that James makes is that renting would NEVER have worked for my grandparents. They lived in far nicer homes well into their 80s than they’d have ever been able to afford to rent.

          And the investment argument makes no sense. Right now I have MORE money to invest because I own. I’d have $500 less a month to invest if I rented my exact same home. I know this because i live in a neighborhood where the houses are very similar and that’s what they rent for.

          I actually lived in my first home for free because I bought it. It was a model home that a builder needed to sell. So I got a great deal and it appreciated at the rate that I paid the mortgage. I rolled all of the equity into the next house. And then rolled that equity into the next.

          And even if the home is worth less than I paid for it by the time I’m 65, I’ll have still paid less monthly to live in it than a rental…

          I like James a lot. But unless you plan to live in a bunch of different places… home ownership is currently a great deal.

          • jp

            in his arguments the hidden costs of home ownership are higher than in yours so your argument of $500 less a month is a bit off plus given how interest compounds are you taking into account the wealth generated by investing that downpayment at a rate considerably higher than 0.2% return annually. assuming 20% downpayment and a 30 year mortage your downpayment of $70000 would be worth $302535 if you were only able to average 5%. remember money invested earlier is more valuable because of compounding

          • What $20,000 down payment? I wouldn’t have had that down payment without the FIRST home. I didn’t put a down payment on my first home (I might have put down $1000). That house got me the down payment for the next house. Which I rolled over for tax reasons.

            That’s the point… His scenario include phantom investment money that doesn’t exist for most people who buy homes.

            It’s easier to intelligently buy a property than it is to intelligently invest in the stock market.

            I actually do both. I can tell you hands down the return on the real property is higher.

            I’m not a moron. My family runs of a solid budget. I can easily compare the numbers of renting v.s. what it’s cost me the past ten year to own a home. It’s not rocket science.

  • Mike

    Where are all these $5,000/month wordpress jobs? You’re full of shit.

  • James Feenstra

    There’s a lot of mistruths in this article….

    you can totally write off the mortgage debt IF you do it properly (buy the house as a corporation owned by you, rent the house back to yourself), and you definitely can write off the mortgage interest (see previous)

    if you’re getting a mortgage at 6% you’re getting ripped the fuck off….both mine are well under 3% and will be for at least the next 5 years.

    you can pull the equity out of the house at any time if you need the money- either via a HELOC or by refinancing the property at the new value.

    maintenance, meh, it happens, and landlords can bill that back to tenants sometimes, depends on the situation. Ultimately doing something like they’ve mentioned (replacing all the pipes) will increase the property value.

    personally I was renting a place that was approximately the same size as my condo and cost $400/month more. That $400/month bought me an income property that now generates $350/month in profits after expenses, plus gives me a massive tax deduction every year (around $20k once you factor in depreciation and expenses, yes, including the entire mortgage, property tax, etc- all the stuff that this article says there’s no way to write off)

    that $750/month goes partially into a TFSA (up to the max $ contribution per year) and the rest goes towards a variety of other investments. I’ve built enough of an income through two properties that in less than 5 years I won’t have to work unless I want to. Likely I’ll end up paying off the remainder of my two mortgages, which will give me a pretty decent passive income from the single income property, and reduce my living costs

    On top of all this, both properties have returned somewhere in the range of 5-8% per year of ownership- well above the cost of the mortgage and the 0.2% the article states. I’d be hard pressed to find any property that appreciates that little on any given year.

    Also, Warren Buffet totally owns stake in real estate, being heavily invested in the banking industry (hey, who holds that mortgage now?) as well as through a couple of the hedge funds that he’s invested in.

    • So your argument is that because interest rates have been kept artificially low (effectively ripping everyone off with a manipulated money supply that’s becoming more worthless by the day) that paying 6% for a mortgage (which at one point was low) is getting ripped off? Maybe you just don’t understand the full breadth of the issue.

      • James Feenstra

        If you’re currently mortgaging at 6%, and current interest rates are 2.5%, why wouldn’t you refinance at a lower interest rate?

        There is absolutely nothing to stop you from refinancing before the end of
        the term, although you may have a small fee (under $1000) depending on
        your mortgage holders policies.

        Depending
        on how much you still owe, it may or may not be worth it. On small
        balances the fee will likely outweigh the savings, but once you cross
        the threshold it will definitely save you money over the mortgage term.
        If you keep payments constant with what you were paying at a higher
        interest rate, you’ll pay off the house quicker, or you can make lower
        payments and increase overall cash flow.

    • I’m not completely defending Mr. Altucher here, nor am I saying that you’re incorrect James. However, most of your rebuttals are outliers and some are just short sighted…as are most traditional investment strategies.

      First, the percentage of home owners with a mortgage that have or would actually buy their home through a corporation is extremely small. Outlier. The majority of Americans follow the “status quo” when it comes to a mortgage. I’m not saying it’s right…but Mr. Altucher is addressing them.

      Second, from your comment stating that your interest rate will be “well under 3% and will be for at least the next 5 years” I assume that you have an adjustable rate mortgage. Many of my friends that were RE investors also thought that was a good idea back in 2005-2007. I have endless stories about how it wasn’t. Potentially Short Sighted.

      Third, Your statement about being able to “pull the equity out of the house at any time if you need the money” is false. HELOC’s and a Refi will require qualification, income and property values to be at the right point in order to access any equity (or % of equity) you may have. You may lose a job, RE values can be affected by job markets, currency markets, etc. There are a number of reasons why your equity may not be available to you…and for the same reasons, you may not be able to sell the property. Additionally, when most people refi, they start over at 30 years again, effectively making their previous payments 100% interest. Short Sighted.

      Fourth, contracts will usually dictate the expenses of the Renter and Landlord. Moot point.

      Fifth, depending on how long you’ve owned your properties, it is easy to see a 5-8% return annually, especially in today’s market. However, what goes up…will come down, or go flat. It’s inevitable. When that happens, your gains will begin to average out and that is exactly what Mr. Altucher is stating. His number of .2% comes from a 100 year track record. Now, no one owns their property for 100 years, so we’ll expect that your rate of return could be higher. But the variables here are huge. For example, maintenance costs will bring down your rate of return. I’ve heard rates of return quoted at 2-3% over a 30 year mortgage. Still hardly an investment I’d want my money in. Short Sighted.

