Grant Cardone is Right: Owning a Primary Residence Usually ISN’T Smart

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A common question that seems to come back with some regularity in the personal financial circles (and here on BiggerPockets) is whether or not it’s smart to own your home. Here on BP, our beloved nomad Brandon Turner, who loves to grab your attention with big shiny objects, wrote an article not too long ago having something to do with the subject. I can’t remember the specifics about the piece, but I do remember that Brandon was selling you on home ownership being a good financial decision — but his logic was all wrong (which I helpfully, as always, let him know in the comments section).

Let’s begin this conversation with the lowest common denominator.

Rich Dad

Don’t you all remember reading in Rich Dad, Poor Dad that your house (meaning a house you buy and move into) is not an asset? Don’t you remember reading that all it does is cost you money every month, which makes it a liability? Don’t you remember reading that because all it does is cost you money, with no income to offset the cost, regardless of how many dollars it puts on your balance sheet via equity, your house is a liability?

Related: Liability or Asset: Is Owning the House You Live in a Wise Financial Decision?

Brandon (and so many others) want to convince you otherwise. Grant Cardone, with whom I disagreed in public forum vehemently both on this blog and his TV show, as far as I know is the only public figure in the personal finance space who calls a spade a spade. Grant not only agrees with Rich Dad‘s major premise that a primary is a liability, but goes well beyond in saying that you should never, ever, ever own primary residence.

Ben Leybovich lands somewhere in the middle. According to me, myself, and I, a primary is indeed a liability. But in some cases, I think it does make sense to own. More on that in a bit.

buying-investment-property

Brandon or Grant?

Brandon Turner and most of the personal finance media tee-up the argument for home ownership on a juxtaposition to renting. Basically, the messaging is that renting equates to throwing money out the window. They tell you that if you finance a home with a mortgage, then every month you make a payment, you are recapturing some equity, and that’s a lot better than throwing money out with rent. In other words, you get some value for the money you spent.

This is their argument. Is it wrong? No — on the surface Brandon and all of the rest of the “buy a house, don’t rent” crowd are not wrong. Indeed, buying allows leverage, and over time, you do pay down the loan and recapture equity. Additionally, there is the interest deduction, as well as possibility of appreciation. So, again, on the surface, great idea. And if your mental capacity will not allow any thought past this logic, fine.

However, perhaps we could wrap our brains around some slightly more refined concepts. The two major issues with owning an SFR are that you lose flexibility, and you lose money. The flexibility piece is easy, and this is the crux of Cardone’s point in specific — what you lose is the ability to decide on a moment’s notice to go where the opportunity is. Indeed, if you are tied down with a house that you must sell in order to follow the opportunity, then you are putting yourself behind the eight ball in today’s economy. This is true for most of you.

This is Grant’s message, and he is right. In concept, at least, he is definitely right. Those of you who work for a living are definitely not in position to say, “I like this house, and I don’t care where the work is; I’m staying here.” You know what I’m saying — Cardone is right.

With that being said, don’t you think it would be appropriate to underwrite the value of your freedom and capacity to quickly respond to opportunities? I mean, while it’s true that buying a house (may) have some positive financial side effects, do you see that if you were to denominate your freedom in terms of dollars (lost opportunity cost, for instance), then buying a house is just a drag?

In this case, we are simply comparing value of freedom to value recapture of principal buy-down. And do you see how perhaps Cardone has a point? Do you see that in this context, renting is not simply throwing money away — it is paying for your freedom and ability to slice like a damn hammer at the right opportunity! Tell me — which has more value?

And Then There’s the Financial Aspect

I have this talk with Brandon all the time. The last time we talked for like an hour. Consider this:

Brandon just bought a big ole house, which he immediately rehabbed (at least the kitchen). He paid market for this house for one reason — this wasn’t an investment. This house was what his wife, Heather, wanted. And Brandon, being the smart man that he is, did not argue — ’cause arguing with a gorgeous wife and mother of your child is just not what smart men do.

But now, in all likelihood, Brandon is into that big ole house more than the house is worth. Brandon rationalizes this as being OK because this is what he can do for his family and because he is not planning on going anywhere any time soon. He is comfortable in Podunk, WA and likes being the boss in Podunk. He is staying Podunk, and so as far as he is concerned, time will take care of his equity.

quality time

Related: Grant Cardone Just Warned Investors of a Market Correction: Here’s How to Protect Yourself

I Thought That Way…

Until, that is, the gorgeous wife and mother of my children decided that our kids needed more and better opportunities than what was available in Podunk, OH. She put me on notice that we’d be moving.

And so we did, but not before selling some property. I made money on the rentals. I lost money on the primary. Why? Because Cardone is right! Not only will you lose your freedom by buying an SFR, but you will lose money.

Why You Will Lose Money on Your Primary

I should qualify this by saying that obviously not all of you will lose money, but most of you. If you live in a high-growth market, chances are better than 50/50 that you’ll make out OK. But, for the rest of us, the dynamic that happens is this:

With every year you own property, your costs of ownership go up. This is both a factor of maintenance and CapEx, as well as property taxes, insurance, and all the rest. And unless those growing costs are being offset one way or the other, there is a virtual guarantee that you will lose money on your primary, specifically if you decide to be intellectually honest and call the interest you pay to the bank an expense, which it is.

You see, when Brandon bought that big ole hose for Heather, he paid a fair price. He did not buy at a discount to market. Why? Because Heather wasn’t looking for an investment. She was looking for the thing she wanted, and for that kind of thing, my friends, we pay what we must, and Brandon did.

To boot, Brandon immediately spent some money on rehab. Furthermore, believe me, when the landscaping needs done in a few years, he’ll do it. And when Rosie’s room and bath need an upgrade because she is in first grade and not a baby, he’ll do that too. And when the furnace and water heater need replaced, I can just see Brandon breaking out that fat checkbook.

And by then, with a few years gone by, that kitchen he spent money on immediately upon buying the house, which looks fantastic today, will need another round of upgrades — and so on, and on, and on. Ask me how I know this!

