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.
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?
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.
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.
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!