      I too have RE investment strategies and I see much better than 5-6% annually, but my strategies are FAR from traditional and I have no maintenance or tenants to worry about. I am also diversified…all in non-correlated assets. Nothing I’m involved with is “Status Quo”. That system usually keeps the majority of people trapped in debt “because there’s ‘good and bad debt’ right. (Rolls eyes)
      As Mr. Altucher has pointed out, “no one should have the majority of their portfolio in one asset class”…yet that is exactly what Real Estate requires of most people.

      My point being, you James are likely an Outlier which means the odds are better that you’ll come out ok. But the caution I leave you with is that most people thought like you back in 2004-2007 and millions of them paid the price when the bubble burst and the markets nearly collapsed. (I’m not talking about sub prime people here.) A couple of my friends actually had millions in cash when things went south and thought they could wait it out or salvage the sinking ship. In the end all of them were broke.
      We may or may not see that kind of turn in the markets again, but we WILL see something. Everything cycles. But not hedging or diversifying and preparing for it are what make people foolish.

  • Grace Mark

    Great to see this post! Totally agree, I learned the lesson that your home is not an investment from reading Rich Dad Poor Dad as a kid. But the myth is so strong here in the UK that people/ government feel like it’s their right to “get on the property ladder”

  • Bertahiggs

    I am waking out of the fog of the supposed american dream, but I’m not there yet. 2 factors I wish you would elaborate on .1- what about if you actually care about beauty and design in your home. Seems your chances of getting the qualities that you want like wood floor, high ceilings, better carpet, etc, nice kitchen cabs all are possible renting but MUCH less likely. just look up rentals in any given city and compare to houses and it’s comparing apples and oranges. So should I just suck it up and become enlightened an just not care about those things for the sake of saving money? I can do that (doing it now) for a time, but I want to know it will end and I can choose nice landscaping and wood floors down the line. How do I get those things out of my landlord?

    2. related- to get a rental house you have to live in a less desirable part of town. Rentals tend to be in less desirable locales with less desirable schools.

    please reply! I love all your podcasts. Q of the day might be my new fave. Keep it coming!

  • Saif Qu

    Some great food for thought for those of us trying to live gently. We evolved because of our ability to adapt. Being financially flexible gives the ability to better adapt and respond to our circumstances.

  • Zach

    the mortgage on a $500,000 house with $200,000 down at a 6% fixed rate for 30 years is only $1,798.65, compared to your $2,500 in rent. so its less out of pocket, its building equity on top of the return on the value of the home, and the interest is tax deductible. so you get every dollar of it back (even at a paltry 0.2% annual return), whereas every dollar of your $2,500 in rent is just gone. also, while we’re talking about return, its a little disingenuous to quote a 0.2% 100 year CAGR on home prices in the same article where you point out average home ownership is only 4.5 years. over the last 4.5 years average home prices are up 5.7% a year.

    you’ve obviously had bad experiences owning homes. home ownership isn’t for everyone, i agree with you on that much. and like any investment it has as much to do with timing and luck as it does with expertise. we should stop pretending its something everyone can and should do. but just because its a disaster for some people (who maybe didn’t understand what they were getting into), doesn’t mean its “financial suicide” for everyone.

    • Chris Gabel

      Oops, you forgot property taxes. Oops, you forgot maintenance and repairs. And replacing the furnace, water heater, roof periodically. Comparing just the principle and interest on a mortgage to rent is a very incomplete analysis.

      • Zach

        just because a renter doesn’t personally write the check for property taxes or maintenance doesn’t mean they aren’t paying for those things. they’re baked into the rent – that plus a little profit for the owner. that’s why the rent is so much more than the mortgage.

        • Pranshu Thakkar

          Yeah but he is shifting when he wants to in a long run renting is more profitable than buying real estate.

        • MathLover

          Renters in a large apartment complex often pay a fraction of the total property tax for a building with many tenants. Yes, the landlord makes a profit, but the amount of property tax paid by each renter is less than if the renter owned a house.

        • tillamook tim

          Right on zach, here’s what I tell people “if I can buy it and rent it to you why can’t you buy it and rent it to me” Of course I don’t make a profit, I just love to throw money away. (that was sarcasm)

      • James Feenstra

        roof is once in 25 years. furnace/water heater is maybe 10 years if you buy shit ones. That’s lets say (on the high end) $25000 worth of repairs in 25 years (one roof, two heaters and two furnaces), so $1000/year or less than $100/month. Property tax is somewhere in the 0.5% range of assessed value (not resale value, the value that the city assigns to the property, which is typically a lot lower than resale value as it doesn’t take into account finsihes, and is more an average value of sales in the area over the last 5 years). Lets be generous and say that assessed value of the property is $450k. 0.5% is about $2250/year. To make the numbers easy (and way excessive) lets count this as $200/mo.

        so,
        mortgage; $1800/mo
        maintenance (major repairs): $100/mo
        property tax: $200/mo
        maintenance (minor repairs- reserve fund): $50/mo
        total- $2150/mo

        renting; $2500/mo

        monthly savings by owning: $350/mo

        monthly capital gains on equity (at 1.5% annually- which is really low); $625

        over all monthly savings on owning vs renting- $975

        Would you like me to continue?

        This doesn’t include the interest that you’d get on saving the repair money in a TFSA or something similar, as you’re not spending $150/month, you’re saving in the event there’s repairs necessary, so this money is still liquid and can be invested, as long as it’s in something that is accessible. A TFSA currently pays around 1.4% annually, compounded monthly. By the time of the first major withdrawl (10 years) it would have generated $1331.38 in interest, or about $10/month of additional savings vs renting.

        Putting this into something like an ETF would generate even more interest (given that ETFs generally return somewhere in the 9% range yearly), although generally they don’t allow for small monthly contributions. If you did yearly contributions (at the start of each year) of $1800 to an ETF @ an average return of 9% you’d be looking at $11,244.58 in interest, or almost $100 a month of additional savings vs renting.

        Personally, I’m all for saving the $1000+/mo on living, as well as having a long term asset that allows me to leverage money for additional investing. I realize that equity gains aren’t really monthly savings, but they do come into play when you sell the property, so for all intents and purposes can be included in doing the math. With renting, this equity gain only benefits the person you’re renting from.

        Long term, you don’t see additional cash flow from renting. If renting is the way to go, why does every major banker/stock broker/investor own their property? While they may not be playing the real estate market (renting out income properties can be more hassle that it’s worth unless you find good tenants- I’ve had both good and bad), they still own their home as an asset for their investment portfolio.

