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Buying A House Is The Worst Investment You Will Ever Make

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February 28, 2012 – Comments (74) | RELATED TICKERS: BAC , HD , NLY

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!

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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.

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74 Comments – Post Your Own

#1) On February 28, 2012 at 10:05 AM, Thompr97 (< 20) wrote:

Thanks for the article, mikecart.  I'm looking forward to your next three articles:

1. Why Apple is the worst company in human history

2. Why there are far better shoe brands than Nike

3. Why Nokia will soon destroy the competition

 I am particularly interested to see how you justify assertions number (1) and (3).

 

Thompson 

 

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#2) On February 28, 2012 at 11:06 AM, soycapital (< 20) wrote:

Buying a house is the worst investment you can ever make in your life.

Ever tried chinese small caps.....? I believe they were the worst investment I will ever make.

A lot depends on your entry price! I'm buying a 4 bedr, 2 bath walk out built in the 70's for 30K from the bank. I'll let you know how bad of an investment that was 5 years from now!

soybeans.............

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#3) On February 28, 2012 at 11:08 AM, mikecart1 (98.96) wrote:

Hi Thompson.  Thank you for your interest in me to discuss those 3 companies.  I believe 2012 is the year to get reloaded and back in the market, but timing is everything.  The presidential election will be one catalyst as well as any un-planned events.  Europe will also help with timing as you can somewhat play the market here based on the defaults in Greece and others in the European Union. 

-Mike

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#4) On February 28, 2012 at 11:14 AM, mikecart1 (98.96) wrote:

Hi soycapital.  I know what you mean with the Chinese stocks.  If you have followed my record with GIGM, you will see I know all too well about how bad of an investment the majority of them are now.  I actually bought GIGM shares and then gave it a red thumb on here to leverage the buy haha.

As for housing.  I mainly have 2 big complaints among many smaller ones.  1st is the huge investment in money required which you won't have to use when markets are great like in 2008-09 when many stocks were falling.  I just see buying a house (whether you buy it all at onces or mortgage like most) as one great way to put a 15-30 year debt on your balance.  I just see all the possibilities you lose out on when you drop hundreds of thousands of dollars on to something society makes seem like the best move. 

2nd is the flexibility.  I hate the idea of buying a house and then having this responsibility to staying there for several years and maybe 10 or more just to make it worth it and losing the ability to move.  In the event of getting a new job or even moving with a spouse but can't because you need to sell a house just doesn't make me comfortable in buying one in the first place.

-Mike

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#5) On February 28, 2012 at 11:36 AM, outoffocus (22.88) wrote:

I think this is a great analysis.  

Keep in mind that I say it is the worst ‘investment’ you can ever make, not the worst ‘purchase’

That is the key statement right there.  Owning a home is an investment in stability and quality in life, NOT A SAVINGS VEHICLE.  By the time you pay interest, taxes, insurance, and repairs you havent really "saved" anything.  And considering that most dont ever really pay off their mortgages these days, when do they "own" their home?  News flash folks, until that mortgage is paid off, the bank owns the home, not you.  So the key should be to borrow as little as possible when buying your home so you dont remain a slave to your house for the rest of your working years.   But people are so brainwashed by banks that they can't even concieve owning a home without a mortgage. 

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#6) On February 28, 2012 at 11:51 AM, EnigmaDude (95.86) wrote:

Absolutely not true and misleading in so many ways.  I know many people who have successfully bought houses as investments and have done extremely well.  Someone has to be the landlord.  Your entire speech is based on several assumptions that are skewed toward what has happened in just the past 5 years or so.  For many young people today, buying a home with the intent of getting a decent return on their investment may not be the best use of their funds, however, there are lots of pros and cons on both sides of the rent vs own equation that you either glossed over or omitted entirely.

Good for you to have the courage to get up and speak about it in front of a naive audience, but don't think that proves that you are correct in your assumptions.  There are way too many variables that you just completely ignored in your thesis.

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#7) On February 28, 2012 at 11:53 AM, mikecart1 (98.96) wrote:

outoffocus,

Thanks for comment.  That is one of the key statements of my presentation that really had everyone paying attention from the start.  A lot of people (older generation especially) have this belief that owning a home is actually a great investment because it appreciates in price.  What they don't understand is that so did their milk, bread, and new car they are about to buy.  A house is never thought of in that way for some reason.  Not sure if it is taught by word of mouth or just assumed.  But a house really is not an investment.  Historically, it has been shown that the real return is a 0.  And that mortgage makes it that the home owns the owner instead.  Because that owner will be at the mercy of the market, that mortgage, and whatever traffic they have to do with to do simple things like go to work.  It is mind boggling to hear of the stories of people that travel 1 hr or more just to get to work.  I don't understand how people can live like that.  Spending up to 10 hours a week in a car just to drive to and from work just seems like a horrible waste of time when life is short enough as it is.

-Mike

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#8) On February 28, 2012 at 12:00 PM, mikecart1 (98.96) wrote:

EnigmaDude,

Highlight the points and variables that you believe I should have included or missed.  Let me highlight one that I didn't go into too great detail in the speech.  This doesn't just include the past 5 years but several segments of the market the past 50+ years.  From new companies like MCD to MSFT, to even dividend players like MO, or even a name known to all like XOM.  There are many.  Let's say a down payment of your house is $50,000.  That money goes in and you got your mortgage payment.  You just eliminated any chance you had of gaining true wealth.  I am not talking about making a few hundred bucks here and there on quarterly dividends or a few dollars on a small investment of what you have left.  I mean the ability to choose your goals, where you live, and then take all that cash you are getting from your job and putting it into all these companies over the last 50+ years that have had great runs.  A person in the 1980s for example instead of buying a MSFT (even something as low as a $1000 investment) was busy paying for mortgage and house maintenance would have lost thousands and thousands of potential returns.  And for what?  So they can say they own a house today? 

For me owning a house really isn't that great.  I'd rather sit on a stock pile of money and have true freedom to live wherever I want.  You could say yeah but you might also invest in something that goes bankrupt.  But that is what diversifying is for and why you shouldn't bank all your money on 1 stock - or 1 house.

