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The Absolute Insanity of Not Buying a Home When You’re Young

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Fellow Riskologist,

If you’re young—under 40 or so—and have been heeding all the personal finance advice spewing forth from some of the most popular columnists and bloggers over the last few years about how owning a home doesn’t make financial sense anymore, I’m afraid you’ve been duped.

Absolutely, positively, undeniably duped.

Buying a house—especially when you’re younger—is still an incredibly smart decision financial or otherwise. I’m about to explain why, but let me start by saying I do not own a home, so there is no hidden bias in the argument I’m about to make.

Read on to learn why all the smart financial bloggers who tell you it’s better to rent than buy are completely wrong. Hint: It’s in the numbers.

The set up: An expanding real estate bubble

It was 2007, and the real estate bubble in America had grown to epic proportions. Home prices were out of control, completely unsustainable, and worst of all—few people even knew what a bubble was, let alone that their frenzy to buy a house before they were “priced out of the market forever” was only adding to the massive amounts of pain they were about inflict upon themselves.

2007-home-prices

There were a few smart financial advisors warning of impending doom, but those folks were just raining on the parade, and few people paid any attention.

Funny enough, it was people my age at the time, 20-25, who understood the same thing these financial advisors did—that doom was on the way. Only we’re from a generation that doesn’t really watch TV, and we weren’t old or wise enough yet to connect our own experiences to the bigger picture.

I had just gotten a great job making money hand over fist, and I started to pay close attention to the housing market.

It was depressing. I was earning more than all of my friends, and there was still no way I could afford to buy a house.

I’d talk to some of my well paid colleagues, and they despaired over the same things. We looked at the situation and said, “Screw it. We’ll never be able to afford it.” So we gave up looking.

What we didn’t know was that giving up was exactly what would save us from financial ruin just a few years later.

The bubble pops, and a new way of life sets in

So it’s 2008 and home prices have started to fall, but they’re still miles away from affordable for me or anyone I know even as my friends and I all continue to earn well above the median wage.

At this point, I’d given up any hope of buying a place and had, instead, found a 5-bedroom house in Portland to rent for $1,200/month and moved my girlfriend and four other friends in.

If I couldn’t buy a place, I was going to live damn cheap! And for the next three years, I did. Turns out, many other people my age across the country were doing the same thing.

We didn’t know at the time our “collective sigh of discontent” as I like to call it was exactly what was driving housing prices down. It was like all the adults had a party, got wasted, made a huge mess and said, “It’s okay, the kids will clean it up in the morning.”

When, instead, we said, “Screw you. We couldn’t clean this up even if we wanted to,” the panic started to set in.

At this point, all the popular personal finance bloggers and television celebrities are wising up and saying, “We’re in a bubble, and the bubble is popping. Buying a house is not a good decision right now.”

2008-bubble-pops

They were right. Everyone starts to look a little differently at real estate.

All the personal finance bloggers jump the shark…

For the next four years, young people like me sit on the sidelines and watch as the housing market gets massacred. We wonder if prices will ever stop falling.

Four years ago, all the personal finance bloggers and television celebrities reminded us: “We’re in a bubble, and a bubble does not change the rules of money. Don’t spend too much on a house.”

Yet, now, as we watch prices continue to decline, the same talking heads start to disregard their own advice. They start to question if buying a house is a good idea at all. Maybe we’ve all been duped, and owning a home is just asking for financial ruin.

Articles start to pop up all over the Internet on well-respected sites like Forbes, Time, NYT, and many others with headlines like “Why I Never Want to Own a Home Again.”

forbes-headline

They start to argue that houses are poor investments and that you can earn more elsewhere. They argue that buying ties you down and kills your freedom. Or that maintenance costs are too much to bear—it’s better to rent so the landlord has to pay for it. They make up all kinds of other arguments that sound good in the moment, but are completely ridiculous.

Since the beginning of time, private property and home ownership have been a proven path to store wealth for the long-term. But now it’s different.

A few years ago, they argued the laws of economics don’t change just because you’re in a bubble. Yet, they’ve decided the laws do change now that we’re out of it.

Which is it, geniuses?

The problem is short-term thinking

I’m about to lay out for you a scenario that assumes the worst about home ownership and the best for long-term renting and show how home ownership still comes out ahead.

But first, we have to ask an important question:

If the long-standing conventional wisdom has been that owning a home is a good financial move, then why, suddenly, have we decided it isn’t anymore?

The answer is one of perspective.

We no longer take truly long-term views for our future, and we optimize our lives for small but instant gratification instead of big wins in the future. And all the financial writers trying to gather eyeballs for their work know this and cater to it.

Even though the reality is owning a home will probably save you hundreds of thousands of dollars over your entire life—one of the smartest financial moves you can make—the advice we see everywhere now doesn’t account for this because no one seems to care what their life will be like more than a few years from now.

But you, a Smart Riskologist, know better.

What’s the lifetime cost of renting vs. owning?

Let’s say you’re 25 years old, and you’re trying to decide whether to buy a house or to keep renting. You run into all kinds of articles written by high-earning personal finance experts in their 20s and 30s talking about how owning a home is a waste of money now, and you can enjoy an amazing life and far financial rewards if you give up the idea of ever owning.

Is it true?

Yes, when you purchase a house, you have to do some legwork to make sure you’re buying something that’s valued fairly. But the rest is nonsense.

And here’s a conservative example using very unfavorable criteria for purchasing a home and favorable criteria for renting. What we want to know is, “What’s the lifetime cost?”

mortgage-calcLet’s say you buy a $250,000 home with a paltry 10% down. You’re taking on a $225,000 loan, and you’ll be paying PMI (private mortgage insurance) of about 0.5% until you have 20% equity in your place.

Now, that’s just the beginning of what you’ll need to account for when you buy a house. Your interest rate matters, so let’s say you get a bad deal (by today’s standards) and have to pay 6%.

You’ll also need to pay property taxes of 2% of the value of your house every year for as long as you own the place. And don’t forget the maintenance you’ll certainly need to save for over the course of ownership. We’ll assume 1% of the home value—which is high—because you don’t want to make any repairs yourself yourself or compare bids to get the best deal.

Put this all together and here’s what you’ll pay to own this house if you live to be 80:

  • Down Payment: $25,000
  • Loan Re-payment over 30-years at 6% (including PMI and property tax): $636,000
  • Property taxes after loan repayment: $125,000
  • Maintenance: $137,000
  • Total cost of ownership: $923,000

Yep, almost a $1M. It looks like a lot, but remember: this conservatively covers your living space for your entire life.

How much would renting that same place cost? We’ll assume the landlord owns it on similar terms but, since she’s a super-nice lady just trying to provide decent housing, she makes no profit on the rental. It’s cashflow neutral for her.

So, she rents it out for the price of her mortgage: $1,766/month.

Over the course of your life, you’ll pay $1.2 million, or about $200k more than you would if you’d owned the place.

That’s right, $200,000 more. What could you do with an extra $200,000? Well, not much for yourself since it took your entire life to save that much, but you could start a pretty awesome college fund for your 15 grandkids.

Perhaps that’s why so many personal finance gurus focus on short-term gains: because people want extra money they can use now for themselves, not later for others.

And the argument for owning only gets stronger when you consider these three things left out of our example above:

  • We left out the value of the house at the end of life. Maybe in your last few years you decide to move in with your kids. If the house didn’t appreciate at all in 55 years, you’d still be able to sell it for the original purchase price of $250k, and that puts you $400k ahead of renting.
  • This model completely ignores inflation. When you buy a house on a long-term, fixed mortgage, you’re essentially shorting the value of the dollar (or whatever currency you use)—a pretty safe bet for any country printing money faster than it can get rid of it. Every year you own your home, it gets cheaper to live there. The opposite is true when you rent. This tilts the scale towards ownership astronomically more.
  • Buying younger? Living longer? No problem, even more money in your pocket since every year of ownership adds to your advantage.

