The Worst Investment You Can Make: Buying a Home

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Dreams die hard. None of us want to give up the belief that we could be a rock star, a billionaire or even the president of the United States. Right now, nearly every 40-something man in this country believes, somewhere deep in the recesses of his mind, that given the chance, he could still play pro ball (some form of ball) -- no matter how much the unvarnished facts would say otherwise.

But perhaps the most quintessential of American dreams is the dream of home ownership. We are taught, generation after generation, to work hard, save up and put down roots by buying a house. And just like those armchair ballplayers, when we buy into that dream, we're deluding ourselves.

In his article, "Five Things Your Need to Know Before Buying a House," author, pundit and successful Wall Street guy James Altucher rejects the home ownership mantra. Among his reasons: "The stress is unbearable when you need to sell. And you have no money when you need it."

Altucher lists various ways in which owning a home can drain one's mental well-being and can become a financial nightmare as well.

Mathematically, it doesn't make sense

When you do the math on home ownership, it's plain that it is one of the worst investments you can make. Consider the purchase of a $350,000 house, which is slightly over the current average U.S. sales price.

In most cases, you will be required to have a 20 percent down payment, or $70,000. This leaves you with a loan balance of $280,000, which at the current interest rate of 4.5 percent for a 30-year fixed mortgage will give you a monthly payment of $1,853.10.

At the end of that mortgage, you will have paid $667,166 in principal and interest –- or $387,116 more than the original loan amount. During that same period, assuming a 1.5 percent rate, you will also have to pay another $126,000 in property taxes. (And there are plenty of places where the tax rate is higher.)

But wait, there's more. Using a 1 percent maintenance rate -- for upkeep, maintenance, and repairs -- you can add another $3,500 per year in costs, bringing the total out-of-pocket costs over 30-years to $898,166.

What Could You Have Done With That Money?

But the dream really fails when you factor in the lost opportunity costs associated with all that money.

Since you have to live somewhere, let's assume you could find a similar rental home for 75 percent of your monthly mortgage payment, or roughly $1,400 per month. Then say that you invested that $70,000 down payment in the stock market, which has averaged a 9.4 percent return over the last 100 years.

Then, each year, you add to your investment the difference between your rent payment and potential mortgage payment, as well as the money you save by not paying for property taxes, maintenance and other costs of home ownership.

After 30 years, you would have nearly $3 million in your portfolio.

Of course there are numerous tweaks you can make to this scenario -– for example, factoring in your home's price appreciation or the tax benefits -– but no matter how you slice it, owning a home doesn't come anywhere close to making financial sense.

20 Ways to Slice and Dice the Inputs

Don't believe me? Check out this super cool interactive calculator that the New York Times created. It allows you to input over 20 variables to try and justify owning vs. renting. See if you can make the math work out in favor of home ownership.

Proponents of owning will tell you that there are certain intangibles associated with purchasing your home that trump mere financial considerations. The sense of community. The feeling of planting roots. The ability to change or redesign your house at will. And all of these points are valid, and may tip the scales for some in this debate.

But facts are facts. You can rationalize whatever reasons you want for owning vs. renting, but numbers don't lie, and it's important to at least go into the process with eyes wide open.

Brian Lund's blog offers more on personal finance, the stock market, investing and the secret to eternal life.

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"Since you have to live somewhere, let's assume you could find a similar rental home for 75 percent of your monthly mortgage payment, or roughly $1,400 per month. Then say that you invested that $70,000 down payment in the stock market, which has averaged a 9.4 percent return over the last 100 years.

Then, each year, you add to your investment the difference between your rent payment and potential mortgage payment, as well as the money you save by not paying for property taxes, maintenance and other costs of home ownership."

This is NOT a valid assumption to make and ignores the fact that renters indirectly pay property tax, insurance, and maintenance costs. Like any other business, the consumer pays for all costs of the product.

This article vastly oversimplifies this calculation and makes some overly optimistic assumptions about renting.

First off, inflation will drive rent up. This article assumes a stagnant rent payment over a 30 year period, but monthly rental costs have doubled over the last 30 years. The payment on a mortgage started 30 years ago would have stayed stagnant. This negates much of the ability to invest the difference between the rental and mortgage payment over a 30 year period.

Second, the typical homebuyer isn't buying an average priced home, they're buying a median priced home, which about $100k cheaper. People move into smaller homes, build equity, and then purchase larger or newer homes.

Third, this ignores the concept of the 15 year mortgage, which generally offers a lower interest rate and a huge savings in compounded interest. The monthly payment can be higher, but you build equity faster. Again, buy a cheaper home to better invest and move into a larger one later.

