Own or Rent Paradox: Your home is not an investment

56 Replies

There is a lot of commentary surrounding the topic of whether to rent or buy (Regarding personal residences). A roof over your head is an expenditure. The rent-or-own paradox is about losing the least amount of money possible under the expenditure header. In my opinion, residential real estate is a better alternative to renting, but don't get it confused: owning a home is not an investment in the traditional sense of the word. If your home was a restaurant or any other business you'd be losing money and would have to close shop. Consider the profit and loss: Mortgage interest, taxes and insurance, updates, upgrades, roofs, HVAC, condenser, etc., on the expense side, and monthly appreciation on the other side just barely keeping up with inflation. Principal payments are not profit, they are merely savings. The only return on investment is the % of additional value the home has accumulated when you go to sell down the road (if the market doesn't go down, or stay stagnant).

And if you use a Realtor to sell your home, don't you dare call your home an investment or an asset. Again, your profits is the difference between what you paid and what you sell it for.  Consider this: It costs $30,000 to sell a $500,000 home. If you're average monthly principal payment was $700, the commission to sell costs 42 straight months (3.5 years) of those equity payments. Make $120k a year to be able to afford that home? That's 5 months of your after tax (30% bracket) salary. Scale it down to make it relevant to you, e.g., $250,000 home, $15,000 commission, $60,000 a year salary.  It's all still the same....These fees are to your profits what a V12 engine is to gasoline. 

If the goal is to be super frugal - when you buy, purchase something below your means where the mortgage debt is 15-20% of your monthly income. Get a 15 year loan and double your mortgage payments to leap frog the amortization schedule, getting the bulk of the payment to go toward principal and not interest.

If your goal is to use real estate as an investment vehicle, purchase apartment buildings or single family homes and rent them out. Hold them long enough to realize half decent appreciation.  Appreciation averages out better in the long term than what it is on an annual basis, so hold for two or three decades, not two to five years. 

In anticipation of some objections surrounding the Realtor bit, below is a peer-reviewed economic study that empirically demonstrates Realtors do not sell the home for more money than FSBOs, nullifying their argument that their marketing efforts of iPhone photography, and picture slide-show "virtual tours" will somehow sell it for more to cover the extra cost of the commission.


If you are an investor then your should likely rent and invest the money.

For people who can’t hold on to money and not spend it buying is a forced piggy bank.

I buy so I can do whatever I want to to my own property. Numbers are important, even moreso when starting out, but life is also about enjoying what you have, and not being able to even change a paint color in a place I live is not for me.

The plan would be you lose money for 15 years, and save money every year after that.

In a perfect world you never lose, but I think you all know what I mean.

I currently buy rentals and rent where I live. I like the added mobility I have with renting and I don’t have to deal with my own personal maintenance issues which frees up some of my time.

When I do buy my primary residence I plan to pay it off as quickly as I can as then my housing costs go way down. That’s another argument for another day tho

@John Fulton , A couple things to consider, first your home is an investment. The question is whether or not it is a good investment. There is the house hack, buy a duplex, triplex or quad and live in one and rent the others. The guys who tout that are usually single, but a few are married even fewer have kids. You get the benefit of low interest loan and cheap living at less than renting and getting nothing back. You can also buy a small decent SFR and fix it up and live in it and if you hold it long enough and sell it and pay ZERO taxes on the profit. You can use that to buy another SFR to live in and repeat, while using some of the proceeds to buy more houses or multis. Eventually you will buy a SFR to live in and keep if you are married and have kids. You are repeating the words of very smart people who eventually when married and had kids ate a lot of crow when did exactly what you are saying not to do. At the end of the day we invest to make money to make the lives of those we love better. I have never rented in my life anything more than lot rent for a trailer house that I fixed up and sold to buy a nicer trailer and put on a piece of land. I lived there, moved, rented it out, and eventually sold it and paid off the residence I had bought in the mean time. I paid $38K for that house, and its now valued at about $160K. I wish I had bought 10 back then sigh. My barely keeping up with inflation houses would have made me be able to be financially free right now.

In my opinion, buying will usually be less of a liability than renting for a number of reasons. First and foremost, the payment of a rental is nearly always more than the rent for a comparable property (why would anyone invest in SFR if this wasn't true), so right away less is coming out of your pocket every month. But lets say you have equal $1000 PITI payment vs. a $1000 rent payment, your principal pay down is $200(?) a month for the first number of years, so you are ahead $2400 per year right off the bat. Then you have the tax advantages of being a homeowner, and, historically, 3% appreciation. So your first year you are ahead $5000 - $7000? Chances are that your maintenance is not going to be that high. And that's year one, the gap only grows as years go by.

