Why You Should Buy a House
I want to make a case that owning a home is far better than renting. Especially if you’re living in the USA.
Related: Tips on Buying a House
The latest survey, from the Federal Reserve’s Survey of Consumer Finances, revealed that a homeowner’s net worth is 36x greater than that of a renter ($194,500 vs. $5,400). Lawrence Yun (Chief Economist at the National Association of Realtors) predicted in a Forbes article, that by the end of 2016, this gap will widen to become 45x greater! So given that we’re already half-way done with 2017, it’s highly likely that this gap has increased quite a bit since 2013.
#1. Owning a home is a form of “forced savings.” The most common reoccurring theme I come across is just how little the average person saves. To give you just one example: it’s very common among millennial and millennial families in metropolitan areas in the US, to spend between $1,000 – $2,000 per month just on eating out. And these are average income people. And this kind of overspending isn’t exclusive to just millennials. I recently read an article somewhere stating that for the first time ever last year, the money spent on eating out has surpassed the money spent on groceries in the USA. So simply put, paying mortgage payments, is a means to force some of that money to go towards paying down your mortgage; which in turn will steadily increase your net worth over time. The same can be said for saving for a down-payment. With a goal of buying a house, the majority of people will need a substantial amount of down payment. Committing to this type of goal will also force people to save rather than spend on consumption items.
#2. Owning a home increases your net worth. I guess this is similar to #1, but I need to state how important this is: when you own your own home, every mortgage payment you pay goes toward increasing your net worth; whereas every time you pay rent, that money goes toward increasing your landlord’s net worth. It’s that simple. For the majority of people who get a fixed 30 year mortgage, after that amount of time, you have a house free and clear. Whereas a renter will have nothing to show for it.
#3. Home ownership is subsidized in the US. You probably heard of mortgage interest deduction. Not only that, but if your itemized deductions exceed the standard deduction, you can deduct your property taxes as well. This is insane. So in a way, the government gives you money for having a house, and that’s why I say it’s subsidized. Which again seems backwards. You’d think the less well off would have the subsidies, but it’s not the case here in the US. Furthermore, this also means that the bigger the mortgage you get, the better. The government practically encourages you to get the biggest mortgage you can afford, and you can write off more interest and property taxes by doing so.
#4. You’re not taxed on a substantial portion of the increase of your home value when selling. This one is crazy too. An increase in the value of an asset is called capital gains. So if your house goes from $300,000 to $550,000, that’s an increase of $250,000. You don’t have to pay taxes on this gain, when you sell. To take it even further, if you’re married, you don’t have to pay capital gains on up to $500,000! The reason why this is crazy is because on practically everything else, if a value of an asset goes up (i.e. stocks), you need to pay taxes on that increase. But with your home, you don’t have to.
#5. Rent costs vs. Mortgage costs in many areas in the US are very similar. For example, my house (3 bedroom 3 bath) currently costs me about $2,500 per month (mortgage + HOA + property tax). The apartments next door costs $2,620 – 3,920 (for a 2+ bedroom 2+ bath). The average rent in Los Angeles, CA, for a 2 bedroom 2 bathroom apartment is roughly $2,550. A single bedroom is on average between $1,800 – $2,000.
#6. Real estate appreciates over time; and at the minimum can be used as an inflation hedge. You’ve probably heard when your grandparents or parents bought their house back in the day. For like $20,000 and now it’s worth $2 million. The median house in my area (Los Angeles/Orange County California) costs $700,000. The median price of a newly built house in Orange County, CA is $900,000+. So there are people out there buying these places. And even though you can have a tremendous housing crash, like in 2008-2009, over the long term, real estate at a minimum keeps up with inflation. For example, we bought our house in 2013 for $413,500 when I was 27, my wife was 26 (which is way cheaper than what most people around here are paying), and 4 years later according to zestimate (which is an approximation), now my place is worth $549,000. Which is an increase of $135,500 in just 4 years. Not bad! Had we rented, we wouldn’t have enjoyed this run-up.