-Mike

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#9) On February 28, 2012 at 12:06 PM, NarGuy (63.52) wrote:

Yes, totally skewed towards the last decade, they are so many factors that can make buying a property the best investment out there that are not mentioned.  What if you bought a run down old building on the lower east side of Manhattan in the 70s?  You think you got a bad return on investment from that?  Even if you spent the money on taxes, repairs and everything else, you would be killing it right now collecting rent, nevermind just selling it for millions when you bought it for probably less than $100,000.  This article only focuses on the negatives of property ownership, there are plenty of people who have made fortunes in Real Estate.  Ever heard of Donald Trump?

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#10) On February 28, 2012 at 12:16 PM, mikecart1 (98.96) wrote:

NarGuy,

Real estate investing and buying a home are two different things. In my speech I am talking specifically about buying a home for the buyer to live in it - the typical home buyer. I am not talking about buying real estate, land, or property for the purpose of using it later as an investment or to rent it out or to hope that the property goes up.  Donald Trump owns real estate and property and rents it out to thousands of people.  He doesn't live in all that real estate and property by himself.  

-Mike

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#11) On February 28, 2012 at 12:20 PM, mm5525 (< 20) wrote:

Interesting discussion. I've made so much money in the market, I can pay off all of my mortgages. However, to do so, would admit I can never get anything better than a 4% return on my money. Most of my loans are in the 5's and then with the mortgage deduction, the true rate is roughly 4% or lower. Then I look at all my dividend payers. My PM is paying me 7%. Later this year after the dividend raise, it'll go up yet again. I would be a fool to sell it to pay off a mortgage.  

I wouldn't say buying a home is the absolute worst investment you can make. In fact, far from it. It does depend on buyer education, of which I'd proclaim most buyers are ignorant. Spending a decade in the mortgage industry, I was very quick to pay a lot extra on my mortgages of my primary and rentals to get that 80% interest thing more in my favor. One trick was putting 20% down rather than 30%-40% down at purchase, and then after closing use that other 10%-20% to pay down the loan that's skewed in the bank's favor those first few years to get it comparable. Soon I enjoyed a 50-50 split in no time, which to me was reasonable. While I was always aware to put at least 20% down to avoid PMI and escrows, I could've put a lot more down. A home is a forced savings account, and a slow and steady wealth creator. Lots of people are afraid of the stock market since the internet bubble as well as the 2008 fiasco. Especially baby boomers are afraid. Some admit freely they're losing money when inflation is factored in by buying US Treasurys or CD's. They don't care and want to hold onto the principal, even when it is being eroded and will not invest in the stock market. Once bitten twice shy. However, if you're smart about buying a home, it's a solid investment. Make your money work for you. Plus, you have to live somewhere. The reason why most mortgage rates are tied to the 10-year is your average borrower only lives or has their current loan for an average of 7 years. They either sell or refinance. If you put a mere 3.5% down at purchase and waste your funds on stupid things like PMI and a forced escrow account and only pay the minimum on your mortgage, you're making a decent investment opportunity swim in quicksand from your very first day in the house. It's all on how you use your money.

 

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#12) On February 28, 2012 at 12:44 PM, EnigmaDude (95.86) wrote:

OK, just a few variables to consider are 1. time frame (length of investment), 2. timing of purchase (true for any investment), 3. borrowing costs (mortgage rates are incredibly low).

You are also assuming that investing in large cap dividend stocks is a no-brainer investment for building wealth.  Also not true. I know from personal experience that even diversifying does not guarantee better returns than home ownership (and by the way you said "buying a house" not "buying a home" in your speech - there is a difference as others have pointed out).

I inherited a large sum of cash in 2007 and my financial adviser at the time recommended that I invest it all in stocks and bonds.  Guess what happened to that investment.  And at the time I was renting.  I lost over 20% of my inheritance (and another 20% to estate taxes) before I got out of the market.  I just bought my 4th home and intend to live in it for at least 10 years, perhaps longer.  I bought it the bottom of the housing market for the lowest mortgage rate in decades.  My previous home I bought in 1992 and sold in 2004 for more than double what i paid for it.

I am slowly getting back into the market but also "diversifying" my investments into my house, stocks, bonds, etc.  Telling people that a home is a bad investment is bad advice.  It may not work for you but it surely does work for some.

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#13) On February 28, 2012 at 12:44 PM, Turfscape (45.96) wrote:

EnigmaDude wrote: "I know many people who have successfully bought houses as investments and have done extremely well."

I know many people who have gone to Las Vegas on vacation and come home with more money than when they left. That doesn't really make it a good investment, though.

I think mikecart1's premise is a VERY valid one: the prevailing sentiment in our society is that when you grow up, you buy a house. A BIG part of that sentiment is owed to the belief that a house is an investment, when, in fact, a primary residence is a liability.

Real estate is not a bad investment, but one needs to separate one's primary residence from the idea of investment. If you are looking to buy a house for yourself, you are not investing in real estate...you are looking for a HOME.

What mikecart brings up is something that should be hammered home in all basic financial education lessons. We do need to break away from this idea that home-ownership is inherently better than renting. Sometimes it is, and sometimes it isn't.

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#14) On February 28, 2012 at 12:46 PM, daveandrae (< 20) wrote:

Speak for yourself. 

After only fourteen years, I own 58% of my home, with only five years left on my 4.75% mortgage. I am 45 years old. Then again, I did buy in a great location, after saving up for years for the 25% down payment I made.

And yes, during the "housing bubble" all of my friends kept asking me when I was going to sell my home and "move up." I told them all they were insane to put 3% down on a $350,000 home. Knowing damn well they made less money than me. Every single one of them lost those houses, too.

The bible calls this covetousness.

Look it up.

To suggest the alternative, owning nothing for the rest of your life, and paying for someone ELSE's property, with no tax benefit, which will be forever adjusted upward to meet inflation, sounds silly.   

 

 

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#15) On February 28, 2012 at 1:11 PM, devoish (98.54) wrote:

I'm going to weigh in against you here, Mike.

Grandma's house is paid off. Her taxes are $4500/ year. She could rent out a room in the house tomorrow for $500/ month and have to beat people away with a stick.

Most "one rooms" on Long Island in neighborhoods where you can go outside at night are $700 and up. Space the size Grandma is living in, an easy $1500.