All the other reasons you still think renting is better, debunked.

If you’re a big proponent of lifelong renting (or one of the financial bloggers I’ve just called out), then you might be foaming at the mouth by now, ready to unleash a torrent of rebuttals for why I’m completely wrong.

Hopefully I’ve already convinced you otherwise but, just in case, here’s my response to the most popular pro-renting arguments:

1. I want to travel and never be tied down to a mortgage! I want to be freeee!

This is a truly unenlightened argument, and it’s steeped in the limiting belief that somehow, if you own a home, you’ve signed up for a lifetime of servitude, never to venture beyond your property line again due to the financial commitment and overwhelming amount of back-breaking labor that comes with owning a home.

Nonsense! If you want to travel and be free, then rent your house out and have someone else pay the mortgage while you’re away.

If you rent, that’s what you’re doing for your own landlord now!

Is being a landlord still too much work? Hire a property management company to run the place. All you have to do is collect and write checks. Surely you can handle that much.

2. It’s cheaper to rent where I live.

Sure, for now.

As a renter, you’ll be blessed to see cycles of rents lower than mortgages and cursed to live through the opposite over the course of your life . It’ll probably switch several times. This is how markets work.

But in the long run it evens out, and rent will always average higher than ownership due to the need for a profit motive for those taking the “risk” to own.

Your ability to beat the average over your life will have more to do with the year you were born and a little luck than any financial wizardry.

3. I rent because I don’t want the burden of paying taxes and interest and maintenance and all the other costs of ownership.

This is my favorite one to blast into oblivion. The truth is that if you rent, you already pay all those things. They’re wrapped up into one monthly check for your convenience. And you get to add some extra for the landlord as well.

Think about it! If you owned something that cost $1,000/month to keep, but then also had a bunch of other costs attached, would you let someone else use it without paying for those other costs? Of course not. Renters must pay the full cost of home ownership and then some, or there would be no such thing as a rental house.

4. Houses are bad investments. I can make more with other investments.

Actually, you can’t. Not because I don’t think you’re a prudent investor, but because we’ve already debunked the idea that you’re going to save any extra money over the course of your life to invest in the first place.

And even if you could, try to remember that if times ever got tough, you cannot not live in the stock market.

5. My rent is super low because I have 5 roommates. I could never buy a place and do the same.

You’re not comparing apples to apples. Right now, you might not be able to buy the house you have that lets you live this lifestyle, but keep saving your pennies, and soon you will. Having roommates pay most (or all!) of your rent is smart. Having them pay your mortgage is even smarter.

6. If my house appreciates, I have to pay capital gains taxes!

This one is absolutely ridiculous, but I had to throw it in because it was actually an argument I read in an article on Forbes. Can you believe it!?

Making this kind of argument is the same as saying you don’t want to earn more money because you’ll owe more taxes. Come on, now…

7. Interest rates are too high. It’s no good to buy.

Sure, and sometimes they’re too low. This is short-term thinking.

If you can snag a well-priced home when rates are low, that’s great, but I wouldn’t base my entire buy vs. rent strategy on interest rates.

Instead, focus on getting an underpriced home. You can re-finance your mortgage if better rates become available, but you only get one shot at getting the right sale price.

The Final Word

It’s been driving me nuts listening to so many otherwise brilliant personal finance experts shout terrible advice over and over, so this is my rebuttal.

It’s not that they’re completely wrong, but that their focus is too short-term. If you plan to sell your house and upgrade every 3 years, you’re already on path to failure, and you should definitely keep renting!

But if you think long-term, and you’re willing to keep your house for the optimal holding period—forever—don’t be fooled by all the inaccurate advice.

If you’re still reading at this point, you probably either agree with me or think I’m a total nutjob. Let me know which it is in the comments.

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What smart people are saying about this...

  1. Actually I kind of like this argument. Except that of the people I know that rent houses out, I’m told that property management companies are a pain in the ass, and maintenance costs are much higher when the person that lives in the house doesn’t give a crap about it. Any period of vacancy is lost income. A lot of the people I have insured (I’m an agent) end up managing the properties themselves, owning several different properties, and having it as a full-time job. Plus you are placing a huge asset in the hands of people who are, by their own admission or inability to buy a house, not fit to acquire their own real property (on the average, this is true). So unless you REALLY want to go into the business of renting, stay in the house, am I right? And places like the college town I live in, rent is always going to be higher. It’s a function of the demographic, not the cyclical market. I bet you rent is a lot cheaper where the average age is higher (generally reflecting higher rates of home ownership), and it happens to be that way in my hometown, only 120 miles from this college town I live in.

    Interest will always be, on the average, higher than inflation. Because who lends money? The banks. And if the banks lent that money at less than inflation rates, they wouldn’t make money.

    You know what would be super helpful? One of these articles where someone doesn’t say “It’s always insane to buy a house” or “it’s totally insane to not buy a house”, but instead says “here are the potential pitfalls of each, and here’s a good framework whereby you can decide if it’s a smart risk”. I don’t expect that you’ll agree with everything I’ve said, but I do think an article like that from a smart riskologist would be neat.

    • Hey Alex. Thanks for the thoughtful reply. Of course factors are going to change for each individual based on different circumstances, but I think I laid out a pretty good argument for why it’s (except in a few specific circumstances) pretty much always a better than renting.

      I’d love to write that more neutral, middle-of-the-road approach article for you, but I’m afraid I just don’t really believe it!

  2. interesting article–just for clarification, how do you arrive at the rent of $1766 /month the landlord would charge you? it’s not clear to me where the $200k difference in owning vs renting comes from when the landlord has the same costs as you and doesn’t require a profit.

    thx!
    jr

    • The rent I used in this scenario assumes the landlord has the same mortgage payment that you would if you owned the place. Of course, it wouldn’t work *exactly* that way in real life—their terms could be better or worse. The price is driven by the market more than actual costs.

      I removed profit to show that owning is still a better deal even if the landlord wasn’t trying to make money every month. If they were, the cost to rent would be even higher.

      • I think JR was asking what did you multiply the $1766 per month by to get the $200K difference between buying and renting. I believe it was the extra 55 years that the average person would live after the age of 25.(55 years * 12 months/year = 660 *1766 = just shy of 1.2 million)

        • ok i get it now. i was asking myself what leads to the value creation of $200k from owning vs renting assuming the landlord has the same costs and in this example it’s the idea that after 30 years you’ve paid off your mortgage if you own and you’re going to live for “free” another 25 years while you’d still be paying rent those years if you hadn’t bought

  3. I don’t think anybody honestly wants to rent for the rest of his or her life. The problem is that it is irresponsible to commit to a 30-year mortgage if one simply does not have the means or the income security, and old-fashioned fixed rate mortgages are very hard to come by. Banks are less willing to take on that risk so the fixed rate only applies for the first few years after which it is pegged to a benchmark rate but subject to a minimum rate floor so you have a limited upside but unlimited downside if interest rates rise.

    Not buying a home when you are young is only ‘absolute insanity’ if you can otherwise afford to buy a home, have a reasonable expectation of future income security and enough savings to tide you through temporary bouts of unemployment, and you have already settled in a particular city or region. It’s also much easier for a two-income household rather than for single men and women.

    • Yes, Marli. Good point: You have to have income security before buying becomes a smart decision. This article assumes you’re in the position to buy, but trying to decide on the best course of action.

      I haven’t seen that a good ol’ fashioned 30-year fixed loan is all that hard to come by, though, as long as you have the income and credit history to support it.

  4. Excellent article, Tyler. We definitely share the same views on this topic. I’ve also been baffled by some so-called personal finance “gurus” who for some reason don’t understand this 6th grade math.

    One other variable in the lifetime cost analysis of rent vs. own is the possibility of paying off the mortgage sooner than the standard 30 years. Making extra principal payments and knocking out a 30 year mortgage in 10 or 15 years would drastically reduce the total costs for the ownership calculation.

