Owning A Home Isn't Necessarily Cheaper Than Renting

Many home ownership get rich books tell you that by paying a monthly rent of $1,500, you can easily waste up to $540,000 over the cost of 30 years even the landlord isn't going to raise the rent.  But these books forget to tell you that by owning a home or a condo that is purchased at $385,000 for example (many condos in major cities where the jobs are,  easily cost more than this price) ,  the interest payment + annual property taxes + HOA fees actually add up to be much more than $540K in the course of a 30-year fixed rate mortgage (at  the current 4.25%), assuming your effective income tax rate is about 25% which is pretty much the average rate for the majority of homeowners who can afford a 30-year mortgage for this price range.  If your income tax rate is any lower, you get much less tax deductions and therefore increase your cost of home ownership. Income tax deduction is like a discount for your existing interest payment and property taxes, the higher your effective income tax rate, the bigger the discount, but it doesn't mean you don't have to pay any interest or property taxes after tax deduction.  This doesn't even include the deterioration of the condo in the course of the 30 years that will cost you extra bucks to repair and to remodel; just so it can still be livable for you, or presentable to your potential buyers when you attempt to sell it.

In an ideal world where there is no property taxes and where local governments don't raise property taxes on a yearly basis, and where the homes are so well-built that there will never be termites attack, plumbing pipes bursting, and the roof chipping away, yes, owning is definitely cheaper than renting.  When you find a country like that, please let me know so I will move there too.  But until then, owning a home in America is not necessarily cheaper than renting, particularly when a home requires you to put 20% as down payment for 30 years.  Holding that kind of money down for 30 years comes with a hefty opportunity cost, which further downgrade the financial benefits for owning a home.

Toyota's Move To Plano Texas Doesn't Ease Housing Crisis Here In California

Guess how much is the above 2,200 sq ft,  4 bedroom, 1.75 bath house (built in the 60s) with a total lot size of 5,500 sq ft is listed?  $895,000!!  Yes, after closing cost and miscellaneous escrow fees, you will need over $900,000 to buy this modest looking house in the California town where Toyota's current headquarter is (which will be no more sometime this year when Toyota's move to Plano Texas is complete).  

Is this a smart investment for $900,000?  I personally don't think so unless your job is actually within 30 minutes commute away from this house.  With $179,000 (20%) as down payment, the monthly mortgage payment for a 30-year mortgage on this house is about $3,600 a month at the current fixed mortgage interest rate of 4%. This doesn't include property tax, which is about 1.2%++ on the $895,000 per year, that you will have to pay, which by the way will also increase every year.

Now for those of you who are fans of book authors who write about how home ownership will make your a millionaire, ask yourself, how much money will you make with $179,000?  If only you don't have to use that on a house's down payment?  Ask yourself if you can rent somewhere with reasonable commute to your work for less than $3,600 a month, which includes water and trash, and which will excuse you from maintenance and upkeep duties, and also the duty to pay for your annual property taxes that is subject to annual increase?

When Toyota announced in 2014 that it would leave California, I was so happy and excited because I thought home prices near Toyota's headquarter here in California will fall and I can get the chance to buy into the area.  Now that Toyota is close to completing its move, home prices near its California headquarter have increased a lot more than the home prices in Plano Texas. That's very disappointing to me.  So, to all the politicians in Texas who constantly brag about how Texas is stealing business from California, can you guys please, please lure more businesses from California to move out of state.  Please  attract Honda to go to Texas too!!  It's because home prices aren't dropping and more people and companies need to move out of California in order to keep housing affordable here in California. 

I really really hope that more companies will just move out of California...for the sake of housing affordability.  It's just too crowded here in California.

This Is The Risk Of Investing In Rental Properties

The owner of this rental property is himself a lawyer.  Many real estate get-rich books will tell you how easy it is to buy a house, and rent it out so you can be the rich landlord.  But like any investment, real estate is not risk free.  Before contemplating on buying a house so that you can rent it out for income, watch this video and ask yourself how well can you manage the risks that are embedded in real estate investing.

You Don't Have To Buy A Home Just Because You Want To Be Rich

There is just this perception that only the losers are renters, and buying a home is the only way to get rich.  I don't know how many times I was told by my friends, and relatives to stop renting, because I will never be able to build wealth if I don't own my own home.  Yeah? Owning my own home sounds easy to say, but  it's not so easy to do. Besides, I refuse to believe in such propaganda.

Yes, I am a renter, but it doesn't mean I am not building wealth.  I have been trying to spend less than what I earn from my paycheck, and I have been investing my savings in stocks.  Sure, I pay rent to my landlord and it's money out in the cold.  But so are my homeowner friends and relatives who are paying HOA fees, repairs & maintenance, mortgage interests to the banks (however low the interest rate is, it's never 0%)  and the property taxes to the government (yeah yeah, everybody says mortgage interest and property taxes are tax deductible but my rent isn't, which is also not totally correct and I will talk about this in my next post).

What I have as a renter that my homeowner friends and relatives don't have are:

1. I have more time to work for more money, like getting a second job or doing paid overtime because I don't have to take time off to stay home to wait for a plumber, or an electrician, or whoever contractor who needs to show up to fix this and fix that.  When I have anything not working in my rental, I will just call the landlord and let him deal with it. I also can choose to live a lot closer to work to reduce my commute time which I won't be so flexible in doing if only I own a home somewhere.


2. I have complete flexibility to move to any town, city or state that offers me a higher pay.  I don't have to spend time selling my home and I certainly don't have to be stuck in a specific job because of the locale of my home.


3. I have more flexibility to reduce my housing cost because I can always move to a place or a situation that charges less rent.  For a couple years, I was renting a tiny little guest cottage inside a very nice house in the same nice neighborhood as my friends, for US$550 a month, which actually was less than what my homeowner friends and relatives were paying for property taxes. Just because market rent in my town is $1,800 for a one-bedroom apartment doesn't mean I must spend this much. There are always options and landlords who are willing to rent a room, a cottage, or even an apartment to you at a good price, for whatever reasons they may have in mind.  In my case, the old lady who rented the guest cottage to me just wanted a housemate for companionship, not really for the sake of making money. She wanted a clean, friendly, responsible and professional housemate, and there I was.  But if I was owning a home, I would be pretty much tied to my monthly mortgage payment and my property tax obligation, unless I go through the hassle to refinance to a lower payment.  Sure if I own my home, I can always sell it, but the point is,  it's a lot more work and it takes a longer time to cut cost should my situation need me to cut housing cost.


4. I have more liquid savings than my homeowner friends and relatives because their savings are all used as down payments for their homes. They can refinance to get the money out but again, it will take time. Meanwhile, I can liquidate my holdings in my stocks anytime I want whenever I see there are better investment opportunities elsewhere. This is the opportunity costs that my homeowner friends and relatives never thought of.

So, in my opinion, there is nothing wrong in renting. I certainly will buy a home if I can afford it without sacrificing other more favorable investment opportunities.  Wealth can't be built by just being a renter or a homeowner. Wealth building is about how we can take advantage of the best investment opportunities available for what we can afford to invest, given our own very unique circumstances.

The American Dream Remains Just A Dream For Most Of Us

While Americans are reported to have much of their wealth tied up in their homes,( about $12.4 trillion), many Americans are still dreaming of owning our own homes. I'm one of those who are still dreaming and home prices in my state has become so high that home ownership is starting to become too expensive for me to even dream about:)

What about you, do you own your own home, or are you renting like me?