In order to retire off her investments into a rental, over the course of working for fifty years, Grandma would have to accumulate 4468 XOM shares and pray every night they don't cut the dividend. Today that would cost her $389,572.

At the time she bought her house, it cost her a $30,000 mortgage, which she bought for less than $200/ month and paid off just under $70,000.

If instead, she started accumulating those shares in 1970, she would have averaged probably a little over $13./share for the same thirty years and spent at least $58,000 to get them. Plus rent for thirty years at, at least $300/ month is $108,000. $166,000 for a place to live your way, $70,000 hers. 

Left with $96,000 to work with, and starting late on the XOM shares, say at $40each instead, she could have 2400 shares of XOM paying her $4,5000./ year. 

And just think, that dividend would only have been paying te rent in the last couple of years. In 2008 she would have had to sell off shares during the fire sale and now she'd be looking for cheaper digs.

 And the kicker? It would not have been XOM. She would have been diversified into GM and AIG. Solid blue chips, you don't want to take chances with money you need to live.

But at least she can still rent out the room.

The truth though, is that she did not buy the XOM, AIG or GM. She has a pension and health benefits from her union, and SSI from the US Gov and an inheritance from her father for the new roof and occasional mishap.

I remember posting about a retirement community where some developer was getting it rezoned so he could toss the retirees out and build college dorms. When you're an owner, actually being stuck in your house is not always a bad thing.

Best wishes,

Steven 

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#16) On February 28, 2012 at 1:11 PM, TheDumbMoney (41.12) wrote:

First, you, like the housing boosters of last decade, are failing to understanding the distinction between homes and properties.  Home: a physical structure that is the largest depreciating (i.e., costly) asset that any individual is likely ever to buy.  Property:  The land on which the home sits, often used as a term to include the home.  The house inherently depreciates.  The property may or may not.  (For more on the property/house distinction, see here.)

Second, studies have shown (and Morgan Housel -- frankly, after some prompting by me and others on Twitter) wrote an article here about how property appreciation is very impacted by the local economy where the property is located.  There are no absolutes.  There are people who purchased the exact same properties (i.e., the house and land) in Alabama and in Santa Monica, California in the late 1940s.  The former have lost money.  The latter have generated spectacular returns, NOT from the depreciating house, which they have constantly had to repair, but from the appreciation in the value of the land on which the house sits.

Can the absolutes.  Buying a house is not necessarily the worst investment you will ever make.  Tell that to the people who kept their net worth in their company's stock and that company was Enron.  Tell it to those who loaded up on silver in 1982 at the peak of that bubble.  The worst investment you will ever make is one that is poorly thought out, but that you "believe" in fully nonetheless.  Price is what you pay, value is what you get.

Finally, related to the above, by focusing only on the negative aspects, you miss certain positives, such as the forced-savings aspect of home-ownership.  You rawther optimistically assume that if a person does not buy a property, that person will: a) invest rather than spend the excess money; and b) invest that money well.  Very little suggests that this is true for the vast majority of people.  Meanwhile, for those paying a mortgage, the amortized monthly interest payment is equivalent to a constantly declining nominal rent payment, while the principle payment is a forced-savings investment component.  Local property taxation can make a home more or less atractive in various locations.  In Westchester County, NY, taxation is super high.  In California, it is very, very low.  Again, no absolutes.

In conclusion, much of what a homeowner can expect to gain (or lose) from the purchase of a property is dependent upon what happens to the value of the land on which the home sits.  That by turns is dependent upon the local and state and even national economy in which that land is located.  It is also, as indicated above by a commenter, dependent upon the amount the borrower pays for the property, and the interest rate the borrower pays.   Again, there are no absolutes.  (Though they sound nice in blog titles.)  While people have finally woken up to the (obvious) fact that a house is a costly, depreciating asset, your speech is really nothing more than indicative of the broader national mood, and of what many are saying.  It is thus indicative of a fairly typical market overreaction in which people refuse to acknowledge the very same positive attributes that previously they believed were all that mattered with relation to a given asset.

A more prudent view is to look at both the positives and the negatives of property (and home) ownership all the time, both in 2005, and in 2012.  Such a view has the distinct disadvantage, however, that when one expresses it, one never gets a standing ovation, whether in 2005, or in 2012.  This is very bad for one's ego.

All best,

DTAF

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#17) On February 28, 2012 at 1:15 PM, outoffocus (22.88) wrote:

Real estate is not a bad investment, but one needs to separate one's primary residence from the idea of investment. If you are looking to buy a house for yourself, you are not investing in real estate...you are looking for a HOME.

What mikecart brings up is something that should be hammered home in all basic financial education lessons. We do need to break away from this idea that home-ownership is inherently better than renting. Sometimes it is, and sometimes it isn't.

 

This is what I've trying to tell people for years.  This mentality has financially enslaved the middle class and it needs to be changed. 

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#18) On February 28, 2012 at 1:16 PM, TheDumbMoney (41.12) wrote:

Rereading my above post, it seems a little too "harsh".  That was not my intent.  I tend to bang things out and then they sound terse and harsh, because I fail to edit and soften them.  I apologize in advance for that.

DTAF

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#19) On February 28, 2012 at 1:25 PM, awallejr (83.97) wrote:

When buying a house the motivation should be first and foremost buying a home;  whether it turns out to be a great investment time will ultimately tell. 

But the pros of home ownership over renting depends more on your family size.  A single person would be silly to own a 3 bedroom house. But for raising a family I submit it is a way better quality of life than some high rise apartment complex.  Spend a day in Brooklyn Landlord/Tenant Court and tell me how wonderful renting can be.  Trust me many slumlords do exist.

Assuming one lives in the same house for 30 years with a 30 year mortgage, and assuming no refinancing extensions, in 30 years you no longer have that mortgage bill and now have 100% equity whatever that may be. Tenant, however, is likely paying way much more in rent than he did 30 years ago and has nothing to show for it aside from helping a landlord make money.

Also don't get comfortable in that rental.  Unless rent stabilized, a landlord is under no obligation to renew one's lease. 1-2 year leases are typical.

What your speech should have said was when buying a house first consider if you can afford it.  Then consider if you want to live in the location of interest for a considerable stretch of time.

