A Word From The Editor
Guest post time! This article is another from friend of the blog, Chris Pascale. Never one to shy away from the controversial money topics, Chris takes on the homeownership versus renting debate. He does this by comparing the running costs of homeownership to renting over decades. In doing so, Chris concludes that while owning the property in which you live is usually a money-losing proposition, it’s a vastly smaller money-losing proposition than renting. Therefore, since we all have to live somewhere, owning is the most efficient use of one’s housing money.
Chris’s cost comparison methods are vastly different from my opportunity cost method, which determined my first home’s $750K opportunity cost. While I focused on what my down payment money could have been doing, Chris concentrates on the housing option with the least cost associated with it over time. Mine was very much a “property as investment” argument, while he makes a “most bang for the smallest buck” argument. Same topic, different points of view. We value differences of opinion at GM HQ, especially when backed up by numbers. That’s a royal “we” since GM HQ is still a one-man show.
Financial Independence (FI) enthusiasts who like to optimize their financial decisions for efficiency may find Chris’s homeownership argument particularly persuasive. Where FI adherents often look for the financial option with the 1% better outcome, Chris’s analysis shows that owning creates financial savings with a much higher order of magnitude. Not only that, but he presents his findings in a much more concise manner than I ever could.
Golden Albatross readers will recognize Chris’s “worth vs. worth it” argument as well. He’s good at relating his Life & Money articles to the basic value proposition this blog is built upon. For Chris, homeownership is very much “worth it.” So, with that introduction out of the way, sit back and enjoy the read. As always, the words are his, but the pictures and comments are my attempt to provide some levity!
— GM
Homeownership Is A Terrible Investment & Bad Savings Account But Outperforms Renting
Regarding personal residences, I’ve lived in 7 – 3 rented, 4 owned. My conclusions are:
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- Long-term homeownership is mathematically better than renting
- I like owning better
It’s easy to prove that your home is not a good investment, but the same data show that buying is better than renting.
In this article, I’ll first define assets and why your home is one. Then, I’ll show the data on why your home is a sure loser of an investment using 2 examples of the same piece of property over 2 different periods. Lastly, I’ll run a comparison between my previous home, which I owned for 73 months, and a much less expensive rental for the same period.
In the end, you will see that I’ve lost money in the past as an owner, even with a 5.5% annual appreciation rate, and that I’ll lose money with my current house. However, I’ll also show that homeownership outperforms renting.
While Chris learned lessons from his houses, I learned real estate lessons from the bands I listen to. Bloodhound Gang’s “Fire Water Burn” = need for fire insurance. Obvs!
Definitions
Basic Asset Definition:
Property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.
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- Source: Quizlet
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Your home has a value that can be extracted for many purposes, so it’s an asset.
Investment Asset Definition:
Tangible or intangible items obtained for producing additional income or held for speculation in anticipation of a future increase in value.
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- Source: Quizlet
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Your home is not an investment asset. It’s more akin to a cost center that might hinder you from investing in assets. It can appreciate, but it will not make you money.
Your Home As A Cost Center (Case Study: My Current Home)
2002: The previous owners purchased it for $365,000
After buying a home, you have:
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- Interest on borrowed funds
- Property taxes
- Insurance
- Annual maintenance of about 1% of the home’s value
- Here is a schedule of home repairs/replacements
The past owners paid cash, so they paid no interest.
Taxes are currently $10,000 a year, but let’s say they paid $6,000 (including insurance) because of a break for elderly homeowners: $108,000.
We’ll figure they paid under $4,000 a year for maintenance using conservative numbers: $70,000.
Subtotals:
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- $365,000: Purchase
- $108,000: Taxes and insurance
- $70,000: Maintenance
Total Costs: $543,000
They sold it to me for $500,000 and paid 4% in RE commissions, so they spent $543,000 and netted $480,000.
A $63,000 Loss!
These guys “lost” $63,000 but lived in the house for 19 years, which comes to a cost of $292 per month. This is nowhere near what they would’ve paid if they were renting the house, which means they actually saved quite a bit each month. Oddly enough, this kind of savings is why Big ERN says that your residence is an investment – because “a dollar saved, is a dollar earned.” I won’t go that far because, again, I believe homeownership is more akin to a cost center.
My Outlook Is Not As Good
My numbers:
I spent $50,000 to fix up the house before the move-in. I also borrowed on a conventional loan.
Aside from the purchase price (which I account for separately because that cost is fixed), let’s average the mortgage interest, regular insurance, the must-have flood insurance, and taxes to $1,500 a month for the next 40 years. I won’t have a mortgage that long, but it’s part of the total. Let’s also say I’ll spend $5,000 a year maintaining it.
These are conservative numbers.
