Buying A House Is The Worst Investment You Will Ever Make
This is a speech I gave to a standing ovation during Toastmasters on March 24, 2011. It is one of my best speeches ever and made people in the audience that owned their homes realize the flaws in owning one. With people questioning the reason to buy a home, others somewhat surprised that the value of a home can drop, and others just not sure what to do, this speech can help!
Buying a house is the worst investment you can ever make in your life. Keep in mind that I say it is the worst ‘investment’ you can ever make, not the worst ‘purchase’. By ‘investment’, I mean something people buy with an expectation of getting a return or something that will increase in value over time.
Yes, it is common knowledge that has taught you your whole life that if you ‘rent’, you are throwing away your money. However, in the next few minutes, I will tell convince you the opposite is quite true. In fact, in many cases when you become a homeowner, you are actually throwing not only more money away, but are throwing away great opportunities throughout your life as well.
First, let’s talk about the actual cost of owning a home. The average home in the United States today is about $170,000, and this varies greatly by region of the country. Some can pay this off completely but the majority of people usually will buy a home by setting up a mortgage.
In the first 5 years, your typical homebuyer will spend approximately 80% of the mortgage payment towards interest. This means that if you bought a product that required you to pay $100 a month, only $20 will be going towards the actual full product price, and the other $80 goes to interest. That is insane! If we compare a typical homebuyer to a renter of the same house - not until the homebuyer has been paying down the mortgage for over 20 years, will the amount they are “throwing away” be less than that of the renter!
Additionally, renting is far better when it comes to repairs. Yes, “homebuyers own the home and renters never own anything”. However, who wants to own repair bills? If that refrigerator or washing machine suddenly breaks one day, it doesn’t affect the renter at all – except maybe spoiled food or dirty laundry. If you are a home owner though, be prepared to spend hundreds if not thousands or more. And this is just the cheap stuff!
On top of that you have other costs that vary from neighborhood to neighborhood like home insurance, property taxes that never stop, and other fees.
Second, owning a home is a terrible investment. People say: “home ownership is an excellent path to build wealth”. Well I guess you could argue that Warren Buffet has lived in the same house in Omaha that he bought in 1958 for $31,000 and he is pretty rich today. But, he didn’t build his billion dollar net worth by owning that old house! He did it by investing in stocks, commodities, bonds, etc.
Long-term historical trends actually show that housing appreciates at a rate barely above inflation (3-4%), while stocks return an inflation-adjusted 7-10% annually. Basically the ‘real return’ of a home is zero! Yes zero! That shows that historically stocks are a nearly infinitely better investment than owning a home. On top of that, any particular year can wipe out years of appreciation for a home like in 2009 with 15%+ drops around the country during the housing bubble. Furthermore, the current returns on your average house today are still zero!
Unlike a stock where you can easily control your shares, sell and get out - you can’t sell and get out of your own home! There is no guarantee in the market. Owning your home is a forced savings plan and is the worst savings plan on earth. What other financial instrument requires you to add more money in it monthly for decades, repair it on a regular basis, pay insurance and taxes on it, and even after all that – not guarantee you a single penny of financial gain?
Third, renting is better than owning a home because you maintain flexibility. Take this company for example. Many people are forced to commute for 1 or 2 hours or more now, day after day, just to get to work. I moved into the apartment across the street and it takes 5 minutes to get to work. It’s awesome. Flexibility is not just with your current job, but with future opportunities. Lots of people are not open to moving to that next great job or that once-in-a-lifetime opportunity mainly because of the hassle of selling their current home and finding a new one. Sometimes even traffic patterns change that force your current home in a situation that makes traveling in your own neighborhood time-consuming.
Flexibility is not just about how much time it takes to get from point A to point B. It is also about flexibility in your finances. Owning a home often ties up hundreds of thousands of dollars that might be invested better elsewhere. You will miss opportunities not only in the market, but perhaps a good deal on a vacation or some new item you want to buy, but can’t, because of a repair bill or an expensive mortgage.
In conclusion, people often will favor a home over being a renter because it offers stability and a feeling of ownership. I say the only thing stable about owning a home is how consistent your hard-earned money goes right towards interest, insurance, and repair costs. On top of that, what is this feeling of ownership people are talking about? I own these clothes. I own my TV. I own my computer. Home owners must pay taxes each year even when their mortgage payments are done. I believe home owners never own their homes. Instead, their homes own them.