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#20) On February 28, 2012 at 1:28 PM, DJDynamicNC (41.76) wrote:

Yes, it is possible to come to a different conclusion about the worth of using a home as an investment vehicle. But the points you raised to bolster your case are very solid.

Buying a house as a HOME to live in for multiple decades is one thing. Buying a house as an "investment" is, as the article mentions, a forced savings plan - and a bad one.

As always, in specific circumstances YMMV. But that doesn't negate the validity of the points the poster raised.

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#21) On February 28, 2012 at 1:32 PM, TheDumbMoney (41.12) wrote:

I definitely agree with the post, and with commenters, in that we need to get past the view that homeownership is always better than renting.  My comment is more directed to the idea that we are there already.  And furthermore, based on everything I read, we are moving swiftly towards an equally incorrect view that renting is always better than homeownership.  Both of these extreme views reflect moods, not data.

All best,

DTAF

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#22) On February 28, 2012 at 1:37 PM, SweetMircha (93.71) wrote:

Wow, an average of $170,000 average price for a house.  that's a bargain to my ears. In Victoria, BC, Canada where I live; I am hard pressed to even find a 1 bedroom condo(old) for that price let alone a house. Houses start at basically half a million Dollars (Cdn $ lol).

I'm just getting ready to build one myself in April that's going to have a rental ! bedroom suite above the garage, in order to help pay off the mortgage sooner. It's costing me over $600,000 with the lot cost included to build here. Then there's Land Transfer Tax and HST on top of that too.

Your assessment of a home buyer's lament is now really starting to make sense and sinking into my head. OMG, what have I gotten myself into now?

Mike, I think you're onto something very educational here.

I think the people that gobbled up the bank foreclosed homes may have gotten off with a better deal in the long run; depending of course on the structural integrity of those home (investments).

Just had to add my 2 cents in this morning. Thanks for the write-up Mike. I enjoyed reading it and contemplating over it.

Have a great day everyone.

Mary

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#23) On February 28, 2012 at 1:56 PM, awallejr (83.97) wrote:

Buying a house as a HOME to live in for multiple decades is one thing. Buying a house as an "investment" is, as the article mentions, a forced savings plan - and a bad one.

That's the point.  People used to buy handyman specials and rental properties as "investments."  Buying a house to move in then flip was a post repeal of Glass-Steagall Act phenomenon that ended badly.  As the initial post acknowledged: Long-term historical trends actually show that housing appreciates at a rate barely above inflation (3-4%), which was fine.  But during the housing bubble prices were appreciating at incredible and unsustainable rates of return.

As others have said, looking at the past ten years is more of a distortion than the historical norm.

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#24) On February 28, 2012 at 2:05 PM, blackswan777 (< 20) wrote:

"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."

This is wrong based on today's mortgage rates. At 3.75% 30-year fixed rate with no points, the very first month will spend 67.5% on interest, while the month in 5 years will spend about 60.8% on interest.

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#25) On February 28, 2012 at 2:38 PM, mikecart1 (98.96) wrote:

Got back from lunch and surprised by the comment activity.  If I miss you, let me know.  I hate when I comment on someone's blog or article here or elsewhere and don't even get acknowledged LOL.  I'd rather have someone tell me off than to completely ignore.  Anyways, here I go!

mm5525,

I agree with most of what you are saying.  However, my big complaint with what you said "A home is a forced savings account, and a slow and steady wealth creator."  I wouldn't say slow or steady wealth creator though.  I don't see how it can create wealth when the real returns on owning a home is zero.  I mean it comes down to person to person but I would say that to say one builds wealth by owning a home is not very accurate.  Thanks for reply.

Engimadude,

I once had a financial advisor, actually I think I had mine around the same time as yours.  The person actually had me tank about 50% of my net worth right before I fired him.  Your variables are good examples but your example of owning your home from 1992 to 2004 should be recalculated (if you haven't done so already) with inflation rate and economic trends.  You may have doubled what you paid for but I'm willing to bet you could have put that money in several internet bubbles during that time with some conservatism and made out just as much if not more and had the flexibility to go along with it by renting instead.

Turfscape,

Thanks for reply.  When I was younger I always wondered why my parents stayed out of the market, missed out on so many key stock market periods, and stuck with a house and other conservative buys.  They still believe that owning a home is best.  I think it is taught through generations and society in general that owning a home is the best thing.  It is similar to like how one 'should be married' by x time.  Sometimes you can't really convince people because your reality is not the same as theirs. 

daveandrea,

You remind me of my parents LOL.  If you are ok with paying off a home + interest after 20 years and the pride of ownership, that is cool.  That is just not what I title as success - not saying you aren't are are.  For me though, it just seems overrated.  I'd rather have the freedom to live wherever I want, however cheap or expensive I want, and have that large chunk of money that would have gone to a house freed up to do what I want with as far as investing goes.

I will answer more later.  I hate scrolling up and down to see who I am replying to LOL!

-Mike

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#26) On February 28, 2012 at 3:02 PM, tmathe85 (52.95) wrote:

There were a couple engineers at my company, one had a home, one had a wife, and one had nothing.....guess who had the ability and mobility to take that job in Malaysia? ME SUCKERS bwahaha!!!!

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#27) On February 28, 2012 at 3:24 PM, Hawmps (< 20) wrote:

mikecart1 said @ #10) "Real estate investing and buying a home are two different things. In my speech I am talking specifically about buying a home for the buyer to live in it - the typical home buyer."

Then

Turfscape said @ #13) "Real estate is not a bad investment, but one needs to separate one's primary residence from the idea of investment. If you are looking to buy a house for yourself, you are not investing in real estate...you are looking for a HOME."

And finally... 

DJDynamicNC said @ #20)"Buying a house as a HOME to live in for multiple decades is one thing. Buying a house as an "investment" is, as the article mentions, a forced savings plan - and a bad one." 

First and foremost... I have been a real estate professional for quite a while and I don’t sell homes.  The thought of walking into a house and saying something like “look at this wonderful kitchen with the cherry cabinets and stainless appliances” and “aren’t these hardwood floors to die for?” nauseates me.  NAR (National Association of Realtors), MBA (Mortgage Bankers Association), NAHB (National Association of Home Builders) for decades, have been advocating the idea that home ownership is the biggest investment most people will make in their entire lives.  Now, look at the names of these three organizations.  Who do you think benefits the most from selling this idea that owning a home is a good investment decision?  It is certainly not the home buyer.

