16 January 2014

On home ownership

A friend posted a link to a posting on Forbes titled 11 Reasons Why I Never Want To Own A House Again. I found the points made quite ridiculous. I started writing a brief comment, but before long it turned into a point-by-point rebuttal.

Before continuing, some disclaimers:

  1. I am not an expert and I am not offering professional financial advice.
  2. I’m only going to be considering the situation in the USA. Other countries will vary.
  3. I’m only going to be considering whether a person should buy a house in order to live in it. Buying property in order to be a landlord is a whole different discussion.

So, let’s go through those 11 reasons.

#1. “As investments go, it’s not always a great deal.”

Sure, averaging across all real estate, inflation-adjusted prices have remained essentially flat. But that’s the long-term average. Unlike with the stock market, there are plenty of people who manage to do their research and beat the average repeatedly. And even if you merely make an average choice and match inflation, that’s better than many other current investment options.

#2. “The mortgage interest deduction doesn’t make up for the fact that you’re still paying a lot of interest.”

Yes, you pay a lot of interest when you own a home. But here’s the thing: if you rent a home, you still pay all that interest — you just pay it via the landlord instead. That’s because most rental property is mortgaged too, and landlords rarely rent at a loss. The people who rented my apartment in the late 90s paid all my mortgage interest — thanks, guys!

And if you find a rental property that isn’t mortgaged, you’ll likely still pay the same rent, because that’ll be the market value. The extra will just go into the landlord’s pocket rather than the bank’s. Over time the ups and downs of rental values tend to mirror the ups and downs of mortgage costs, and there’s a reason for that.

#3. “Homes often tempt people borrow more than they can afford.”

Yes, there are a lot of idiots out there. Don’t be one of them. Only borrow what you can afford to pay back. I put together a spreadsheet which reversed the mortgage calculation, so I could plug in how much I could afford to pay per month (based on experience gained while renting) and work out how much mortgage I could therefore afford. If you’re not up to that, go see an independent financial advisor and have them help you.

#4. “Owning a house subject to a mortgage drives up debt to income ratios. […] that debt load can be a drag on your credit and ability to borrow for other things (like a new car).”

Firstly, if you can’t afford a new car without going into debt, don’t buy a new car. Buy a used car and save thousands of dollars.

Secondly, having a mortgage and paying it reliably will boost your credit score. It only hurts your credit if you miss payments or underpay. Which takes us back to point 3, and the importance of doing your homework.

#5. “A mortgage is typically 20 or 30 years while, at any given time, the current administration has only four (or possibly eight).”

Yes, decisions by politicians can dramatically change the financial viability of your mortgage. However, decisions by politicians can also dramatically change the financial viability of your rental situation, not least because (as I’ve already pointed out) changes to mortgage costs get passed on to renters in the form of rent increases.

#6. “A mortgage is typically 20 or 30 years.”

This one’s actually a valid point. Yes, having a mortgage can limit your mobility, particularly if you buy property which you can’t rent out while you head off to live elsewhere.

#7. “Houses take a lot of your money.”

The rule of thumb is 1% of the house price per year in maintenance costs. But this goes back to point 3, and the importance of doing your research and choosing the right house.

And like with mortgage interest, renters are really paying maintenance too. It’s just factored in to the rent.

#8. “If you do hit the home appreciation jackpot, there can be significant taxes.”

Significant taxes on income that you won’t have any chance of seeing any of if you rent. As arguments go, this makes about as much sense as saying that you should remain unemployed because if you get a job you’ll have to pay income tax.

#9. “I like for things to be predictable and real estate taxes can vary.”

You know what else varies a lot? Rents. And speaking of unpredictable, I know someone who had to move 8 times in 5 years because of landlords changing rents, deciding to sell the house, and doing other unpredictable things.

#10. “You can’t deduct a loss on the sale of your home.”

Yeah, point 3 again.

#11. “It’s getting more difficult to claim the itemized deduction.”

Yes, you can only itemize if the itemized deductions would exceed the standard deduction. So what? If the standard deduction exceeds your itemized numbers, that means you’re doing better and paying less tax than you would if you were allowed to claim the itemized deduction.

So, does that mean I think owning a house is always a good thing? Well, I do own a house. Before that, I owned an apartment. I’ve done well out of both deals, it has clearly worked well for me. Here’s what I’d list as the advantages of home ownership:

You pretty much know what your monthly expenditure is going to be for the next few years.

My experience renting was that the rent went up every year, because I lived in places where lots of other people wanted to live. With a mortgage, I know how much the payment will be, forever. Yes, property taxes go up, but in Texas (for example) they’re capped so you can put an upper bound on how much they will increase by, and plan accordingly.

You can fix stuff.

The worst thing about renting is when something breaks and you have to wait for the landlord to get it fixed. Especially if it’s the heating. Or if the kitchen ceiling collapses due to a water leak. Or if the washing machine breaks with all your clothes trapped inside it.

You can improve stuff.

I actually broke this rule at the last place I rented; I replaced the decades-old mercury thermostat with a modern timer thermostat, and replaced a useless shower head. But in general, if something about your rental property sucks, you’re out of luck unless the landlord agrees; whereas if you own the property, you can do whatever you want. Redecorate, replace the oven, install satellite TV, it’s up to you.

You can retire to it.

Even if the house doesn’t appreciate faster than inflation, you can still organize your mortgage in such a way that it’s paid off by the time you retire, meaning you’ll have a place to live rent free while keeping the above benefits. Sure, you could put the money into an index fund instead, and plan on buying a house with the earnings when you retire, but that way you’re stuck renting for most of your life.

I’m not going to list “making a ton of money” as an advantage, because I’m willing to accept that a lot of that is down to luck.

As for downsides of owning a house, the big one, as already mentioned, is that it can make it difficult to move somewhere else to get that exciting new job or start a new life or get away from your annoying neighbors.

There are also financial considerations. The process of buying a home costs money over and above the cost of the mortgage, so you need to keep the home for a certain number of years for it to be better financially than renting. There are online calculators you can use to work out how many years that is for your specific situation. (I plugged in my numbers and it reckoned 2 years.)

So I would say that if:

  • you don’t plan on moving for a good few years, and
  • you have a steady income, and
  • you can afford to own a house, and
  • you do your research thoroughly, and
  • the area you are in is not in the middle of a property bubble,

…then it’s probably a good move to buy a house rather than renting. But hey, I’m no expert, is there anything I’ve forgotten?

And as a reminder (see disclaimers at top), I’m only considering the question of whether you should buy a house and live in it. Buying a house in order to rent it out is a whole different kettle of fish. Being a landlord has numerous additional costs and nuisances associated with it. Based on my own experience, I do not in general recommend it.

© mathew 2017