Subtotals:
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- $500,000: Purchase
- $250,000: Maintenance (pre-move-in fixes plus yearly maintenance)
- $720,000: Avg interest, tax, and insurance of $1,500 x 480 months
Total Cost: $1,480,000
Analysis
If I sell the home for anything less than $1.4 mil, I’ll “lose” money by a monthly amount I can measure to be the rent. If it sells for $0.00, then I still only paid $3,083 a month, which (as you will see below) is less than my current mortgage payment, and just a bit above what I was recently paying in rent on a small 2-bedroom apartment. Conversely, if the house sells for $1,000,000, then “rent“ was $1,000 per month for 40 years.
This surprised me. After all, while I prefer owning, I always knew that it was expensive and that renting, while having some limitations – like the landlord not renewing your lease – was better. However, while it’s true that when you rent, a broken fridge or oven isn’t on you, it’s also true that you might pay more while having nothing in the end.
Jeff Rosenstock’s “HELLLLHOOOOLE” = the importance of paying rent to your slumlord landlord
Had I stayed renting our most recent 2-bedroom apartment, I would have paid $34,800 in yearly rent while getting nothing on the backend. This means that instead of taking a certain loss on what I now own, I’d have had a guaranteed one. Also, renting is kind of like being a child. Want a relative to come live with you? Better get permission. Want a pet hedgehog? You’ll need to ask first.
Owning brings certain loss. Renting guarantees it.
On the other side of that, renting gives you a lot more flexibility and mobility. I used to own a rental house in North Carolina. When Hurricane Florence hit North Carolina in 2018, the family that rented the house from me just up and left. I had to spend the next 16 months managing the rebuild from afar. It’s clearly left a lasting impact because the link I was going to place in this paragraph is already in this piece (the flood insurance link).
Being a Bad Investment Doesn’t Make It Bad
Something to remember is that not everything is about money. A house is where you shelter your family. Part of the shelter is the cash you can withdraw in the sale or share upon your passing.
In contrast, JL Collins and Kristy Shen say that homeownership is a terrible investment and maybe an even worse idea. You can find those pieces here and here. I agree. However, long-term, renting isn’t worth it compared to owning.
Enter Shikari’s song about a house in a field on the side of a cliff = location, location, location. Totally not a metaphor for global warming.
Just To Be Clear, Here Are Some More Numbers:
2012-2014: I rented a 4-bedroom townhouse for $2,100 per month. After 30 months, I paid $63,000.
2014-2020: I bought a 5-bedroom home in the same school district for $310,000 and paid (total costs, with estimated maintenance) $3,300 per month. I then sold it for $430,000 after 73 months – a 5.5% annual appreciation.
I spent $240,900 in payments/expenses. Still, I only left the closing table with about $170,000 in cash – the appreciation, plus equity, minus selling fees.
Let’s compare this loss to the cheaper rental over the same 73-month period:
| Rental Home | Owned Home | |
| Monthly Cost | $2,100 | $3,300 |
| Total Cost in 73 months | $153,300 | $240,900 |
| Total Cost in 480 months | $1,008,000* | 1,080,000** |
| Profit in 73 months | ($153,300) | ($38,400)*** |
| Profit in 480 months | ($1,008,000) | Unknown |
*If rent never increased
**I used the following formula [($3,300 x 200 months) + ($1,500 x 280)]. The first half is because I had a 30-year loan for the first 20 months and then re-financed to a 15-year mortgage, and the second half is accounting for an estimate of taxes, insurance, and maintenance after the loan was satisfied
***I paid an average of $1,130 toward the equity each month, so the formula is the 2020 sale price minus the upfront cost, plus the monthly cost times 73, less accrued equity, or [$430,000 – ($310,000 + $240,900 – $82,500)]
More Analysis
I “lost” $38,400 living in that home, which means I paid $526.03 per month to live there. And I liked it! Let’s not gloss over that either. When I rented, I didn’t entertain very much, nor want to. When I bought it, one of the first things we did was have 50 people over. We put a firepit in the backyard and lit that baby up all the time.
Later, we added a 900 square foot playground. Guests visited a lot too, some for up to 3 weeks. The bank had no say, whereas a landlord would! When my wife brought home a cat (which some scumbag left for dead in a sealed box at the VA hospital parking lot during a heatwave), she only had to fight with me.
And the Descendents sang about the importance of suburban homes
A Current Homeownership PostScript
After paying $526.03 per month to live in our last house, we rented a tiny but nice apartment for $2,900 per month until we closed on our current home. I now spend over $4,000 per month between the mortgage and maintenance. Still, I really can’t create a proper evaluation as I did above. For one, I don’t have the data. Also, the tiny apartment cannot compare to the larger home I purchased.