And then, Heather will turn to Brandon one day while crossing the street on their way from the coffee shop to pick up Rosie at school, and say, “Brandon, we are moving! Rosie needs better educational opportunities.” Or “I want to be closer to parents.” Or “I want to see palm trees out of my window.” Or “I’m tired of all of the wet and cold in Podunk. Brandon, we need to move.”

Ask me how I know this!

And there goes Brandon opening up his checkbook yet again. Why? Because in order to find another schmuck to by his big ole house from him, he will first need to spend $40k just to throw some lipstick on that animal.

Do you really need to ask how I know this?

And, if Brandon, out of sheer boredom because he is so rich with nothing better to do, decides to go through the mental exercise of underwriting all of the costs hidden in this little story, he would quickly realize that home ownership might not be such a good idea.

Don’t Despair — There Are Answers!

All of these defects of home ownership are curable, which is why I at once agree with Grant Cardone and disagree with him. There are things we can do to remedy.

But you’ll have to wait until next week. 🙂

What do YOU think? Do you agree with this assessment of home ownership? Why or why not?

Let me know your thoughts with a comment!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

108 Comments

  1. What do you think of this scenario for home ownership:

    In a market the typically appreciates (NYC suburbs). Acquire a property for $170K (well under market value), put $100K into in (using 203K loan with 3.5% down for acquisition and rehab). Loan on property is $275K but property is worth roughly $425-$450K the day you move in. Either tap into the equity to purchase assets or live there 2 years, sell tax-free (sec 121 exclusion) and rinse and repeat.

    In my area a crappy 2 bedroom rental goes for $2000 a month (tenants typically pay utilities), so with a wife and a young daughter, it’s hard to justify renting, because a decent rental would likely exceeds to PITI.

    In your opinion, is there anything I’m missing?

    • Ben Leybovich

      Yes 🙂 This, however, requires you to buy an investment first, which is also a primary. Therefore, you can’t be too picky about the aesthetics – that’s one. And two, this is hard to find.

      But, yes – underwriting the future costs against real equity is one way to make primary work.

    • Donald Jeune

      Hey Ryan,

      I’m actually in the process of doing the same thing that you mentioned. Using a 203K loan on a property in Brooklyn or Bronx NY. I have a pre approval for a 203K loan and found some properties but so far it seems that investors are snatching up all the distressed properties or other buyers are snatching up the short sales. Did you have any success with buying any properties with the 203K loan in New York? Which area did you purchase in? Let me know when you get the chance. Thanks.

      -Donald Jeune

  2. My tenants paid off my house. They were the ones that paid off my mortgage. The issue is how you pay it off. First, I did not buy something extravagant. I bought when prices where low in east Texas. You have to use your imagination in order to come up with creative solutions for your financial issues. Pretty simple stuff!

  3. Stephen S.

    I think your position assumes some facts not in actual evidence. Perhaps we can agree with an alternate scenario?

    First of all; I agree that marriage is a team effort but someone has to be the quarterback and in my case I suggest that it be me. So while yes; I don’t want to ever see that light-up-my-life smile fade – I don’t want to act foolishly either.

    Second: opportunity is everywhere. In America we are literally drowning in it. Chasing it any real distance takes time and effort which I suggest could be productively spend exploiting opportunities which do not require great mobility. So in my mind the weight of the lost-mobility gambit is low.

    So how about this: let us buy a nice house for ourselves but which could also be rented rather than re-sold. And we buy and rehab it on largely the same basis as if it were a pure rental. Of course; my rentals are nice because I prefer to deal with people who are and want to remain nice themselves – so this may not work for C/D area people. But You would never be in that category – I am assuming based on your condemnation of $30K units and so forth

    Then we diligently seek out the local opportunities available to us. This to reduce the need to chase them far afield. And if larger or better child-rearing circumstances become required the existing owned-house can be converted into a rental. How about that?

    stephen
    ————–

      • Zach Ziskin

        But the same logic applies to any property that you would seek to rent out–it costs money until it’s rented. I don’t see how a former primary residence turned into a rental would be any different in that respect.

        The bottom line is that as long as you purchase a primary residence with the same financial consideration you use in purchasing investment properties there’s no problem. If you buy making sure that after purchase and rehab it could still cash flow as a rental, there’s no problem. The problem comes in when someone purchases a primary residence with emotional considerations first and foremost.

        • Ben Leybovich

          Except that not every house can be turned into a rental. In fact, I’d argue that most houses we would chose as primary would not work. Certainly not Brandon’s 🙂

    • Colin Reid

      We have done this for two of our five properties. We bought primary homes using rental strategies, knowing they are not our “forever home.” We pay for some equity rather than paying for someone else’s, then cash flow when we move. We know the area we want to settle in eventually, and don’t plan to leave for many years. We’ll buy there for stability rather than cash flow. We know we’ll have all the opportunities we need there, and while we have hard numbers on the opportunity cost, it’s worth it to us.

  4. Shawn Ginder

    We are renting, living in Europe, but invested in my home town area in PA. For us instead of buy a typical $200k home residence in PA, we bought three rental properties with 6 rental units instead for $170k. We used 100% creative financing which generates for us about $1000 a month cash flow. We continue to live in Europe pursuing our passion and dream, but through the investments will be able to replace our income as we continue to buy more over the next years. Ultimately it comes down to what you want to do with your life, investing is a financial vehicle that enables you to live your dream. One day we may buy a house to live the dream we have to owning a nice home, however right now this isn’t our priority. So on one side agree with what you shared, the other side is with wife and family you have to take their “life dreams” into the equation and not just “business and financial” goals. Meaning having a good place to raise a family is an important value of life. If you can do this in a rented home than great, if you can’t this is where exceptions can be made to hit your values and priorities other than business related.

  5. Stephen S.

    Ben,

    Writing the above makes me remember how much I like the way your mind works. And I am also reminded to ask you question:

    How about this idea?

    You and I go house shopping together. We each pick one of two roughly equal houses. I then buy the one that you like and you buy the one that I like. I rent you the house that you like and I own and you rent me the house that I like but you own.

