Conventional wisdom isn’t always wise.
The conventional wisdom in 2007 was to buy a home before prices shot up even further. How’d that work out for those homebuyers?
For as long as anyone can remember, buying a home has been a dream for most Americans and Canadians. And buying a home has its perks, from equity building to the freedom to knock down walls or paint those walls bubble-gum pink. But just because a strategy has advantages doesn’t mean it’s the best strategy out there.
I’ve been a homeowner, and I’ve been a renter. I’ve been a landlord since I was 24, long before I became a homeowner. And I’m a renter once again.
Goals and dreams are great, but let’s get more creative with them. Here’s why financial independence makes for a better dream than homeownership—and why you shouldn’t assume renting is the slower route to get there.
Flexibility to Move & Pursue Jobs, Opportunities, & Mates
When you buy a home, you take an initial loss. That’s because it costs thousands of dollars in closing costs to buy a home, and when you go to sell, it will cost thousands more.
Over time, most homes appreciate in value, while the principal value slowly ticks downward. After a period of years, homeowners usually reach a breakeven point, where if they sold the property, their net payout would cover all the of the costs they’ve incurred (each round of closing costs, maintenance costs, etc.).
But what happens if six months after buying a home, you get a job offer that pays double what you’re earning now—in another city? Or if your spouse gets such an offer? Or what if you meet the man or woman of your dreams, but they live in another state? Perhaps you have children, and a new report comes out showing that the local schools are far worse than previously reported?
What happens if you find yourself expecting another child (surprise!) that you weren’t, well, expecting? Maybe that 2-bedroom home isn’t big enough after all, and you’ll have to move in a year or two.
The point is that it’s hard to predict your wants and needs in two, five, 10 years from now. Our realities are constantly shifting, so tying ourselves to one home for a period of years is dangerous. The ability to move to pursue our dreams has very real value.
Real Estate Benefits Without Being Tied to One Home
I own 15 properties in the U.S., but I live in Abu Dhabi. Why? For the heck of it. My wife took a job over here so we left the United States and started traveling.
As a landlord, I can capitalize on the benefits of real estate ownership without being tied to one place. I have all the tax benefits (and then some) that homeowners have, I have a hedge against inflation, and I benefit from appreciation. But I spent a month living in Italy last summer and didn’t have to pay a mortgage at home while I did so.
And I get it—not everyone wants to be a digital nomad. Consider a closer-to-home example: Let’s say that it’s expensive to buy a home in the neighborhood you want to live in. But rents in that neighborhood aren’t outrageous. You can move in for a year or two, enjoy living there, and then move again at your leisure.
Some markets make sense to buy into, while others don’t. But if you buy as an investor rather than as a homebuyer, you separate your financial interests in real estate from your personal, emotional interests about where you want to live.
More Balanced Net Worth Allocation
For most American homeowners, the vast majority of their net worth is made up of their home equity. That’s a problem.
Homes are illiquid and cost money rather than earn money on a monthly basis. Why have so much of your net worth comprising an “asset” that you can’t sell quickly or cheaply and that costs money every month?
And is your home even an asset?
Your Home Is (Almost) Always a Liability, Not an Asset
I agree with Robert Kiyosaki on this one: An asset brings in money every month, while a liability costs money.
We all need a roof over our heads; it’s a necessary expense. But that doesn’t mean it’s an asset. I need food, but that doesn’t mean that a loaf of bread in my pantry is an asset.
Whether you rent or own, you spend a certain amount of money for the right to live somewhere. Sure, many homes appreciate in value over time and might provide a payout one day in the indefinite future. But we don’t live in the indefinite future; we live in the here and now, where your home costs you money that may or may not ever come back to you.
The one exception: If you “house hack” and buy a multi-unit building, where other residents pay for your mortgage plus some cash flow.
Don’t Ignore Opportunity Costs
Imagine having $50,000 in cash, which you could use for a down payment on a home or a down payment on a multifamily building.
Even if we set aside the flexibility issues already raised, tying up so much of your capital in a liability rather than an asset is problematic. If you take the $50,000 to buy a home, that’s money you can’t invest elsewhere, in a real asset.
In contrast, if you rent, you’re free to invest that $50,000 in an income-producing building. Perhaps you leverage that $50,000 to buy a $250,000 five-unit building, borrowing the other $200,000 and earning $1,500/month in cash flow?
So yes, you might spend a few more dollars each month on a rent payment rather than a mortgage payment for a comparable property. But does the $50/month savings justify missing out on $1,500/month passive income?
Increasing Demand for Rental Housing
The homeownership rate in the U.S. clocked in at 63.5% at the end of 2016, a far cry from 2004’s peak of 69.2%.
Indeed, Trulia ran a report last year, finding that older Millennials, men, Hispanics and the upper-middle classes are particularly leaving homeownership behind in favor of becoming renters.
If demand is rising for rental housing, then what’s a better investment for that imaginary $50,000 of yours: a multifamily apartment building or a single-family home?
Buying Wholesale vs. Buying Retail
When you buy a home for yourself, competing with other homebuyers, you’re buying at retail prices.
When you buy a multifamily investment property, you’re competing against other investors. In other words, you’re buying at wholesale prices.
The per-unit costs of multifamily buildings are far lower than single-family homes or even than condos priced to sell retail. House-hacking by buying a multifamily building and moving in means not just having renters pay your mortgage but also a lower price for your own housing unit.
If you know you’ll live in a specific home for 15 years, by all means, buy. But for the rest of us who have trouble glimpsing more than a year or two into the future, consider renting instead and investing your cash in rental properties. You’ll still get all the benefits of owning real estate, without tying yourself indefinitely to one specific residence.
Is homeownership the dream, or is living the exact life you want the real dream? That perfect life might change over time, so aim for financial independence, rather than thoughtlessly settling for other people’s dreams.
[Editor’s Note: We’re republishing this article to help out our newer members.]
Thoughts? Opinions? Outrage?
It’s a contrarian stance, no question. Let’s hear where you weigh in on the subject!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.