Your House is a Lousy Investment

Here’s the truth about houses: Unless you’re a landlord, your house will probably be the lousiest investment you ever make.

The myth about home ownership is that it’s a great investment — a way to “build equity” rather than “throwing your money away on rent.”

Hogwash.

Here’s the truth: When you rent, you pay one bill: the rent. That’s it.

When you buy, your property tax ALONE might cost as much as a single person’s rent. Property tax for the house in which I was raised (which was valued at $250,000) cost $500 a month … the same amount I paid as rent all through college.

And this tax, by the way, is money that contributes $0 to your equity … money that you’re “throwing away.”

Live in an area with low property taxes? Okay, then calculate your property tax + homeowners insurance. I own a house in Atlanta, Georgia, and my taxes + insurance equal the cost of a one bedroom rental in the same neighborhood.

“But I’m not single!” I hear you saying. “We’re a couple with kids, and we need more than one bedroom!” Fair enough. Let’s say you’re a couple, looking for 2-3 bedrooms, you live in an area with low taxes, AND you’ve found cheap insurance. On the surface, you seem like a great candidate for a home owner. So let’s crunch some more numbers, shall we?

How Much Will that Home Really Cost You?

Calculate the amount of money you’re throwing away on the interest on your mortgage. Remember, your mortgage principal repayment becomes home equity; your mortgage interest payment becomes thrown-away money.

“Oh, but mortgage interest is tax-deductible!” you reply. (This is the equivalent of saying, “Oh, but for every $1 dollar I pay, I save 28 cents!”)

Let’s say your mortgage interest is $400 per month. Subtract the 30 percent you saved in taxes. Your out-of-pocket mortgage interest — your Net Loss — is $280. Now, let’s assume low figures for the property tax and insurance: Your property tax is a mere $300 a month, and your insurance is $120 a month. Congratulations: every month, you’re “throwing away” $700 per month on your house: money you’ll never see again, money that doesn’t add to your home equity, and money that won’t add one cent of resale value to your home.

Wait, that’s not all. That $700 per month ($8,400 per year) that you “throw away” is JUST taxes, insurance, and Net Loss interest. We still haven’t accounted for repairs and maintenance.

Regular ‘ol Maintenance … Nothing Fancy

You want a roof over your head? You can expect to replace it every 10-15 years. An asphalt-shingle roof (the cheapest) on a ranch house will cost $1,700 – $8,400, according to CostHelper.com. Let’s taking the average of those prices — $5,050 — and the average of that timeframe, assuming a new roof that will last 12.5 years. That means your roof costs you $400 per year.

Don’t forget to replace your carpet. According to Home Depot’s website, this will cost $2-$6 per square foot and needs to be done every 5-10 years.

On an 1,800 total sq. ft. home (moderate size) that needs 1,000 sq. ft. of carpeting (hallways, bedrooms, living area)  assuming a modest $3.50 per sq. ft including padding and installation, every 7.5 years, your carpet will cost you an average of $465 per year.

Now we’re up to $865 per year on JUST maintaining the carpet and roof.

Oh yes, does your house come with a yard? A lawnmower costs $250. It’ll last for, say, 5 years without breaking, so that’s an average of $50 per year plus gas. I hope you’re not planning on landscaping, because that will really cost you. You’ll need a sprinkler system, too. And your furnace needs to be fixed. Don’t forget to fix the gutters, repaint the siding, and spray for termites.

Honey, can you please call the plumber? And fix the garage door? And … is your refrigerator running?

 

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19 Responses to “Your House is a Lousy Investment”

  1. Blessing @ Working Mom Journal
    23. Mar, 2011 at 10:58 am #

    Girl, you are so on point. I am living on your blog for the next two weeks :) I am actually renting my 2086sqft house for just $800. I am better off doing that than buying and paying taxes, paying for landscaping, etc. I learnt from the recession, thank God.

  2. Tom
    01. Jun, 2011 at 12:05 am #

    Agreed! I am from Vancouver, where an average house by any definition will go for North of a million dollars. There are certainly good reasons to want to own a house, as long as financial gain and investment don’t enter the picture! Another great post.

  3. Kellen
    13. Jul, 2011 at 7:01 am #

    Great points! If you buy with an FHA loan (like I’m planning on) you’ll have to pay PMI (mortgage insurance) too, because your down payment is so low. And, according to my mortgage company, while that can be reduced as you get more equity in the home, it never goes to $0/month with an FHA loan, not even when you get to 20% equity.

    • Shilpan
      13. Mar, 2012 at 10:22 pm #

      The trick to get rid of PMI is to call your lender and have it appraised. If your equity exceeds 20% threshold, they will remove PMI. But, the ball is in your court.

  4. Catherine
    14. Jul, 2011 at 8:58 pm #

    HI Paula

    I don’t totally agree with this theory. There is something to be said about the feeling of permanancy that renting doesn’t give you. I like my privacy and renting just doesn’t give me that feeling regardless of where I am renting.