But … if I was comparing, I would say with certainty that even when I do sell, it will be at a “loss.” However, the guaranteed loss would have been total if we stayed in the apartment, and I wouldn’t have liked it as much.
To conclude, my main message here is simple: Homeownership is expensive. If you’re looking to make money, it’s a terrible investment and a bad savings account. However, from a cost perspective, it’s cheaper than renting. It also has some perks that appeal at a personal level.
Chris Pascale is an author, accountant, and professor from Long Island. He currently works for the Treasury Department and sits on the Executive Advisory Council to the Deskovic Foundation. His finance writing has been published by the AICPA, Optimal Living Daily, and others. He is currently working on a biography about Vice President Charles Curtis.
Great article! I think my numbers show that in a shorter term (3year assignment)renting is more favorable.
I also do think you should include the investment opportunity costs of the down payment when owning compared with renting. I have used this calculator when advising my kids:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Yeah, I would definitely not buy if I was just stopping over somewhere. Makes it hard for someone in the military to build wealth outside of the TSP unless they are willing to risk holding rental properties.
Thanks for reading! I’m with you here. We purchased while stationed at Fort Polk from 2009-2012. Being away from the base was very good, but the ROI on that property was negative, and owning is more expensive in the short-term. The real gains are found in appreciation over time. In 3 years the property appreciated from $110,000 to $130,000 after we’d replaced both bathrooms.
Upon selling, we paid 6% in RE fees ($7,800), and may have also picked up the closing costs. I’m not sure, but do remember getting cut a very small check on the back end of a property selling for $20k more than we bought it.
I’ve read this more than once, and at first felt there was so much crammed in here, but then realized it’s just “what is the cost?” like the “you must count the cost” thesis from that article that came out around Christmas. This is different because you must live somewhere, but I like the theme.
It’s also nice to read that someone can agree on principle and still add something to the conversation that is different (I am referring to the links to Collins & Shen).
Thanks! I have really enjoyed JL Collins and Kristy Shen’s points on home ownership, and do worry we’re now in the middle of a similar period to when Kristy and Bryce were looking at homes in Toronto (my home is said to be worth 15% more since March). However, you’re going to live somewhere, and hopefully you have a lot of life left to live. As such, owning is a good move if you own sensibly.
For example, even my first home purchased at the top of the bubble wasn’t so bad if I’d have stayed there because I’d have paid it off. Even if the gain on the real estate was bad, the gains in personal wealth building would have more than made up for it.
Super helpful article! I have had an itch to buy up, but I do like my current home. The difference of your purchase for $310k compared to $500k a few years later shows that it makes sense for me to stay where I am, pay it off, and maybe see if the 40 year stay is a good move.
Not sure I will, but the huge price differences make me see it in a new way.
Homes are money sinks, especially older ones that need a lot of maintenance. But renting is not good either. At least with home you are building equity and get a mortgage interest and tax deduction.
I recently looked around to see what my options would be in the rental market. Dismal and appalling. The market is nuts here and buying a house has not only been the best option for my personal circumstances and life/enjoyment/security, but financially too.
I think there’s a math error. If you borrowed 80% then you didn’t pay $500,000, you paid $100,000 and the rest is accounted for in your interest payments. You double-counted $400,000 of cost.
Joe,
First: Crap, in looking back, I see that I can’t even add round numbers, because those 3 numbers add up to $10k less. Sorry about that.
Second: Hopefully, I’ll be able to explain my method without being confusing. $500,000 is the actual purchase price, not the amount borrowed, which I think is the right way to state that metric. In the case of the loan, I actually borrowed $450,000 (put $50,000 down, invested $50,000 into repairs/maintenance, paid $20,000 in closing costs, and also had moving costs, maintaining the apartment for 2 months while also owning the house, etc.).
Regarding the to $720,000 figure, it is 40 years of estimated taxes and insurance, plus the interest during the life of the loan. It’s fairly crazy just how much interest you will pay on long-term debt. Also, I live on Long Island where property taxes are high.
But interest can be the killer here. For example, when I had the home that I bought for $310,000, it was originally with a 30-year loan with a $2,100 payment. Then I re-fi’d to a 15-year for $2,800 a month.
Loan Payment Months Total Cost
30 year $2,100 360 $756,000
15 year $2,800 180 $504,000
My real cost would have been higher because I had the 30-year for a bit under 2 years, and also because taxes and insurance costs are going to go up, most likely, not down.
Hope this helps. Thanks for reading.