@John Fulton - question for you. We sold our primary home last year and cashed out $115,000 in equity. That is after all closing costs were paid, including realtor fees. We purchased the home just 3 years before w/a minimum down payment and installed upgrades to the tune of approx $15k. Are you telling me I shouldn't have considered that primary home an asset or an investment?  Because we now have the equity working for us, on our way to purchase 6 more units. 

What about appreciation?

Renting is ALSO a waste of money.  So, as long as you HAVE to pay for a roof over your head, why not make it one that you own, and has the abilty to appreciate to accommodate for those expenses you mention like roof, HVAC, etc...?

Also, there are other options if you feel that strongly about it.  Try a house hack of a multi-unit where you live in one unit and rent out the other 1-3 units.  This may be the best case scenario for someone like you as the rental income would likely pay for most, if not all of the expenses, and the mortgage.  So, you could potentially have an investment AND a free place to live.  Can't beat that.

I ran the numbers on this, and owning is definitely better than renting in the long run.  The primary reason for this fact is that rents rise with inflation, so your out of pocket costs rise over time.  In contrast, while property taxes rise over time, unless you are dumb and get a variable-rate mortgage, your largest ownership cost - your mortgage - is fixed, so your out of pocket expense is more stable.

Of course, then you add in the appreciation you get on the property itself, unless you live in an area with declining population, which isn't the greatest idea either for you economically.

Now, let's be clear that owning a house is not an investment in the sense that owning rental property is.  In most cases, when you figure in all the carrying costs of ownership - taxes, mortgage interest, insurance, maintenance, etc. - these costs usually are larger than your appreciation.  People think they are making money because they compare the sale price to the purchase price and leave it at that.

So, owning a home in most cases is a money-losing proposition.

HOWEVER, it is far LESS of a money-losing proposition than renting.  It is far better for your overall longterm financial health to own your own housing than to rent it from someone else.

Your home can be a bank as well to invest in property. Don’t forget about HELOC. Bought my house for 237K out here and it’s worth 400K and I get 90% of my equity out of this with my HELOC at 5.7%. I use this for repair money and down payment money on deals that’s way cheaper than hard money. So my personal home is a big player in my fix and flip business as an investment. Money out for down payment/repairs and then paid off after sale. Can’t do that with a rental. Renting can be good for some people depending on there investment goals and it’s crossed my mind to do so but I actually enjoy working on my personal home and having the freedom to pick materials I want and have a pet if I want etc etc. Give and take with both but once you have the equity your personal residence can become a tool for more property investments.

I recently bought a condo. This website from NY Times was a huge help in deciding buying vs renting. It is the most comprehensive calculator I’ve found. https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

I pulled numbers from HUD for average appreciation and rent increases so I wasn’t just guessing (too much). For me the crossover was owning for about 2 years on average and 6 years for an 80% confidence level.

Then when you add in that I have a roommate so I can house hack, I’m planning on owning this condo as a rental when I move, and refinancing the capital out for the next down payment, it is a no brainer. I make A LOT more by owning vs renting.

@Jay Helms Your anecdote is lacking vital data points:

1. ) What did you purchase your home for?

2.) What was the 'minimum' down payment?

3.) What was the total amount of interest you paid? 

Lets go from there. 

@John Fulton I completely agree with you my friend! I feel that people that view home as a liability and/or not an asset or investment are in the minority even with people involved in real estate. I really liked the point that Grant Cardone made on his second podcasts regarding renting vs owning a home. He really did open my eyes to see the truth of owning a home vs renting and buying investment properties. I know everyone's situation is different but I believe the benefits of renting far outweigh the benefits of owning in today's market. You can get so much more as far as a gym, pool, maintenance and repairs for cheaper or for the same price! Thanks for the post and creating this thread I can't wait to read the different replies and views. I love controversial stuff like this because it really helps me expand my way of thinking and shows me different opinions and ideas on the matter that I never thought of before.

granted it’s not surprising that most people on BP think owning a house is better than renting but just realize it’s not always feasible or the best option.  

I moved twice last year and to different states.  Could I have done that with a house?  Sure but it’d be a major pain to do so, much easier when renting.  Also if I had a house it’d have a bunch of extra room I don’t currently need and I’d feel obligated to fill it with other stuff I don’t need.  

You get best of both worlds when you own rentals and rent where you live (if that fits your lifestyle). If I wanted to buy a house around where I live it'd cost around 200k, I could have HOA fees and higher taxes and insurance and all this other stuff I don't need right now. Point is it's differnt for everyone.

