It’s a deep part of American culture to own our homes. There’s a lot of government policy to support this too, not least of which is the tax break provided to mortgage interest.
That said, my gut tells me this is changing. Millennials, who’ve seen their parents’ net worth get decimated in the last decade are signaling that they don’t value “things”. Things including big homes filled with lots of stuff, like their parents.
It’s no surprise then that we can easily find articles that talk about the value of renting vs buying. The article lists three things better about renting than buying:
- Low costs
A funny thing about that article, not the only funny thing, is that two of the three points are actually rooted in the fact that people buy too much home (more than they can afford).
When calling home ownership worse than renting because you have no money to invest elsewhere and you’re over-indexed on real-estate because of your home… well, that just tells me you’re spending too much on your home.
Same with low costs. While there’s certainly fewer expenses with renting, it just speaks to poor budgeting if spending too much on maintenance means you can’t invest elsewhere. Same with neighborhoods. I’m sure you want to live in the fancy neighborhood, but if you can’t afford it…
And, the author’s example of renting in the nice ‘hood is another example of potentially bad thinking. Spend more on rent to live in the neighborhood you can’t afford to buy in so you can have more today, but at the expense of your future. Not sure it’s a good idea.
I do really like the author’s point about diversification though.
As a renter, you don’t have to pay for a large down payment to get into a home. You don’t have to pay for repairs or to upgrade your appliances. You also don’t have to pay property taxes or closing costs, which can run thousands of dollars.
Because of all of this, you can use your money to invest heavily instead…
The word “can” should be replaced with “should”.
People who rent their whole lives but don’t invest are in trouble.
I have a very long-term point of view.
I believe that many American’s main source of retirement funds are their homes. They have large homes that they no longer need, need to maintain, or pay tax on. They sell their homes, and they have money to retire somewhere more modest.
What happens when a generation retires without owning homes that they can use to fund retirement?
Yeah, they’re screwed. Unless they plan ahead.
We don’t have a good track record of planning ahead (financially).
Elephant’s Paycheck dreaming
I’ve always thought that it would be interesting to compare an Elephant’s Paycheck portfolio to home ownership simply from the perspective of an investment strategy. Take the finances of a mortgage, but instead split it into rent and investing, and track the investing from an income generating perspective towards retirement.
In fact, this was my first thought when years ago I thought of how I might write a book about this topic.
The thing would be that people would need some way to enforce the discipline of actually making the investments of “principle” when there’s no bank threatening foreclosure. That would take more fiscal discipline than I think most people have.
Like this post? Have a look at my book The Elephant in the Room has a Paycheck: A fun & socially conscious blueprint to get started investing