What does renting a home or apartment instead of buying have to do with investing?
First of all, buying a home is one of the biggest "investments" people make with their money. They pay a mortgage, taxes, and upkeep to not only provide themselves a place to live, but to hopefully have a tangible asset that can be borrowed against or sold at a profit.
Second of all, from childhood all of us as Americans are taught that owning a house is the American Dream and that if you rent, you're merely throwing your money down the drain.
What if this was just a misconception?
"Renting Makes More Financial Sense Than Homeownership" by Jack Hough brings to light the other side of the argument. According to Hough, renting costs less and thus allows the remainder of the money to be invested in a historically 7% return (factoring in inflation)- the stock market. Meanwhile housing investments return a shocking 0% after accounting for inflation.
Hough makes a strong case for renting. What does everyone out there think?
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6 comments:
Home buying is a lot like picking stocks. You typically make or lose most of your money the minute you buy a house. With the current economy, there's a lot of low hanging fruit right now that could net you some serious money when the market turns around. Best buy you can make is the cheapest house in a wonderful neighborhood. Take advantage of the prices you find on foreclosures and short sales and extremely low mortgage prices and you'll be sitting pretty in a few years.
Think of it this way, you are making a Buffet type value play buying a nice house in a great neighborhood that's seen the price fall due to the terrible market or mistakes of the management (i.e., the owner and/or bank that made the loan).
As for the argument that renting is cheaper, that may be true in an up market or when rates are high, but there are numerous other factors that go along with that such as the inability to make the place you rent truly your own in terms of style, layout, etc.
Buffett says something like "Buy fear. Sell greed." Sounds like Conan the Barbarian of Wall Street. Hear the lamentations of their home equity accounts...
There's definitely some low hanging fruit out there as Woody points out but if housing prices mirror the CPI, it seems like a break even proposition mostly.
And if you don't feel like reading his book, here is an article he wrote for SmartMoney.
http://articles.moneycentral.msn.com/banking/homebuyingguide/whyrenttogetricher.aspx
My link in the original post goes to the exact same article posted on yahoo :)
Personally, I'm going to have to do some more research about owning vs. renting, but I think this is a great starting point for the renter's argument.
To Paul Woodcreek:
I wonder if the bubble has burst to the point that housing is cheaper than the historical averages or just back down to them (where then it would still be a bad investment).
From Buffett's recent letter to his shareholders, "Homeownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser."
I agree exactly after making that mistake myself. A home is not an investment, it is a place to live.
Gone are the days when owning your own house was the American dream. I agree with Cadillac that buying a house for the sake of owning a house is not a good idea. If you have the financial means, and you plan to be in that location for a solid length of time (10+ years), then a house could be a good "investment". Otherwise, leave home buying to people who flip houses for a living or are in property management.
An argument for the real estate investor (and any investor) is that you buy when the price is low (maybe now?) and the company (neighborhood, location) has a competitive advantage (new factory/jobs being created nearby, close to the city/finincial/business center). Of course, there are risk-taking investors who trade constantly (flip that house) or investors who are in it for the long haul (staying at the house for an extended period of time). And as most advice goes for the average, run-of-the-mill investor, you get the best returns staying put for the long term. So it may not be right for everyone, but a house could be a vehicle to keep your money in.
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