Buying a home can become a good investment if at some point during the ownership period the property has a CHANGE IN USE and the "home" becomes a rental, or you happen to be in the path of development in which case it ceases to be a home when you sell and gets razed to build a retail center or a hotel for example.  At that point, the "home" is worth lees than zero (cost to demo) and the value is in the land.  For those that happened to buy and sell and cash out with cheap/easy debt-created false appreciation before 2008, all I can say is the sun shines on even a dogs a** sometimes so kiss your four-leaf clover and move on.  Another way a home can become a good investment is if you can have a mixed use and run a small business out of your home and avoid the cost of renting an office etc. and can chalk up your normal every day expenses (mortgage, utilities, insurance, RE taxes, property maintenance) as a business expense and write it off at the end of the year against the income from that business. 

I bought my first “home” in 2001 and I still own the property to this day, although it is no longer my “home”.  We also ran a business out of that house for a few years.  Since changing the use of that “home” into a rental it has worked out very well and I have used the cash flow it generates and tapped the equity I have in it to invest in other income generating real estate.  So, the premise of the argument/speech is absolutely correct from the specific perspective of buying a house with the idea that you are “making a financial investment in a home”… you are purchasing a liability for all the reasons previously mentioned in other responses that I do not need to repeat.  That is not to say that buying a home is bad… just don’t be fooled into believing that your “home” is a good financial investment for the typical home buyer that does nothing else but live in it.

A home is the biggest liability people purchase in their lives, not the biggest investment in their lives as NAR, MBA, and NAHB would have you believe.  An investment should put more money in your pocket than it takes out.  A “home” does the opposite.  You buy a home for shelter, a place to raise a family, or to have a place that you can call yours to do what you like such as tinker with your favorite hot rod in the garage, have a yard to grow a vegetable garden, or build out a home theater or small music studio in your basement.  It is much more difficult for a renter to do those sorts of things.

 

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#28) On February 28, 2012 at 3:42 PM, outoffocus (22.88) wrote:

Hawmps

Well said.  I would like to thank Mikecart and the other commenters for having the courage to say what I've been trying to tell people for years. It pains me to see people overpay for a home because they think they have "equity" in it and its their biggest "asset".  Or even worse, they have a nerve to call a mortgage "good debt".  The truth is a home is you biggest liability that has your biggest liability (loan) attached to it.  Homes are the only "asset" that we can justify buying with 80%+ leverage and still say that we're "building wealth".  An asset generates cash flow, a home does not.  That cash flow builds "equity", a home does not.   That fallacy we call "home equity" is nothing more than our down payment plus an unrealized capital gain...period.  If I buy Apple stock today at $400 and it goes up to $450 tomorrow, no one is talking about my $50 of "equity" in my stock.  

Sorry I just have to vent.  It just seems that people have been so brainwashed over the years about the idea of home ownership that anyone that says otherwise is labeled a fool.  Its incredibly frustrating. 

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#29) On February 28, 2012 at 4:01 PM, DJDynamicNC (41.76) wrote:

Hawmps: +1 to that comment. Exactly right and well said.

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#30) On February 28, 2012 at 4:05 PM, daveandrae (< 20) wrote:

Mike- 

I left out the fact that I have been growing my then 1998 five figure equity portfolio at an annualized rate of 18% since the day I stepped foot into my house.  Thus, I could easily pay off my home any time I damn well please, with plenty left over. Or, I could just let my equity portfolio continue to grow at an 18% annualized rate while I continue to amass home equity by 6% a year.   

Either way, its all good.   

By my calculation, if I continue to simply make my monthly mortgage payment and reinvest my dividends, that would mean that by this time next year, I would own 63% of my home while my equity portfolio appreciated another $47,000. All the while having factored in NO real estate appreciation since two thousand NINE, AND having not come out of pocket to buy a single share of a single stock in over a year.   

Thus, it is a mathematical certainty that the equity portfolio will eventually be large enough to pay off my house. All the while leaving me with plenty of coin left over to enjoy what already has been a very, comfortable, life. 

Contrary to popular opinion, some of us can acutally fly, drive, or ride our Harley Davidson motorcycles anywhere we damn where please AND have a home to go to when we're done vacationing at the Four Seasons. 

Thus, I am living, breathing, proof that you can buy and OWN your very own piece of land in this country, outright, AND have become independently wealthy all at the same, damn, time.

Once again, I am only 45 years old. 

I sincerely hope anyone that believes in hard work, the American dream, COMPOUND INTEREST, and has the financial ability to think for themselves, would stop responding to this ridiculous nonsense.

 

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#31) On February 28, 2012 at 4:16 PM, EnigmaDude (95.86) wrote:

Mike - you are probably right, but back in the 1990s I was trying to raise a family and did not know much about investing.  Sometimes I wish I didn't know now what I didn't know then!

When I think of a home as an investment I am thinking about it in more than simply financial terms, I suppose.  Hawmps probable has the best comment on this thread.  I especially like this line, "An investment should put more money in your pocket than it takes out."  So from that standpoint, a home is probably not the best investment one could make, but I still do not think that its the worst either.

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#32) On February 28, 2012 at 4:18 PM, StoneyTerp12 (55.56) wrote:

I would argue that your home absolutely creates cash flow to the homeowner.  Not in the traditional sense obviously, as that cash flow is poured into equity, but the home creates cash flow.  The one point that I haven't seen in the discussion (maybe I missed it) is that a person must live somewhere with a roof over their head.  That part is unavoidable, and costs money. 

The delta between what would have been your rent, and the interest/taxes/insurance/etc on your house is the cash flow.  Clearly the delta changes with time, and may even be negative up front.  However, as time passes, rents will rise faster than mortgage payments with escrows, and the delta will increase.  That delta may not be the best investment, and it probably shouldn't be thought of as a "traditional" investment, but its an investment.

Long story short, people need to take the foregone rent costs into consideration when determining their "investment".  That is, of course, if you don't want to live in your parents' basement.  (I mean no offense to those who live in their parents' basements.)

