We’ve all heard that if you’re renting, you’re throwing away money each month. We’ve all heard that buying a home is a the “solid investment.” Even my own family, who didn’t talk much about finances at all while I was growing up, drilled this concept into my mind.
The theory behind this is that if you pay about the same amount towards your mortgage as you do in rent, you’re using the same amount of your monthly income and, instead of just paying that to your landlord, you’re putting it towards the equity in your house, which you can eventually sell. This is where the idea that your home is an investment comes into play.
So I’m going to be break down why that isn’t necessarily mathematically accurate, and why renting instead of buying is a valid financial move, depending on your lifestyle.
Let’s start by talking directly about the math of this choice. One of my favorite personal finance experts, Ramit Sethi, who wrote the NYT bestseller I Will Teach You to Be Rich, talks extensively about this topic. He cites that the monthly mortgage payment (principle and interest) only accounts for 50% of the costs that home buyers pay, on average, during the time they own their home.
Let’s talk about the other costs:
- Home repairs/maintenance (expected, like replacing your home’s roof when the time comes. Or unexpected, like a plumbing mishap that floods your home’s basement. Both of these are examples I use from my parent’s home, which they’ve been living in for almost 18 years and are still paying the mortgage on)
- Insurance
- Property tax
- Realtor fees*
* I am aware that the seller, not the buyer, pays realtor fees. The reason I include these is that, if you’re planning to sell your home one day, YOU will need to cover the realtor fees.
On top of those costs, people also tend to buy too much home, meaning their mortgage could also likely be more expensive than a monthly rent payment.
Here’s an infographic created by Jeremy on instagram @personfinanceclub. I love this breakdown, because it illustrates not only the point I was making that the monthly mortgage is typically only about 50% of what a homeowner will pay, but also shows why calling your home a good investment can be fallacious.
The fact is that the 50% of money you put into maintenance, fees, taxes, and insurance could theoretically be invested in a retirement account, yielding 8% growth on average, which is likely a LOT more than you’d make with your home when you account for the true costs of home ownership.
Now, I understand that this is not true for everybody. Some people will put a ton of money down up front, pay off their mortgage in 15 years or less, and buy a house that’s well within their means and will grow in value. It happens!
But oftentimes, if someone’s telling you their house is the best investment they’ve ever made, they probably haven’t looked at the actual numbers, or their house is actually the only investment they’ve ever made.
I’m absolutely not saying that buying a house is always a bad idea. If you’re someone with a strong financial plan who knows exactly where they want to live for the next 5-10 years of their life, and you value owning the roof over your head, I would never tell you not to buy a home. My advice would be to run the real numbers in a renting vs. buying calculator, and make an informed and logical decision.
My goal with this video is to alleviate the pressure to buy a house, which often comes from an emotional and cultural feeling rather than a mathematical reality. The truth is that a lot of this talk about buying a home comes from the real estate industry, and isn’t truly in your best interest.
I think a lot of millennials and younger are coming to terms with the fact that home ownership isn’t a good decision, or even a financial possibility, for many of us. My hope is that this information can relieve some of that social pressure.
🙂 Rachel
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