    • Hearing the “just rent and invest your money elsewhere” argument drives me crazy. Where does this magical money to be invested come from when you’re paying more for housing for the rest of your life? Right!?

      And yes, paying off a mortgage early will make it even cheaper. Unless you have great credit and were in the lucky position to get a loan when rates are incredibly low. In that case, I’d take as long as possible to pay it off, making your housing cheaper by the day.

      Of course, that’s assuming you have the discipline to re-direct the money you’re saving into better investments.

      • Yeah, those same “rent and invest your money elsewhere” proponents are also the same people who would say that you shouldn’t pay off your mortgage so you can get the tax deduction for the interest paid.

        Sure, so lets send the bank $10,000 in mortgage interest during the year so we can save $2000 in taxes? According to MY calculator, that’s a $8000 net loss!

  5. Hey Tyler, I’ll raise you one further and let you in on a real estate investing kickstart secret…

    FHA allows a buyer to use their owner occupied home purchase to buy up to a four-plex. What that means is you can buy up to four units with only 3.5% down.

    Last March my wife and I bought a triplex (3 units) from an old couple who were downsizing in their 80′s. We rent out two units, which pays for our mortgage, taxes, insurance, and repairs. We also rent out 2 of the bedrooms in our 3 bedroom unit, which pays for utilities and gives some extra pocket change.

    To top it all off, after purchasing this property last year we decided to teach English in China for a year. While we were gone we had a friend manage the property and rented our personal unit out on AirBNB. This was a completely hands off investment that went up in value over 30% during the real estate rebound here in Phoenix. I handled emails, collected checks, made payments, and watched the value of this place go through the roof. Now that I’m back my wife and I are both free to work on our creative/business pursuits without needing a full-time jobs.

    So I’m definitely pro real estate, and I’ve proved to myself how passive it can be if I want it to be. I’m looking forward to buying my next property!

  6. Man, that bubble bit me in the butt! At 25 I bought a 4/br house, moved in and rented the other three rooms. It all went fine until my tenants all lost their jobs and I took a huge pay cut. Lost that house sadly and have done some time in financial ruin. During my ruin times though I got married, had a kid, got another on the way, bought seven motorcycles and even bought another house. Even if you fall flat on your face you can get back up. My foreclosure was finally resolved after four years in limbo with ruined credit. Now that it’s resolved I’m chomping at the bit to get back in the game and buy a rental. There’s nothing that even compares to real estate for building wealth and if you think renting is the way to go you’re missing the boat!

    • Thems’ the breaks, huh?

      Glad you’re making a recovery now, but looks like you forgot to heed Marli’s advice from above about income security. ;)

      During the bubble, many smart folks enjoyed/suffered a suspended reality!

  7. I paid cash for my home, so the lifetime cost of buying over renting is even better. You pay rent all those years and at the end you have nothing – I have all the equity in my home which has likely kept pace with inflation, and I can then sell it at the point I need to move into a retirement facility and live off the proceeds. Definitely the wise choice in my opinion.

    • That’s fantastic, Tara. Even if it doesn’t keep pace with inflation, you still have an asset that doubles as a place to live, and you only have to pay maintenance and taxes on it.

      I’m actually now realizing I left insurance out of my equation above.

      At least I left it out on both sides, so it should theoretically even out.

  8. For number six and the capital gains taxes, you didn’t even mention that the capital gains on your personal residence are completely tax free up to $500,000 if married and $250,000 if single! That’s a HUGE advantage over other investments.

    You also didn’t mention the tax benefits of home ownership vs renting. Though as a CPA I have to say most of my clients overestimate how much their mortgage is saving them in tax liability.

    Fantastic article, well researched and thought out. I would like to hear your opinion on a move I just made that seems contrary to this though. I live in Denver, CO where over the summer the housing market exploded into a sellers market. I bought my home two and a half years ago for about $210k. My wife is pregnant with twins and the costs of daycare for them would basically mean she would be working for free, so she will be staying home. I decided to sell our house at what I believe is the peak of the market and we are going to walk away with about 45k, which is enough to pay a year of my wife’s salary plus pay off medical debt associated with the pregnancy. We found a great house to rent for essentially the same cost as our mortgage. I also still own a house in Ohio I rent out.

    What’s your opinion with your (justifiably) strong beliefs in home ownership? Good move or dumb move?

    • Hey Josh.

      Good catch on the capital gains exemption. Makes the argument even dumber (since it was already very dumb in the first place).

      As for your situation? I think it’s a perfectly fine move. Of course, I’d always favor holding for the long term—preferably forever!—but buying low and selling high never hurts either!

      And renting is fine if you have income from other properties, like the one in Ohio, to balance out the difference. I wouldn’t want to do it forever, though. Just until I could find a property that fit my needs at a price that’s reasonable. You don’t want to buy at the top of the market.

      • Yeah we had to rent for a few reasons, first we don’t want to buy in this market, second we may want to move closer to family with the kids on the way and third and most important I’ve only been self employed for about a year making it nearly impossible to get a mortgage.

        But we def plan to buy again when the time is right.

  9. Fantastic article, Tyler! One other piece of the equation is that, as of now, the IRS still allows mortgage interest and property taxes to be tax deductions. When you factor in the tax savings, your EPR (Effective Percentage Rate) is considerably lower than the actual interest rate you are paying on the mortgage.

    This EPR is also why I typically advise clients to put down as little money as they can, as long as they maintain an affordable mortgage and a modest margin for equity. With current interest rates, your EPR is generally somewhere in the 2-3% range – and there’s no reason the average person can’t obtain a higher return on investment somewhere else (perhaps leveraging more property) using the additional money they may have put down on a property. Similar to your scenario’s, I’ve never ran the numbers on the option of putting more money down or less and not had putting less down come out ahead, even with conservative assumptions.

    Great job!

    • Thanks Mellisa.

      Your advice and strategy is a good one. I’d add that these two criteria need to be met, though:

      1. The APR on your loan is much lower than you could earn in interest in other investments (and you’ll ACTUALLY invest elsewhere), and

      2. You expect inflation to be high for the forseeable future.

      Otherwise, you’re paying a lot of interest to save a little bit of taxes. No good!

      Unrelated side note: I’ve never liked the argument of saving on taxes as a benefit to buying because 1) It’s not as much as people expect it to be, and 2) I think landlords, in general, factor this into their rent just as they do the other costs and savings of owning their rental properties, so it’s kind of a wash.

      • Tyler,

        Yes, I agree! Again, when I run the numbers for people it is usually pretty apparent what comes out ahead, and I’m always careful to be conservative. And it certainly only works if you actually invest the money elsewhere, like you said. :) Easier said than done for many people.

        You’re also right that taxes/etc are factored into rent, and it’s good to be careful in ones estimation of these savings when buying. For me, I’m usually in a conversation with people who are going to buy anyways, and so it’s simply a question of doing that in the most strategic manner.

        I do also agree with Adam’s point that no matter how much sense something may make on paper, following a path that enables one to make decisions that are suited to where you are at in life and what your goals are is very important. Sometimes, even if money may be saved and everything computes right, there are other things that do, and should, take precedent.

    • Hi Melissa,

      Just curious, how do you calculate the tax savings to get the EPR.

      Home ownership definitely comes with some tax benefits, but I agree with Tyler, unless you have a substantial mortgage the savings are overestimated. It seems hard to imagine that would considerably lower EPR.

  10. This advice may serve that majority of the audience here (though, I doubt it), but I believe strongly it’s a very bad suggestion for the far majority of the population.

    For the far majority of people I’ve spoken with over the last 5 years (thousands), buying a home is not about math. It’s not an investment, they don’t treat it as such, and they shouldn’t treat it as such. It’s a huge emotional investment, a huge declaration about the path they want to take in life, and a major anchor point in their journey.