        • Sid Jhala

          Hi James…Sid Jhala here…from Toronto. I read your comment on James Altucher’s website regarding the ‘House Buying’ article and totally agree with you. I tried to search for your contact details but could not find any. I am looking to see if I can invite you out over Coffee / Lunch / Dinner and get a chance to know your Real Estate Investment Strategies better. I am new to Canada & wanted to learn from you who seem to have got ‘it’ together. I would also be open to coaching and paying you a reasonable tuition amount if you would like. It would be wonderful if you could email me on sjjhala@gmail.com or call / text me on 647-713-8030. Looking forward to your response. Thanks.

        • MrDax

          Owning a house is the dumbest “investment” there is. It is absolutely Illiquid. If you put your money in SPY ETF and forget it, in 20 years you would definitely earn more than in any single house you can buy. Not the mention all the hassle of owning the home.

      • kdk22

        As a landlord I can tell you that I do NOT pay for anything mentioned in this article, out of my own pocket (read: money I made from other sources). I set aside money each month (collected from rent) into “reserves” so when a roof goes, a pipe bursts, floors need to replace…while I’m “paying for it” it is money that was collected from the rent at one time or another.

        In addition to such reserves, I take home money as well that is for myself. I know that rental numbers vary by area. By I can tell you that my rentals produce enough cash to not only pay for themselves (including all taxes, insurance, repairs, etc..) but they throw off enough cash to pay for my OWN home.

        Again, I realize that these numbers don’t work in every area. But it simply isn’t correct to make such a blanket statement. The rentals certainly require more work/attention than my stock holdings. So the rentals aren’t exactly “passive” income more semi-passive income.

      • You can buy insurance for unexpected repairs, also, if you do your homework you’ll find that instead of buying a new A/C unit, you might hire someone who suggest a $30 part. Yes, homeownership can be a pain in the ass, so what? The goal is to own something you can afford. I don’t care if it’s a pre-fab home or trailer, as long as you can afford it, it’s an asset that increases in value or can be rented.

      • shepd

        And the landlord just chooses to lose money each time one of those breaks? He never uses rent money to cover those costs? Think this through!

        Also, as an owner, you will choose the most efficient furnace and water heater, plus the longest lasting roof you can.

        A rental property will be fitted with the cheapest root possible, and the lowest efficiency furnace and water heater possible. Because, in the end, *you* are paying the utility bill, and cheap roofs save money (but they do end up leaking and ruining the tenants stuff… but it isn’t the landlord’s stuff so who cares!).

        YOU get to pay for tenant’s insurance, and you’re paying the landlord’s property insurance as well. Guess what an owner doesn’t pay for.

        And, at least in my city, additional property taxes are charged for rental units on top of regular property taxes. The landlord pays for those, and I suppose, again, in your world, that money comes straight from their retirement account, rather than slowly being tapped from your rent cheques.

    • Joe Rhodes

      No, you do not get every dollar of interest back on your taxes. You are confusing a tax DEDUCTION with a tax CREDIT. A deduction means only that your taxable income is reduced by that amount, so you get a fraction of it back depending on your marginal tax rate. And if you don’t have more than $12,500 of itemized deductions – including mortgage interest – it does you no good, since you could have just taken the standard deduction.

    • cance440

      Nope. Property taxes, maintenance, interest, and insurance completely consume whatever appreciation your house might see. The deductions in our case are covered by the standard deduction anyway. We’d get that if we lived in a tent. Hyperbole aside, this article is on the mark. Home ownership is no investment.

    • Of course you included taxes and maintenance in your number right?

  • I can’t get over your prose and delivery. This site will, for quite a while, be an easy culprit for distracting myself from doing important work.

  • derp

    How is a home not an asset? that’s a horrible mindset, Yes! a home can be a liability as well but so can multiple different types of assets. Like the cell phone, one of the greatest assets of our time can be a liability, even a car!
    Just like any decision where you’re spending THOUSANDS of dollars you should spend time to research and make sure you’re making a finically educated and literate decision. You can even RENT a room in your home to pay for your Mortgage.

    Do I believe the system is leveraged against the average user? YES! but this is in every existing market today, tech, healthcare, electronics, financial… all of these systems are built to squeeze pennies. Definitely ranting here,
    i guess my point is that it’s unfair to hound the Real Estate market when every other market is also rigged to leverage the user, EVEN your website.

  • flankton

    Wow. You are way off. The poorest people are the elderly who never bought a home and now have to live in tiny apartments subject to rising rents. OWN your home before you retire. There is nothing better I can tel you. Also, if there are a lot of homes for sale in your area you probably live in a really bad area. There is a home shortage right now in the healthier parts of the nation. Also rates are 3.5% right now. I can’t believe this author gets paid to write this garbage. N

  • Dixie Darlene Mcguffin

    http://www.homeservices.com/ A Berkshire Hathaway Company, owned by Warren Buffet.

  • Ray

    James, you a fucking moron for posting this truthfully speaking. Speaking from an investor stand point I can tell you that’s not so accurate of home ownership. Most people who fail in the real estate industry is because they dont have the right knowledge or guidance. The value of ownership is not just owning your own home under your name, but having some valuable assets to pass down to the next generation of your family. And the reason I get so upset with this post is, because your discouraging other individual not to get into real estate, all because you didn’t have success. Your trying to put your failure on ther indivual. I’m pretty sure your the type of guy who will work for the same company for over 20 years then retire, having nothing to pass down to the next generation in your family except some small stocks or bond.

    • pacomerh

      hm, no he’s not that type of guy, he wouldn’t work for any company, and not for 20 years.

    • Ashley Johnson

      Maybe he doesn’t have a family. No use being locked down…

  • James can write about this until he’s blue in the face but it doesn’t make him correct.

    In my area, if you have good credit you can buy a home for almost nothing down and with a historically very low interest rate. Even after interest, insurance and taxes, a home like mine runs about $400 more per month to rent. So why in the world would I rent unless I plan to move (which I don’t)?

    On top of that, if you buy smart and negotiate well you can position your self to be in a home that will at some point sell for more than you have in it.

