Buying a home absolutely destroys wealth in the United States. There’s a demographic tidal wave called the “silver tsunami” where aging Baby Boomers will be forced to liquidate their homes for cash.
In fact, millions of Boomers have no cash-flowing investments to their name. The only “asset” they own is their overpriced McMansion, which no Millennial wants (or can afford) to buy!
I have long been a massive proponent of renting instead of buying because it is a far superior way to create wealth.
This past year, during my senior year of college, I paid $5,800 for rent, cable, internet and utilities. This figured also included maintenance, parking, lawn care, and snow removal!
Now that I’ve officially graduated, every once in a while I browse Zillow looking for homes. I get bored sometimes, can you blame me?
If you look closely on the right sidebar, you can see every listed property has a transaction price history and property tax disclosure.
This started sparking my interest, so I asked my parents how much they paid in property taxes every year.
It certainly isn’t hidden or confidential information. Every local county has their own assessor’s page showing property taxes on different homes.
I have a friend who recently bought a home in a more up-scale, but newly developed, area of Des Moines. Guess how much their local property taxes cost? Approximately $6,000!
I almost blew a gasket. Are you crazy?!? That’s more money than I paid for rent, utilities, parking, cable, internet, lawn care, and snow removal for an entire year!
Bankrate wanted to discover how much the average homeowner spent on annual home insurance premiums.
“How much is homeowners insurance? It depends, but the national average for home insurance is $2,305.”
Take into consideration this amount is definitely skewed upwards based on housing prices in California, New York, and Connecticut. However, for the sake of argument, let’s assume you spend $2,000.
Combine your insurance with property taxes, and you’ve already spent $8,000 out of pocket! It’s impossible to build wealth when your “investment” gobbles all your cash.
Nerd Wallet has an excellent piece called “The 20% Mortgage Down Payment Is Dead”.
“For first-time home buyers who financed the purchase, the median down payment was 7%, according to a 2018 survey by the National Association of Realtors. The median down payment for repeat buyers who financed was 16%.”
Oh, so what? Why does a 20% down payment really matter anyway? Well, unless you reach 20% equity in your home, lenders will charge you Private Mortgage Insurance.
“PMI protects the lender in the event that you default on your primary mortgage and the home goes into foreclosure.
PMI is usually paid monthly as part of the overall mortgage payment to the lender, but sometimes it is paid as a one-time up-front premium at closing.”
Depending on the magnitude of your mortgage, PMI will typically run anywhere from an extra $75-100 per month!
In my article “Don’t Buy a Home in Your 20’s“, I broke down a hypothetical scenario with a character named Terry. Terry couldn’t decide whether to rent or buy a home.
All his friends and family members kept harping at him to buy because “renting is throwing away money”. BUT, Terry just wanted to run the numbers to make sure they’re correct.
I walked my readers through the total lie that just buying a home “builds equity” and that it would be in Terry’s best interest to rent while young.
You might ask, “Why?”. Terry should rent because it is a logical, mathematical fallacy that you “build equity” in a home right away.
In fact, it takes about 7-10 years to build any substantial equity in a home! To prove why this is the case, let’s check-out a quick example.
Assume, Terry took out a $250,000 mortgage ($300,000 purchase price – $50,000 down-payment) for 30 years at 6%. This leads to a monthly payment of $1,499.
The interest expense for the first month is $1,250 (250,000*.5%). The .5% is the monthly interest rate (take 6% annual rate divided by 12 months).
So, 83% of his monthly payment went towards interest! Buying a home destroys wealth due to a fundamental misunderstanding of loan amortization.
A classic rule-of-thumb is to set aside 1.5-2% of your property’s value every year for maintenance. So, a $300,000 house would estimate $6,000 in maintenance.
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Now, this doesn’t mean every year you will spend exactly $6,000 in repairs. Maybe one year you need a new $10,000 HVAC unit, or another year your roof needs replaced.
