physcalTherapy is a blog covering personal finance basics as well as irrational behaviors, common myths and the lies we tell ourselves that prevent us from achieving financial health.

Buying a home is overrated

Buying a home is overrated

Ok, so that title is a little click-baity. I tried to come up with a better title for this post and everything I came up with ended up being three lines long, so I stuck with this.

Conventional wisdom: "Renting [a place] is throwing money away, you should buy instead so that you can build equity. A home is an investment." 

This piece of conventional wisdom argues that it is financially better to own your home because with the money you pay in rent, you could 'store' it instead in your home and when you eventually sell your home, you could get some of that money back. And not only that, but your place might go up in value, so it's also an investment!

Whenever I hear this piece of 'wisdom', it really gets me riled up because it's seems so manipulative to me. If someone tells you you are throwing away money, what are you naturally going to do - try to stop throwing away money! And a lot of people end up wasting more money buying a place because of it. The problem is that this wisdom isn't necessarily false... but it's only true under certain conditions.

Photo by  Ciprian Boiciuc  on  Unsplash

First of all, if you take out a mortgage in order to buy a home (which a majority of folks do), you are still throwing money away every month. When you make a mortgage payment, there are two parts of it, principal (the part that gets 'stored' in your home) and interest (the fee the bank collects for lending you the money). Most* of that interest money is thrown away every month. So, if you get a mortgage, in the best case you are just throwing away 'less' money. In the worst case, you are actually throwing away more money.

Second, there are a lot of 'fees' associated with both buying and selling a place. For example, if you buy a $300K home today and then turn around and sell it a few months later for the same exact price you bought it at, you could easily be out $30K from all the fees. So even though your place goes up in value, you could still lose money in the process.

If I had to rewrite that piece of conventional wisdom, it might sound like this: "If you live in an area where owning is cheaper than renting... and you plan to hold onto your home for at least 5-7 years... and you can get a low interest rate... and you have enough money to put 20% down... then it might be a good financial decision." For a very detailed financial comparison of renting versus buying, check out this New York Times 'rent vs buy' calculator - it's the best one I've ever seen.

I will end with this - there are many reasons to buy a home that are not financial, such as wanting to renovate a place to suit your wants and needs or wanting the security of knowing that you don't have to move because your landlord won't renew your lease. Buying a home is a big, personal decision and I will not judge anyone's reasons for buying a home. I just hate to see folks mistakenly thinking it's a good financial decision when it isn't.

 

* I say 'most' because you might get a little extra money back in the form of a tax discount for paying mortgage interest.

** Full Disclosure: I have bought five homes and sold three of them and currently own my primary residence. So either that makes me a big hypocrite or qualified to speak on the topic.

 

 

 

 

 

It depends

It depends

The golden rule of personal finance

The golden rule of personal finance