The result of decades of propaganda

70 Comments

…is this:

“About 84% of the respondents…said owning makes more sense than renting, consistent with earlier surveys.”

The push for Americans to own real estate has been so systematic, so deeply embedded, so endorsed (by multiple presidents and the duplicitous NAR) that no matter what counter-evidence is presented, a majority of Americans will always believe real estate is the best investment they can make. It is an invisible script, perhaps the most sacred financial cow of all.

Real estate can be a worthwhile investment. But not nearly as often as you think.

I’ve put together a comprehensive rebuttal on my Buying a House page.

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70 Comments

 
  1. If you’re shopping for your dream house, it’s almost always a bad investment.

  2. Saving to buy a house is LAST on our list of financial goals, after fully funding an emergency fun for one year, paying off student loans, maxxing our two 401ks and Roth IRAs every year. I don’t know if we will ever end up owning property, and I’m fine with that.

    It amazed me how many people started telling us to look for a house after we got married. It’s like apartments are toxic to newlyweds or something.

    • I agree, it’s totally insane

    • Speaking of totally insane…
      One of my parent’s financial goals was to help my brother and I with a downpayment on a house. I’m not interested in buying a house anytime soon and my parents are flipping out.

      I’m worried that they will buy a house for me. Seriously. They may or may not actually be capable of buying another house… certainly not without some “creative” financing and me making the mortgage payments.

    • Not owning properly doesn’t just save property management headaches (if you own it to rent it out), it also doesn’t handcuff your ability to relocate for whatever reason. Paul Graham mentioned about how a lot of consumption are phrased as “investments” by a particular group (in this case, I presume builders and real estate agents): http://www.paulgraham.com/selfindulgence.html

      I’m not interested in purchasing a house b/c of the headaches. Many people are being owned by the house rather than the other way around in terms of actual feelings that they don’t want to admit (to avoid embarrassment or ridicule).

    • Ooops. I meant “not owning property” instead of “not owning properly”

    • Totally agree! I’ve been married a year and a half and my parents and some coworkers keep hounding me about when I’m going to buy a place. It’s like they don’t think newlyweds can live in apartments. With mortgage, insurance, property taxes and HOA fees, my monthly housing bill would be over twice as much as my current rent. It makes me sick to think how much of my monthly take home pay would go to housing.

  3. It’s no wonder. Government bends over backwards to get people to buy homes. Why? Well, who owns your mortgage? The banks. Who is Congress craven to? The banks.

  4. I’m a two-time loser in home ownership. Meanwhile, in the three months since I became a renter, my family and I have: used the pool and/or jacuzzi just steps from our apartment at least once per week, didn’t pay a dime when the A/C went kaput and I had it fixed within hours, haven’t touched a lawn mower (but made $50 after I sold the one we had) because our complex has weekly mowing/edging/lawn maintenance service, and built up an emergency fund which curiously didn’t exist when we were “homeowners”.

    The realty industry is an albatross on American society. But boy – does it know how to shove crap propaganda down our throats. I used to believe it just like that 84%.

    • And you’ve made nothing in principal, instead contributing to either the mortgage of the management company or directly to their bank accounts.

      While home ownership is only right in particular circumstances, it is ignorant to ignore the pros and cons of both sides.

    • Anyone live in Vancouver? Some of the most over-priced real estate on Earth. (google crackhouse or mansion). Owning is well over double the cost of renting in many cases. Yet everyone here thinks renters are idiots even though most of us are.

      I live in an apartment downtown so I don’t have a car (saves a few grand a year). My apartment has a gym, full-length pool, theatre (like those you see in mansions), a party room I can book, a billiard table, and a 24-h concierge. I’m not throwing my money away, I’m living a great life!

      You’d have to pay me to live in an old house.

  5. Owning your own home isn’t everything it’s cracked up to be. You can definitely make bad decisions when it comes to a mortgage. But it’s not always the wrong decision or the right one.

    At least with a mortgage – you could potentially get at least some of that money back when you sell your home. The money you pay in rent is gone forever.

    Every situation is different. I think your Buying a House Guide has a lot of solid advice to help people make the right decision.

    • I’m so glad you wrote that! I cant stand it when people say “buying a home is always a great idea” or “buying a house is the worst idea ever”

      In reality, it’s about finding the right fit for the right person. Maybe it is a great investment, but maybe it shouldnt be thought of as an investment. Maybe somebody with a family wants to buy a house for the stability or the sense of community. But buying a house for the sole reason that you think the prices will go up is kind of a crazy reason to buy a home.

      It’s like financing vs leasing a vehicle…both have merit and downfalls, its all about fit.

      There’s no black or white, just lots of shades of grey.

  6. I’m a former member of the 84% referred to above. In 2003, I bought a 3 bedroom townhome for $134K (just before the prices soared). Then, the bottom fell out, and now my home is worth less than $70K. One unit under foreclosure was short-saled at $50K! Yikes! Talk about a lousy investment.

    It was all about prestige. I wanted to say that I own MY OWN home. I used to think that my coworkers who rented were idiots. I mean, why rent if you could OWN?

    Owning has made me about $20,000 poorer, given that I’ve had to replace: carpeting, washer, dryer, oven, a/c unit, dishwasher, as well as the water heater. The kitchen was 20 years old (and looked it), so we had that remodeled as well. I nearly forgot about the accordion hurricane shutters.