This results in an average of 1.5-2% in annual maintenance. People tend to forget that homes are depreciating assets.
Here’s a quick list of the most expensive home repairs! It’s not a matter of if they’ll go bad; it’s when will they?
- Foundation Damage
- Hot Water Heater
This compiled list will run you north of $50,000!
I had a different friend (I know, a lot of friends right) who just bought a new house and discovered they needed a tree cut down in their backyard. How much do you think this one cost?
Well, if you guessed $3,000 you’d have hit the nail on the head! Buying a home will require a lawn mower, snow blower (in the Midwest), fertilizing, rake, leaf blower, chainsaw, bush hedger, sidewalk edger, etc.
This endless list of expenses is enough to make your head explode. With all the downsides, who actually benefits?
So, Who Benefits?
It’s quite ironic, but the people who buy real estate are the ones that get raked over the coals. Home builders and realtors can sell overpriced homes and get larger commissions.
In fact, the American Dream in the United States has never been to own a home. The Realtor’s Association ran a propaganda campaign decades ago to convince citizens otherwise.
The American Dream is that you don’t need to be royalty, or son of a despot, to create a better life for yourself.
All you have to do is work extremely hard (and make good decisions), and you will be more successful than you ever imagined. This is the real American Dream our founders created!
The National Association of Realtors spent over $41 million in lobbying expenditures throughout 2019. They are the ones who benefit at your expense.
Renting is so much better than buying a home when you’re young? But don’t renters still pay maintenance, property taxes, insurance, and interest?
Yes, it is true that all these costs are wrapped into your monthly payment. I mean c’mon, landlords aren’t in the business of losing money. Real estate is a business.
So, how come renting is so much cheaper? Well, landlords can take advantage of economies of scale and tax breaks to offer more competitive housing prices.
“Economies of scale are cost reductions that occur when companies increase production. The fixed costs, like administration, are spread over more units of production.
Sometimes the company can negotiate to lower its variable costs as well.”
Take an apartment building for example. If the apartment needs a new roof, that cost can be spread among multiple units (rather than concentrated at the expense of one person).
Additionally, landlords have access to tax breaks that individual homeowners do not. Depreciation is probably the best example.
The result is landlords can offer after-tax, after-expense housing that is far cheaper than a single home. I sure do love capitalism and competitive pricing!
Here is my official disclaimer and caveat: I 100% support anyone buying a home if you are going to house hack!
It is an excellent way to never pay for housing again. House hacking is when you live in one of the units of your investment property as your primary residence, and have renters from the other units pay your expenses.
This strategy allows you to reap the tax breaks of a landlord, and gain cash flow, all while living for free. Ultimately, this allows you to maximize your personal savings rate.
I can’t personally speak from experience, but I plan on house hacking some time in the next 2-3 years with a duplex in Des Moines.
Check out my article “House Hacking: How To Never Pay For Housing Again” for more information if this is something that interests you!
Look, I want to own a home one day. I wrote an article called “Reasons To Buy a Home“, so I understand the temptation.
Buying will be better in the long-run, once you burn your mortgage and have no housing payment going into retirement. Well, unless you’re one of the 50% of Baby Boomers going into retirement with a mortgage.
In that case, I wish you the best of luck because that sounds like a terrible financial strategy! Nevertheless, there are many wonderful things about home ownership.
- No Landlord
- No Annual Rent Jacking
- Capital Gains Tax Break
- Price Appreciation
- Your Own Place
I so happen to believe that buying a house in your 20’s is one of the absolute worst financial moves you can ever make.
You should use your 20’s to build an investment portfolio of cash-flowing stocks, bonds, or rental properties. Then, during your 30’s, you will be in the financial position to make the transition.
Buying a Home Destroys Wealth
Buying a home absolutely destroys wealth in the United States. I have long been a massive proponent of renting or house hacking instead of buying because it is a far superior way to create wealth.
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