    We project the costs of ownership and set the rent a few percent about that – with the idea of zero-netting with perhaps accumulating a slight cash reserve for each property.

    We each maintain our own houses and bill each other for the work. We expense the work and we each depreciate the house we rent out on our tax returns. In the end at some point we exchange the properties and move on.

    What do you think?

    stephen
    ————-

  6. Steve Vaughan

    I only read yet another rent vs own debate because it was yours, Ben!
    Surprising even myself I like your arguments against home ownership, which are much more than just financial. Immobile roots is a big one. My wife wants a new kitchen, too. I ‘need’ a shop. The list goes on. I’ve said before that mine is a slave labor camp – disguised as a house. Yard work and gutters and fences. Painting. Water heaters. Air handlers. How nice it would be to just call the LL when there’s a problem 😉
    However – we do like our 2 pupper dogs we don’t need permission or higher deposits for. Our son has a sports-themed bedroom. We took a wall of cabinets out. Lots of intangible benefits to owning, of course.
    In our case (it has a mother-in-law apt) at least it passes the ‘asset’ test and will put money in our pocket once paid off soon, but it would sure be nice to be more mobile.
    Thanks for another enjoyable, informative article!

  7. Tyler pertree

    There’s a few aspects that I didn’t see addressed. 1) Legal protection of a primary residence in case of the crap hitting the fan. 2) Security / stability for your family vs. moving around for an “opportunity”. This wouldn’t be nearly as true with a wife and 3 kids in school.

  8. Giovanni Isaksen

    Hi Ben, another great article, I think you nailed the part where your spouse hits you with the I want ____________ (sunshine/education/parents/palm trees/etc.)!

    I did a fairly rigorous analysis of rent vs. buy, comparing the popular Zillow methodology to reality using data from nation-wide research. Net-net (and by Zillow’s own admission) their numbers ignore maintenance, repairs and CapEx which produces a skewed result in favor of owning. When you do put in modest amounts for those items (heaven forbid actually track them and use real costs) you will find that owning over the long term will get you a cheap place to live but that’s about it.

    That research including the interactive chart is here: http://ashworthpartners.com/rent-vs-buy-and-the-great-myth-of-homeownership-as-an-investment/ and here: http://ashworthpartners.com/the-buy-vs-rent-meme-that-just-wont-die-and-my-challenge-to-zillow-rentals-realestate-multifamily/

    Good hunting-

  9. Sean Cole

    The whole argument here is one-sided and leads to a false conclusion.

    Lots of folks on BP own rentals. By definition, nearly every single one of those rentals is cash flow positive. This means that the rent paid by the tenant is higher than all of the costs associated with owning the property, including CapEx. It’s fine to value the freedom to move with 30 or 60 days notice, but saying that renting is cheaper than owning is just not true.

  10. James Thompson

    I am of the belief of owning a home for a better future vs renting. In 30 years or less, I’ll only have to account for property taxes and general upkeep while those who are renting will have to deal with the inflation of rent and be on the hook for $1000+ worth of rent each month. I’ll be a happy 63 year old with no worries about the roof over my head while the 63 year old renter will be complaining about rising rents. Not to mention I could always rent my home out in the event I needed to move so the mobility with owning a home is good enough for me.

  11. Dumitru Anton

    Ben, oh, Ben,

    aren’t you tired of being right almost 99.999999979821689128912% of the time?
    you (I) hit all the right spots:
    -Home purchased right before the Great R (check)
    -in HOA (check)
    -market not really back yet … (check)
    -…unless invest in said home to get a good-ish sale price (check)
    -need better opportunities for kids/kitchen/bathroom/modern thingies/different culture (check)
    -my upstairs neighbor jumps a little too much at 1am or 5am (check)
    -“i don’t like the cold” (check)

    -I WISH I KNEW THEN WHAT I KNOW NOW! (check)

  12. Fay Chen

    I beg to argue that a primary residence is not a bad investment. The underlying element here is spouse/marriage/kids/family. They are often the one taking away your freedom/flexibility to pursue opportunities. Assuming you are a rational investor, consider the following scenarios:
    – your spouse prefers to live close to work
    – you want to live in a good school district for your kids
    – your spouse does not want to house hack
    – your spouse doesn’t want to move where the opportunities are
    – your spouse wants to move to a house that would make a poor investment
    – your spouse doesn’t like real estate investment

    Those scenarios will make you less flexible and may ruin your investment, while a loner rational investor should be able to avoid these situations.

    Therfore, marriage, kids and family are poor investments because they limit your freedom to pursue opportunities. But they provide emotional benefits, which is difficult to measure. That will be another discussion.

    • Ben Leybovich

      Fay – the single best investment, emotionally and financially, that I’ve ever made was my wife. I think this is true for most of my successful friends – Brandon Turner, Justin Gesso, J Scott, Brian Burke, Josh Dirkin. I can tell you with utmost certainty that their success financially is directly a function of making the right decision as it relates to their partner.

      Our wives can see what I cannot. They can feel what we cannot. They can do what I cannot.

      The problem of life is not with the mechanics. but with the vision. If it weren’t for Patrisha, I would not be doing half the stuff I do.

      So, I disagree 🙂

  13. Dan D.

    I can see arguments made for both sides, and I think there are price points at which “all things being equal” a math equation could always tell you which is better by comparing rent prices and house purchase prices.

    The difference of course is how you FEEL about renting vs how you FEEL about living in a house you feel you own. The stability of knowing you can knock out a wall, plant a tree, pick a new fridge, etc., has some sort of value that is different than taking whatever fridge Ben L decides to show into your apartment when the old one breaks. (or wonder how long you’ll stay at that residence when you find out the landlord wasn’t paying the mortgage). Stability has a price for many relationships and there’s a value that comes with it that’s usually greater than the price.