    Most people, myself included, in their 20′s are still on a search for exactly what they want out of life. Who do they want to spend it with? What type of work do they care about? What businesses work with their personality types? How can they make an impact on the world?

    Your post ignores most of this – and in exchanges makes cases about investments and numbers and assuming numbers about rent and mortgages.

    If you take someone in their mid 20′s, who already knows for certainty the role they want to play in the world (and I’d argue that I’ve been certain before AND STILL CHANGED something), has dependable fixed income (either job security or a business devoid of any external market factors), has a stable relationship (long-term commitment or married), has healthy family (especially parents and siblings), has little to no debt, and has a strong desire to stay rooted in one location for at least 5-6 years (better 10 years).

    Then yep, your advice is spot on.

    Find me this person, though. I’ve been looking for 5 years and don’t think I’ve met one.

    The thing is – your 20′s and early 30′s is extremely volatile – at least for the far, far majority of people. And in times of volatility, I believe it’s far better to stay flexible, minimal, and emotional less attached to anything that is as big as a life investment as owning a home.

    You are more likely to experience a career change, you are more likely to change your business plan, you are more likely to change your relationship status, you are more likely to have a major health even happen to a parent or grandparent, you are more likely to make decisions based on a whim… then almost any other time in your life (when you combine these general tendencies).

    My advice, after talking to a whole lot of people – and reading both a few extreme case studies and a few thousand absolute horror stories of regret…

    Don’t assume you are the smartest person in the room. Don’t choose something this major because the math makes sense. Don’t commit to this financial and emotion anchor in your life – unless you are sure – and have been sure for a year or two.

    The risk of this backfiring FAR outweighs the benefits of any mathematics outlined in this post. And the math can be argued by intelligent people for both sides.

    I love taking risks, I just want to take ones that enable more freedom (in general) and allow me to be wrong – and recover quickly. I also love risks that I can measure on a smaller time frame as it allows me to be more nimble.

    Purchasing a home in your 20′s – for the far majority of people – is far more risk than it is reward. And the type of reward you’ve outlined (monetary) is definitely not worth the risk you ignored (emotion and physical anchoring, restriction in live choices, the inability to be nimble and bounce back from other risks you want to take).

    “Nonsense! If you want to travel and be free, then rent your house out and have someone else pay the mortgage while you’re away.

    If you rent, that’s what you’re doing for your own landlord now!

    Is being a landlord still too much work? Hire a property management company to run the place. All you have to do is collect and write checks. Surely you can handle that much.”

    You know I love you, but it’s clear that you have little experience in property management, renting our your own home, or talking to a lot of people whom have. Once again, it *can* work – but I know a lot of intelligent people whom will once again point to the RISK of doing this far outweighing the REWARD. At best it’s simplistic advice that doesn’t have any foundation in math or example (and most of the rest of the post did)!

    I’m a huge fan of Tyler’s (for anyone reading this that doesn’t know me) and a huge fan of the philosophy of this site.

    This article, however, is bad advice for almost everyone. And I strongly urge people to ensure they are getting advice from many different angles before making this big of a commitment!

    With lots of love,

    -Baker

    • Thanks Baker. I was going to write a lot of what you already did.

      I’m a huge fan of you too Tyler, but the further I got into this article the more I thought, “I’m convinced Tyler doesn’t own a home.” (I hope I’m wrong and you own a thousand homes and are laughing all the way to Trump status.)

      Buying a home in my 20s was – up to this point – the biggest mistake I’ve made in my life. And I’ve made a bunch.

      Now that all said, this is absolutely masterful linkbait. ;) (I’m being serious, nice work.)

      • Karol, just wrote a novel in reply to Baker while you were posting. See below.

        I mentioned at the very beginning of the article that I’m not homeowner, but I’m hardly unfamiliar with the emotional factors or economics of it (as explained in my reply to Baker).

        Would love to hear more about why buying your house was such a mistake for you.

        As for the linkbait, it was never intended—the article doesn’t really link out anywhere—but I’ll take it as a compliment that you like my headline. :)

    • Adam, you clearly put a LOT of thought and effort into that comment. For that, I commend you. Now, I shall tear you apart, limb by limb. :)

      “For the far majority of people I’ve spoken with over the last 5 years (thousands), buying a home is not about math. It’s not an investment, they don’t treat it as such, and they shouldn’t treat it as such. It’s a huge emotional investment, a huge declaration about the path they want to take in life, and a major anchor point in their journey.”

      That’s correct. Most people treat their homes that way. And that’s the problem. It’s all wrong! The best way to protect yourself—both emotionally AND financially—is to be aware of how emotionally invested you’ve become in such a trivial thing, and try to remove it. It really is trivial. A house can be a wonderful thing for you and your family, but, at it’s core, it’s just a pile of wood/metal/concrete assembled into something useful. To train yourself to look at it as such is Smart Riskology.

      “Most people, myself included, in their 20′s are still on a search for exactly what they want out of life. Who do they want to spend it with? What type of work do they care about? What businesses work with their personality types? How can they make an impact on the world?

      Your post ignores most of this – and in exchanges makes cases about investments and numbers and assuming numbers about rent and mortgages.”

      You see, it actually doesn’t ignore that! Why? Because all of those questions can and should be answered independently from the “should I buy a house” question. To think that they have to go together is, in my opinion, a terribly limiting belief.

      “Then yep, your advice is spot on.”

      Finally, something we agree on! ;)

      “Purchasing a home in your 20′s – for the far majority of people – is far more risk than it is reward. And the type of reward you’ve outlined (monetary) is definitely not worth the risk you ignored (emotion and physical anchoring, restriction in live choices, the inability to be nimble and bounce back from other risks you want to take).”

      No! It’s the opposite! It’s far more reward than risk! Like I mentioned before, I vehemently disagree with the idea that buying a house stops you from doing any of the other “young people stuff” you mentioned.

      “You are more likely to experience a career change, you are more likely to change your business plan, you are more likely to change your relationship status, you are more likely to have a major health even happen to a parent or grandparent, you are more likely to make decisions based on a whim… then almost any other time in your life (when you combine these general tendencies).”

      These things are all true, except for making a decision on a whim. Riskology.co readers are strictly forbidden from making decisions on a whim. But you see, I make the case that owning a home actually adds *more* freedom to your life. Yep, it takes a little more work to exercise that freedom—you can’t just pack up and leave tomorrow—but how are you ever going to get where you want in life without a little elbow grease?

      “Don’t commit to this financial and emotion anchor in your life – unless you are sure – and have been sure for a year or two.”

      This I agree with. This a temporary relief from the limb tearing.

      “You know I love you, but it’s clear that you have little experience in property management, renting our your own home, or talking to a lot of people whom have.”

      Quite the opposite, actually. I grew up learning the ropes of property management with my parents, who slowly built a portfolio of rental properties over time. It’s what allowed them to retire early. I love you, too.

      • Your reply is interesting. And shows how far we are off in what we feel is the best way to help people.

        You believe that you can advise people to remove emotional from the process of buying a home. That it’s trivial. I used to believe that too, but after talking to a couple thousand people directly and indirectly (and after buying a home myself), I realized you can’t remove the emotion for 99% of people. I couldn’t for myself – and I’ve never seen a case where it was removed.

        So there are two options. Spout advice that says “REMOVE ALL EMOTION, IT’S JUST A HOUSE, THE MATH SAYS THIS…” Or to realize that emotion does play a role – and acknowledging that – and choosing to help people navigate those emotions is more helpful than saying they should remove it.

        I’ve changed my relationship to this over 5 years of interacting with the problem. For me, I consider this to be a matured view based on my experience hearing from people in similar situations.

        #2, you say that you didn’t ignore all the questions I asked about people’s life situations. And then you claim you DIDN’T ignore it – because it should have been ignored. That’s confusing logic. (You did ignore it – you just claim you intentionally ignored it. Ok.).

