Buy A House Please
Earlier this year, I bought a house. Disclaimer, my day job is in real estate, so I do have a slight bias towards real estate, but hear me out. Buying a house was the single greatest financial investment I could have made and here’s why:
Fixed Rent for 30 Years, Then Free Rent
When I lived in my one bedroom apartment, I would get a notice once a year that my rent was going up. Last year it was a $200 increase per month. That was over 10% and then some jump in rent year over year. When you buy a house, your mortgage can be fixed for 30 years. That means your rent NEVER goes up. EVER!
What exactly does this look like? See the graph below. I assumed modest 3% increases in rent each year and a 30-year fixed mortgage. Just to be able to compare apples to apples, I assumed both were the same in the first year: $1,250 a month.
As you can see, assuming one stays in the same house for 35 years, the homeowner will be paying nothing in mortgage since the mortgage will be paid off, and the renter will still be paying close to $3,500 a month in rent.
If that’s not convincing enough, let’s look at it another way: the renter will have paid $906,931 in rent over 35 years and the homeowner will have paid only $450,000 in mortgage payments.
Also, keep in mind, the real estate market can boom, crash, bust, rebuild, and boom again and your rent (or mortgage if you buy a house) doesn’t change at all, nor do these numbers.
One Word: Equity
Another reason I chose to buy was to build equity. Unlike my parents or grandparents, I do not have a pension I can count on. Further, I don’t believe I can rely much on Social Security either, so I’m left with building a savings and buying investments.
The chart below is another powerful one. It describes how much equity one will build over time. We have two things going on here. The first is appreciation. To keep things simple, I assumed the same $1,250 mortgage payment. I assumed someone could buy approximately a $300,000 house with this payment. The National Association of Realtors suggest the price of existing homes have increased on average 5.4% annually from 1968 to 2009. I was much more conservative. I modeled almost 1/3 of that at 2%.
What was the result? As you can see, your modest $5,000 investment will turn into almost $590,000 in 35 years. Keep in mind this is only one third the average we saw over the last 40 years. If history repeats itself, that $5,000 will turn into almost $1.8 million. Who needs a pension at that point? If you bought a house before 30, you’d have a nice nest egg by the time you’re 65 and ready to retire.
What does the renter get after 35 years? Maybe a thank you for making someone else’s retirement?
I’m Paying for This Rental Anyways, May as Well Own It
One of the biggest reasons people rent is that they don’t want to deal with the “broken sink” or the “leaky toilet.” Well guess what; when you are paying rent, keep in mind you are paying someone else’s mortgage, someone else’s property taxes, someone else’s HOA dues, someone to manage your phone calls, and a portion of your rent goes towards the cost of fixing things that break in the house. Whether you rent or own, you are paying these things. The only difference is that when you buy a house, you don’t pay a profit for someone else. That part you get to save/keep.
Landlords wouldn’t be in business if they didn’t make money on you. Every time you call them to repair something, they will repair it, but remember, your rent goes up each year for a reason. They have to recoup their repairs somehow. Why not be the one making money on yourself. Why give it to someone else?
I Will Save Thousands of Dollars This Year on My Taxes
Many people forget how much they pay Uncle Sam. Mostly because the vast majority of us are W2 employees and our employer “withholds” money for us to pay taxes. At the end of the year, we think that the rebate we get back or the amount we pay is the amount of tax we pay. In reality, the real tax we pay is the full amount that was taken from our paycheck every week for the last 52 weeks.
How will buying a house save me in taxes? Here’s a simple scenario. Mortgage interest and property taxes are tax deductible. Back to our example, at a 1.29% property tax rate, $3,870 in property taxes and $8,809.95 in interest (for a total of $12,679.95) are tax deductible each year.
That means the government will let you make $12,680 tax free. Your income drops by $12,680. If you are in the 28% tax bracket, that means you will save in real dollars $3,550.39 in the first year. How’s that for a tax benefit. You may qualify for even more if you use a portion of your house as a home office, or pay for certain improvements, like solar.
Assuming all else being equal (and no increase in property tax), you will save $124,264 over the same 35-year period. What does the renter save: $0.
Now let’s pull this all together.
Pays $906,931 over 35 years
Makes $0 in equity
Saves $0 in Taxes
Real cost to rent per month: $2,159
Pays $450,000 over 35 years
Makes $590,000-1,800,000 in equity
Saves $125,000 in actual dollars
Real cost to own: $0 (left with an asset)
Why rent when you can own? Over the long haul, the cost to own is negative. When you buy a house, you make more money than you spend.