    I think a very valid point for any new investor or anyone who hasn’t purchased a house yet is to first buy a rental house before they tie themselves down with a primary home. There were a few times where I’m sure investors had purchased a primary, then later thought, “If only I had bought smaller” or “If only I had purchased a cash flowing property first” paying this mortgage or rent for my residence wouldn’t seem as bad.

  14. Bill Gulley

    Oh, what a load Ben,

    Your house is an asset, most often the largest asset a person has, then there is the liability side, but it should be worth more than you owe, bottom line that’s a plus.

    That “freedom” has a cost, financially, socially and economically, if you want to move, then just move. I’ve moved out and just had an empty house, that’s me and I don’t suggest that for everyone, I’ve done it with and without a mortgage. I didn’t rent them I just held them, but a younger and broker person would probably rent them. I still have one that’s empty, all utilities are humming along just fine, yard (over a half acre) gets mowed weekly.

    In my area, appreciation is a pretty solid 3%, that’s more than the holding costs, forget principal buy down. Depends on the neighborhood and I don’t buy in shabby areas.

    Got some news, go into your banker and ask for a loan without owning your own home!
    Bankers want to see stability, an anchor to the community, the gypsy life style scares them. If you’re a marginal borrower, that ownership can swing the loan.

    There are times it’s better to rent, but so far those points have not been raised, just having a wild hair about skating out isn’t a good reason, IMO. Avoiding responsibility isn’t business like nor does it yield a good citizen.

    Age has a lot to do with the expectations we live with, physical abilities, mental attitude, financial stability also play into the own vs. rent equation.

    If Mommy ain’t happy, no one is happy!

    As for our gurus, they usually need some attention grabbing subject matter like not owning a home for attention, that headline for this blog brought me here! It worked! LOL

    :))

    • Ben Leybovich

      Haha – Bill, I never concluded not to own. You might think this is the conclusion, but I don’t believe I stated as much for exactly the reasons you mention.

      We need to take this conversation further, which I will do in the next article 🙂

      But – got you to read, didn’t I?! That’s not nothing, my friend 🙂

  15. Ben-great article. There are so many different ways of analyzing this issue and I’m looking forward to the next article you push out for BP.

    You have to do your own cost benefit analysis based on your specific circumstances. For my wife and I, choosing to rent in our area (North Dallas) for the last 3 years has given us the ability to save money, finish our masters degrees, and pay down a mountain of student loan debt. Keeping life simple by renting an apartment was the right play for us. Had we purchased a home in our area 3 years ago, I don’t think we would be in the financial position we are in today. This even considers the vast amount of appreciation the housing market has seen since we moved here. Freedom, flexabiliity, and the overall stress reduction that renting provides is really difficult to quantify. But I know for my wife and I, it has definitely worked for our situation. I’m a big believer in what Cardone preaches about saving money to invest and I think buying a home that doesn’t produce cash flow takes would be investors further away from their ultimate goals.

  16. Ben Leybovich

    Allison – I have to mention a couple of things to you.

    One – you only edited out 1 sentence from what I can tell, but what a sentence that was…funny, witty, edgy. I think you should have left it in 🙂

    Also – dude – I’m talking about Brandon’s big ole house – is the picture of a shack at the top of the article really the best you could do? I would have thought image of notre dame or hermitage would have been more appropriate…hahah

    Allison – thoughts?

  17. Matt Hoyt

    Ben,

    Well written article. However, I realize there are scenarios to rent that make sense but I would disagree with most of these arguments against ownership. People have made the normal comments here about interest deduction etc etc. Let’s see if I can make two different points. When I buy a primary I always take a minute to look at it as a rental. What would it rent for and what would the cash flow be. Then it is simply another property in the portfolio that you are choosing to rent for the market price. If you want want to move to a different city you just do that and rent your house out. Or if you need to save money you to go rent down the street for cheaper. Of course you get the benefits of home ownership: interest deduction, piece of mind, happy wife and I would argue more credibility. I’m a real estate broker/investor – people would use and invest with me less if I was a renter – that’s just fact. But here is another trick with looking at your primary as rental. You can get the best possible rate and terms on the loan while you live there and then turn it into a rental. We just moved last month and rented our old primary. The loan I got a year prior was 80 ltv 2.15% 5/1 interest only. Try getting that on an investment. Every time my wife wants an upgrade I ask if that would help the rent or sale price. We discuss it and just make sure it’s not too overboard then we proceed. We have between us three former primaries in the portfolio all of which are fantastic rentals with fantastic loans. I’m not leaving the area but if I need to tomorrow our new house will rent in three days and I have already thought about what it will take and those numbers. Add that in with everyone else’s arguments plus the emotional satisfaction and piece of mind that comes with home ownership and it’s a no brainer. I have other arguments as well but I feel like others have touched on them and this one is overlooked. What would your primary rent for?

  18. Bryan Otteson

    Hi Ben,
    Another article with a different point of view. Of course, it all falls apart when you have a homeowner that also thinks like an investor. All that “I have to change the water heater, clean gutters, etc.” is all part of owning a rental as well. Just factor those into your purchase and move on. Regarding mobility, it’s a double-edged sword. If you “need” that great school district, you are very likely a fool to rent because after 1-2 years and the rents go up, or the owner moves back to town, or whatever happens, you’re now trying to relocate your entire family, find another rental in the same district, say goodbye to the friends your kids made locally, etc. Mobility is good but forced mobility because you are a renter is bad. Just as you look at the “cost of mobility” you should look at the “value of control”. As a renter, you have none. I would say in reality those 2 forces even themselves out, which means you are left with the argument of paying someone else’s mortgage or paying your own.
    Keep the articles coming Ben; I love to get the opportunity to see different viewpoints!

    • Natasha Keck

      Bryan has hit the most important point for the investor who is not trying to squeak every dollar out of her lifestyle. The value of being in control of the decision when you move or not is priceless. If you have kids in local schools, even doubly so. I can’t tell you how many children I’ve seen have to change schools because their landlord decided it was time to sell.

    • Ben Leybovich

      Ahh – but an owner who thinks like an investor is not a typical owner. Furthermore, it’s really, really hard for us to make concessions on anything as it relates to our family’s lifestyle when the only benefit is financial.