        That point aside, it seems a really naive view to think that all those life situations I brought up – don’t affect whether you should buy a house. Do you really think that?

        That’s a huge separation in values. Again, based on interaction with home owners – and living my own life through marriage, kids, business changes, getting laid off, quitting jobs, renting because I have to, buying a home, renting because I want to, etc… That NOTHING effects your living arrangement more than what I listed.

        And the nothing effects people lifestyle and budgets more then their living arrangements. So all of this is very intimately tied together for the far majority of people.

        #3, You claimed I said buying a house “stops” you from doing other “young people stuff.” I never said it stops, I said it makes it more difficult and gives you less flexibility if something happens in your life. And I outlined that the risk of having more restriction when a life event comes up outweighs the financial risk for most people. This is for most age groups at various times in their life – but I think it’s even more common for people in their 20s to maximize the benefit of flexibility.

        #4, you claim “But you see, I make the case that owning a home actually adds *more* freedom to your life. Yep, it takes a little more work to exercise that freedom—you can’t just pack up and leave tomorrow—but how are you ever going to get where you want in life without a little elbow grease?”

        In my world, something that “takes a little more work to exercise that freedom” and something that requires a “little elbow grease” is something that restricts freedom. I believe the point you want to make is that by restricting your freedom in the short-term – and taking a large risk for most people in the short-term – pays off with more freedom down the road. That seems to be how you structured your argument in the post.

        But let’s call it like it is. The home restricts freedom. In almost every case it makes people LESS flexible – or requires more work up front. That *can* payoff down the road, of course. We all know that. The argument is whether the risk is worth the reward.

        It seems silly to imply there isn’t risk – or that buying immediately yields more freedom. I’d stick to arguing that it’s worth it in the long run.

        Lastly, you are applying what you learned from someone who owned multiple rental properties (assumingly successfully) as a seasoned landlord to a 32 year old who just started a family and is trying to either become a landlord from another city – or hire a company to trust his house to and try and break even (extremely rare to break even when hiring a company unless there are hugely beneficial market changes).

        My only suggestion is that for that one part of the article you made something incredible difficult and taxing for many people sound like it was simple and easy. That small section is a HUGE stretch compared to the rest of the post.

        Overall, it comes down to philosophy in how to help people.

        I commend you for tackling this – and trying to help. But I believe your approach to this big of a decision only helps a tiny percentage of people who could read it.

        For most, you can’t remove emotion. Telling them to is futile at best – and VERY dangerous at it’s worse. Because when people believe they have removed emotion, I believe that’s a very bad place to be. I’ve seen it backfire in my own life many times – and I’ve got 1,000 emails of people who thought they were making a logical, emotional less smart move… and now regret it.

        I encourage you to help people navigate the emotions and importance of this – rather than telling them to remove emotions. Or at least consider if this may help you help more people.

        For most, you can’t remove life events and major factors from the decision to take on enormous debt, responsibility, and emotional weight in a home.

        And for most, having a anchored mortgage does temporarily limit what they could do with that money/time/stress if something changes in their life. It does limit the resources they can invest in other areas of their life.

        For many, this restriction is welcomed. They are in a place to enjoy the home, handle the extra weight, and benefit in the long run.

        But that number is tiny compared to the amount of people who could benefit from increased flexibility. Especially for people, like me, with young families, new businesses, new careers, and evolving relationships.

        I don’t think I’ll change your opinion. My in the last 5 years, mine had evolved from where you are now – to where I am now.

        And I hope that posting this may help round out someone who reads this – and I can possibly prevent another “holy cow this house is killing me!” email to my inbox. :)

        • Baker, I think we could write a novel going back and forth on beliefs. Clearly, we both feel pretty strongly.

          What I hear you saying is that the best advice is the advice that applies to the biggest swath of population.

          But that’s not what Riskology.co is all about, and it never will be! What I publish here is aimed at helping the smartest and savviest of risk-takers.

          To write another “sometimes it makes sense but sometimes it doesn’t” generic article would just be more noise that panders to the lowest common denominator.

          Instead, I asked myself, “What do my smartest and most informed readers need to know?”

          I would never say there’s no risk involved. But I would certainly argue that if you’re a responsible and resourceful adult, then a lifetime of renting is much *bigger* risk.

          You know how Riskology.co works! We expose hidden risks and turn conventional wisdom on it’s head.

          And as long you stop by once in a while, it’ll make sure I do a good job bullet-proofing my arguments. ;)

          • “Clearly, we both feel pretty strongly.”

            And that’s the key word, right there: “feel.”

            While I’m going with Baker on this one, Tyler, I *definitely* appreciate the energy and analysis you have already put forth.

            Speaking only personally, having dealt with 6 major recessions in my life (5 as an adult, can you say “Rust Belt?”), the whole notion of income security is something I (sadly) find laughable. Why this is so is probably yet another epic War and Peace length blog post, but I know I’m not flying solo here. But that’s a novel for another day.

            And this is definitely one of your better posts.

        • Regarding emotions, I can definitely say that while I care for my property to protect it as an investment, I don’t care for it in the it-burned-down-i’m-crying-my-life-is-over kind of way.

          I do acknowledge I approached this first property very differently than most people with their first home, but that doesn’t mean Tyler’s advice isn’t worth considering for some.

          My first property purchase is not my dream home. It’s a stepping stone, and one I plan to keep renting out and upgrade from 3-5 years down the ride. Knowing that this is a temporary parking spot means I’m treating it like a daily driver, not a custom or collector’s car. I’m not beating it up, but I’m certainly not customizing and remodeling either.

          And if I decide I want to live abroad, I know I evaluated this property enough that it will cash flow by a long shot even with a manager and keep building equity while I’m gone.

          So Baker, you’re right. Emotions get us in all kinds of terrible financial situations, and the “biggest purchase of your life” is definitely a quick way to screw up. But if you know absolutely no one that has won big with smart real estate investing than we need to introduce you to some new circles. (www.biggerpockets.com being a good place to start ;).

    • Oh, and Baker, I’d also like to point out that the pendulum swings both ways. You live in Portland where I do, so you know very well just how tight the rental market is here, and just how limiting and restrictive it can be. This is the case in many cities right now.

      So goes the tides of the market!

      I don’t embrace that argument (of being restricted/loss of freedom/etc.), but since you do, I wanted to point that out.

      When do you want to come over for dinner? :)

  11. I bought a house when I was 34. Sometimes I want to scream at the mortgage payments that never stop coming but, I knew it then and I know it now, I would still pay money to rent and have nothing to show for it. Also,when you rent you are a lot more limited in how you can relate to your space. Because we own our home at any given time we could paint a mural on the kitchen cabinets or dig up another bed in the front yard to grow pumpkins or knock a hole in the wall and build a pantry…. I also have three good-sized dogs. If we had to live in a rental our options, passions and pets would be much limited. I would hate that.

    The only downside is that I would like to move on to greener pastures but I can’t sell my place right now. But even with the inconvenience of being stuck somewhere I no longer want to live, I won’t go back to renting if I can help it.

      • Well yes, I bought the house in 2004 but I got an OK deal given all the craziness going on around me in the market at that time. And I didn’t do anything stupid like opt for balloon payments or variable rates. I knew better and I got a nice, safe fixed 30yr. The problem is more where I live, housing just isn’t moving here in the rural hinterlands of southern Oregon.

  12. I’m going to have to agree with Karol and Adam, but I have a few specific separate arguments. I grew up in a family where everyone is in the real estate business, so I’ve seen it from the inside out. The simple truth is that if you aren’t an active real estate investor and if you don’t know the particular market you live in really well, it’s so easy to pay too much for a particular piece of real estate. And almost no one knows that much about real estate even after buying their first home. If you’re treating buying a home as an investment, then you need to treat it as seriously as you would investing in the stock market, and understand that the fundamental concept of investing is that you’re risking money in the hope of gaining more. ‘Risk’ is the operative word there.