    Having a mortgage isn’t the worst way to spend money and if its done right, you can have it paid off quickly. Tenants, biweekly etc. Yes it might be more than renting BUT its not like you dont’ get something in return. And if you are planning on retiring in that home, well you need a place to live at that time too.

    Renting isn’t for me nor is buying really cheap housing and saving like crazy to travel. One of my passions is animals and you can’t have them in appartments and I don’t want to own a trailer in a trailer park.

    It comes down to choice and I prefer to own but doing it the right way.

    Thank you for all the tips.

    • AffordAnything.org
      15. Jul, 2011 at 5:12 pm #

      @Catherine — It’s definitely all about setting priorities. I wrote this post to show that buying doesn’t always make the most financial sense, but there are lots of things that people choose to do for pleasure, even though it doesn’t make financial sense. Eating at restaurants doesn’t make financial sense compared to cooking at home, but many people, including me, still do it because we prefer to spend extra on something we enjoy.

      The point of this post is to illustrate that buying won’t necessarily “save” you money compared to renting, but if you want to buy a home regardless of that fact, then you should be conscious that this home is your “spending priority” … even if it means you have to make cuts in other areas (like eating out, vacations, etc.) in order to buy the home.

  5. Ryan Brooks
    22. Jul, 2011 at 3:49 pm #

    Although it is very nice for you that you were able to rent a $250,000 house for $500 while you went to college, that is not realistic for most people. Most property owners are not willing to rent out nice homes for just enough to cover property tax. I assume that they took care of the yard and landscaping for you as well. Did they get you a hotel and put your things in storage when they replaced the carpet?
    The thing you and most other people need to understand is that most people buy a nicer house than they need or can properly afford, but they typically settle for less when they rent. I assume that in college you rented a small, modest place without extravagant landscaping, not the quarter million dollar home that you compared it to.
    Compare the costs of buying the same crappy place that most people rent or compare the cost of renting your dream home to buying same. Most people rent the place that will get them by for a year or two, and then buy the house they want to die in. That is the problem.

    My first house purchase at age 25 was 1750 sq ft for $15,500(1997). I did put a roof on it. It cost $1000 and I put it on myself.

    It comes down to mobility. If you are going to move, rent. If you are going to stay for 20 years, why buy your landlord a house. Unless you think he is losing money renting to you. Just remember to buy a house just as cheap as the place you would rent otherwise.

    p.s. never ask the guy selling carpets how often to replace it. 5 years is absurd unless you are renting the house to college students having puking contests.

    • AffordAnything.org
      22. Jul, 2011 at 5:03 pm #

      @Ryan — Actually, the house I lived in during college was very nice, and yes, they did the landscaping for me.

      You mention: “unless the landlord is losing money renting the house to you.” In a LOT of markets, this is 100 percent the case. The monthly mortgage, property tax, insurance, water and trash add up to less than the cost of the monthly rent. The landlord loses a few hundred every month, hoping he can compensate it through eventual property appreciation, which is a gamble.

      Take a $250,000 home, for example. Let’s say you put down $25,000 and took out a 30-year fixed-rate mortgage for $225,000 at a 6 percent interest rate with 0.5 percent PMI. Your monthly mortgage payments would be $1,442. Add $100/mo insurance, $250/mo taxes, $150/mo water, $30/mo trash and an estimated $70/mo in repairs/maintenance, and your total monthly expenses (excluding electricity and gas) are $1,942.

      The question becomes: If you bought this house, can you rent the home for AT LEAST this much money? A successful landlord would say “no” — the figures above don’t factor for estimated vacancies (between 5 to 10 percent), the cost of landscaping/maintaining the yard, and the cost of hiring a property manager. Plus, the $70/mo repairs budget is a little too conservative — it assumes nothing major will go wrong.

      Now, that’s not true in every market. Some areas command high rent, but the purchase price is low. Other areas — in fact, MANY other areas — command high prices but yield low rents, which costs the landlord more money than he collects.

      In the past, landlords took that gamble because housing prices were appreciating. These days, post-Housing Crash, they’re more reluctant to take that risk.

  6. Luis@wealth-steps
    21. Aug, 2011 at 7:42 am #

    The reality is that your house just like any other investment can be a good one or a bad one. If you pick the wrong house and buy it for the wrong price then it’s a bad investment. IMHO it’s still better than renting.

  7. Elizabeth
    24. Aug, 2011 at 10:30 pm #

    Hi,
    I agree with you that it’s never wise to bite off more than you can chew and home buyers should definitely consider all the costs you pointed out!

    I’d like to add, however, that if you can afford a house, that there are positives. I’ve thought about this before and concluded that — initially, a house is more expensive versus renting, but over the course of time, rents will rise and continue to rise, whereas the home owner has locked-in his monthly mortgage based on today’s “values.” Imagine 15 years from now…

    Even though landlords rent out at the current values, don’t most make profits all the while covering roof repairs, property taxes, grounds maintenance, etc.? I’m thinking most of those who have owned homes / apartment buildings for several years, not those who unfortunately bought in this recent bubble — hopefully, the market will recover and these people will get their values back!