      After all – money is cheap enough. We shouldn’t cramp ourselves just to make/save a buck. There are other ways…or not LOL

      Next article 🙂

    • Matt Schreck

      I’m glad someone mentioned this, as I was going to comment the same. My wife and I have been kicked out of two rentals in the past 3 years due to the owner wanting to sell. This costs time, money and stress.

      The second kick-out we ended up buying from the landlord, off-market. I wish I had known about BP at the time, I definitely would have offered less as this house will not cash-flow at current rents… so I’m definitely not disagreeing with the bulk of your argument. But the freedom to move has to be tempered against the freedom to stay!

  19. Thomas Fosnaugh

    Did you 1031 the building you sold or just going to pay the taxes? Looking forward to more of your articles as my wife and I are looking to escape the midwest as well but are not sure how we should handle our rentals/primary. Thanks for all your great content.

  20. One additional component to Bens point. Many people may have a fair amount of equity in their primary residence. Considering you can Generally only tap into about 75-80% of your equity you are potentially leaving 10s or potentially 100s of thousands of dollars tied up in your primary residence, not working for you. As an alternative, you could sell your primary residence, rent a home, and use all that equity for other investment properties, bringing you closer to that magical financial freedom threshold! Isn’t that what we all aspire to?

  21. Jon Tudor

    I generally agree but for my wife and I buying houses as a primary residence plays into our rental property strategy/financial independence strategy.

    We only buy a primary residence when it meets our rental property equations, is a wide margin below what we can afford, and is a strong school district with anticipated appreciation. If so, then we can feel confident that we can move out and rent it later if we need to move (flexibility for opportunity argument) or sell it if truly necessary (my wife is a licensed agent so we are able to avoid some of the costs of sale). This also means that we can purchase property for less down and further leverage our cash. This strategy also makes sense as it is clearly less to own a comparable sized property than rent it (capital expenses and other costs included).

    It appears that my wife will get a promotion at her property management firm within the next year which changes our strategy and makes it clearly better to rent. With the promotion she will be credited $1,200 a month for rent at properties owned by the firm, bringing us down to $275 a month rent for similar sized places to where we live now. We will take advantage of this when it is avaliable but this is not something that most have access to so I think that owning a primary residence is the best option for most people as long as they ensure it’s a good rental when you buy it. We also have the added benefit of moving into one of our previous SFH primary residences if we have children and want them in a good school district at a later time.

  22. Matt Hoyt

    Ben,

    Well written article. However, I realize there are scenarios to rent that make sense but I would disagree with most of these arguments against ownership. People have made the normal comments here about interest deduction etc etc. Let’s see if I can make two different points to add to the standard ones. When I buy a primary I always take a minute to look at it as a rental. What would it rent for, what would the cash flow be? And all the other questions I ask myself when buying rental. Then it is simply another property in the portfolio that you are choosing to occupy and forgo market rent. If you want want to move to a different city you just do that and rent your house out. Or if you need to save money you to go rent down the street for cheaper that the rent your house can command. Of course living in your primary you get the benefits of home ownership: interest deduction, piece of mind, happy wife and I would also argue more credibility. I’m a real estate broker/investor – people would use and invest with me less if I was a renter – that’s just fact. But here is another trick to looking at your primary as rental. You can get the best possible rate and terms on the loan while you live there making it more desirable as a rental should you choose to rent it. We just moved last month and rented our old primary. The loan I got a year prior was 80 ltv 2.15% 5/1 interest only. Try getting that on an investment. Every time my wife wants an upgrade to our primary I ask if that would help the rent or sales price. We discuss it and just make sure it’s not too overboard then we proceed. We have between us three former primaries in the portfolio all of which are fantastic rentals with fantastic loans. I’m not leaving the area but if I need to tomorrow our new house will rent in three days and I have already thought about what it will take and those numbers. Add that in with everyone else’s arguments plus the emotional satisfaction and piece of mind that comes with home ownership and it’s a no brainer. I have other arguments as well but I feel like others have touched on them and this one is overlooked. What would your primary rent for?

  23. Lawrence L.

    I completely understand what you are talking about. I have a house my primary residence I don’t want to sell it and I am not even at home that much so I am thinking about renting it out. I heard on a podcast the guest said he wished he never sold the houses he lived in so I’m thinking I can rent it out have the tenants pay rent so it can free up my money to aquire more investments. Would that be something you would do Ben?

    • Stephen S.

      But what about my actual question:

      So how about this: let us buy a nice house for ourselves but which could also be rented rather than re-sold. And we buy and rehab it on largely the same basis as if it were a pure rental. Of course; my rentals are nice because I prefer to deal with people who are and want to remain nice themselves – so this may not work for C/D area people. But You would never be in that category – I am assuming based on your condemnation of $30K units and so forth

      Then we diligently seek out the local opportunities available to us. This to reduce the need to chase them far afield. And if larger or better child-rearing circumstances become required the existing owned-house can be converted into a rental. How about that?

      stephen
      ————–

      • Ben Leybovich

        But you are missing the point a bit, Steven. I left Ohio for Arizona based on a lot of research of what would be best for my children’s education. When I say opportunities, I don’t necessarily reference finances.

        I like freedom. I either want to rent, if per square foot pricing for the same amenities that I could buy is so competitive that there is no reason to buy, or I want to buy equity, income, or both. Having income allows me to stay free by way of renting and moving. Having equity allows me to stay free by way of selling and moving. One or the other has to be present…

    • Ben Leybovich

      Depends on the house. Not every house is conducive to renting. Also, you’d have to move out and rent it in order to flip the paradigm. I am looking for ways to walk into deals with the paradigm already flipped as the basis of acquisition.

    • Ben Leybovich

      Hahaha! Justin – one way to put this would be to say that I know how to get a rise out of them… Another way is to acknowledge that I talk about things which are important to folks – things that they think about on a daily basis. And as a result, they engage, and I love it!

      Which is it, Justin?