    Needless to say, I look forward to renting again.

    • “my stock porfolio just went down 20%, i’m selling them all and never buying again”

      I bet that doesnt sound too logical to too many…that’s what u said about owning a home.

    • DanP: Actually pretty different…real estate’s post-inflation return has been close to 0% over the last 100+ years (see Robert Shiller), while equities have risen dramatically. I cover the details in my book.

  7. I bought my first house at 23 and never looked back. In my second now, for a good long time. No, I’d never recommend it for an investment, but for me, I wanted the grounded stability that having a house brings. You know you aren’t going anywhere if you’re not renting, and I needed that after a childhood of moving. It has its ups and downs, and it’s not for everyone.

    Seems to me the ideal of property ownership goes all the way back to our country’s roots, possibly longer. Has nothing to do with banks or government, but a deeper, more ingrained desire cultivated over generations rather than decades.

    • I bet you don’t live in NYC, though.

      There are some places where houses are relatively cheap. I assume you are in one of those places.

    • You’re right, Julie, I’m nowhere near NYC! I live outside the Chicago area where a lot of housing is pretty cheap. Rent would cost about the same as my mortgage, though renting would be cheaper, what with maintenance an’ all.

      I do not envy those who live in high cost of living areas.

  8. I’m amazed that every time a friend or family member gets married, talk about getting a house begins. Apparently the stress of planning a marriage and honeymoon just aren’t enough challenge. The only house I ever want to buy is the one I have built to my exacting specifications, die in and leave to my family for generations. I also want it to have a dedicated library room and the ability to defend against a zombie apocalypse. I refuse to buy a house that doesn’t meet these standards. Don’t judge me. There is no one who DOESN’T want that house.

  9. engaged over here, and my future mother-in-law has already started prodding us about a house. say what?! we are such happy renting campers. 1, love nyc and it’s all rentals here anyway, 2, should my love change we can leave no prob, 3, don’t want to be stuck in one place forever :(

    • Totally agreed, Ramit. I live out in the SF Bay Area, where a starter condo can run you $450K (not including taxes, etc.) if you don’t want to live in a neighborhood where the police stop by every other evening (those houses start at $300K).

  10. agreed completely – it is a bunch of horse sh%#*$t

    however, i do own several rental properties across the country and have done well with them. my approach is value investing, not speculative, therefore appreciation is merely icing on the cake for me. i like the parlaying effect (paying off one and using additional proceeds to pay off another and rolling the ball onward). tax benefits are also relatively significant if run as a business, which i do. finally, for a newbie, one can leverage money further. for example, with stocks you can invest at a 50% margin, with real estate, i was able to structure several 0 down low interest deals, and even in today’s horrendous economy, someone with a good FICO and respectable balance sheet/cash flow can pull off a 20% down 4-5% int rate deal.

  11. I disagree to an extent. I think buying a house just to own it is not a great financial decision especially when people try to max out the house that they can afford. However, I previously lived in an area (Cincinnati) and now live in Greenville SC where there is a major disparity between a mortgage payment and the cost of rent. I bought a house and am now renting it out making postive cash flow (after principal/interest/prop mngt fee/etc) of about $250/mo. The disparity is even higher where I’m at now. Obviously there are more risks involved, but in my case I think (so far) it’s been a calculated risk that has paid.

  12. I think its more of people deciding whats right for themselves. I have owned a home in a decent area for about 5 years. As far as repairs go I am handy so I fix anything that pops up. It also depends on the area you live in. Ramit, lives in NY and SF which are terrible places to buy unless you are much better off than most people in the US.

  13. I own a home but I’m in my 30′s with kids and a dog. It does make more sense than renting for me because I have no intention of moving for at least 18+ years. Do I think it’s a good investment? Not really. I didn’t buy it as an investment. I bought it as a home.

    I would never recommend buying a house as an investment to anyone, especially a young married couple. When you’re younger and you don’t have anyone to provide for, why tie yourself down with the financial burden of a huge mortgage? Save your money, invest your money, and by the time you are ready to settle down for the long haul that house WON’T be a financial burden. It just makes sense.

  14. Amen, Ramit! Question: I’m with you 100 percent on this, but my fiancee’ thinks I’m completely heartless for not wanting to buy. She views buying as a very emotional and family-oriented decision (place to raise kids, put down roots, etc) and my very logical financial arguments are completely lost on her–despite the fact that she works in financial services and should know better. Suggestions for how to deal with this? Should I just roll with it as a deliberate consumption decision (a la your “my consumption is better than yours” posts)? Or do you have something in your bag of tricks that might help her see the light?

    • Yes, give her Chapter 9 of my book.

    • First off you and your fiance are talking apples are oranges here. You’re talking about money and she’s talking about hopes and dreams. How can you put a price on her hopes and dreams? One thing that might help get you two on the same page is to turn the consequences of the numbers into real scenarios. For example: If we buy a home we can’t save as much for retirement and our kids might end up taking care of us in our old age – don’t want to put that burden on them. Or if we save like crazy now one of us could be a stay at home parent, something that would be impossible with a high mortgage payment. Or if we are renting we can live in neighborhood x (safer, excellent school, closer to work) and because of that our kids can walk to school and we can spend more time with them due to a shorter commutes. You’ll be able to move to a new place with a shorter commute if one of you gets a job in a different location. What are the emotions that go along with all of these things? If buying a house means giving up other things she takes for granted now the numbers will become more real to her.

