James Altucher says you should rent and invest any extra cash in yourself. He’s talking about the most creative or entrepreneurial expression of yourself — the best you have to offer the world. I understand this to mean you should use your money to buy yourself the freedom to do what needs to be done. I agree with him — you need to know your priorities and then organize your life and resources to honor those priorities.
Altucher says home ownership has all the attributes of the worst investment possible: it’s highly illiquid (takes time to sell), there’s a high leverage (debt usually a lot higher than investment), it includes most of your net worth, and provides you with a very low net return on average over time (barely better than inflation). It looks even worse if you throw in maintenance costs.
Let’s suppose you’ve devoted whatever resources you need to your creative or entrepreneurial priorities. Even creators need a place to live. For most people, the rent versus buy decision isn’t only or even mainly an investment decision. There are issues around how long you expect to stay in one place, how much control you want over your digs, and other lifestyle choices. But let’s set those aside for the moment and zero in on the investment question. If you do have access to some spare cash, should you use it for a down payment or go find a nice place to rent and put your money into stocks?
If you think there’s a good chance you might want to move within a year or two, then don’t bother buying unless you are a very confident house flipper. For purposes of comparison, I’ll consider a ten year scenario.
Suppose you run the numbers on two similar houses, one a rental and one for sale, for ten years. You need to make realistic assumptions about the trend in house prices and the stock market over this time period. Over more than a century, both have tended to increase, stocks usually more than housing; but house prices have been more consistently positive with the exception of the 2008-12 recession and the 1930-34 Great Depression. Between 2008 and 2017, the S&P500 rose by 60% but the Richmond house price index didn’t change (it had a big drop through 2012 followed by a five year recovery). However, for that ten year time period it turns out that buying still had an edge over renting! The keys to that advantage are leverage (you benefit from appreciation of the full value of the house even though your downpayment covered 20% or less and your mortgage payments are fixed over time) and deductibility of mortgage interest and real estate taxes. If you’re interested in the details, give me a call (804-658-7718) or shoot me an email (firstname.lastname@example.org).
But wait, that’s not all! Here’s where I get to the compelling non-financial argument in favor of buying.
People buy homes so they can make their own lives. They get free of landlords who need to give their permission or can decide not to renew a lease. People want to customize their own spaces. They also want to grow roots, develop a sense of identification with a space, become more closely identified with a community — it doesn’t have to be permanent, but for the time you are there, you want to be really there, connected in relation to the house, the land, the community. Of course when you rent you can save extra money on the side that you might have had to put into a mortgage or expensive maintenance, but that’s hard to do when your space feels temporary, out of your control. Rather than forcing yourself to stash away money in a soulless CD or mutual fund, it can be more satisfying to travel or spend it on too many nights on the town or expensive toys. In the end, most folks don’t really save that money…. unless of course they are saving it FOR something, like buying a house or condo some day. Meanwhile, if you can’t yet afford to buy, then don’t. But don’t waste your money on expensive rent either — instead save as much as possible as quickly as possible, look into creative financing options and you will soon be ready to buy the house of your dreams. Maybe not your most outlandish dreams, but a beginning, a step on the path.