  24. Susan Maneck

    Am I missing something? If it makes sense to buy rental property how does it not make sense to buy your own house?
    I reminded of the old adage my mother taught me, “whether you rent or whether you buy, you pay for the space you occupy.” Long before I seriously got into real estate investing I considered every house I bought an investment. And the fact I my job was not permanent never stopped me from buying when I had the money. I was a gypsy professor for over ten years, never staying at one place for more than three years. My first purchase was when I had a job for only one semester. I bought a mobile home in Tucson, AZ bought I chunk of land near Flagstaff, built a pad and moved in the utilities. The project cost me 35K altogether. It appraised for 45K. I turned it over to a property manager who rented it out for 5 years at $550 a month, then it was sold for 53K. Later when I lived in Florida, I bought a three bedroom 1 bath house from HUD for 35K. It had been vandalized and I put in about 10K fixing it up. I lived in it for a year and half, then had to move on. I held a garage sale and sold my house there (I kid you not) for 55K.
    It seems to me the obvious way no to love money on your principle residence is not to spend money on it you would not spend if you were a landlord or were flipping the house. I knew I wouldn’t be living in these houses long term so I only fixed what needed to be fixed or would make the house more saleable.
    Of course, I’m the sort of person who doesn’t buy rental houses I won’t live in. In fact my closest tenant lives two blocks away, on the same street as four of my other rental properties.

  25. 24 and single-I bought a small single family home 3 percent down and I rent out the second bedroom to a friend and back garage apt to a tenant which leaves $280 of the mortgage to cover myself. Beats the $800/month two bedroom apt–until I start looking at my costs like you said! I see what you mean about the expenses…I find myself staring longingly at new kitchen appliances, researching landscaping, and planning a fabulous patio…I need to stop! These expenses I would never incur at an apt. If buying this house was truly financial then I can’t upgrade it the way I (and hgtv pressures) want to. Thanks for reminder and reality check!

  26. Pat Tibbetts

    It would be helpful to come up with some new terminology. Kiyosaki takes it upon himself to redefine the terms “asset” and “liability,” and half the world buys it — lock, stock and barrel.

    Anything you can convert into cash, tangible or intangible, is an asset. Period, dot, end of sentence. Whether it appreciates or generates cash flow is immaterial.

    A liability is any arrangement whereby one is obligated to give up future economic benefits. It’s what one entity owes other entities.

    Assuming everything in one’s life is dollars and cents, the only way to know whether to own or rent is to do a pro forma calculation to determine an IRR. Of course, most people’s primary residence is not all about dollars and cents…right??

  27. Glen Dall

    Ben – Interesting article as my wife and I are in the process of selling our primary residence condo that will net us a 29% gain in 4 years. We will move into a home that we bought for $105K, will put $95K into, with an ARV of $250K. We’ll finance it on an interest-only note with a mortgage of $113K, leaving the remaining cash to finance on a line-of-credit to purchase additional flips and finance renovation costs on those flips. Our monthly payment for interest, taxes and insurance will be about $500, versus $1,500 in rent for a comparable home. In two years we can sell for $250K, maybe more if the market chugs along at 3% growth, and pocket the profit TAX FREE. We’ll move into another flip with 30% equity. that we can sell in two years with TAX FREE profit. What am I missing in this scenario? – Glen

  28. Heath S.

    I’m not sure why you assume there is more flexibility with renting vs owning? If you rent a home you will still have a lease on the place so you can’t just get up and leave to chase an opportunity. You can sell a home or rent it out whenever you want, so I would argue there is actually more flexibility with owning.

    • Ben Leybovich

      Heath – you are telling me that paying the buy-out of lost deposit plus most typically 1 month additional rent, is not infinitely easier than renting out your home (which may not be rentable) and managing the tenants long-distance?!

      That’s what we commonly describe in the vernacular as talking out of your ass lol

      Try both and come back to let us know which one turns out better 🙂

  29. Tim Shin

    Click bait, Ben! Good article and I can’t wait until next week. Are you going to talk about buying a rental property and renting from yourself in that one? Or is it mainly underwriting the costs against equity? But if you do that you’re hoping your appreciation continues or the market doesn’t go down when you sell to move on. Maybe are you going to discuss multifamily ownership, live in one rent the other(s)?

  30. Tim Pagano

    Wow, I can’t believe this thread. Didn’t we learn anything from the Great Recession? If you have a family there are more important things than a rate of return. You need a home that shelter’s your children and provides a sense of continuity for the family. When you look at your home as investment you to a large degree miss the importance of living. A home and its expense is the cost of making a life with other human beings.

    Speak with anyone who has lost a home and you will find yourself discussing everything but investing. The loss of self-esteem, the fear in children’s eyes, the sense of confusion. It’s an experience that changes people in profound ways.

    I’m a trained investor, but first and foremost my home is where I provide my family a bedrock for family life. A fool can look at the price of something, but it takes a bit of intelligence to understand that the soft costs play a far more important role in having a complete life. Some of the most miserable people I know are the wealthiest folks, and some of the happiest folks I know are balanced in their approach to life.

    I’ve read Rich Dad and I agree with most of what he says, but I also know that much of what he says works only in a good economy. Too much leverage can be a bad thing when you can’t meet your obligations. Losing everything is not any fun. I’ve watched it happen too many times.

    I’ve seen so many folks transform when they finally pay off the mortgage. It’s true financial freedom, because there is a sense of peace when you know some banker isn’t lurking in the background just waiting to seize your security. That experience is liberating for most people. I’ve lived all over the world, but knowing I own a small piece of it provides me a sense of fearlessness.

    Maybe the difference is that I see my responsibilities differently I guess. It’s when you find something more important than oneself that providing a sense of security is worth more than money.

    With that said we buy wrecks and rehab them and live in them. We’ve made money on 5 out of the 6 homes we’ve owned and the other one we broke even. If you don’t have anyone in your life then I guess renting makes total sense, but when you have a family you choose to have a sense of stability. With that comes a sense that you want to come home in the evening to the same place you left in the morning. It’s the cost of living the life I chose I guess.