  15. Marie said: “With mortgage, insurance, property taxes and HOA fees, my monthly housing bill would be over twice as much as my current rent.”

    Then you would have made a lousy choice in buying. Two years ago, I was renting a nice one bedroom, one bath, one car garage apartment, just steps away from the pool, spa and exercise room and I was paying $850 a month for that place. I wasn’t the top of the Ritz and it wasn’t the ghetto either.

    Now, flash forward to today. My girlfriend and I bought a home last year (June 09) and our monthly payment is $882 a month PITI. With HOA and utilities our monthly expenses only increased about $200 over the apartment Three bedrooms, 2.5 baths, 2 car garage, nice spa in backyard which is a nice oasis garden and the home is only 5 years old now. We have room to spread out, we have an extra bedroom for guests (my parents are visiting this week) and we don’t have to worry about what our “rent” will be next year or the year after.

    Yes, if something breaks, we have to fix it. If you own a car and you need new brakes you need to fix those, too. We don’t have to listen to anyone walking around above our heads anymore, we don’t have to listen to the rowdy kids at the pool until midnight anymore and we don’t have to worry about breaking any rules if we want a lemon tree in the backyard.

    So, if your monthly payments are more than double for an apartment, then you’ve done something monumentally stupid when buying a house. I’m sure most of the comments that I’ve seen here are coming from people that would better off renting anyway, whether a house is considered a good investment or not. These are usually the people that let houses fall into disrepair and become shacks.

  16. Actually Ramit, it’s the “I don’t want to have to take care of a house” mentality that I’m reading in their comments that tells me a lot. These are the people that need someone to take care of their homes for them, be it an apartment or a house.

  17. “…real estate’s post-inflation return has been close to 0% over the last 100+ years (see Robert Shiller), while equities have risen dramatically…”

    Not a good comparison. First, the risk profile is completely different; You don’t compare the high returns of stocks to the low returns of bonds and conclude that you should never buy bonds. The return needs to be measured against the variation around those returns.

    Second, Shiller’s quote, I believe, is based only on the price of the houses, and does not measure the value received from actually living in them. This is akin to only measuring stock price fluctuations and completely ignoring dividends. To get the actual return, you need to sum the return from all sources (as well as subtract expenses from all sources).

    Third, neither the quote, nor your book point to the most relevant statistic that matters: the price to rent ratio. Too high of a ratio makes a house a poor investment; too low of a value makes renting and investing the difference in equities a poor investment. This is an important nuance that needs more than just cursory mentions.

  18. Ramit,

    You are so right; I have made the worst investment of my money. Please compute how bad of a mistake I made.

    I purchased a house in 2008 for $145,000. The neighboring homes were selling for $180,000 (it’s a condo so they are all identical) however I was able to negotiate a lower price as the HOA was suing the former builder and the bank was motivated to sell due to uncertainty in the market (everything was collapsing their world was on fire). I used private financing at 100% of cost and paid 9% interest only for 6 months. After 6 months I refinanced the house and the bank valued it at $186,000. I got a conventional loan at an 80% LTV at 5.5%.

    Such a bad rate because it’s a rental. After one month of owning I had a renter in the house. They pay $1,175 per month for the 3 bedroom 2.5 bathroom house.

    So I put in $1,110 for the first month’s interest plus HOA dues of $130. I did pay for fire insurance and the HOA dues costing me $690 over the 6 months.

    Cash in was $1,930 for the 6 months of owning.

    I now only earn $50 a month after interest, principle, taxes, insurance, minor maintenance and HOA dues.

    Cash in $1,930
    Cash Flow $600 annually

    What’s that return? Was it a good investment? I do put in about 15 hours a year which I am not compensated for.

    There is also approximately $37,200 in equity based on other sales in the area. Maybe I would get some of that if I sold it, maybe it will appreciate or depreciate in value.

    I agree I have not used my $1,930 wisely for investing.

    To readers – there are reasons you don’t buy a house: it does not cash flow when rented, people are moving out of your market, you need liquidity, or you plan to move away from the property in a short time frame.

    I also own my personal residence (purchased in 2008 from bank $50,000 below market value at that time, currently only valued $15,000 above purchase price) which I rent two rooms out (got to love craigslist) and have a second home on the coast which I lease out (purchased at auction $20,000 below market in 2010).

    You need to realize that people who are intelligent investors are making money off of you when you are renting. Yes in dense areas there are economies of scale. You renting in a high rise is going to be cheaper than purchasing a house (because of land cost) but if you owned the high rise I bet you would be making money (good money / return).

    Ramit, I am a commercial banker. Please stop preaching about things you don’t understand. This is the only subject I don’t agree with you on. However for most people in our age bracket I do not recommend home ownership because they will not be living in the same house for more than 3 years, don’t have stable income/liquidity, and don’t know anything about housing.

    • Good comment. Very good. Note that I’ve never said real estate is ALWAYS a bad investment for everyone. But it usually is for ordinary people.

