My wife and I are having a running battle about this topic. That means that she’s ready for battle and I’m running.
Is it better to own a house or is it better to rent a house and invest the money you save by not owning? I have looked at lots of advice columns, blogs, real estate books and investment books, but haven’t seen an analysis that answers this question once and for all. The people who believe that real estate is the greatest investment since fire never talk about the fact that over the last 40 years stocks have had better average returns than real estate. Those who think owning a house is the worst investment decision on the planet (besides buying tons of Choo Choo Coleman baseball cards back in 62 for their future value) never factor into their calculations the cost of renting a decent home. After all, you still need a place to live if you don’t buy a house!
Here’s my advice.
Always set up an emergency fund before you set up a house fund. The emergency fund should be equal to about six months of living expesnses.
Always contribute to your 401K up to the company match before you add any money into a house fund.
Buy a house if:
a. You can’t save 15% of your salary each year. Most people fall into this category. They know they should be saving money and investing that money for their future retirement, But they can’t seem to do it. They can’t stop buying luxury cars, vacations, and tchatchkes (Yiddish for useless junk that you think is nice). A house is a form of forced savings. So if you don’t have the ability to save money on your own, you need to buy a house to force yourself to save.
b. You don’t have the discipline to maintain an investment strategy through good times and bad. Of the small percentage of people who have the ability to save 15% of their annual salary, only about half will have the stones to develop a written investment strategy and stick with it during good times and bad. Everyone else will chase after new investment fads every year, sell their holdings when the market drops, or listen to some broker who convinces them to buy Yak sperm futures. If this is you, buy a house.
c. You have always wanted to own your own home. The house is definitely an emotional issue with you, not an economic one. Just remember how much you love owning a house when:
i. The heater breaks on February 6 and the repairman can’t come until March 9th, so you have to burn all your furniture over a five week period to keep the water pipes from freezing.
ii. The deer eat your shrubs for the fourth time, forcing you to put a twelve-foot high fence around your property, complete with barbed wire and guard stations.
iii. Termites have a year long feast in your timbers, and you only find out when the first heavy snow deposits your roof in the living room.
Rent a place and invest added savings in the market if:
a. You plan to live in your parents’ basement for the next 30 years. It’s a no-brainer. You won’t pay much rent to your parents, they will do your laundry, and you’ll probably be able to raid their fridge. All the money you save, invested in stocks, will do wonders for the pile of cash you will end up with when you retire.
b. You expect to be moving every two or three years. Each time you move, you are hit with realtor fees, mortgage points, closing costs and lawyer’s fees all over again. These additional costs will negate any appreciation you might have in a house.
c. The cost of renting is much less than the cost of owning a home.