  31. mike staheli

    In my market it makes no sense what so ever to rent unless you don’t plan on living here very long. It would cost me $1400-$1500 to rent where my mortgage is less than $900. We buy and sell if it makes sense. If it doesn’t, we’ll rent it out and move to the next.

  32. PJ Muilenburg

    You’ve done it again Ben! Interesting article and looking forward to the follow-up. I’m of the opinion that there is a ‘point of profitability’ with a primary residence that will be wildly different in different areas and situations. That is where, if you needed to sell or break lease, owning costs less than renting. Maybe 5 years and maybe 15+.

  33. Tim Koren

    I agree with the general premise and the idea of primary home ownership being a liability (particularly with the costs of required maintenance). But I think it’s a mistake to include things like upgrades to the kids’ rooms or the wife’s ever-changing kitchen/other room design desires as costs of primary home ownership; they seem more to me like costs of marriage and/or having kids! After all, as a renter what are you going to do? Convince your family to move houses every few years due to an inability to modify the home you live in? Even in the best-case scenario of being able to repeatedly find the exact configuration of house that meets everyone’s needs without any modification, the time (and likely financial) costs would be pretty significant.

  34. There are also people out there who want different things that simply a roof over their heads. They want a place where they can raise a family in safety, with no neighbors and the freedom to roam over thousands of acres of public land. Their wives want the same thing and the kids benefit too.

    Not everyone wants to live in a McMansion or move every couple years into a new to them home with all the upheaval that comes from that. Some people want the stability of a fixed location, the ability to have a workshop/man cave/loafing shed with horses or other animals without the drama of a HOA.

    Pursuit of the mighty dollar has been the demise of many relationships and families and while money is essential, its not the reason why we invest, its the opportunities money gives us. My home on 10 acres of land in the boonies is paid off which allows me to spend a portion of my income on rentals. I bought cheap, increased the value of the raw land so if I had to sell, I would make well over $100K in return. Not every purchase decision can be measured in simple dollars and cents; watching awesome sunsets and millions of stars with zero light pollution with my family on the front porch is priceless. Still a good article for those who prefer to be flexible in the job and housing market.

  35. Scott Pigman

    Oh Ben, you are my favorite Russian speaking, podunk-living, real-estate-website lurking troll*. Your ability to provoke people into responding to your posts is incredible. Hats off.

    Perhaps in the next installment you’ll address what good options poor Brandon really has. Sure, he could rent a house instead of buying one. But if the kitchen needs a facelift in a few years or he needs to update his first-grade daughter’s room up from being a nursery, what does he do then? Get his landlord to do the updates? Not likely! Get permission from the landlord to update the landlord’s house on Brandon’s dime? That’s better how? Oh sure, he can just move! But moving is exhausting and expensive. (Ask ME how I know!) And it’s really exhausting and expensive when you have a wife and daughter in tow. (Ask me how I know!) And doing it every year or two is *really* draining. (Ask me how I know!)

    There’s value in mobility, absolutely (Ask me h… never mind). There’s also value in being able to nail a nail into the wall to hang a picture without worrying about violating clause 46b in the lease (you know the drill).

    *I mean that in a good way.

  36. Christopher Leon

    First, as always, very well written article.

    Second, ironically I found myself in this very similar scenario not too long ago, as my wife found the house she wanted. Moreover, because she found what she wanted, and due to the fact I am her real estate agent and I must act in the best interest of my client, I had to pay market for the beast which made my butt hole pucker up to the size of a decimal point!

    I completely agree that this purchase is in fact a liability and will cost me way more than I can imagine, especially with no off-setted income (technically). Not owning a primary keeps you more nimble – I agree. However, I feel the question of owning or renting is a personal one. For us personally, we have a growing family (3 kids and another on the way – all under 2 y/o) and our plan is stick right where we’re at for the next 30 years. We moved up in price point to stay in good school district, chose an up and coming neighborhood so we could grow with the community (and the kids a like). Luckily, our rental business is right around where we’re at, I practice real estate in virtually the same area, and family is minutes down the road. For us, it just made sense to buy and hold a primary. If the market turns for the worse, and people no longer want to rent our products then I’ll be updating this post down the road accordingly.

    For most people, owning a primary is foolish. If you have a solid financial foundation, have little to no debt, and have income producing assets that (hopefully) exceed your living expenses, I think owning a primary is OK and warranted. Even more so if you have a growing family. Best believe, in 30 years or so when I’m in my 60s, I will certainly cash this pig in, and downsize to a townhouse since the kids will be gone (hopefully) and my wife and I can enjoy our golden years. Until then, I’m proud to be a homeowner, raise my kids in a good neighborhood, cut my lawn like a good American while drinking Mexican beer.

    Salud.

  37. Daniel Balfour on

    A house that is mortgaged with taxes, insurance, and a small fund (10% of mortgage) for home related repairs do to emergencies equates to less than the cost to rent this house by $300.00 a month (This assumes ZERO money down as well). What should one do?

  38. John C.

    Disagree.. with caveats.

    First, I do agree that being rich is not simply about money. I very much align with Tim Ferris on the NR (new rich) concept of money, mobility, and time being fundamental elements to a “rich” life.

    That being said, in response to your article.. if you buy a primary residence that can become a rental (at a moment’s notice) then there is no limit to your mobility. Especially if it cashflows positive.

    The ever increasing carrying costs and/or CapEx that you mentioned as negatives to owning a primary are.. inevitably baked into your rent costs as a tenant. If you’ve ever invested in real estate, you know that if you remodel a kitchen you will also raise the rent to reflect the added value (and people are more than happy to pay for it).

    To me, the only time it makes sense to rent is if you already know you’re staying in one place for a short period of time (3 years or less) OR.. if you have got a killer deal where the monthly rest is less than the interest you’d otherwise pay on a comparable property’s mortgage. The latter is very much an outlier.

    • Ben Leybovich

      I don’t disagree with your basic premise, aside for saying this – most SFRs that can be good rentals are not where I’d want to live… The same characteristics that make a good rental house a good rental house are what is the opposite of what makes my heart sing. In which case, if this is my only strategy, what do I really have…?!