#7. Having a mortgage allows you to leverage your money for a higher return. Some of you might be saying, well it was great that your property went up $135,500 in 4 years, but there was an even bigger run-up in the stock market! You could’ve made more there instead of with a house! And yes there’s some validity to that. But even with that being the case, having a mortgage means you’re leveraging your cash. So having a down payment of $100,000 in the stock market with a 15% return would’ve netted us $15,000 per year. But a $400,000 property returning just 5% would net a higher return of $20,000 due to the leverage on the money.
#8. The real estate in the US is relatively cheap compared to other parts of the world. Yes, it’s true! Even though a lot of my peers (myself included) moan and groan about how expensive real estate is here locally (and it’s true), real estate is actually relatively pretty cheap here compared to many places in the world relative to median gross income. Places like Japan, Australia, Hong Kong, Singapore, UK, are all far more expensive than the US. This is hard to imagine, but it’s true; that said, even though real estate is relatively cheap here in the US, personally for me and my wife, we’re not really big on putting everything in one basket; so we’re big believers in buying a cheaper more affordable home within your price range, than going all in on a house (there’s a lot of cons to being house rich, but cash poor).
#9. Having ample parking space is a tangible benefit. Yes, parking. In some places, especially if you’ve lived downtown anywhere like Los Angeles, you know how annoying finding parking is. You have to pay for valet everywhere you go or find public parking, which you still have to pay for. Even if you’re living on the outskirts of a city, if you live in an apartment, chances are you don’t have a garage. So have fun driving around for 15 minutes to find a place to parallel park on the street after a long day of work. Not fun. So having your own place typically means you have a garage, possibly a drive-way, and on top of that ample street parking as well for visitors if you live in a HOA or gated community like we do. There’s never a time where there’s no parking available. You can argue that people can rent houses as well, not just apartments. And yet even though that’s technically true, I’m not seeing this much in my area. I know of very few people who rent houses. Most people are leasing apartments. And currently, there are way less single family homes being built; with way more apartments going up because that’s where the trend is. Especially among the millennial cohort.
#10. Having a house means there is no one living below you or above you. If you’ve lived, or are currently living, in an apartment you know how inconvenient it is with people living on the floors above you and below you, and possibly even to the right and left of you. If you’re the one above, you have to tip-toe with every step. I know this because I grew up my whole life living in apartments until I was in middle school. As children, my brother and I couldn’t run around in our own place! If you’re the one on the lower floor, it’s even worse because you have very little control over what the people above you do and the amount of noise they make.
#11. Having your own place typically means you have way more space. Way more space for storage, way more space both in the common areas and in your bedrooms and bathrooms. Just having an attic and garage means you have a lot of places you can store everything. Additionally, adding built-in shelving and racks in your garage really makes a huge difference rather than reducing your living space by having everything stored within your common living areas or closets. Again, not a big pro, but a pro nonetheless. And only people like me who’ve grown up in apartments will truly appreciate this.
#12. There’s a tremendous sense of accomplishment and peace with owning your own home. This part isn’t math. But there’s a certain level of accomplishment and pride of owning your own house. Not only that, it’s a place you can call home, and there’s really no price tag for something like that.
I hope I made a convincing case of owning your own home. Owning a home, especially here in the USA, is far better than renting. Having said that, I understand that it’s tough for a vast majority of people to save enough for the down payment. I get that. We thought it was going to take us a grueling 8 years of belt tightening to get there but we ended up getting there in 5 years. So thank God for that. It wasn’t an easy journey for us, but it ended up being worthwhile in the end.
And given that the US is set up to encourage home ownership, there are programs out there (FHA loans) and special bank programs (Wells Fargo), where they allow you to do as little as 3% down.
I need to admit that even with all these great pros to owning your own place, there are also a long list of cons to owning a home as well. Maybe I’ll touch on some of that in a future post!