    And renting out your home so that you can move on can be complicate the question of investment further. The moment you decide to rent out your house, you take on a host of legal issues that you never faced before. At a bare minimum, you have a legal obligation to convert your mortgage into a commercial mortgage, which requires a lot more down — most people renting out their own homes don’t actually do this, but if your mortgage lender finds out that you are are renting your property out, you’ve got some trouble. You also have to worry more about those small fixes that you would have otherwise put off — waiting to fix an issue until you have more money isn’t an option if that issue will cause your tenant to move out in the meanwhile. It’s a business, just like any other and if you don’t know what you’re doing as a landlord, it’s an easy business to screw up.

    Given that you live in Portland, you’re dealing with a particularly odd real estate market: we’re essentially out of places to build new houses within the city limits. Right here and right now, the odds are good that the value of properties will continue to go up in the short-term. That’s unusual, at best. But I would still be reluctant to by a single-family dwelling here, unless I knew for sure that I would be here for the next five years (the minimum length of time it takes to come out ahead in terms of closing costs).

    I don’t want to be a downer, but it’s important to understand how easy it is for someone to screw themselves in the real estate market.

    • I’ve turned two different homes from personal residences to rental properties. They had two different mortgage companies and informed them both when I made the move. Neither one had any issue with it or made me convert to a commercial loan.

    • Hey Thursday. Thanks for your perspective—it’s a well-informed one. I also grew up in a family heavily involved in real-estate. Specifically, single-family rentals.

      I definitely agree that there’s a lot to know when trying to getting the right deal on the right house—and that how well you do in that regard certainly changes the payoff over the long-run.

      And becoming a landlord is certainly not just as simple as ABC 123, but it’s far less-complicated than I think a lot of people make it out to be. It doesn’t have to be a big, scary monster!

      I want to point out, though, that I’m really not trying to make a case for investing in real estate. That was never the point of the article.

      This is about looking at the life-time cost of different options for where/how you’re going to live and choosing accordingly.

      I only pointed out investing as a way to bring up the point that renting doesn’t actually save you any money to invest in other ways in the first place.

  13. Thanks for this great post Tyler, I honestly wish more people thought like this. I think the problem with many people our age boils down to an insecurity or fear of committing; committing to the maintenance, payments, and single location of a home in this case. There’s nothing wrong with that, but the best way to get rid of fear or insecurity is to educate yourself.

    When I bought my home 2 years ago (I’m 25 now), I wanted a nice location, a great price, and nice amenities. I couldn’t afford everything though so I bought a fixer-upper condo only a mile away from downtown Austin. I saw this purchase as a learning experience and an adventure, and spent the next year re-doing, fixing, and painting the place. I locked in a 30-year fixed mortgage with a 3.5% rate and my mortgage plus taxes and HOA fees totals $1,000/month while similar units in my complex rent for $1,400/month. With the amazing location and high rental demand in Austin, I could easily rent my unit out. This ease to rent-out the condo acts like a form of insurance in case I ever wanted to move elsewhere.

    Living in my own condo has given me a greater sense of community, a greater feeling of care for my neighbors, and a bigger sense of attachment to my city. It also provided me with a big sense of accomplishment for all of the renovations that I did and for the skills that I gained from that work. Contrary to popular opinion, ownership actually feels more liberating than renting because you don’t have to deal with greedy landlords, noisy neighbors, cheap amenities or restricting rental contracts.

    Age isn’t a factor in this equation, it’s just a matter of knowing what you want, being savvy and being prepared.

    • Hey Erwin. Sounds like you shopped smart, knew what you were getting yourself into, and put some sweat equity into your place to make it an even better situation for yourself.

      Nice job!

  14. I agree with a lot of what was said above by Baker and Thursday. While what you’re saying is theoretically true, Tyler, I don’t believe it will work in the favor for the vast majority of American people.

    Another note: Robert Shiller, who just won the Econ Nobel Prize for his work on studying assets and evaluating the housing market, thinks homeownership is a terrible investment. He calls investing in homes a “fad” and shows historical returns are virtually nonexistent.

    Maybe this ignores part of your argument or is besides the point, but it’s hard to ignore and I still believe it’s not as clear-cut as you’ve laid things out.

    More here: http://www.theatlanticcities.com/housing/2013/10/economist-who-just-won-nobel-prize-thinks-housing-terrible-investment/7240/

    • Hey Jeffery,

      Always appreciate your comments. I’d agree with everything you said, except…

      1. It doesn’t just work in theory! It works in reality every single day for my friends and family! I didn’t just make this up; I’m not that smart!

      2. Robert Schiller is a genius. He’s absolutely right. Your home is a terrible investment. And I’m surprised by how many people latched onto the idea that I’m making a case for real estate investment.

      I’m not! In fact, I specifically bolded and italicized the sentence in the article that says, homes are a proven place to *store* wealth. Emphasis on *store*, not create.

      I’m saying: At the end of the day, you’re better off financially and otherwise by owning an asset. Since everyone *has* to live somewhere, it’s good to own something everyone has to have. Don’t expect to get rich from it, but do expect it to *save* you money over the long-term.

      You guys are keepin’ me sharp.

  15. I think there’s a psychological component that needs to be factored in as well. An argument can make sound economic sense, but do the financial benefits outweigh the emotional implications? It’s one thing if you’ve already decided upon a city you want to live in, and have to choose between renting or buying for the 30+ years that you spend there. But more and more people are choosing the location-independent route, and even those that aren’t often spend a few years in a new city before moving on to the next one. In my case, I’ve spent half of my 20s in LA, plan to spend the rest in Portland, and spend my 30s either traveling Europe or in the Bay. While it’s true I could make money renting out a house while I’m on the road, I’d also have to factor in the expense of traveling back to the house to take care of necessities, and a place to stay while I’m in town (assuming tenants are occupying the house.) Not trying to dispute your numbers, but for me the psychological hassle of being “tied down” to a place is a real one that, for the time being at least, precludes this as an option.

    Great post though — it’s always a fun exercise to think your arguments through, even those that I don’t fully agree with!

    • Thanks for the comment, Saul.

      I’m never offended that someone disagrees with me so long as they’ve thought their argument through.

      In my opinion, when you’re finances are already in order, owning a home doesn’t just have financial benefits, it has deep psychological ones, too.

      But every situation is a little different. As long as the tradeoff you make is based on sound logic for your own situation, go for it!

      That is, absolutely, the spirit of Riskology.co!

  16. Definitely refreshing to see a counterpoint to the common dribble! While I don’t own a conventional home, my girlfriend has owned a condo since she was 25, and I think it’s going to be a great investment for her down the road.

    Here’s my story: I just completed a tiny house on wheels. It went way over budget, but I made it super nice and comfortable for living in (long term). I have $0 debt on the house, so am basically living rent free now.

    On the flip side, the house isn’t considered a “house” by the establishment, so no property taxes. However, with this bonus comes risk: I am technically not allowed to live here full time, though functionally I’d have to get caught which is difficult to prove. What do you think? Better than owning a home? OR should I have taken my $40k as a downpayment on a conventional house?

    • As Wayne Gretzkey used to say, “I skate to where the puck is going to be.”

      You have something that can be comfortably lived in. It’s valuable to you and to a very niche market right now, but if it’s built well, I think that market is going to grow tremendously in the years to come.

      What it will depend on is having a convenient and legitimate place to *put* your tiny house.

      Again, though, your house isn’t an investment. It’s place to *store* wealth and to lower long-term living costs.

    • Ethan: I have a friend who built a tiny house for himself in Texas, and is planning on driving it out to LA. Hopefully he’s able to park in one of our backyards without the landlord minding. I’m fascinated to see where things go with this — it ties into my own interests in the Share Economy, and I wonder whether there comes a point where “tiny house parks” are a common thing. Might be a good idea to create a site where homeowners are able to offer yard or driveway space for that purpose.

