Housing prices are depressed and interest rates are near an all-time low. For many people, these conditions suggest that now is the time to invest their savings into residential real estate and make a house investment by buying a home. However, there are many more considerations that should go into making the largest purchase of one’s life.
Everyone needs a place to live, and they must choose whether to rent or buy. After reading a number of personal finance books, the potential homeowner might think that there is no sense in throwing away money renting when they can start building equity by making a house investment. What they fail to take into consideration are all the additional costs of being a homeowner.
- Property taxes almost always go up. While the mortgage payment may be locked in at the current interest rate, the homeowner’s property tax payments can continue to increase putting an extra squeeze on an already tight budget.
- Utilities are often taken care of, at least in part, when a person rents. Once they decide to make a house investment, they are stuck with the entire bill each month.
- Regular maintenance is the responsibility of the landlord. If something breaks, the landlord fixes it. When something goes wrong with a house, the homeowner pays for the repairs out of pocket. Even basic problems with plumbing or heating systems can cost several thousand dollars to repair.
- Homeowner’s insurance is often costlier than a person initially expects. Renter’s insurance, on the other hand is relatively cheaper. In the event of a catastrophe, getting back up and running as a renter can be quite a bit easier than as a homeowner who has made a house investment.
On the surface it might look like the costs to rent are the same as to own. Especially when a person just compares the price per square foot, the cost appears to be a no-brainer in the favor of owning a home. But after figuring in all the extra costs, the savings frequently swings in favor of renting.
Many people might say it costs more to own a home, but you build equity as you repay your mortgage and the price of real estate increases. This is true; however, residential real estate only appreciates at a historical rate of around 4% per year (depending on the area of the country this number could be more or less). In comparison, the historical annualized rate of return for the S&P 500 is 8%-10%, even after adjusting for inflation. Even with the tax advantages of writing off mortgage interest, from an investment perspective it simply makes more sense to put money in the stock market than to make a house investment.
There is nothing wrong with owning a home. I have been a home owner for over 5 years and I love the added responsibility that comes with it. A home is a great place to raise a family, it is convenient to have a yard for kids and a dog to play in, and many people see the maintenance and fixing up a house as a hobby rather than a chore. Owning a home is not a bad thing, unless a person is trying to own a home as an investment. Then they are in for a big disappointment when they realize they could have made more money investing in stocks and bonds.