  • Matt

    As an MBA I find this article ludicrous. Purely based on bias of negative home ownership experiences. While the cost of renting is theoretically the same as the the future cash flows from home ownership, there is a huge premium for the lack of liquidity in home ownership. Also, the leverage inherent in mortgages allows you to invest your money at a much a higher return- even if you’re risk adverse and largely in blue chip bonds.

    • MrDax

      As an MBA… Wow, now I immediately believe you know about investment strategies

  • Waggoner Financial

    200k at 5% monthly return rakes in $10,000 per month, compound that for just one year and you made $160,000. Pay some tax you come out way ahead of the game. Never put any money down on a home…. ever. Rent or 0 down you can make that payment from the income generated from your down payment if properly positioned.

    • dennis maize

      Where on earth is the average person getting 5% a month return? Moronic.

      • Waggoner Financial

        I’m glad you asked, myself and my clients actually do better than 5% however nearly all my clients were very skeptical until they saw their account balances grow and did the math. I have pages of reports to validate moronic returns… I would even give you a demo and full access so you could see for yourself. And yes this is all legit with a decade old track record passing the scrutiny of the SEC.

        • Feed Mill

          Ok Mr. Madoff.

  • Richard Vincent

    You make some hopeful and inspired comments. But the bottom line is that the house is a fixed asset which for most Americans is their largest. That asset can be re-financed to pull money out should you need it, as well as being an appreciable asset with significant tax benefits. It it also the place where you can pull the cheapest debt. All markets are different and that fact alone dictates whether it makes sense to purchase or not. In Southern Cal. The rule of thumb over the past 50 years is that a house doubles in value every 15 years. Yes there’s inflation yearly which offsets the gain, but that gain is not a capital gain which is another important wealth building tool.

  • Jimmy

    Fundamentally flawed in your stats and math. Let’s go with the basics. While taxes and maybe the responsibility of the owner and not the renter. The owner has already factored the taxes into your rent. The 2500 in rent most definitely includes their taxes. Over 3 years that is 90000 that you will never get back. At least with owning you will get a portion of that back along with the tax write offs through the years of ownership. I think the point you are trying to make is; owning a home is not an investment or an asset. I would agree with you on those terms. An asset is something generates more income than it cost to own. A home that you own and live in is never going to pay you. Unless you sell it. Even then, once you calculate your true cost of ownership you will likely find that you either slightly broke even or possibly made a nominal profit. The difference of renting and owning are simply. Owning will likely allow you to sell the home and recoup some of your money. Whereas renting the money is just spent. Again a home that you live in is never an asset.

    • Feed Mill

      You are fundamentally flawed in your understanding of what an asset is. A home is always an asset, it’s just not always an income generating asset. What people don’t seem to understand is that the question isn’t whether you should own or rent, it’s whether you should invest in real estate. Financially, there is no difference between owning the home you live in and being a renter while investing in a comparable home which you then rent out. Financially speaking they achieve the exact same result. You’re either earning rental income and incurring matching rental expense, or you’re not. All other income/expenses occur identically. The only caveat to that is the tax treatment of things. Renting out the house allows for much more favorable income tax treatment of the expenses of owning the home, but it also tends to increase the property taxes and insurance costs.

    • Graham Telfer

      Jimmy not everyone wants to live your life. Or your mathematical calculations.

  • skiidahonorthsouth .

    If just a little critical thinking and planning is put into Career, Spouse, vehicle(s) and home…Magical things can happen…like retirement at 50 with a long since paid off home and zero debt. The problem is most 20 somethings are complete idiots financially, and in this generation…their parents and possibly grandparents are not much smarter about financial planning.

    Sure, there is some luck involved, especially in the spouse area. We married in our late 20’s and explored compatibility with 3rd party classes. Kids were also well thought out, after marriage, under insurance, and with planning for future in mind…i.e. both had a college fund started the week they were born (Both graduated debt free in the past 5 years)

    We purchased a modest home with potential for remodel. Both of us had savings to get to 20% down, and we paid off in 12.5 years on my salary only.

    THEN (and this is where this article really becomes idiotic) we continued to put the same amount we had been paying monthly for the mortgage into other investments.

    Cars, very rarely new, usually around 3-5 years old, purchased for function not a fashion statement. Usually cash purchased, but have used loans.

    Basically, I feel like a long lost brother to Dave Ramsey. His suggestions reflect almost verbatim my approach to money management. I retired at 50 to pursue income generating hobbies, no debt, low bills and taxes, kids are both doing well and have zero student debt. Our household, combined income peaked at $75K, but averaged closer to $50k in the last 10 years. After my retirement (wife still working we are at $40K)

  • Rick

    I think many posters here have poor reading comprehension. Altucher has made clear here and in other articles that it makes sense for some people in some situations to buy a house. His articles are intended, I believe, to share a non-mainstream opinion with people who might benefit from it. To make people think. To question conventional wisdom. Beyond that, the ad hominem attacks and straw man arguments say a lot more about the people who post them than they do about Altucher.

  • TruthMeister101

    Altucher’s analysis is way too over-generalized to really be persuasive. The better way to make the buy vs. rent decision is to do the analysis and calculations based on one’s own specific situation, geographical location, and market conditions. Two of the better web-based resources are as follows:

    NYT Rent vs. Buy Calculator ==>
    http://www.nytimes.com/interactive/business/buy-rent-calculator.html

    ULTIMATE Rent vs. Buy Calculator==>
    http://michaelbluejay.com/house/rentvsbuy.html

    My experience which I bring to this question is much more extensive than Altuchers; namely

    I’ve personally RENTED and lived in apartments, a townhouse, and SFHs in Huntsville, Al, the Florida Panhandle, and metro-Atlanta.

    I’ve personally OWNED five owner-occupied SFHs, the most recently purchased of which I have occupied for the last 21 years in the Atlanta area.

    I have personally bought, managed, rented out to tenants, and sold over 100 apartment units, townhouses, and SFHs primarily in metro-Atlanta as investments.

    I trust Altucher’s experience and opinions in many matters but he is really off-base in this analysis.

    One startling counter example would be the SFH market in Palo Alto, CA. Had an owner bought into that market in 2008-2009 at the low of the market, in a good neighborhood, he could have easily netted a $1 M + profit in 6 – 7 years. In fairness to Altucher, however, I would not recommend buying in Palo Alto today, but renting instead due to current market conditions (see above).

  • Jonathan Reilly

    Eh. Bought my house in Los Angeles for $210k. Put maybe 40k in to it over 15 years. Paid it off. It is now worth $850k. No debt.

