Many people dream of owning their own home. After all, that is what makes us feel like we have arrived. We have been taught, often from an early age, that owning your home is the only way to become rich (instead of making your landlord rich). Lately, there have been quite a few analyses done on why a home is not an investment, and owning is often not as good of a route to take. Here is the math behind those analyses.
Most real estate is claimed to appreciate at between 3% and 5% per year (obviously this varies by location). However, with the interest that you are paying on your loan, you do not actually experience that type of growth in your investment.
For instance: you buy a house for $150,000 and get a 4.5% 30 year fixed interest loan. Over the next 30 years, if you pay nothing but the minimums, you will pay around $336,000 for the house (including taxes and insurance; these have not been adjusted for inflation). At this point, your $150,000 house will be worth $497,969 (assuming 4% growth). That comes out to an annualized rate of return of about 1.3% ($336,000 growing to $497,000). If you had taken and invested $11,220 each year for 30 years, you would have “spent” $336,000. However, if you only got a 4% rate of return (and you could almost certainly double that), you would end up with $650,000. Or $150,000 more than if you sold your house when it was paid off.
You may be saying, “Yeah, but that’s not a fair comparison, I would still need to pay rent!” That is true; however, we are looking at a total cost versus total return. Even if you only invested the difference between owning and renting, let’s say $300 per month, you would invest a total of $108,000 over 30 years, and it would be worth $208,000 (assuming a 4% return). You invest 33% as much as putting it into the house, and you get a 40% better return.
The point of the math is not to dissuade you from purchasing a home. Renting may be cheaper, but you don’t get to own. You are subject to the landlord’s rules, you can’t customize your living space, and in many places you can get evicted for no reason other than the landlord wants you out (he or she must still give proper notice). Owning a home is a good feeling, I know because I own my home (or at least I have a mortgage that I am paying on). And interest rates are still low (for those of you Down Under check out NPBS for just about anything mortgage related, including great interest rates), so it’s still a good time to lock them in.
Owning versus renting has long been a hot debate. One side says own and build equity, the other says rent because it logically makes more sense. The truth is: would you actually invest the money if it wasn’t going into your house? Most likely you would not. Owning a house is like a forced savings for many people. What it ultimately comes down to is what you want, desire, and are comfortable with. Owning isn’t bad, I love my house and I love to work on it. I am very happy with my decision to buy.
What are your thoughts on owning your home versus renting?
Very interesting points. I agree that having a house is like a forced savings account. I am happy with my house now because its finally making money in terms of rent with tenants.