The American Dream … or the American Nightmare?

What are you willing to sacrifice for this?

The traditional American Dream is home ownership, but everyone who  lived through 2008 – 2010 knows that home ownership, for many, became the American Nightmare.

What went wrong? (Aside from subprime mortgages and other things outside of our control):

1. Many people bought a home because it’s the “adult” thing to do … not because it makes financial sense. In fact, for many people, renting makes more financial sense than owning. Unfortunately, too few people actually sit down to crunch the numbers and figure out Rent vs. Buy. They see home ownership as a status of success, and they pay — dearly — for that status.

2. Many people think a home is a good investment. Guess what? Even if you’re one of the lucky few who escaped the Great Recession untouched, and your home is worth more now than it was in 2007, it’s still probably a lousy investment compared to the gains you would have earned elsewhere.

3. Many people forget the costs of homeowners insurance, maintenance, repairs, mortgage interest, and mortgage insurance. When you add these into the picture, your home becomes an even lousier investment.

4. Many people assume they’re supposed to live alone, or live with their partner/spouse, because it’s a status symbol of success and adulthood. Again, you’re paying — dearly — for that status.

If you sincerely despise living with roommates and you’re willing to pay a hefty premium to live alone, fine. But if you kind of liked having company around — especially like-minded roommies who are as clean and quiet as you — then you should move in with them and slash your bills.

The most important thing to consider when determining your housing choices?: Ask yourself: What am I willing to sacrifice in order to afford this?

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?