    Maybe your stream of consciousness justification isn’t really all that apt?

    • Ashley Johnson

      Only a moron would buy an overpriced house for 850k. First rule of investing, never buy high… Maybe you got lucky and scammed someone out of 600k. But house prices can’t go up forever. This guy will more than likely lose a ton on his house. see housing crisis 2007.

  • Phoenix Rising

    It’s an investment alright….just not yours.
    You’re really just working to give bankers fat wallets…..hoping maybe to screw over the next gullible idiot, and walk away with the shirt on your back.
    You’re renting your home from a bank, and get stuck with all the upkeep.
    It’s a shitty deal in every way, unless you can screw over the next fool in line.

    Debt write-off should be illegal – don’t make it everybody elses problem that you’re an idiot.
    Don’t forget, banks will just crank up interest if they decide they need more free money.

    Prices are high because of banking mortgages, not in spite.
    If things could be bought with cash on hand only, the prices would reflect that.

    Finance ‘business’ is just a scam to make money from nothing.
    YOU do the actual work that pays the scammers, when you decide to live a debt based life.

    And for what?
    Some arbitrary manifestation of success?

    Where’s the ‘success’ in being enslaved for a lifetime, paying back money that never existed in the first place?

    • Graham Telfer

      It’s the idea of an American dream placed on an ivory pedestal. Real smart people base their live debt free as much as possible, find freedom and consolation in a carefree lifestyle. Those faced with the indignation, fear of unknown and society pressure own homes, pay banks and finance its upkeeps—hoping to justify their purchase either in a future tense or the legacy of owning it for their future generations. What they don’t know is that all human beings turn into dust anyway.

    • brian kirkbride

      fat bankers? don’t forget to add shareholders, moron

      • The Last Real Gentleman

        Well, they come from the same batch of lazy fuckers, asshole.
        Same shit, different title.

        • brian kirkbride

          you must be a renter, you fucking loser

          • The Last Real Gentleman

            Well, my conscience is clean, and I have economic freedom.
            Indebted facade riders can only wait for the next gullible idiot to scam.

  • iquack

    I agree. Never owned a house and won’t.
    Better to rent and own……you guessed it…….Home Depot stock!

  • Melissa Minter

    So I’ve got to say I’m in love with you’re writing style and descriptions. You are incredibly talented, and I’m fascinated by your voice in this article. Thank you for your point of view. I am currently looking for a house because I want to have a cheaper mortgage than my current rent so I can change jobs to a lowering paying, less stressful one. But you really gave me food for thought, and yes money in the bank is a huge stress reliever, which I have to put money down on a house, but I might just hold off.

  • Idahoballer

    If you do it right, eventually you pay off the mortgage and have a nice chunk of net worth. On the other hand, rent is forever and will never add to your net worth.

  • Diana Matic

    :) Right on.

  • I agree with a lot of your points, but “I get that. It is real. And in America, nobody can take your land from you if you own it” is simply not true.

    In America, if you don’t pay your property taxes, they come take your shit regardless of whether you own your home outright or not. There is no such thing as “property rights” in America, regardless of the public school propaganda that everyone gets fed.

  • Vincent Cate

    Here you go James. You can read and write by the ocean for $375,000 with 3/4 acre. http://www.realestate.ai/index.php?action=listingview&listingID=21

  • Bilma Amraoui

    Purchasing a home can be beneficial depending on where you live. In FL I purchased my home at 23 for 95k and have one more year to pay it off by 27. My home is now worth 230k. I can either A. Make 135k by selling now B. Not have to worry about paying rent for the rest of my life travel more, buy my dream car invest more etc, should I choose to live here. C. Move and make 1500 a month of passive income. My home has become an investment in my case. I do understand this opportunity is not possible everywhere.

  • I honestly think James is trolling us with this particular piece of advice.

    Where I live the 500k house James uses as an example would rent for at least $500 more a month than a mortgage would cost on the same house. And you wouldn’t have to put anywhere near 200k down. Maybe 30k. BUT if you had purchased said house two years ago, you could sell that house today for 60-80k more than you paid. And houses in my neighborhood are sitting on the market for around 60 days right now.

    I’ve owned three homes. One of them I actually managed to live in for three years for FREE. I put 5k down on it and got 30k back out of it when I sold it.

    It’s just all about buying smart. It’s like any other investment. Why James ignores this simple truth is beyond me.

    And it’s basic math. You can add interest all day long, and over a lifetime owning a home is far cheaper than rent.

  • gaultfalcon

    I agree with you that owing a bank has a lot of disadvantages. However, if you do find a good piece of real estate that, for whatever reason, you wish to own you can, if you are able, buy that property in cash. If you don’t have the cash you can still mortgage the property and simply pay it off at an accelerated rate (preferably under 10 years).

  • dontbefooledagain

    One of the things that seems to be missing in James’ argument is that a mortgage is a forced payment. Part of the payment is interest, but usually at least 1/3 is principal, and it increases over time. That forced payment goes towards equity.

    I’ve been lucky with both my houses I have bought. I bought in ’99, sold right before the bubble hit for a nice profit, rented for 4 years, and bought again in 2011. The current place has appreciated $300K in 5 years, allowing me not only to live for free, but making an extra $56K if I sold today, including mortgage payments, insurance, property taxes, sales commission, improvements, and not even counting the interest deduction, which is equal annually to my property taxes. Lucky is the key word, and it’s not a special skill.

    Had I continued renting my previous place, I would have been out $240K. YMMV and each situation is unique, but for me, owning has been better than renting. For others, renting is a better deal.

    • brian kirkbride

      there isn’t such thing as luck you stupid fool. It’s called opportunity and timing.

  • disqus_fnwCMQDX7u

    How about you not be a dumbass and not buy a $1.5 million house, take out a 30 year mortgage, or take out a mortgage that has repayments more than 1/3 of your income? It’s not that hard to figure out…

    • BritBit

      Because for most people, the cheapest property where they are is over 30% of their income and requires a 30 year mortgage as saving up a bigger deposit would be impossible. ‘Outside of your means’ for most under 35s is 100% of the properties in the area they need to work in!

      • disqus_fnwCMQDX7u

        I’m under 35, so obviously I know that, but most people under 35 don’t buy houses anyway. If you can’t afford it in your area, then rent if that’s cheaper. What I mean is owning a home in itself is not financial suicide, just buying one that you can’t actually afford is.

