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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