Fourth, most twenty some things will not have a $70k principal investment. Most people making enough money to out away $10k a year outside of a retirement account and hit $70k for a down payment before they're 30 (and have 30 years to let an investment grow) are college graduates who will mostly be paying off student loans at this point instead. They won't be getting that kind of dry powder money until their mid 30's. The way that people in their late twenties have that down payment is by selling their first starter home that they bought with a minimal down payment in their early twenties and paid PMI on. Assuming a starting principal of $70k for a 30 year investment is simply unrealistic.

Fifth, this article ignores the fact that once you own your home after 15-30 years, you no longer have a housing payment outside of property taxes, insurance, and maintenance. You will be forever paying rent, unless you buy a home with that investment. In 1985, the average home price was $82k. Today it is at $224k. Assuming this kind of real estate growth, that assumed $350k may cost $1 million or more in 30 years.

January 28 2016 at 11:37 AM Report abuse rate up rate down Reply
Michelle B

This article was simply awesome - straight forward and to the point! My family and I have had this running debate about buying/renting & the underlying factor is always "freedom" - comfort, community, customization etc. BUT how free are you really when trapped by a mortgage, maintenence and unexpected expenses? Ill take that extra $$ and invest in living, thank you!

June 03 2015 at 12:50 PM Report abuse rate up rate down Reply
Brian Zabel

You should really look at the median house price not the average. The median is around $290,000 for NEW houses source. The median price for all houses is $187,000 source. The average house price is skewed because of multi million dollar homes and that number isn't really relevant to someone who wants a house. So lets do your math 20% of $187,000 is $37,400 leaving you with $149,600 the current rate is actually 3.99% lets do 4% for simplicity. Thats a $711.35 a month for the average person for a house. Thats less than the median rent for a 1br or studio at $769 a month source at the end you will have paid $293,486 not accounting for property tax which varies a lot. There is also a lot of intangible benefits. Your mortgage is fixed but you have no idea how rents are going to change. You are also building equity in your home and that can save you from borrowing money at a higher rate otherwise.

January 04 2015 at 4:10 PM Report abuse rate up rate down Reply
David Marden

This article is pure garbage. Where are you going to find someone to rent you a $350,000 home for $1400.00/month? If buying a home is such a bad investment, who is going to buy the home to rent it to you? I am surprised that all of the landlords in the United States are not aware that owning a home is such a bad investment? Renters are at the mercy of the landlords and will face rent hikes, or be forced to move more often (which also costs money). Owning a home also provides stability (school district, public services, etc) that can be more difficult to maintain as a renter. Buying a home is an investment and there are always risks associated with any type of investment. Buying a home is hardly the worst investment you could make.

August 16 2014 at 3:17 PM Report abuse rate up rate down Reply

Renting sucks, keep paying your overpriced rent for a matchbox in the big city. When you retire you'll still be lining the owners pockets or doing that somewhere else. I'll retire comfortably in my home that I own including the land underneath it. As long as the property taxes are paid on it, it's mine.

August 06 2014 at 2:57 PM Report abuse +1 rate up rate down Reply

Just keep telling this to all the apartment suckers who keep paying me rent.

August 01 2014 at 1:23 PM Report abuse +2 rate up rate down Reply

I rented for twenty years, waiting for the crash. Now I have two houses for the price of one. Paid cash.

July 24 2014 at 11:33 PM Report abuse rate up rate down Reply
Sona Hucko

It is amazing to watch what kind of ideas some people have.
Lets start here. My payments are $1853.10 for a hous,. if your math is correct. I have to pay insurance, taxes, repairs, up keep, let's say all together with motgage payments $2300 a month. You expect to rent this house from me for $1400 a month. I had seen a lot of people with low math skills, but no one who wouuld rent you a house for this money. I have to make a profit on a top what was mentioned before. Your rent will be $2550 a month. If you do not agree you may aply for a place under Brooklyn bridge. But first ask your family if they will follow you.
I guess you know golden rules. Who has a house, is making rules. Good luck with your rent.

July 24 2014 at 12:25 AM Report abuse rate up rate down Reply

Oh really, flysalot2. I can't get a tax deduction for my home morgtage because as a single taxpayer, the deductions I get are good enough.

July 23 2014 at 8:34 AM Report abuse rate up rate down Reply

Ok, if it is better to rent than own, after 30 years of renting, what do you have? Zilch, but you did paid off your landlord's mortgage. What dumb advice. And don't forget, with a mortgage, you have a tax deduction. Depending on the mortgage amount, you can save on an average of $200 to $300 per month off your income taxes. For example. If you rent and pay $1,500.00 per month, it is really costing you $1,700 to $1,800 per month since you don't have a mortgage deduction. Now, if you have a mortgage of $1,500 per month, with your tax savings, you are really paying $1,200 to $1,300 per month.

July 22 2014 at 12:59 PM Report abuse +1 rate up rate down Reply