  • cance440

    “I get that. It is real. And in America, nobody can take your land from you if you own it.”

    Not even this is true. If you can’t pay your property tax, you will get tossed on the street.

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  • Such a controversial topic with both sides of the equation very passionate about defending their choice. Renting is total flexibility,which is great to have. James is spot on regarding being able to invest in stocks that invest solely in property. There are heaps of property trusts and you can pull your money out as quickly as you can hit the sell button.

    There is almost zero point discussing this topic with a baby boomer who did buy their original home for $30,000 and is now sitting on a million dollar property. My next door neighbor bought his for $6,500 44 years ago and recently sold for $1,250,000. Not bad really. All it took was a crazy run of Chinese investors piling into the area in Sydney to drive prices up. The house across the road just sold for $955,000, so the market has cooled pretty quickly. How long will it take my neighbor to recoop his investment? Only time will tell.

    • Hot Off the Presses

      What about that you make that money in a market that you must then live in and have to spend most of your profit to find suitable housing? That is unless you relocate to a yet-undiscovered area.

  • Tim Hammerich

    Please keep encouraging people to rent! I will need good renters to pay my bills on all the property I plan to buy! ;)

  • ctiberius

    I never once thought of my house as an investment. So that is a meaningless argument to me. The other ‘reasons’ in this article are red herrings. The original reason for owning a house is a short commute? Huh?

  • Ken

    So…the $40K house I bought 35 years ago, and paid off in 15 years, isn’t really worth the 1/2 a million that the other homes on the street are selling for now?
    He saz: “The average house has gone up 0.2% per year” making mine (using his math) worth only $45K now.
    Much better to put money in a savings account that currently pays 0.01% interest a year, while my stock in AT&T pays nearly 5% a year in dividends?
    Guess the MBA was a waste of graduate school..K

  • Jim

    I get most of what’s written above, BUT…when you rent, you are ALWAYS at the whims and moods of your landlord, and unlike the author, there are few things I despise more than moving. I know I’m fortunate, but I’ve got good work where I am, I love the home/property where I live, and it is now mine, to do with as I please. With a much lower interest rate than 6% (all of which is a tax write-off), and since I’ve been here already 14 years and still love the place as much as I did the day I moved in, I suspect I’ll be here the rest of my life. BYW…I love to travel, and do a lot, but I really like having a place that is truly ‘home’ to come back to.

    I can have as many dogs, cats, horses, or whatever on this property that is mine; try getting that by the vast majority of landlords.

    If you are like the author, still unsettled and/or restless and wish to move around a lot, then certainly his advice is valid. However, for those like me, who are settled and love where we are, having a landlord imposing his will on where I live and what I do is the absolute LAST thing I would want.

  • romano5150

    YOU ARE TRYING TO FEATHER YOU OWN NEST…PERHAPS YOU COULD USE THAT SHITE YOU ARE SLINGING TO MAKE SOME WALLS FOR YOUR OWN HOME!

  • Sam Fields

    The 2005 G.W. Bush bankruptcy bill made home ownership a magnet for Trustees and fraudulent lending. Obama should of stopped this in his first term because the Bush change led country downward into recession.

  • Max Rosales

    How about buying a multi-family home purely to rent it out and generate a monthly revenue?

  • This article is completely illogical and filled with incorrect information. I hope no one takes it seriously

  • Daniel

    Who the hell puts down 40% on a house?? Ridiculous.

    • BritBit

      What? It’s totally doable. Once you’ve paid off your student loans, higher living costs to wage, saved up 50% of your earnings every month from your gig jobs… you’ll be set to go at 50! Then you can start saving for your IVF babies.

  • Adam Abramowitz

    I live in a house that I am renting with my best friend since the third grade.

    The bathroom in our basement flooded for an afternoon.

    My band continued practicing while the maintenance dude had some plumbers fix up our space.

    The same maintenance dude came back a week ago when our dish washer broke.

    He was sad to discover we weren’t jamming that day.

    That day, I spent the afternoon editing a podcast.

  • skunk

    Owned a house for 16 yrs was on the market for 2 bring the price down a tad every few months house never sold.So forclosed got into something about 600 dollars less saved that 600 for 2 yrs and started short term investing with someday day trading.Have turned that 15000 into 350k in 2 1/2 yrs and since jan this yr has been my biggest gains on etfs like nugt and jnug. GOLD BABY

  • James- it sounds like you’re living happy, daily. Good for you, man. While I’ve read your blog for years, I feel like I just stumbled upon the fullness of living a life open to possibility and beauty and everything that lies ahead. It’s been wonderfully freeing and completely unexpected. I still sometimes have pangs of shit-what-am-I-doing? But I’m so excited. ✌🏼

  • I used to think like you, when my parents pressured me to buy a condo in the edgewater neighborhood of Miami, I was pissed off. Suddenly I had to pay HOA, taxes, insurance… But now I’m pleased, now I’m renting it to another for $1,850, I use that money to rent somewhere else and pay the HOA. Maybe my profit is only $75, but at least is an asset.

    Renting is throwing money away, you’re just making your landlord richer. As for “mobility,” any home can be rented, you can have all the mobility you want. When I lived in Chattanooga, my renter was paying my mortgage.

  • shepd

    Let’s consider your $1 million dollar cost to own a home. The $500,000 home would rent for $3000 a month, easy. We’ll assume you’re 30 and want to retire at 65. Based on the usual rate that rent controlled areas can raise rent by (3% per year), rent will be $8441 a month when you retire, and if you die at 80, your last month of rent will be $13,151.72. Over the course of those last 15 years you’ll be spending nearly $3 million to rent. And that’s in a rent controlled environment, if you move you will pay more.

    We’ll assume in 35 years the home has been paid off (you can’t even get mortgages for that length of time anymore so it kind of has to be). The homeowner now pays $0 a month to live in his home. The homeowner’s maintenance to 65 was perfect because we quoted such a high cost of maintenance. Since the owner now expects to die in 15 years, they can completely stop maintaining anything whatsoever and let the home fall apart (I am assuming the home will be willed to the children, not sold). So only property taxes are involved.

    Typical mill rates are 1% of property value. Let’s assume a low 3% appreciation of the $500,000 home (if appreciation is much higher the homeowner wins by default because they can sell) over 35 years increased it to about $1.5 million. Taxes are $15,000 a year, which is now the cost of living in that home. Over the next 15 years the owner will pay around $500,000 in taxes.