      A few differences between you and most of the people I’m writing for:
      - You are a professional investor, which is quite different than the people I’m writing to.
      - I don’t know where you live, but you bought a house for $145K. That is very different than many of my readers who live in CA and NYC.
      - Also, minor detail, but your #s look good as long as things go well, which is unfortunately what virtually 100% of people who advocate real estate promote. Yet you don’t mention what happens if something goes wrong, such as a major roof repair.

      With that said, if you carefully examine the numbers, real estate can work out great as an investment. The problem is that people are suckered in by hype, obfuscated claims, and emotional appeals for the largest purchase of their lives. That is why I agree with your last paragraph.

    • Ramit,

      Thanks for your response.

      I just get the impression from reader’s comments and your comment – “Actually pretty different…real estate’s post-inflation return has been close to 0% over the last 100+ years (see Robert Shiller), while equities have risen dramatically. I cover the details in my book.” – that real estate is the worst (or inferior) investment you can make.

      I have tracked DOW vs Average Sales Price over the last 50 years starting and ending during stable periods and they are almost identical at 6.7% in value appreciation. However there are a few differences, yes you have maintenance/taxes/ownership with a house but you also are not paying for shelter. The second is leverage – you have the ability to invest 4:1 or higher at a very low rate which you cannot find with stocks or most investment tools. The third which is a real estate negative is you are buying one property in one market which is extremely risky if you don’t know what you are doing.

      In my case no I don’t have to worry about roofing as that is covered, along with all exterior maintenance, by my HOA dues.

      In my area it’s very sensible to purchase a home right now. I live in a suburb outside of Portland, OR where there are no buildings over 6 stories. Intel just laid out plans to invest $4B into new and existing facilities increasing jobs by 1,000 (plus a good multiplier of jobs). This is what will drive prices higher, constraints on supply (banks are not lending for construction) combined with increased demand for housing.

      I tell people who want to be a real estate investor that they need to be an expert on risks and finance.

      The last thing I tell everyone my age who asks if they should rent or buy – I say live at home (w/ parents) nothing beats free.

  19. The comments seemed to be mixed between investment properties and homes. Investment property should be treated like any other investment – the goal is to maximize return for the risk level of the investment.

    Your home is where you live. Whether you rent it or buy it with a mortgage, remember, it is where you live, not your retirement fund.

    I bought my fourth house six years ago and paid off the mortgage this year. I don’t count it when I total my net worth – remember, its where I live, not my portfolio.

    With the mortgage paid, the cash flow required to live here, with up keep, insurance, taxes, and utilities is relatively modest. To me, this was an emotional choice, one that brings me a certain peace of mind. There’s no variable in the rate of return formula for peace of mind – but I wouldn’t totally discount it either.

  20. I think a big thing here that people forget to point out is owning a home is a LUXURY. It is not a right or requirement… it is an expensive luxury. I spent all my 20s in very lucky rental scenarios: cheap, quiet, spacious. Yet I still plan to buy a home next year. Why? Because despite my luck when renting, I’m tired of hearing my neighbors two or three times a day even if they aren’t especially loud. I’m tired of worrying when I hang a picture, or having my landlord ask me about the towel rack I put up. I’m looking to settle down with my wife even if we aren’t having kids. And I’m going to say it: I’m tired of throwing money away on rent. Yes I know that is sacrilege, but for financially responsible people is does hurt to write rent checks into a void.

    I’m not looking to make a profit, I just want to have that money still be mine. Thanks to Ramit and other financial bloggers, I feel very well prepared (we set out with this as our goal 2 years ago). We’ve got the six months emergency fund, we’ve got the 20% down payment, we’ve got the closing costs, we’ve got money for the move and for a car down payment that we know we’ll need soon. We’ve researched the communities and the property tax for the homes we are interested in. We’ve done the math about 50 times, and are confident we can pay off the home in under 10 years, costing us only 10% of the total value of the house in interest if not much less.

    Could we get away with this on the coasts? Hell no, we’d be renters probably forever. But back home in the south? Pretty easy to do. You just have to be reasonable.

  21. Around here a decent one bedroom apartment with a garage runs $800+ a month easy. Plus utilities.

    We pay a mortgage on a 10 year old house, 1,900 square feet backed up to a 150 acre nature preserve. Two car attached garage, three bedrooms, three baths, fireplace, finished basement, vaulted ceilings, southwest facing deck – the whole schmear. 15 year fixed mortgage is $880 a month, plus another $300 a month for property taxes.

    We pool with the 4 other neighbors on our little street for snow removal and lawn care. Cost – $80 a month per house. No mower, no snow shovel. No work.

    I can’t imagine what it would cost to rent a place like this around here.

    Sometimes buying can make sense when rental prices are insane.

  22. Buying Vs Renting this is always more than just about money. People are not just choosing to be homeowners to make investment and flip it, maybe its the different quality of living that attracts them, or their own personal space or what ever non-monetary reasons they have for doing it. But it is an investment and not everyone is going to make good choices, just like 401k and maxing out will add to your savings sure, but life is uncertain and and its time to go from saving 401k to spending the 401k, you better hope the market is right, else the equation is going to be way off. Homeowner ship is not some propaganda, its just like any other product, marketed in a certain way. Else why even buy a New car, ever you will loose 10-20% of your money the second you drive it off the lot.

