The Myth of Home Ownership
I talk to clients of all ages and stages of life who are trying to get into their first home, trying to upgrade to a bigger personal residence or selling the home they raised their family in and downsizing. All chasing “the American Dream” of home ownership. And while it may makes sense for a lot of peoples situation, it’s not for everyone. In fact I would argue that a personal residence is one of the worst performing assets you have. At best it’s a forced savings account and mentally it feels good to buy something for $400,000 and in 30 years (assuming you actually pay it off and don’t refinance, etc.) you may have an asset that is worth $800,000. Seems great but the problem is over the 30 year period you’ve likely paid between $800,000 and $1,200,000 when you factor in interest, taxes, repairs, maintenance and other normal costs over that period. Meaning your return on investment or ROI is negative to flat at best.
“Well its better than paying rent…that just wasting money.” Is it? Rent and your monthly principal, interest, tax and insurance (PITI) is comparable. But what about all the other costs, repairs, routine maintenance, HOA fees and assessments? These add up and dramatically diminish returns on this investment. In the Mid-Atlantic region and most of the country it’s not unreasonable for you monthly home ownership costs to be 1.5 to 2 times the PITI. Rent is fixed, no surprises, no additional charges each month. When you sign the lease you know exactly what the financial commitment is for that period.
Well what about the tax break? This is biggest myth out there. People jump through all sorts of hoops to create tax deductions. Well very few of them are worth it. For instance let’s look at 2 scenarios. Scenario 1, I am in a 25% tax bracket and have $25,000 in mortgage interest and taxes I save $6,250 in taxes ($25,000 x 25%) and the net costs is $18,750 ($25,000 – $6,250). Scenario 2, I have no deductions and I simply pay tax on the $25,000 of income at 25%, $6,250 in taxes is my net costs and I have $12,500 more in my pocket $18,750 (amount in my pocket after taxes in scenario 2) – $6,250 (amount of savings in my pocket in scenario 1).
Now I am not saying everyone should rent and no one should purchase a home. If you feel comfortable that you will own the home for at least 10 years, you can afford the total costs (PITI plus repairs, maintenance etc.) then you should buy a personal residence. Ideally you could buy it with a 15 year mortgage to increase the ROI. However there’s no need to extend yourself because “it’s a good investment.” Your personal residence is not a good investment. If you want to invest in real estate then buy rental properties (at least someone else is paying part of the costs and there is cash flow) or buy a fixer upper and create sweat equity or flip it (very risky but at least it has the potential for a good return versus a personal residence). There are a ton of non-financial factors that make buying a personal residence attractive but don’t over extend yourself, it’s not worth it.
These are just general statements and may not apply to your individual situation. You should always consult your CPA, Investment Advisor or other professional to see how this relates to you.