    What these articles completely forget about is how destructive the cost of rent is when you get older. For most retired people, I see the cost of rent is eating something like 80% of their net pension/RRSP. For those living in homes, taxes are eating something like 20%.

    Of course, you could try to save $12,000,000 for your retirement with the difference between the cost of a house and renting lifestyles I usually see. Better start writing $5,000+ cheques to your RRSP every month starting today!

  • Lela Markham

    I’m one of those people who likes to know where I’ll be in 30 years. I’ve chosen to remain in Alaska through hard times because I can’t imagine living happily in the many places I’ve visited — not even the ones I’ve enjoyed. Something always reminds me that wherever this is it’s not Alaska.

    For the near-decade we were married before we had kids and for nine years after we started our family, we lived in a tiny one-bedroom house without a mortgage. It worked fine until we decided to have a second child and then for the next three years the pressure built until one day we realized we either needed to move or someone would need to leave for good because we were all cramped into a space that was too small for four people. Alaskans do not have the option of spending days outdoors. We needed a bigger house.

    The house we bought was larger than I thought was necessary, but it meant our kids could have their friends over instead of our kids always being gone to someone else’s home. It made for hectic teenage years with our very social daughter, but I’m glad we did it.

    Because we live in a military town, the military reimbursement for housing drives rental prices. When we bought our house 14 years ago, our mortgage payments were about equal to what it would have cost to rent a similar home, but now, we’re paying half what the rental house across the street from us goes for. And in 16 more years (less because we have been paying extra) we will be done with the mortgage.

    My older brother bought his home 45 years ago and has been mortgage free about 20 years. He banked and/or invested the money he saved on his mortgage and retired on more income than he made while working. Of course, you have to be debt-adverse to do that and he was and is. He hasn’t paid a non-mortgage interest payment in 30 years. Having a house that he owns means he’s been able to provide a stable base of operations for his kids and grand kids.

    So, while the decision to rent may work well for you, I doubt it works well for everyone or even most people. Certainly, if you can’t afford to buy, you shouldn’t. If you frequently change jobs and geographical regions, home ownership may not be for you. But if you plan to stay in a community, raise a family and have a stable base in retirement, owning your home is a worthy goal. I can’t imagine going into retirement paying $1500 a month in rent — which is what a decent apartment in my community costs. I pay half that in mortgage payments and, as long as the economy cooperates, I won’t owe that in retirement. And, again, I wouldn’t sell my house when I retire because … again, $1500 a month in rent. In fact, if the son who says he’d like to buy the house and share it with us changes his mind, we’ve got a plan to carve out an apartment for ourselves to live rent free and rent the rest of the house for whatever the going rate for a 3-bedroom house is when we retire. So, in essence, the house will be paying us.

    • BritBit

      I think that’s the point though. This article is aimed at the majority of young people who would be considering buying property (traditionally) and weighing up options. They have far more additional expenses now that prevent saving for a deposit (student loans, to name one) plus lower wages due to stagnation and still need to live where the jobs are (no point living in a cheap rural area if you then have to commute 4 hours a day). If you are in a lucky position where you can buy in cash (or with a large % deposit) then great. Good for you. But most of us are no where near that and could be saving well into our 30s or 40s to amass a big enough deposit. Yes, we could get a 100% mortgage (if any still exist) and try to afford the increased interest rates when they start to go up again. But that will take up most of our salary. We could have the mortgage paid off by 70 and then enjoy that spare income (?). But what’s the point of living in poverty most of your life to (hopefully) get a few good years before death? Some people will certainly live much longer, but others will still die in their 60s and 70s. The idea that we will all live past 100 is unrealistic.

      I’ve had to move to other cities and countries several times to stay employed and will likely continue to do so if I want to avoid minimum wage jobs. My friends with houses have either had to turn down jobs or sell up multiple times (with all the costs associated with this) to hang onto their careers. So while they may have banked cash when comparing montly rent to monthly mortgage payments, they’ve lost all of this and more every time they’ve moved (plus on additional costs associated with a new home).

      However, I would argue strongly that renting is only a good investment if the renter ploughs money into other assets (I don’t count education here, as usable skills and knowledge can generally be obtained for free) that earn the same or more interest rate over time. Mine average about 9% (including the recession years) and include indirect property investment. I also use all the extra hours I have during the week (not mowing lawns, painting, DIY, etc) wisely to earn additional income. Someone who only rents high end (for them) properties, wastes the spare money and time and has the same job for decades would be wiser to buy somewhere. I’m planning to buy a home outright at some point, but I could not do that without having rented in my 20s and 30s.

  • Peter Gerson

    As always,(following you on Linked in and now here), great food for thought and challenging the status quo – I love it and could not agree more!

  • Ken_Long

    Owning is still less expensive than renting, else how could people make a profit renting. Plus if you own a place you can do what you like with it, you can paint it purple, or work to improve it’s value. True it’s not always a great investment, but then the same can be said about many things that dont offer the function a home does. The bigger problem is buying too much too quickly and becoming a slave to the debt.

  • Scott Riddle

    Ridiculous. So you feel qualified to write an article about buying a home in investing in real estate because you chose to buy in over your head twice? Perhaps if you would’ve been living within your means and buying within your means. Or would’ve actually saved enough money for a decent down payment . Or paid cash for your home like many other cultures do. You could put more solid facts in this article.

  • Andrew

    You should rename this:
    It’s Financial Suicide to *View Home Ownership as an Investment*

    I make a good living, and bought a house at age 25 (20% down, 3.5% interest). I also bought a sports car (20% down, 1% interest). Yes, of course I will lose money on both. But what was the point of making all that money, if not to enjoy it? You seem to view money as only something that should be continually re-invested to make even more money. At what point do you just stop and spend it on yourself?

    You also always talk about living a stress free life. My house will be paid off by the time I’m 55, if I only do the monthly minimum. Talk about a stress free retirement. I would much rather pay off a mortgage while I’m young and am able to find work easily, than have to worry about coming up with a rent check every month for the rest of my life.