On behalf of the people that inherit many billions of dollars each year because people bought a home... it is a huge investment.

Is it always the best investment possibly not.

There is not a simple one size fits all answer. 

For me it's simple numbers game.... I can rent far nicer property than I'd want to spend on mortgage. I spend my "down payment" money on investments and the investments afford me most the the benefits of owning a home.... and pay my rent.

Once they numbers flip and it's cheaper for me to buy, then I buy.

My homes are all investments. I move every 2 years-ish. I buy an ugly house, live in it while fixing it up, then sell it in  2 years for a big fat profit that I put into my pocket instead of  Uncle Sam's, because of the 121 exclusion.

I bought my current house for $176,000. I put $100,000 in it, and I could easily list and sell it today for $550,000, four years later. I think making $274,000 in 4 years on a $276,000 investment is a fine return. I'll take that "bad investment" any day of the week and twice on Sunday.

@John Fulton I believe the issue with the opposing views/commentary is that a lot of the information and beliefs are relative to one's own perception or experiences and ultimately their end goal. I completely agree with you that a roof over your head is an expenditure, and the main argument for rent vs. own for the general public comes from the fact that people generally spend as much as they make, and are bad at saving. My wife and I bought our home because our mortgage was going to be less than our monthly rent, which is an increase in our net monthly cash flow and allows us to put more into savings/investments.

"Investments" are an asset or item that you purchase with the hope it will generate income or appreciate in the future. Where i disagree with you is your belief that a home's ROI is only the additional value of appreciation. A home value could certainly decrease or stay stagnant, but the same could happen with your other investments. The joy is that you only realize a loss if you are forced to sell, which does happen, consider the expense your cost of education and move on. You need to be aware of the debt associated with the home, back to most people spending what they make, forced savings allows them to build equity in a home that they would not be getting if they were paying rent, and eventually when they want to move out of their first home/condo into a bigger home they can use their equity for their next down payment.

If their goal is to use real estate as an investment vehicle, often times they won't have the necessary capital to get a loan on an apartment building, which is why they start with a SFR. In WA state we have 0% down programs for primary residence acquisitions, I'm not aware of any commercial lenders offering 100% financing. I think you're mostly referring to the rent vs own paradox for the general public? For investors they can certainly go either way, but personally I prefer to own my home vs rent because I hate sharing walls and want my own space. We will likely go the HELOC route that was previously mentioned ^ to get access to our equity for future purchases/rehabs.

Nobody will ever agree on this for many reasons.  This goes back to anyone who read Rich Dad, Poor Dad.  Cardone and other sales steam shooters have mentioned this, that may be the case for them but it is not the case for everyone.

Sure - on the cover a house is a liability.  It costs money every month, there is no guarantee you will get any back, and you may get stuck living in the place for longer than you want.  Appreciation is no guarantee.

On the other hand many people have made money on their house.  Once you factor in the sunk cost of having to pay for a place to live, purchasing a house could be getting you a return on investment.  Home ownership has the following benefits:

- Monthly payment is likely cheaper than it would cost to rent

- You are building some equity

- Possible tax advantages over renting.  

- Can sell your house to try to recoup payments vs all rent payments are gone.

There is a large lifestyle aspect to consider here also - we could all owner occupy a multi-family property but at what cost?  Surely my family would not be living with me if that was my intention.  My dog would find it hard living in such a place.

If you are looking at everything in life as an investment you are likely missing out on a lot.  

@Mindy Jensen I don't think anybody even implied your homes are bad investments, because your strategy is profitable and isn't applicable to the main point I made.  What you're doing is using real estate as an investment, e.g., rehabbing (buying ugly houses and fixing them for profit), which falls under the investment header.  As I mentioned, real estate is a great investment vehicle if treated like an investment. I created the discussion to shed some light on the notion that typically residential real estate ownership (again, not what you're doing), is not profitable. Most people are purchasing property at nearly 50% debt-to-income, living above their means, using property as a trophy and not an investment, and the appreciation they do accrue is wiped clean in selling fees and interest to the bank. Their homes are not investments and this kind of home ownership is so unprofitable it caused a recession, where millions of folks to this day can't even sell them for what they bought them for TEN years ago!  

Originally posted by @John Fulton :

@Mindy Jensen I don't think anybody even implied your homes are bad investments, because your strategy is profitable and isn't applicable to the main point I made.  What you're doing is using real estate as an investment, e.g., rehabbing (buying ugly houses and fixing them for profit), which falls under the investment header.  As I mentioned, real estate is a great investment vehicle if treated like an investment. I created the discussion to shed some light on the notion that typically residential real estate ownership (again, not what you're doing), is not profitable. Most people are purchasing property at nearly 50% debt-to-income, living above their means, using property as a trophy and not an investment, and the appreciation they do accrue is wiped clean in selling fees and interest to the bank. Their homes are not investments and this kind of home ownership is so unprofitable it caused a recession, where millions of folks to this day can't even sell them for what they bought them for TEN years ago!  