  39. Duane Wood

    This topic caught my eye as this is an issue that I have been wrestling with for the past 12 months. My wife and I should downsize with all of the children out of the home, but we like where we live and rentals are few and far between. The homes are at a price point where rentals do not make sense. Even without a mortgage, the cost of ownership is huge (HOA, Utilities, Taxes, Maintenance, Cap Ex). Financially, I can very easily make the case to sell, invest the money from the sale and rent from a financial perspective as we could positive cash-flow and buy a small 4-6 MF investment property.

    My point, however, is that a primary residence is NOT and investment. It is a cost center and one that I advise people to consider the cost of the lifestyle you choose. Make sure you can afford the lifestyle and be wise while executing. We actually bought our home for 75% ($75) of the cost to build at a down point in the RE cycle in 1994. We have remodeled to suit or family and invested 50% ($50) of the original build price back into the home. It has been great to raise the family in the home and on the surface the current market value less capital invested is $65 ($190 MV -$75 Purchase – $50 – Remodel). But the true cost of ownership is not included in this simple analysis and with the time value of money and opportunity cost the cost has been significant. Would I change it? No, but be sure to count the actual cost of a residence as it is not a true investment. If cost were our only consideration we could have saved thousands, but we have memories and have enjoyed living in a great area for the past 22 years.

    • Ben Leybovich

      Fair enough. If you can support the cost, and the cost is fair considering that you are buying your desire to be there (which can’t really be quantified in $$ anyhow), then you walk into it with eyes wide open.

      Besides, it sounds like this is a desirable location, which means the likelihood of significant price inflation over time. So, you are where you want to be, and the equity will save you…

  40. Jessie Huffey

    The bottom line is this- if you are buying your primary based first on emotion and want, you will lose money. If you buy your primary based first on investment strategy and second on personal needs, you will probably make money. My husband (who is a licensed contractor) make buying and selling primary residences our entire investment strategy. We buy an undervalued fixer upper in a good neighborhood, live in it and remodel it for a couple of years as we have time. Sell it once it is fixed, and pay no tax on the gains due to the primary residence tax exemption. On our last one, we bought for 350k, invested 20k in materials, and sold for 500k after 5 years. I understand that he has a specific skill set that allows us to make more money than we would otherwise, however, primary residences can be an excellent investment.

  41. Kevin Olson

    Interesting article Ben , I agree with a lot of what you’re saying and a big part of it to me is the balance of lifestyle design and being a educated investor with savvy financial intellect.
    Take it easy on Brandon though geez! Poor guy taken to the cleaner on the BP post… Curious to see your next article and ideas to find the best of both worlds. Obviously living in a multi unit building you own could be a way to splice it, but that has its own “lifestyle” disadvantages, etc.
    Thanks!

  42. Adam Ulm

    This may be heresy, but I call into question Kiyosaki’s premise that the only definition of an asset is something that is currently generating income. I like the idea, but it doesn’t apply across all situations, and I think it’s improperly applied here.
    In business school we were taught that an asset is:
    “An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. Assets are reported on a company’s balance sheet, and they are bought or created to increase the value of a firm or benefit the firm’s operations. An asset can be thought of as something that in the future can generate cash flow, reduce expenses, improve sales, regardless of whether it’s a company’s manufacturing equipment or a patent on a particular technology.” (http://www.investopedia.com/terms/a/asset.asp)

    Simply put, it doesn’t have to be currently generating income to be considered an asset.

    In situations where you HAVE to pay for a thing either way, paying that same amount (or often less) toward ownership is far more financially sound than paying toward someone else’s ownership.
    Instead of accepting Kiyosaki’s narrow view of what an asset is, how bout we all accept the premise that we all need a roof over our heads, and that roof has to be paid for. If you don’t accept that premise and choose to be a homeless real estate investor, ok, you win. But otherwise, let’s agree that we all have to pay for lodging. So, while paying for lodging, wouldn’t it make sense that the money we pay for lodging go to pay off our own mortgage rather than someone else’s mortgage? Not acknowledging this concept is short sighted.

    But your first point was about maintaining flexibility. Based on this logic, an auto lease would be a good idea. Pay a car payment for 2 or 3 years, and then give the car back and have nothing to show for it. Then start all over again paying off someone else’s asset. Better yet, let’s rent a car….no, only take taxi’s or ubers. That would give you ultimate flexibility, wouldn’t it? Except that you just paid for someone else’s asset. Oops.

    The last thing I take issue with is your premise is that with every year of ownership the costs go up, and you’ll lose money on your primary by paying for all those repairs. Guess what my friend, you’re paying for those repairs on that apartment you’re renting right now. You’re just not getting anything back for it. As a REI, you should understand that the owner of whatever place you’re renting is passing all those costs along to you, and making a profit to boot. And when his property is paid off, you won’t have anything to show for it. Oops.

    What I really like about hearing all the stories of the guests on the Bigger Pocket’s Podcast is the endless creativity they are using to make deals. I think that’s the answer to the flexibility issue. In my best impression of Yoda “Limited is, your flexibility, only by your creativity”. In today’s mobile world, I don’t really understand why you have to liquidate all of your properties in an area, if your wife says you have to move out of that area. From what I’m hearing from the guests on the podcast, the flexibility should be built into one’s investing system, rather than whether they rent their primary residence. Similarly, instead of selling in a down market and losing money, why not move where you want to, and rent your house until the market recovers?

    I just found Bigger Pockets and REI and so I haven’t done any deals yet (other than my primary which as of today I’m right side up $173k on according to Zillow), so I admit I’m armchair quarterbacking here, but the concepts I laid out are sound. I don’t know about you, but I don’t like the idea of paying for other people’s assets, but I really like the idea of having other people pay for mine. That’s why I’m here.

    I appreciate your article. I disagree with just about every point, but I appreciate it because it has made me even more sure that buying my primary residence is a really great idea. So thanks!

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