      • Saul- Definitely great idea about the site. There is one floating around out there- I believe http://tinyhouselistings.com/ has a way for site owners to rent out space. There are still a lot of unknowns- insurance, legal issues, etc. that would keep most people from offing up their yard, I would assume.

  17. Just real quick… I’ve owned 5 homes. I never got ahead especially with a mortgage. FIRST the bank took about 95% of my payment in interest. I WAS basically renting to the bank with all the risk. Lets just say I never made money. Sure my home appreciated, I was in a good market. I made money on the sale of my last home after owning it for 8 years on the INITIAL purchase cost. BUT I was never ahead of the bank. They aren’t stupid. If I would have kept it for 30 I’d pay triple the initial loan value. I didn’t own it the bank did. BUT I took all the risk. Insurance, maintenance upkeep, the house was getting older by the minute. It was a pain in the ass to buy and sell. The only way it may work out is if you pay CASH. I’m in a different market now but I rent and have a nice condo. My rent is cheaper than my mortgage payment. They take care of all the yards, maintenance, etc. My fridge went out, they had a new one for me in 15 minutes. Try that as a home owner. I could go on and on but don’t have time. Let’s just say it’s a breath of fresh air not owning. After playing the game for many years I love having that monkey off my back.

    • Thanks for the story, Jeff. And you highlighted a very important point: Unless you hold your property for the long-term, you’re essentially renting from the bank.

      You can’t rely on appreciation, and it costs a lot of money to sell a house, so unless you’re in it for the long-haul, it’s difficult to come out ahead.

  18. I’m not going to be purchasing a house in the immediate future, simply because I am not sure where I’m going to live.. but I will definitely buy when I figure that out.

    My only gripe with this post is that you didn’t say indubitably duped instead of undeniably. D:

  19. Hi Tyler –

    Unlike many of the other commenters, I think your advice DOES make sense for the vast majority of folks, but DOES NOT make sense in particular situations like mine.

    FWIW, the wife and I would love to own a house. But we live in Oakland, which is among the hottest real estate markets in the country right now. Home prices rose more than 50% in the last 12 months. Houses have been routinely going for tens of thousands over asking and snapped up within a few days of listing. I know that kind of price madness won’t last forever, but it’s not evident that it’s a bubble that’ll burst either.

    We pay $1045 in rent, which is increasing this month to $1075, for the first time in the four years we’ve been in the place. Oakland is rent-controlled, so our rent will never increase faster than inflation. The house next door to us, with similar square footage to our apartment, just sold for $560k. Finding anything lower than $400k is near impossible in our market.

    Have a look at the NY Times rent vs. buy calculator:
    http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0

    If I assume 3% inflation, 7% ROI on money invested elsewhere, 3% home appreciation and rent increases (keeping up with inflation, but not otherwise increasing), then the calculator says I wind up $1m poorer over 30 years. Not only that, but the money is tied up in equity (hard to access if you’re not interested in selling your home), as opposed to in cash where it’s throwing off interest every year.

    In fact, in the long-term, the curve moves downward (favoring renting) if you assume your investment portfolio has a better return than your home appreciation.

    If there’s a flaw in my logic, please let me know. Maybe I’m not comparing apples to apples, by looking at rent on an apartment rather than rent on a house? And I could use a primer on California property taxes. But I can’t make the math work in favor of buying a home unless I figure we find an EXCELLENT deal on a house and on insurance, where we’d also be able to rent out bedrooms or a mother-in-law unit, and assuming that we one day outgrow our apartment and are forced to move and face a dramatically increased rent.

    So just to say: I don’t believe it’s always financially advantageous to buy a home, especially in an expensive, rent-controlled market. We will probably buy eventually, but I expect it to cost us money in the long term.

    • You’re right. You’d be wise to keep renting right now. It does not make sense to buy a house when you’re in another bubble (yep, it’s another little bubble in the bay area). That’s working against you.

      And you have another force working for you: rent control.

      So, you’re in a spot right now where prices to buy are artificially high, and prices to rent are artificially low.

      Take away the government regulation and give this second little bubble sufficient time to pop (it will, all bubbles do), and I’d bet the incentive to buy comes right back.

      As for now, though, yes—if you’re going to stay in the bay area—keep renting!

  20. Okay, I’m going to come back to read the comments again.

    I’ll say this: I’ve done both.

    I just sold my rental property for a HANDSOME profit in Toronto, where we weren’t hit like you guys.

    Buying is a great idea when you want to settle down, know where you want to live, and have income stability.

    I’m 25 and don’t know what’s next. The last thing I want right now is to be held back by a home.

  21. “4. Houses are bad investments. I can make more with other investments.

    Actually, you can’t. Not because I don’t think you’re a prudent investor, but because we’ve already debunked the idea that you’re going to save any extra money over the course of your life to invest in the first place.”

    Are you being serious? Aren’t you blogger friends with MMM and ERE’s Jacob? Houses are terrible investments since they aren’t liquid at all. The cost of house ownership definitely exceeds your estimates. http://www.iwillteachyoutoberich.com/buying-a-house/

    Also, I’ve got a steady job in tech, but the Sword of Damocles is definitely lurking overhead. All the time. Do I make a middle class income? Definitely. Do I feel safe enough to buy a house instead of renting? No. My mom really wants me to buy a house, but I just don’t feel comfortable doing it. We watched what happened and we’re very leery of owning real estate. I don’t know upkeep skills and I’m probably not going to learn them; I congratulate anyone who knows how to take care of their own home, since that will save you tons of money. If you’re the kind of person who expects to flit around for a while and whose income isn’t secured, like me, it’s not that sensible to buy a house. If I were to get fired (and believe me, “fire fast” is one of the mottos of my company), I’d be holding the bag for a mortgage I could not hope to pay.

    • You have to make decisions that you think are best for yourself. Totally respect that. But, I’m going to say it again: This is NOT about investing. This about lifetime cost of housing. How much are you going to pay over the course of your life for your place to live depending on the lifestyle choices you make.

      And yes, a house is incredibly illiquid, but when you’re making a *smart* real estate purchase in your younger years, it’s about saving a ton of money on your life-time costs, not finding the most easily convertible investment.

  22. You’ve forgotten a major economic factor: the opportunity cost of spending a five-figure down payment on your living quarters. There are three obviously better places to put $25,000 when you’re 25: emergency fund, paying off all debt, and starting to save for retirement.

    Since so many 25-year-olds have debt and have no emergency fund, it is not “Absolute Insanity” not to buy a home when you’re young.

  23. Bottom line you must be comfortable with your own “risk” meter.

    I bought my first house when I was 22 not for any particular reason but because I hated giving away my money. Back in 2003 I couldn’t even qualify for a mortgage I got a “line of credit”(insert lesson learned smile here). I am not the cleverest of people and certainly not the most affluent and neither of my parents are bankers or in real estate. I remember having two mortgages and working at Starbucks making $7/hr eating top ramen noodles for a while. But… that aside you figure a way to make it work.

    I still can’t sell my first house for squat what I paid for it in 2003 but I can tell you it is my most profitable rental property allowing me a good shot at cutting the term of my mortgage in half if not more. It is your typical grungy rental property too – all the appliances don’t match, no air conditioning, old in need of some updates that I haven’t done yet, all the while turning coin.

    I thought rent to be a lost cause. So I occupy time and space for a while great, it’s easy to do, most people do it. You get a copy of your lease agreement and off we go. Renting is easy, getting a mortgage involves a few more steps heck maybe even a bit superstition. Don’t get me wrong during transitional periods renting is a good idea. That transitional period for me just happens to be about three months not a year or two.

    I was diligent on my first purchase, I did the research, took my time, didn’t get emotional and ha. . . 10 years later here I am still holding onto it. I walked into my second property looked at it once never lived in it, said I had to have it no research whatsoever involved I wanted it so, I had to have it. Three years later it happens to be the most in demand neighborhood in Denver and is appreciating through the roof.