    I’m comforted to think that one of my kids will live here some day. And again, she, and her future kids, will never have to worry about paying rent. Taxes and maintenance, sure, but that is much cheaper than rent. I’m not investing in myself – I’ll lose money from this house. But I’m investing in my children and grandchildren

  • Sonia Garces

    Hundred percent agree Huge tax tax tax tax

  • MidnightGamer MG

    if i was a renter i would buy some land in my home town or near my family, and i would bury a large crate with a good sized tent and some solar panels just incase if i ever went broke i would have a place to fall back on,and i would have a place to pile all my junk on, im a bit of a horder, and like to be over prepared.

  • KT

    Let’s just distill the conversation down to the key factors: risk and return. This allows us to re-focus the conversation from making emotional and verbose arguments to comparing the merits of investing in real estate vs other investments

    Risk:
    – Illiquid
    – Rental market fluctuations
    – Housing cycle (though you could argue this is not a nonfactor if you’re planning on owning for its dividends)

    Return:
    – Cap rate
    – Potential capital appreciation / loss

    Personally, I don’t invest in real estate for capital appreciation; getting it right of course is a good freebie. I view real estate as similar to fixed income; I get a reasonable mid-single digit to high-single digit cap rate in tier 2 or 3 cities (post-aforementioned expenses incl. property taxes, mgmt fee, insurance, etc). Viewed another way, I can breakeven on my properties leaving them vacant for 3-4 months / year. I also get a real asset – which I value.

    Of course, I’m not proposing that everyone should put 100% of their assets into real estate; diversifying is important. But I don’t understand the emotional backlash against including into one’s portfolio what I consider to be a reasonable investment: mid to high-single digit return on a real asset with upside optionality on the capital appreciation side?

  • tillamook tim

    You say you lost 2 houses, did they get up and walk away and go somewhere you couldn’t find them? So in fact you didn’t lose two houses, you had to give something back you hadn’t paid for, I’ve made hundreds of thousands in real estate, and the people that bought property from me made money too, never have i had a piece of property on the market for more than two weeks before it sold. Of course I always pay cash, today a million in the bank won’t pay my light bill on the interest. If you’ve had bad luck with property it’s like anything else, you didn’t do your home work.

  • Hot Off the Presses

    I bought a house in Folsom, east of Sacramento, for $110K in 1997. Over the next few years property values in San Francisco blew up. I mean complete trash bungalows for $600K. People from the west were coming to Sac with cash to engage in bidding wars. In 2003 I sold my home for $330K. It seemed like the best financial move I ever made. Where did I go wrong? I would never buy another one though, after reading this.

  • Puneet Lahoty

    James, great article. Had some questions though with the Math assumptions. Let’s say if someone is buying a house in San Francisco, it has seen a 5% CAGR in house prices if I take data from 1980 till date. Plus interest rates are 2/3% for mortgages. If I use these numbers, and replace the 0.5% growth of US housing and 6% mortgage rate, does it tilt the argument? I understand that your article is for housing market in the US in general, but for the use case highlighted above, buying a house is still a poor financial decision according to you?

  • Dave Ives

    James, I enjoyed this article and I’m a property investor. But, I couldn’t help but notice you like to rent, and you also mention landlords … so, renting depends on somebody owning real estate … ? Who are these owners/landlords? And, are any of them making money from providing housing to people who love to rent? If not, why are they doing it … ? Keep up the interesting and “outside the box” writing. (really enjoyed your book “Choose yourself guide to wealth”)

  • Peter Stephens

    “Here’s a fact: The average house has gone up 0.2% per year for the past century.”
    OMG! Such an outrageously incorrect statement really does not inspire confidence in anything else you say here. At 0.2% per annum, compounded, a house purchased for $1,000 a century ago (and a quick glance of any newspapers from a century ago will confirm this was a typical price for houses in the US, Canada or Australia) would sell for $1,219 today! Please name anywhere (preferably out side of Detroit!) where a house can be purchased for $1,200? If this is just a transposition of the decimal point – and you really meant 2% – why is the mistake repeated throughout the article? And why are there no similar errors when you write about interest rates or other percentages such as the costs involved with purchasing? Just to set the record straight, average house prices have risen between 3% and 7% over the last century in these three countries. It is a very simple calculation and if you name any particular area I can tell you the exact average annual rate of growth for the last century. Here in Sydney it has been 6.6%. My house in Sydney’s Stanmore for example was purchased in 1901 for 500 pounds ($1,000) and is now worth around $2,100,000 – which represents 6.8% average growth per annum over 116 years. Curiously, my Corte Madera SF property has grown at about the same rate over the last century. Now I am well aware that there are many areas in the US – especially outside the big cities – that show much lower rates of growth than this. Maybe even as low as 4% p/a in some rare cases (at 4% p/a a house purchased for $1,000 a century ago would be worth around $52,000 today). But most areas of the US have experienced average annual growth over the last century of at least 5% ($1,000 in 1917 = $131,000 today) or even 6% ($1,000 in 1917 = $300,000 today). Of course, this is before you even take account of the value of rent – which adds a further 2% to 7% per annum to the equation.
    Now I am not here to argue that purchasing a house is the ultimate investment. A well considered, diversified share portfolio could outperform most real estate investments … in many if not most cases. But given that we all have to live somewhere, there is no reason that the purchase of your own home should not form part of any sensible investment potfolio. In any case, how can you help people to make the right investment decisions for them, unless you give them accurate, impartial information?

    • AC1

      Shiller (who shared the Nobel prize for asset-value work) found it is 0.2% over inflation. So the article is completely correct in that houses don’t perform very well once inflation is removed from the equation…the author could have been more clear about the 0.2% meaning. Some cities have had higher than inflation in housing (Sydney for example) and others lower than inflation (Detroit)…and that is complicated by timer period, during the 50s/60s Detroit was booming. Shiller found that overall housing is only inflation plus 0.2%.

  • I lived in Arlington VA near the Clarendon metro for 12 years and rented. I saved over $40,000 in those 10 years versus buying. This was in an area of very high appreciation. You have to run the numbers. I would say that for most young people renting is better. I moved a lot as an engineer and having to sell a house every 3 years I lost a lot of money. The other thing if you are handy is build a house in a rural area you like that is close to a major city. I just built a 3,500 square foot home for less than $35,000 cash. I did all the work myself and it was fun

  • Name

    What I can say is that it’s pretty dumb to put most of your investment and net worth into a house. It’s pretty dumb to pay all that mortgage interest. Oh, but you said you can’t afford to pay it in full…again..dumb!