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#33) On February 28, 2012 at 4:21 PM, SkepticalOx (99.44) wrote:

Popular blogger (entrepreneur, ex-fund manager, investor, etc.) James Altucher has been preaching this for quite awhile in his posts titled something like "Why You Should Never Own A House". Taking into account the historical return of real estate, plus closing fees, plus all the taxes, plus all the maintenance fees, plus the fact that it usually a highly leveraged, illiquid, and concentrated bet for most people, if you were looking at it from an investment perspective it's kinda scary.

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#34) On February 28, 2012 at 4:25 PM, SkepticalOx (99.44) wrote:

I would argue that your home absolutely creates cash flow to the homeowner.  Not in the traditional sense obviously, as that cash flow is poured into equity, but the home creates cash flow.  The one point that I haven't seen in the discussion (maybe I missed it) is that a person must live somewhere with a roof over their head.  That part is unavoidable, and costs money. 

That "cash flow" you are referring to ends up going to property taxes, costs for maintanence, and interest on your mortgage. Owning a home may be a good purchasing decision, and maybe even a good investment (like, maybe right now with such a depressed real estate market), but the problem with America has never been the lack of enthusiasm for owning a home vs. renting. 

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#35) On February 28, 2012 at 4:27 PM, StoneyTerp12 (55.56) wrote:

Ox,

 I agree that the homeowner pays these, but the renter does as well.

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#36) On February 28, 2012 at 4:27 PM, awallejr (83.97) wrote:

Mikecart1: They still believe that owning a home is best.  I think it is taught through generations and society in general that owning a home is the best thing

Despite the fact that you didn't reply to any of my replies ;p just to continue the discussion, societal benefit is the main reason why home ownership is encouraged over renting.  The theory goes that a homeowner will feel stronger ties to the local community since he has a bigger stake in it's success than a transient renter.  That isn't to say renters can't be good citizens, but being transient can simply be "here today gone tomorrow" while the homeowner is still here tomorrow.

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#37) On February 28, 2012 at 4:32 PM, SkepticalOx (99.44) wrote:

Ox,

 I agree that the homeowner pays these, but the renter does as well.

You don't, not directly anyway. You don't pay interest because you didn't take out a six-figure loan, and you don't pay property taxes because, well, you don't ownt he property. Maintenance costs is usually split between landlord/renter, depending on your deal. 

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#38) On February 28, 2012 at 5:00 PM, JaysRage (88.87) wrote:

Even when people do the calculations and the math usually somehow forget the additional utilities costs and maintenance that are necessary for long-term ownership of a home.   When you add up interest+additional utilities+maintenance, it's very hard to cost-justify a residential home as an investment.   If you added in maintenance costs, it fails the XOM example listed above.  

That said, I own a home.   I enjoy the additional quality of life and privacy and security and stability of home-ownership.  

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#39) On February 28, 2012 at 5:12 PM, AvianFlu (40.45) wrote:

I was a Realtor for 15 years and there is a lot of truth to this article. One nice thing about stocks is that you don't have to pay heat, maintenance, utilities, and property taxes. Still, you have to live somewhere and when you are a homeowner you have the freedom to make modifications to the property that a landlord might not allow. People who move a lot should consider not buying since about 10% of a sale goes for fees. Renting is not disgraceful.

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#40) On February 28, 2012 at 5:52 PM, sharktopus (< 20) wrote:

Far too many variables here to be able to say authoritatively that a home is a bad investment. Your assumptions range from the inflationary/deflationary state of the future economy, distance from a potential job of rental vs ownership, mortgage term and interest rate, investment habits of potential home-buyer, failure rate of appliances..etc.

All else being equal, the decision is to add equity value or not at the expense of mobility.  As long as a homebuyer buys first and foremost as a place to live, buying a home is money in the bank.  With the current mortgage rates, rental montly costs are likely higher than mortgage + insurance + repair escrow.

The lack of a stable financial situation, the necessity to move every year, and other variables can drastically change this. I just think it is a bit presumptuous to say that homebuying is a bad investment..period.  For many it is extra net worth for living where they want to live anyhow.  Just my 2c.

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#41) On February 28, 2012 at 5:56 PM, mikecart1 (98.96) wrote:

devoish,

Good real-life example.

DTAF,

"In conclusion, much of what a homeowner can expect to gain (or lose) from the purchase of a property is dependent upon what happens to the value of the land on which the home sits." I agree with that and I just can't live in a house knowing that fact is real and out of my control.  Good points though.

outoffocus,

Thanks for reply.

awallejr,

"Tenant, however, is likely paying way much more in rent than he did 30 years ago and has nothing to show for it aside from helping a landlord make money." The idea though is that I would never recommend renting in the same place for 30 years either.  It kind of takes away from my point of flexibility haha.

DJDynamicNC,

Thanks for reply.

SweetMircha,

Yeah just something to think about.  Don't let this speech be the absolute conclusion of your situation though.  It is just my thesis and one I live by haha.

Will reply to more later.  Gotta run. 

-Mike

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#42) On February 28, 2012 at 6:18 PM, Hawmps (< 20) wrote:

StoneyTerp12 said #32) "I would argue that your home absolutely creates cash flow to the homeowner.  Not in the traditional sense obviously, as that cash flow is poured into equity, but the home creates cash flow.  The one point that I haven't seen in the discussion (maybe I missed it) is that a person must live somewhere with a roof over their head.  That part is unavoidable, and costs money."

I agree that a mortgage will hedge against rising rents over time IF, you do not sell and have to start over with a new loan, AND you didn't buy at market pricing 2005-2007 in most parts of the U.S., AND rents rise faster than the cost to run your local government + insurance costs + maintenance costs.  And yes, obviously having a roof over your head has a cost, no matter how you slice it, no matter how you do it.  And yes, owning a "home" does generate cash flow... however, contrary to the first part of your statement, the cash flow from home ownership goes the WRONG direction.  The equity build-up from amortization is the carrot the banker, the Realtor, and the home builder dangle in front of you to help convince you that this is a good investment decision, then they talk about tax breaks on your mortgage. 

And now, ranting....