I am 67 and was aware and involved in my parents’ homebuying and selling decisions growing up. My parents got transferred for my father’s job. Most people don’t choose the market they are buying and selling in. Life changes determine when you are going to buy, sell or rent. If you bought around 2005-2007, you were likely underwater until the recent overheated market finally made you whole (that is if you didn’t short sale your property). You can’t “dollar average” a house purchase. Bought a house in 2011? You are a genius. Your examples of home ownership are in an up market for real estate. Right now, despite real estate economic guru advice, new home buyers could easily find themselves underwater after the move in expenses of decorating and just a few upgrade remodel projects. Been there. Houses need constant love. In addition to the average replacement cycle of components, there are always unexpected repairs. Look at a listing for a well maintained home which is dated and you see the issue. Analysts attempted to find long term data on whether property appreciation and found data in the Netherlands dating back 100s of years. The only thing that appreciated was the land under the structures. I think that is the case in the US. Location is everything.
You must have learned a great deal. I can attest to your reference because the only thing that saved me in my first home purchase (October, 2007) was that I was low-income, low COLA, and cautious. I’d rented it out for about 10 years, so the numbers on that place are different, but the result was the same – had I been a renter in that property for the same period, I’d have had a total loss compared the partial one if I’d lived there the whole time, then sold.
Thanks for reading. I appreciate it.
I do not see the opportunity cost of the initial down payment and all of the successive principal payments locked in the house value over the years accounted for in the calculations anywhere. Please correct me if missed it somehow. This would be a huge error in your analysis giving a significant unfair advantage to the homeownership side. The renter would be able to invest all of the down payment, principal payment (and also maintenance etc.) money in the stock market. Assuming the historical average stock market return of around 10% the actual results would change your results in a HUGE way.
Thanks for taking the time to comment, Chris.
The biggest reason I didn’t consider the opportunity costs of putting a down payment on a house versus investing into any of the available markets is because for me there wasn’t a debate to buy or rent. I was going to buy this year, no matter what.
HAVING SAID THAT: If I was renting, I would have only had to put down the deposit and pay the realtor (in NY the renter pays a commission equal to a month’s rent), whereas to buy I paid well over that in closing costs, plus $50,000 down, plus $50,000 in fixing up the place.
If I didn’t buy in a gated community that discriminates against FHA and VA Loans, I could have used a VA, which would have permitted me to keep the down payment.
But let’s say I was feeling extra adventurous last December and put $90,000 into Bitcoin, which I very very very very clearly recall just about tripled right after my wife felt like maybe that’s what we should do, but decided herself it was best to keep it in the bank while in the mortgage underwriting process.
Let’s say that not only did we put the funds into Bitcoin, but we maxed out the return (we definitely would have cashed out at something like a 20% overnight gain); after paying the 20% short-term gain rate, we’d have had over $230,000.
Truthfully, an opp cost comparison of this sort deserves a real case study of something that was really done. If I’d have written it here, it would have been as Captain Hindsight basing gains on charts instead of trades. While this article might not be everything it could be for every investor, my goal was to draw out every bit of marginal value I could for readers by detailing what actually happened based on real decisions that were made, as opposed to me saying “see how much better it was to buy this [company, fund, crypto, city, business…..].”
If you’ve gone of forgoing home ownership for bigger gains, please consider detailing what you’ve done. There’s a lot of people who’d love to know what you did, and if you had a specific process. For many, buying is a means of creating some savings that they otherwise won’t, but the numbers show that even in a housing boom, you’re not going to do that great in terms of ROI. In fact, the guy who bought my house for $430k last year just sold it for $480k (11.5% appreciation), and he’s really just getting his money back after replacing the fence, leveling the backyard, and paying taxes/insurance/fees.
In his case, he chose to put $430k in cash directly into the home. He could have invested it instead of parked it, but after working so hard for the money, he might have preferred it being in a no-gain piece of property than in a riskier asset that could have doubled.
Reading this, I feel good about being a property owner.
This is what I needed to know.
People say that renting is actually better & I assumed they’re smarter than me since it’s Peter Schiff and JL Collins saying it. The math says a lot more than the example of how a broken oven affects you if you rent versus own.
P.S. the example is that if you rent and the oven breaks, you call your landlord and take a vacation. If you own and your oven break, you buy and oven and cancel plans you had because your budget for going out is busted over your oven.
I gave this another read with interest rates climbing and the ideas seem to be simple wisdom. Owning is not perfect, but renting is more not perfect. Think I said that right. I don’t know.
🙂
> renting is kind of like being a child. Want a relative to come live with you? Better get permission. Want a pet hedgehog? You’ll need to ask first.
I just listened to an old Google Talk by JL Collins where he talked about renting being better and wondered if this is the FIRE line of thinking like how Dave Ramsey sparked all those church classes where people parroted his line of thinking.
This kind of extreme disagreement found in the FIRE community is such a breath of fresh air?
Kudos to your wife on rescuing an abandoned animal. It sounds harrowing.