    I would also like to add that property taxes are also tax deductible and currently, PMI is tax deductible. So you do save a little more there. Also, just owning a home opens up other tax deductions not available otherwise– that’s because we can claim either the “standard deduction” or “itemized deductions.” Once our itemized deductions exceed the standard deduction–and home ownership usually helps this-you can claim “itemized” and start deducting other thigns too–like stuff we donate to Goodwill, other charitable contributions, including what we give to our Church or Temple, a % of employee incurred expenses, etc. So generally, there are more write-offs available to home owners, that go beyond just the mortgage interest & property taxes.

    Overall, I think if you can afford a home, it’s normally a good decision…

    I’m looking to buy a home now, have good credit, and will luckily quailfy for the lowest interest rate. Our loan broker said we would be approvved for $600K to $650K based on our income and credit, but we’re aiming for $400K, to keep it reasonable. :) Btw, we’re in Los Angeles, so these #’s may seem crazy in other places, but in L.A….sadly, these prices are normal…

    Just wanted to add my thoughts…
    Thanks.

    • AffordAnything.org
      25. Aug, 2011 at 5:09 pm #

      @Elizabeth — I definitely advise looking at a home from the point-of-view of a landlord trying to determine if the house is a good rental investment. You mentioned that most landlords earn a profit even after repairing the roof, etc., but this unfortunately isn’t always the case.

      SOME landlords make a profit. Other landlords are losing money on the house each month, and hoping — speculating — that the house will rise in value enough to more-than-compensate for their “negative cash flow” each month. During the housing bubble, this was a popular strategy.

      My parents actually did this with a rental property they bought — they lost $200 per month but hoped the house would rise in value enough to compensate for that loss. It didn’t, although they were lucky — when they sold it, after accounting for tax write-offs as well as realtor/broker fees, they broke even. Nothing lost (except time and hassle), nothing gained.

      Thanks for the comments! I agree that this is a generally good time to buy since housing prices and interest rates are so low. If you’re ever going to buy — now is a fantastic time to do it.

  8. Charlie
    30. Nov, 2011 at 6:17 am #

    I’ve enjoyed reading many articles on your site tonight, thanks for the insight. However this article leaves me with mixed feelings. Rental markets do differ from place to place; however, with inflation, paying a mortgage over the span of residency in a home should accumulate some amount of money you will make when you sell a home. That’s a fact. Real Estate is real property, rental space is not. You talked of a laundry list of ‘throw away monies (taxes etc.)’ from owning a home, but you see, this list exists in a rental property just the same, only you pay it for the landlord instead of yourself.

    Just like one of your other (well written and well received) articles says: money is money is money! It doesn’t care where it comes from, or in this case who is paying it. The bottom line as I see it is this: if one can find a mortgage that’s cheaper than rent, why on earth would anyone consider to keep renting?? Another added bonus to purchasing a home is that you can move out anytime you want, and boom you are a landlord! So there is that cushion in home ownership versus renting. This again alludes to another article in which you explain multiple income sources rather than one. If you own a home, you always have the option to try and rent it out if you can’t afford the payment for some unforeseen reason.

    Okay, sorry for the babble! Great stuff on this site! I’m young as well and looking to make the right decisions to prepare myself financially for the years to come.

    • AffordAnything.org
      30. Nov, 2011 at 8:23 pm #

      @Charlie — One giant, friendly word of caution: please don’t fall into the trap of assuming that you can rent your home for a price that covers the house payments!

      In fact, as someone who buys rental properties, I can tell you that the vast majority of homes can’t collect rent at a rate that would even come close to equaling the house payments.

      Let’s take a $275,000 home. You plunk down a 20 percent downpayment and borrow the remaining $220,000 at 5 percent. Your monthly payment, including 1.25 percent property tax, is $1,467 per month. Insurance adds another $200 a month; water and trash (usually the landlord’s responsibility) adds another $200 per month, and paying a property manager requires 10 percent of the gross rent, or $146 a month. Repairs and maintenance – as a rule of thumb – cost 1 percent of the purchase price, or $2750 per year, or $230 per month. (You won’t spend this much EVERY year, but this is a long-term average that takes into account “big” expenses like replacing the roof once every 15 years, repainting the house’s exterior, etc.)

      So your expenses — as the owner of that house — are $2,243 per month. To break even — JUST to break even — you’d need to find tenants who are willing to pay you $2,243 per month to live in that house. (And that’s assuming a 100 percent occupancy rate! The numbers get worse once you start accounting for vacancies!)

      In almost any major U.S. city or town, $2,243 per month is far too high of a rental price for a middle-of-the-road house. If you owned this house, you couldn’t rent it out to cover your expenses.

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