  23. I own a home that I paid cash for. I don’t live in it, but my tenant does. I calculate break even at about 3.5 years assuming nothing major breaks and an 80% occupancy rate. For me it’s been worthwhile. After 4 years I will have recouped my investment and will continue to make money. i will only ever buy a home that I can pay cash for. What they means for me is that I can’t afford a home in New York City where I live, and whatever home I purchase will be tiny, but it’s my little plot of land and I own it free and clear. How’s that for my retirement fund? And I have more than half my life left to go to qualify for early retirement.

  24. I have been a renter, as I get a nice one bedroom for me and my GF in a very nice complex, we get a pool and just pay the rent, which covers our heat bill, we’re just responsible for cable and electric.

    I have been pushing for us to stay here through the future with getting engaged, married, and having our first child. My logic is that I can continue to save and living in a nice place in the time being and what’s the point of a home for just the two of us. I can’t understand having more space just so we can call ourselves homeowners.

    My GF mother is a real estate agent and pushing the ‘now is the time to buy’ on me often. MY GF she has said repeatedly that she would not be living in an apartment for a few more years. She’s actually said I would be single if I planned to continue to live in an apartment. I don’t really know if she just thinks I’m cheap and want to live in an apartment, or if she does not understand the financial burden. She says we could get a ‘starter home’. I’m against the starter home and would rather rent until I could afford a ‘forever’ home in a nice neighborhood that I can raise a family and never worry about moving.

    I understand the value of owning a home and WANT it, it’s just the financial strain is hard to do right now. If I could afford it, I would as I see it as the way to settle down, start a family. In my apartment I can’t have a dog, which I want, I don’t have enough room for 2+ children, which I also want in the future.

    With all the outside pressure of ‘you should buy a home’, I have looked in cheaper less affluent neighborhoods and considered purchasing a ‘starter’ home and renting out the basement or upstairs to subsidize my mortgage payment.

    In NY suburbs you could find a $300k home in a not so great, not so bad neighborhood with taxes of $7k/year making a mortgage payment around $2,200 month. If you rent out the basement as a one-bedroom apartment for $1000/month you can now live with a mortgage/tax payment of $1200 month. Although costs would be much higher when you factor in utilities ect. on a multiple bedroom home than a one bedroom apartment.

    If money was not a huge factor in my decision, I wouldn’t be analyzing as a investment opportunity, but would be purchasing a home to have a sense of community, have a dog, have children with their own backyard to play in, their own rooms to sleep in.

    Home ownership should not be looked as an investment; to bad it’s not seen as a roof over your head and a place to raise a family to too many people anymore.

  25. I didn’t realize the percentage of my income that would be going towards paying the mortgage interest and property taxes every month until months after we moved into our house. We were pretty naive when we purchased our first house and thought that as the local advertisement says, “Why rent when you can own at the same price?” It’s totally bogus! We looked at the price of the house, but not the costs.

    There are so many more costs associated with owning a home; so many unknowns, so many possibilities of major surprise expenses (roof, furnace, air conditioning, basement moisture problems, etc.), the possibility of tax spikes and more that renting doesn’t have. I’d recommend people not even look at houses to buy (owner occupied) without a solid understanding of what they are about to commit to.

    When I began to think about paying for my home in terms of the hours of work I would be dedicating to paying for it every month, I became frugally-minded very fast. Owning is surprisingly similar to renting, but in this case it is renting from a lending institution. The “home owner” takes on a whole lot more liability than the completion of a simple, 12-month lease; they’re basically the long-term security of the bank’s investment.

  26. I will have to look into your book. I wonder how it compares and contrasts with the books by Dan Cavalli that I am currently reading.

    For my part, I am past an age where I believe a house could be anything but trouble. We have lived in apartments all of our married lives and through the children growing up. I find that my rent is far less than a mortgage could ever be, letting me have a stronger ability to save for retirement. Our youngest daughter is always after us to buy a home, but at 41 with a husband pushing 50, I can’t see getting into a mortgage that will drain us of enjoyment in our retirement years.

  27. I totally agree. I’m 38 and live in an appartment. Having a house would make gardening easier, but still manage to have a nice balcony garden. I also managed to find room to reorganize everything when my employer asked me to work from home. While I miss the “privacy” of a house – ie, not having strangers put your clean laundry in your basket because you’re a minute late getting it; I do native drumming and chanting, if you’ve ever done it, you know it’s not easy to do it quietly, especially with my kick-ass drum – I know renting is the best thing for me as a single person. I am not throwing money away, like everybody seems to be telling me. If I had a mortgage, I’d be struggling to make ends meet. I know that for a fact. House-owning single friends have told me so. And if I had a mortgage, I probably wouldn’t be able to have those extra accounts (emergency fund, gift fund, workshop fund, car repair fund, etc.) I admit, I used to feel bad about renting. I believed the hype and the pressure and felt like I was less of a grownup for doing so. Now I know better. Knowledge is power.

  28. Well, I don’t think this would be balanced without my slightly differing opinion. I’ve been both renter and owner, and heard the “arguments” for both sides. If my opinion matters, I prefer being an owner.