Paying a mortgage is the same as paying rent, instead of paying rent to a landlord for the roof over your head, you are paying rent to the banker for the money you used to put the roof over your head.  All the tax break insentives out there for owning a home, contrary to popular belief, are not to benifit the home owner, it is another tool for the banker provided by the government (by way of laws introduced by legislators that happen to have ties to the banking industry, imagine that) so the banker can sell more loans, that get securitized and sold to GSEs (Goverment Sponsored Enterprises should be Government Subsidized Entities).  It's a circular relationship and the banker always wins in the name of "home ownership for every American" and because "every American has the right to own a home" no matter the real economic cost to our country.

And, raving.... 

As soon as you sell at an average of 7 years holding period, you give most of the equity you built up to the Realtor for the privilege of holding your hand while you sign some papers, which an attorney will do for a whole lot less than 6%.  NAR spends, let's just say a whole lot of cabbage, every year to convince you that you need them to sell your house because if they didn't, you would figure out that you don't need them to sell your house.  After you sell, you usually buy again, taking out a new mortgage loan with $x,xxx.xx up front fees from the bank just for the privilege of "renting" you the money that the government wants you to borrow because "every American has the right to own a home" AND, just because the banker is so generous, they will let you tack the fees onto your mortgage and let them amortize along with the rest of your loan over 30 years which evenually cuts further into your equity when you sell again and hand 6% over to the Realtor, again.

Riddle me this fellow Fools... If mortgage rates are at/near all time lows now, and a buyer can afford $x.xx/month, what do you think is going to happen to home values when interest rates start to creep up (inevitable, eventually) and the buyer can still only afford $x.xx/month? 

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#43) On February 28, 2012 at 6:31 PM, Hawmps (< 20) wrote:

SkepticalOX said @ #37)"You don't, not directly anyway. You don't pay interest because you didn't take out a six-figure loan, and you don't pay property taxes because, well, you don't ownt he property. Maintenance costs is usually split between landlord/renter, depending on your deal."

Ox- I can assure you, no matter how you slice it, my tenants pay all expenses (taxes, insurance, mortgage, and a maintenance reserve) plus my profit, in their rent, every month and they pay their own utilities on top of that.  I have had two months vacancy total in 6 years, and only realized about 1 month vacancy (financially) when I kept the rental deposit from one tenant that moved out before the end of the lease.

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#44) On February 28, 2012 at 6:56 PM, outoffocus (22.88) wrote:

Riddle me this fellow Fools... If mortgage rates are at/near all time lows now, and a buyer can afford $x.xx/month, what do you think is going to happen to home values when interest rates start to creep up (inevitable, eventually) and the buyer can still only afford $x.xx/month? 

Lets not even consider the thought...

People think we've already hit bottom when it comes to the residential housing market, but the bottom callers in this market fail to take this into account EVERY TIME!!  

Could it be that we've only hit the eye of the storm?  

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#45) On February 28, 2012 at 8:07 PM, Hawmps (< 20) wrote:

You are correct outoffocus... and what's really gonna bake your noodle later on… think about the cost to run your local government, which generates revenue from real property taxes, which is typically on an ad valorum basis (depending on your locale).  If property values stay flat, or continue downward, and the cost to run all the city and county services we enjoy (or loathe) continues to increase, the money will come in the form of increasing property tax rates, putting additional downward pressure on property values, because that increases the home owner's monthly obligations, making them able to afford less mortgage, putting additional downward pressure on property values.  Strap your boots on, it's gonna be a long ride.

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#46) On February 28, 2012 at 8:08 PM, Hawmps (< 20) wrote:

You are correct outoffocus... and what's really gonna bake your noodle later on… think about the cost to run your local government, which generates revenue from real property taxes, which is typically on an ad valorum basis (depending on your locale).  If property values stay flat, or continue downward, and the cost to run all the city and county services we enjoy (or loathe) continues to increase, the money will come in the form of increasing property tax rates, putting additional downward pressure on property values, because that increases the home owner's monthly obligations, making them able to afford less mortgage, putting additional downward pressure on property values.  Strap your boots on, it's gonna be a long ride.

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#47) On February 28, 2012 at 9:34 PM, HarryCarysGhost (99.70) wrote:

Ok, since I've been dealing with this for the past two years....... I feel the need to chime in.

Fellow Fools please forgive the upcoming rant-

PHASE I.

My Mother stops by with the news that she received an unexpected inherentance. Says 6 G is for me if put towards a down payment on a dwelling.

My girl is watching all those flip this house shows.

I do the math and figure out that it would be cheaper then rent. 

Mentioned that it might be bubbleicious, but we prodded on.

Phase II

Got entirely bored with the wasting of weekends spent house/condo hunting.

Overpaid just to be done with the process.

After moving in was assesed a special fee to install sprinklers. Then property taxes doubled as property value dropped. (No longer cheaper then rent)

PHASE III

Property value plummets. As do interest rates.

Figure this is a good time to re-fi.

Banks don't seem to see things the same way....

They would rather have me forclose then admit that the assets on their books would be totally insolvent if they actually had to report at non- mark- to market.

Phase III

We shall see...

I would never buy a place unless I was paying cash again.

Screw the banks.

Cheers.

 

 

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#48) On February 28, 2012 at 9:42 PM, JakilaTheHun (99.94) wrote:

Real estate is a lucrative asset class, but people misunderstand why.  You make money on real estate via levarage.  And leverage is risky. 

I agree with your speech.  I'd much rather be a renter.  The idea that I'm not 'owning something' is inaccurate; I own the extra money I'm saving and I can invest it elsewhere.  I also have more flexibility in what I do as a renter. 

Really, it's better to rent, and if you want to invest in real estate, buy into a REIT.  The people at the REIT are professionals; they do all of the management stuff for the RE properties for a living.  When you buy a home, you basically own a 1-house enterprise, so you are "part-time" and don't have time to become an expert.

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#49) On February 28, 2012 at 10:10 PM, awallejr (83.97) wrote:

Really, it's better to rent

Perhaps for a certain group such as people who only plan on being in a certain area for a short period of time, but for people who wish to plant their flag and own a piece of the planet earth to raise a family, sorry after you do the math and the extrapolations, owning will win out PROVIDED you bought something you can afford.

I've been involved in the real estate business for over 30 years.  I've seen 2 crashes now, in 1980s and our recent financial bubble.  We are at incredibly low interest rates now with prices that have dropped dramatically.  If you plan on starting a family and are employed buy a house and stop listening to these noodleheads that tell you to rent.