    I now have three properties and a fourth one in the works. I don’t buy the excuse I want to be free a house straps you down, I don’t know where I am going to end up bla bla bla. If I told you all my properties are in different states, a trail of where my jobs have lead me, would you still say I am not free? I would go so far to argue these days that getting out of a lease is more difficult or just as financially painful as purchasing a home. More and more lease agreements are not offering a early termination fee but rather sticking you with the whole bill if you want to move out early. But hey keep renting because I am happy to make a living off of you.

    Bottom line if wanting a home to be yours, why would you rent. In a world that is overcome by instant gratification, yes owning a home is a long term prize and has a few extra steps. Never once when purchasing any of my homes did I settle on the fact that it was going to be my final resting place and that I am forever chained to it or that it’s just too much work. Before you go down the I can’t do it path, or the I don’t have the funds road the comfort level might not lie in wanting to own a home at all but what makes you feel safe and the path of least resistance. As cliché as it is, if you want it badly enough you find a way to make it work.

    I just signed the contract on my fourth place scared shitless of course however, I will not let that fear get the best of me. Any given day is filled with “what ifs” there are plenty of them out there. In the best of times and the worst of times we navigate our way through. Take the risk, life will bounce you back.

  24. I absolutely agree with your advice. Buy as soon as you are settled in a city where you think you will stay. Refinance if you can improve your rate, but NEVER take out accumulated equity or extend the final payoff date.
    Home ownership really pays off in 15-20-30 years down the line when the mortgage you could just afford in the beginning is easily affordable and even a fraction of current market rent. How can grandma afford to live in that big house in the nice neighborhood? Because she has no mortgage payment.
    20 years after buying my first home I own my current house free and clear. It costs only $400 a month in property taxes and insurance to shelter my family. That makes everything easier: the emergency fund that would carry some families only 6 months will carry me for 10. My social security will go further and my retirements accounts will last longer because I have no rent or mortgage.
    Even with the 2008 setback my house has appreciated and will continue to do so. And I have an asset that can be sold to provide for my needs if I outlive my cash retirement.
    Conversely, a renter will be facing thousands of dollars of escalating housing expense to be paid from a “fixed income”.

  25. What most people overlook is that this is the bare minimum/worst case scenario for repaying a home loan. It continuously baffles me that people insist on putting the minimum down payment (10-15%) on a house. If this is something you’re planning for financially, it’s totally worth it to spend an extra 3-4 years living in a super-cheap rental while you save like mad to put down 30 or 40 percent of the home purchase when you buy. Not only will your monthly mortgage payment drop drastically, the amount of interest paid over time will plummet.

    Take it a step further, and make a personal commitment to paying off the mortgage in 10 or 15 years instead of the typical 30. Unless you’re going through a mortgage broker, there typically isn’t any penalty for paying it off early, and that leaves you with a home and property that you 100% own, no rent, no mortgage payment within a decade. You’re freeing up one of the largest monthly bills you’ll ever have for the majority of your lifetime and saving a bundle in interest, which is purely bank profit.

    Ex: We put 40% down on our home in April and happened to get a steal of a rate at 3.75%. That put our monthly payment at less than $800, and coming from a 2-bedroom apartment that was running us $1235/month, it’s easy to continue paying that as a minimum (and in most months we pay much more, thanks to a thriving business). We’re on track for full repayment within 5 years because it’s a priority for us.

    • That’s really fantastic, Isaac! And yeah, I made my argument from a “worst case scenario” with homeownership just to make a point. If you pay off your mortgage faster, you’re (normally) getting even further ahead.

  26. I’ve had this feeling that people claiming rending is smarter than buying were missing something, but I didn’t really have a strong argument. Thanks for your article!

  27. I’ve got to wonder whether this argument is consistent with your blog? One who walks the standard path of thirty year mortgage enslavement is hardly a risk-taker. The road less travelled is to seek out what you want and grab it with both hands today. Hence how I’ve managed to live in million dollar plus apartments since my early twenties.

    Back then I had a mortgage all set and approved and chose to walk away from it. Why? Because you don’t know how long you have in this life and spending the most important years of your life – your twenties – living in suburbia is not time well spent. They say you should slave whilst young and reap the rewards in your twilight years, but what if you never make it? And even if you do, by the time you get there you certainly won’t be able to enjoy it in the same fashion.

    My twenties were spent in several different places. I first moved into the penthouse of a luxury inner city highrise at 21, where I got to enjoy 3 and a half years of everything the city and high life had to offer. I then moved on to an even fancier, newer subpenthouse apartment nearby and finally into another penthouse, that was split over 3 high rise levels. Could I have bought any of those apartments? Not with ten people to carry the burden! The mortgages would have been insanely high compared to the rent we were paying.

    Now I reside in yet another luxury high rise apartment with a view that most people would give their right arm for. I have the beach across the road, three pools, a hot tub, two saunas and shops and restaurants downstairs. I’m still renting!

    Are there downsides? Sure. I’d love to own this apartment and not have to answer to a landlord, but very few people will ever be able to make the sort of money that would be required to do so. It’s very much a case of giving up one thing to get another. You have to decide early on in life what is most important to you. If it’s lifetime cost versus quality of life, then you’ll likely wish to get a mortgage in a modest suburb and diligently strive away to save those pennies. One day you might be able to own something like the place I live in. It may not be until you’re in your sixties though. Trust me, I’ve lived the life and have a very clear understanding of the demographic of luxury home owners. They aren’t in their twenties and only the tiniest percentage are middle age. By far and away the top 1% of the market is owned by very wealthy individuals or companies and is well out of reach of the average person. If you aren’t wealthy, you may have to settle for renting once you get into the upper end of the market. It is however, worth it. It’s worth every cent.

    For me, where you live is very much like travelling – it’s an experience. You should love where you are and savour each day, not just come home to a shapeless box in the middle of a bunch of other shapeless boxes that look out into a yard and onto a road. There’s so much more to life and so much more to be had. But you have to be willing to give up some of the long held ideals of being a home owner and having the sense of security that comes with that. It’s all a huge risk and we’re all just renting this life anyway.

  28. You can’t just compare total dollars to total dollars without discounting them to present value. If you had the option to receive a $100 bonus today or a $110 bonus 30 years from now, you’d be a total moron not to take the $100 today. If you invested the $100 in a mutual fund, you’d have a lot more than $110 in 30 years!

    If you had the option to spend $1,000,000 on a home, most of that within the next 20 years, or $1,200,000 on rent, spread out evenly over the next 60 years, you’d be a fool to buy. Because most of the dollars of the $1,000,000 are sooner in time than the $1,200,000.

    Put another way, if you have the resources to come out of pocket $1,000,000 for a home, mostly in the next 20 years, then you have the resources to pay $1,200,000 in rent over 60 yrs and pass a lot on to your heirs that you otherwise would be unable to. At first this may be counter-intuitive. But keep in mind that in the first 20 yrs the rent is only $400,000. This leaves ~$300,000 to invest (not $600,000 since the homeowner still will have future costs, just not as much) in a mutual fund that the home buyer would not have. This $300,000 would grow over time and more than make up for the remaining $800,000 in rent, due to the magic of compound interest.

    So you have actually just dealt a death blow to the very thing you tried to argue for : buying property when you are young.

  29. I agree with the ideology. But I feel most people are scared to buy. My house is on a lease. Contract got over last month. I had to 800,000 to extend for another 10 yrs. I decided to buy a house instead of wasting money on rent. A decent house for a fmily of 4 cost 3.5 million. I will be paying a monthly installment of 22k. Thats more than half my salary. Sometimes, the thought freaks me out. what if i m without a job or what if i get sick. But the thing is, it’s for long term, and belief is all you need to do something.

    PS: All the above value is in Thai currency. (Baht)

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