    I have a couple plots of land (suburban lots where houses used to stand) where I grow crops to eat, a rental property (with a good property manager and a darling of a tenant- it’s all in the screening process), and the little bungalow I live in. I’ve resisted a few scripts, such as “more is better” (it’s 700 square feet, no garage, no basement), “live in a nice neighborhood” (there is crime and garbage in my area, but it’s reasonably low), and “make it look good for *when* you sell” (I’ll sell if and only if I want to).

    I like the fact that as the owner, I can do whatever I damn well please. I can dig a foxhole- and have- because I felt like it. I can build a fire in the back yard when I feel like it, and no landlord is gonna tell me what color light bulbs I can have, or that I can’t write things on my walls (I really get into my affirmations), or that I can’t have mazes on my ceilings, or put in something custom for how I actually live my life (like a hammock, or a painting, or some custom shelving and cabinetry).

    While it’s true that I’m responsible for every inch of my property (including when the gutter snaps off, and when some jackass dumps garbage in the alley out back), I can deal with these responsibilities- it’s kinda like having a business, in its own way. I can also deal with the fact that I can live in my home, all expenses taken care and with fun money, for under $900 a month. I can strip my budget down to around $600 if things get REALLY bad- and in my area, $600 will get you an okay place in an okay neighborhood, if you’re not keen on eating anything.

    I love having control of my own property taxes (which I slashed a couple years ago, and got a refund for- you ever get your rent back?), how much I pay on my mortgage (which I chose to get as a cashflow management tool, so I could buy a rental), the color of my house (which looks straight outta Key West, even though I’m in Indiana), the kind of insurance I have (if the place burns down, I’ll lounge in a nice hotel for up to a year on their dime), and the kinds of plants I want to grow in my yard (I like to use the whole thing, and I eat heartily).

    Back when I was a renter, I was ruled over. They told me when I had to move (I hate moving), and they told me what I can and can’t do. No candles? No firearms? No cohabiting with my girl? Now, anyone who wants to rule over me can tell it to my ax. Maybe I’m a little right-wing and a little nuts, but this land is MY land.

    As far as investing goes, I like that I can draw money out of the house if need be (and have done so). Every developed property I buy becomes a potential source of cash, for when the next great investment comes up. And unlike my dividends, which may be cut at any time because some executive wants a bigger bonus, I can control the rents I charge- this will be my path to financial freedom. I’m already halfway there. I intend to be free by 30, and I’ve less than 2 years to go.

    And for the record, I don’t think I’ll ever sell. Why would I buy something just to sell it? Okay, that’s my rant on home ownership and why it’s the way for me- not a perfect investment, but I have yet to find such a thing. If you guys wanna rent, I’d be happy to rent you a lovely place.

    • I do want to own a house some day,for the reasons you mentionned and more. It would just ver very unwise for me to do it at the moment. The key is to buy a house for the right reasons and when you can truly afford it. Sometimes, renting IS the best financial option. In the consumer world we live in, there are a lot of lemmings running to jump off that house-buying cliff. Ramit’s post was, in my opinion, to point out another purchase a lot of people make without really thinking.

  29. America’s landlords have made renting in the US quite a different proposition to what people experience in other, non-house-owning-crazy countries. The most typical rental contract in the US prohibits pets, painting, and other forms of personalizing one’s home. If pets are permitted then it’s only cats or very small dogs.

    I bought my house in 2004, not as an investment, but as a home. I have a fenced backyard where I can raise chickens, let my dogs run free, grow veggies, and light a fire. There’s a wall over there I’m planning on knocking out one day. None of this would be allowed in your average rental in America.

  30. I’m late to the conversation, but I think there are two rationales behind home-ownership, and only one of them is money (the other is emotional). On the money side, whether or not your house becomes a good investment is the result of a certain amount of luck. Things change over time that you have no control over: the profile of a city can change dramatically, the economy can tank, or your style of house can come back into fashion and raise the demand for it. An owner can end up with a great investment or an albatross even if they carefully research and buy a good home in a good neighborhood.

    I sold my house last year and I’m renting again. I’m happy to rent and not own right now because I had no idea how much work it took to own a house and I’m relieved not to have to do it: yard work, maintenance, appliances, accidents, windows, weather, bathroom remodels, etc. All of those things take money, and so do property taxes (I paid almost $7K a year) and insurance. I loved my house, but it was time to leave.

    Now that I know what it takes to keep a house in shape, I don’t think I would ever use it as an investment. There really isn’t a good guarantee of return on your money, and especially not for your time and efforts. I will buy again eventually, when I’m sure I’ve found the one I want to live in, but not before. Renting is better than throwing time and money away on a house that just isn’t worth the effort.

  31. Ramit – As you note in your response to some of the comments, buying a house is not ALWAYS a bad idea, but is a bad idea when one has not considered the total monthly costs (HOA, taxes, increased utilities, insurance, etc.) and maintenance costs. When I’ve seen you write about real estate, you generally make broad sweeping statements that call your credibility into question, for me, for this particular reader. And reading between the lines, it seems that you are assuming that your readers are generally from NYC or CA, but I imagine many are not. As you say, many are, but also that means, many are not. So, why give such passionate financial advice based on what are probably the two most expensive markets in the country? Really, in the end, I think that you are trying to be provocative and get readers engaged. In this case, I guess it worked, because this is the first time I’ve ever read all of the comments associated with one of your newsletter items, as well as the item itself. So, “good job”, I guess…. It bothers me to come to the conclusion that a financial writer is making pronouncements based not on the most accurate, finely tuned financial explanations, but on what will garner the largest audience. (I guess I shouldn’t expect finely tuned info from a source seeking such a widespread audience?) Not trying to be a jerk, just giving honest feedback to let you know that I am beginning to be wary of your advice based on your own propagandistic method of discussing the real estate issue.