How much in rent do you think the person would have paid over 10 years?  A "normal house" valued around $200k in our area rents for ~$1,700 per month in most areas.  $1,700 months * 12 months per year * 10 years = $204,000 in rent payments!!!!  

Ignoring any tax benefit or debt reduction, say the mortgage payment on said house was $1200 per month.  Total mortgage payments total $1,200 * 12 * 10 = $144,000.

You could sell this house at price lower than your initial cost and still have saved $60,000.

Most of us have the sunk cost have wanting to live under a roof.  If you don't and want to only put your money in "investments" you have other options.

Hey John I think this is a great topic to discuss.  So I'll let you know what I have done with my house and why I feel it's both a place to call home and an investment.

First off I bought my house with a business partner.  He put 50% down and I financed the other 50%.  We then both put 5k into a bank checking account for any major expenses.  We call it our OH S#$T account. So we keep a minimum of 10k in this account at all times.

So this allowed both of us piece of mind because each of us wanted to buy a house but didn't like the risk we would be taking on. The risk was caused by putting a down payment which can be 3.5%-20% depending on which way you go. (Or 0% if you are a Veteran and get a VA loan). Which would leave the monthly payments high so our monthly rent income wasn't covering much. Or if we put more down then it left little in reserves.

So the added bonus of this house is the basement is I'd say 75% finished with a standing shower and bathroom.  But they are separated and on the opposite sides of the house so the house is listed as a 1.5 bath.  So I saved on it verse a 2 bath house.  My business partner and I live in the basement and rent out the 3 bedrooms upstairs.  The kitchen, living and dinning room are all up there and so is the full size bathroom.  I also rent out the 2.5 car garage. The basement has a small countertop of both sides of the basement and small cabinet space.  Just enough room for a microwave and a two burner cook top.  Oh and there is a refrigerator in the wall as well. 

I'm living for free, so is my business partner.  Then we share half of the yearly home insurance cost, we alternate paying the tax bill each year, split repair costs 50/50 and pocket around 230 a month in extra rent income. 

I plan on living in it for 5 years minimum.  We call it home base.  Because the mortgage payment is so low, if everything goes south we can always come back to it. Slowly we will finish the basement and eventually move out and turn it into a full out rental.  Then do the same to a four plex.

So basically my tenants are smarter than me because I own a home and also a bunch of rentals? 

I think some people's feathers were ruffled but I suspect they didn't read my thread in its entirety because I said I believe ownership is a better alternative to renting in terms of reducing the wasteful spend, but that doesn't make your primary home a profitable investment.  The point of the article was to introduce a thought experiment to help folks who financially suffer under common misconceptions, as millions of aspiring homeowners are romantic about real estate, and spend more than they budgeted for that bigger house or bigger yard, or a chefs stove that is a total and utter SUNK COST, and then justify it by parroting that "Your home is your biggest investment" expression. This is false, and I recommended people not live above their means by purchasing a trophy house, and instead live below their means and re-INVEST the rest into....drumroll............... real estate; rehabbing, flips, rentals, multi-family, etc.!  The bulk of the rebuttals of my article are going something like this: "Oh yeah?! Well, I [insert investment strategy here], and made [insert dollar amount]." To which I say, of course you did! There are millions of home owners who still can't sell their property for what they paid for it 10 years ago, and have 10 years worth of outdated color schemes, wear and tear, depreciated appliances, etc. The maximum debt-to-income ratio was 43%, Fannie raised it the DTI ceiling to 50 percent. This is not financially savvy. This is not real estate investing acumen.  Sure - their home appreciates, but as I said, those profits will be evaporated by the cost of selling the home plus the costs of interest, among other things. And I repeat: Equity derived from your principal payments is not profit, equity is savings. Would you classify your bank as an investment if you deposited money into your savings each month and then withdrew it 5 years down the road? What did they do for your money other than hold it? The only profit in your primary residence is the difference between what it was worth when you bought it and what it is worth when you sold it (appreciation). And what I'm saying which has yet to be challenged  is that when you deduct all the mortgage interest and Realtor fees, you clearly lose money. 

If you think primary, residential real estate is profitable, I'd love to see the calculus that proves it, rather than listen to anecdotes that involve principal payments because those aren't profits.

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