Get Rich Slowly is a good website that I like to visit. One of the most popular, and interesting, blog conversations on the site is entitled Renting vs. Buying: The Realities of Home-Ownership. I found it fascinating and astonishing that of the 179 responses on that blog, the majority of people expressed the opinion that it is better to rent than own. Reasons for this opinion included, such comments as, “you pay too much in interest,” “we’d rather put the monthly mortgage money in more profitable investments,” and “we don’t want to pay for house repairs.”
I was amazed because I think that buying a house is the one of the best investments available to the average person, second only to buying 2 or 3 houses. Sure, if you buy one house you pay a lot of money to the mortgage company only a small amount of which actually pays off the house. However, renters pay a lot of rent money, that only pays off the mortgage of the owner of the rental complex.
How much do renters benefit when property values go up? Zero. If you own a house you have an investment that consistently goes up. According too the U.S. Census Bureau, the housing market historically (1940-2000) rises 5% per year (adjusted for inflation). Home owners benefit from historical trends and renters don’t.
Some comments touted stocks as delivering a better return than real estate. The catch is, you can’t leverage stocks. As a simple example, if you want to purchase $10,000 of Google stocks, you pay $10,000.
With leverage (borrowed money), you can purchase a $200,000 house and just put $10,000 of your own money in. If the Google stock goes up in value 10%, you made $1,000. If you house goes up in value 10%, you made $20,000. Because of leverage, you doubled your investment in real estate, whereas you only received 10% on your stock investment.
The 500-lb gorilla in the room that was never mentioned is that eventually the home owner will pay off the mortgage on the house and never make another mortgage payment. The renter is doomed (as Darth Vader might say) to pay rent forever.
The big benefits of home ownership comes later. Let’s say you bought a house on a 30-year mortgage. Time passes. You want a bigger house. Do you sell your home? No, instead of selling your residence, you move into a new house and rent out the old one.
When you have a rental property, in addition to owning your residence, then the cash starts to flow to you. For the second house, instead of you paying the mortgage, the tenant pays it off, not only the mortgage, but also the taxes, the utilities, and on top of everything else, he/she pays you a few hundred bucks extra.
Then you do the same thing again and you have 3 houses, and more money coming in each month. In addition, the value of all houses is going up. A $200,000 is worth $300,000 in 10 years. If you own just 3 houses, you made $300,000.
Home ownership makes sense, and multiple home ownership makes dollars.
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