  32. I know this topic is a favorite whipping-horse of renters, and bloggers love it because its certain to stir up a bushel of comments and page hits, but the math is really pretty simple and undeniable. If you move around a lot, or live in a region with a wide discrepancy between rental rates and housing prices, then it makes sense to rent. Otherwise (and this applies to the majority of people), over the long term, it makes better financial sense to own.

    Renting is throwing money out the window. So is paying interest to a bank, but eventually, the interest ends. The rent never ends, and even worse, it gets bigger and bigger over time, due to inflation.

  33. @Matt:

    “It’s no wonder. Government bends over backwards to get people to buy homes. Why? Well, who owns your mortgage? The banks. Who is Congress craven to? The banks.”

    Wow, Matt, that’s really insightful. I can’t believe I’d never realized that before. You’re absolutely right!

    That must be why Congress has so steadfastly refused to pass any kind of credit and banking reform legislation at all, even though the public have been crying out for it.

    Oh… wait a second … they’ve just spent the past 2 years passing a series of the most sweeping and restrictive banking reform legislation in history. The banks are crying about how it will ruin them, but Congress passed it anyway.

    Hmm.. something doesn’t add up, Matt. Can you explain this obvious and glaring contradiction?

  34. I’m not sure how you don’t “Get” this, but for most people, buying a house isn’t about ROI.

    I’m about $20k upside down on my house right now, but I wouldn’t trade it for the world. Show me an apartment or townhouse with a heated three stall garage where I can work on my race car at 1am without anyone bothering me.

    There is so much more to this argument than just money and investment. Buying vs. Renting isn’t black and white, it should be based on your personal needs.

    I’m frankly a little sick of financial blogs telling me I’m not not as fiscally responsible as someone who rents. I guarantee that’s not true.

    • I actually agree, Eric. It’s a highly emotional purchase, but many people justify it with false money arguments (“renting is throwing away money!”). The emotional side is very important, and for the largest purchase of your life, it’s critical to distinguish which one is more important. Again, I cover more of this in Chapter 9 of my book.

  35. When I finished school nine years ago I bought my first townhouse & lived with a few roommates (their rent covered my mortgage). Repeated this process three times, and today my rental income exceeds the income from my modest government job. I can “retire” from my day job if I want. I would never be in this position without real estate… So yep, Real Estate sucks. Keep telling people that. :-)

  36. “Rich Americans Ditch Home Ownership For Renting”
    http://www.cnbc.com/id/40260336

    Another article for the sceptics dated as late as today.. a little late considering the ambition to be “first[!] in business worldwide”..

    All the best!
    -J

  37. Ramit,

    I’ve read your blog and your book. But I ignore anything you say when you open your mouth about real estate. I think that someone (such as yourself) who is not knowledgeable about real estate investment or ROI or cap rates should refrain from having an opinion on the subject until he educates himself. I think that some people don’t actually educate themselves about the purchase before they make it and that’s a mistake–but it’s a mistake to make any purchase or investment without knowing what you’re doing. For many, many people, probably much of your reader base (us flyover states)–owning a home makes perfect sense. PITI is less than rent in many of these areas–and even in major metro areas outside of NY and CA. You can live in the most expensive area of the country if you like, but I prefer to be wealthier in a location where my dollar does further.

    Real estate is and always has been the best way to invest for educated buyers. Is it no surprise that the wealthiest have real estate holdings as much of their investment portfolio? Or that 1031 exchanges provide the best way to shelter yourself from capital gains tax if you’re going to turn the proceeds from your existing rental property into another income property? Or that the NNN lease means your tenants will cover EVERYTHING–including property taxes (we have our tenants pay them via an escrow account). I think that you’re oversimplifying–and underestimating the intelligence and education of your reader base–by telling us that for most of us, real estate investment is a bad idea. Real estate should be an educated decision, but so is investing in stocks, zero coupon bonds, mutual funds, and any other investment instrument. It takes time, energy, and an understanding of the LOCAL market (which means you can’t make generalizations about the national market or misquote the NAR).

    -SEQ

  38. Ramit,
    Nice post. At this point in my life and personal stance vis-a-vis money and other issues, I would not own a home again unless my mortgage was considerably less than renting. I bought my first place at 21; I have owned 6 homes since then.

    A critical distinction to make is that one’s HOME should not be viewed, primarily, as an investment. It’s a home, not a money-making vehicle–it can be, but these days, it’s most often not. I have a lovely tiny home (follow my twitter, posterous, website–and the unconsumption blog on tumblr, where I am a contributor, and you’ll see my love for tiny dwellings and sustainability with style), that is a whopping 550 sf, so it’s not ostentatious by any means, but still, I am under water. Way under water. Likely to need a hyperbaric chamber should I emerge from the depths of this housing calamity. And I put a good chunk (read: life savings) down; I am not one of the 3% down borrowers, so walking away is not an option at this point.

    I am, indeed, fiscally responsible. I am well-versed on personal finances, I have never defaulted on anything and have an excellent FICO score. I’m a good risk, but since I work for myself my income fluctuates. I would love to have to the benefits of hind sight, but in this case it’s not possible. I can’t even rent out my home for what I pay on my mortgage each month.

    So, going forward, I’m here, part owner of a home that has lost 50% of it’s value–the other owner is the bank, of course. Value is a fluid concept, however, since my home has lost none of it’s value as housing for me. Value only matters when/if I want to sell or refinance. So, I wait and watch–no drastic decisions at this time…

  39. My one comment:

    I’ve read a lot of articles stating why owning is often times a horrible investment. Personally, I would say it depends…primarily on how the individual intends to utilize the property. I haven’t see many articles explaining the economics of owning and renting a room out. For example, buying a 2 bed/2 bath condo (or even a duplex) that, after a down payment, has mortgage + association fees of $1500 a month, and renting to a buddy for $750, cutting your own costs down to $750 as well. The point being, the renter can cover a large portion of your monthly payments. This also is assuming you buy something on the newer side, reducing risk of having to make substantial payments in upgrades/fixes. Also, if you could afford the original monthly costs, you can now invest the savings from a roommate more appropriately, or spend it on things you enjoy.

    This seems to me the only way that makes practical sense, at least for a younger person willing to sacrifice some space, as they are then betting on property values rising modestly over time to turn a profit (rather than property values having to skyrocket over time to compensate for interest payments). Will property rise in value at a better rate than the stock market? Probably not, but it gives strictly renting a very good run for its money, and you have to live someplace!

  40. We own a 4 family in the NYC Metro area. There is upkeep involved, renters to deal with, but all in all we pay about the same as we would to rent a one bedroom (and live in a two bedroom + yard). I am also quite sure that the rental market in the area we are in will not be going down any time soon as the infrastructure gets better and better.

    This is not for everyone, does require work, but from every angle I have looked at makes great financial sense.

    I also had a party last night where about 20 more people than I expected came. It was a great night. We were bbq’ ing steaks til almost midnight. No one complained and I was not afraid of being kicked out (even though many of the people were loud children who seemed to never run out of energy).

    The intangeable benefits of owning vs. renting sometime outweigh everything else.

    MD

  41. [...] http://www.iwillteachyoutoberich.com/blog/the-result-of-decades-of-propaganda/ – One of the “invisible scripts” in American society is to be homeowners, even though it’s not financially feasible or rational to do so. – I Will Teach You to be Rich [...]

  42. Forgive me for being naive, but if you’re going to be in a home for 5-10 years wouldn’t it make sense to get the tax write-offs? At least that’s a perk that’s not included in renting.

    If you then factor in two assumptions: 1) that the price of your home will remain constant 2) not looking for a huge cash-out profit when you sell; the equity you’ve built will be returned to you when you sell.

    If the overall gripe is with the propaganda of ‘having to own your own home to live the American dream’ then I agree. It’s not for everyone. This is clearly shown by the mess we’re in. But generally speaking, owning is better than renting in my opinion.

  43. My husband and I live in NYC, which means we pay a lot of money to rent an apartment. I don’t aspire to purchase an apartment because it seems like a big pain in the butt and I don’t think it is a good investment. HOWEVER – we are so sick of rent going up every year, and being at the mercy of a landlord who determines how much we pay, and moving every few years when our apartment gets too expensive. I am so sick of moving I could just scream. Although I don’t see buying an apartment as an investment, there is something really enticing about having some control over our payments. Yes, I realize there are other things besides mortgage payments (maintenance, taxes, unexpected costs, etc.) but still…it gets me thinking.

  44. Hmmm. Love you young people questioning common scripts, but I clearly remember the day in 1964 when I was at my best friend’s house and her parents told me their house cost them $200 a month. It was a nice home in the best neighborhood. They had purchased about eight years earlier.

    My parents were living in a rental in the worst part of town, a small apartment, for $200. Even at that tender age I could understand how important it is to essentially freeze any expenses you can, especially housing.

    It’s not an investment. It’s called home. But, I’ve purchased 20 homes since and never lost out financially.

    The laws are written to protect property owners, which also helps. We can’t say that about banking or securities.

  45. Every place is different were i live:
    House avg 120-180k = 400-800 dollars month
    Rent avg 1000-1500 month

    cheaper to purchase even factoring all the work i put into the house

    Parents in NJ

    House avg 400-600k = 2-3k month
    Rent avg 1k-2k month

    Cheaper to rent

    It all depends…

  46. What cracks me up is so many people ranting to comment about how Ramit is wrong or commenter so-and-so is wrong… when the whole point is that IT DEPENDS. The conventional wisdom is that home ownership is the one true path… and it may be for some, but not for others. People, lay off the superiority please and THINK when you read.

    We own. That’s our choice and it works for us. If it was cheaper to rent… or if we weren’t planning to stay here… or if we didn’t have big dogs… or if we lived in a bigger city… maybe we wouldn’t.