You were told to buy stocks in March of 2009. Some listened, most were scared.  You are being told to buy a house now.  Some will listen, most will be scared.  Lost opportunities in the end.

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#50) On February 28, 2012 at 11:13 PM, BurntTiger (< 20) wrote:

Im buying a house for 150k.  If rent payments are 15k a year for a equalvenlent rental then does that equate to a X% guarenteed return on investment?

 

Yearly rental cost/ loan amount+interest paid+taxes+extra costs = ROI?

Surely there is a point at which buying is better than renting. 

 

 

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#51) On February 28, 2012 at 11:45 PM, awallejr (83.97) wrote:

Yup there is.  When you are ready to start a family and committ to a neighborhood and can afford the purchase of a house therein.  Ignore the naysayers and buy. 4% interest rates.  Take advantage.

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#52) On February 28, 2012 at 11:51 PM, CRNA1109 (62.65) wrote:

l bought my home as a brand new foreclosure. Noone had ever lived in it. The bank ended up with it after the builder went under. They finished it, l bought it. Dirt cheap. It's on a lake. l have one, count em, one neighbor and he's pretty darn cool. l am the only one that fishes so the lake is essentially mine for the time being. l'm six miles from the beach if l care to go. l have a pool in my backyard that is mine and mine alone. l have enough privacy to walk out my backdoor and swim stark naked if l please. l'm happy to pay my taxes on the home. Especially since they are outrageously low. My  appraisal has risen each time its been done. Dont ask me how. I have no idea but it has. l literally paid pennies on the dollar and surprisingly, here, where l live, the housing market is turning around and values actually are starting to rise a bit. l'm a homeowner and l wouldnt have it any other way. l understand what you are saying. Truly, but l'll take my home over a condo with crappy neighbors anyway. lf the fridge breaks down and you can't afford to replace it, you probably shouldnt have bought anyway. For what l paid for my MTV crib, l came out way ahead. I already have a ton of equity in the home and yea i am pretty sure l could unload it if i wanted too. For a profit yes. Will l, NO. l'll probaby die in the house. l love it that much.

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#53) On February 29, 2012 at 1:52 AM, awallejr (83.97) wrote:

 l am the only one that fishes so the lake is essentially mine for the time being

Sweet.

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#54) On February 29, 2012 at 5:05 AM, Louboutinlover (< 20) wrote:

I think this analysis and everyones comments would helpful to see a chart or a spreadsheet with the costs broken done over a 30 year time frame. And when I say costs I mean include all of the costs of owning a home for 30 years including, replacing a roof, a remodel, water damage, property tax, a possible refi etc. Include any tax deductions for people who can itemize, because not everyone does or can - so that would possibly be another column in the excel comparison.

While it sounds great that everyone should buy a foreclosure or at an auction this rarely happens. I want to see a chart of what normal Americans are doing not sophisticated investors i.e. the Americans who are not reading Motley Fool.com or posting on this blog.

 Thanks!!!! I will be deeply indebted to anyone who takes up this challenge.

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#55) On February 29, 2012 at 8:06 AM, ryesgramdi (< 20) wrote:

Bought a condo in 1991. Bought a house in 1995. Rented the condo which paid most of the mortgage for the house. House was a 2 family so my daughter who wanted finally to go to college lived on one floor. My contribution to her college was her housing. She graduated and then paid rent. Sold the condo in 2001 for almost a triple. Put the money in stock market without much knowledge. That account in losing money. I paid taxes along the way on that account which has to be added to the cost of that account. Sold my house in 2004 for another triple. Rented for several years plus started a self run account with scottrade from money from house sale and learned to invest on my own with TMF and others. Created a dividend portfolio plus some growth stocks and am now ahead by a few percentage points. A note about rent. Rent for a one bedroom was about 5 to 7 hundred in 1991. Rent for a one bedroom in the suburbs (cheaper) was $1150 and increased yearly after I sold my house. That was ok because half of my money was earning interest in treasury bills and cd. That was covering a lot of that rent. The rest of the money was being invested slowly. I'm in year 11 of investing. Very little to show for it but definitely improving. Even with the help of newletters, one has to choose which stocks to buy. Very few people will be able to follow along with all the picks. Very few will get in at the right price. I am now a condo owner again and bought cheap and left the 1 bedroom apartment behind.  But because I was  a renter I was easily able to take advantage of the opportunity to buy. I will most likely sell again but will not aim at the higher profit because I am 68 years old and want to try living in different places in the country. Still I will make enough on this purchase to have lived in it for free plus (condo fee, taxes, etc) buy a new car. If home prices go up again, my stocks in reits and real estate will go up. I will rent again and place the money from the sale of the condo in some safer dividend stocks at lower prices (buy low, sell high), keep enough in cash to pay my bills for a couple of years, and who knows maybe some time in the far future after a big runup in housing and a  big crash to follow, I'll buy another home.

I would like to second the suggestion that someone make a spreadsheet showing the true costs of buying a home and include the true costs of rental increases and add a little variety to it if you really want to spread the news with buying at the right time like I did and buying at the wrong time like others did. Also tell the truth about stock ownership. It's easy to pick a great stock twenty or thirty years after the fact but it's not a true comparison. My experience is closer to the truth for the stock part.

 

 

 

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#56) On February 29, 2012 at 9:01 AM, SkepticalOx (99.44) wrote:

Here's an interactive chart from the NYTimes which calculates using variables such as price of home, rent, interest rates, property taxes, to tell you if it's better to rent or buy: http://www.nytimes.com/interactive/business/buy-rent-calculator.html

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#57) On February 29, 2012 at 9:12 AM, mattm712 (< 20) wrote:

I'd agree with a lot of the posters here, including the OP.  Buying a home simply for the sake of investing might not be your best choice.  However, like all things in life, there are pros and cons and everyone's situation is different.  There are assumptions made in the OP's post that don't apply to some of us or don't apply to current, localized conditions.  It is incumbent on every individual to due their due diligence with all things in life, including buying a home or a stock.

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#58) On February 29, 2012 at 9:12 AM, mattm712 (< 20) wrote:

Ugh, *do their due diligence.

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#59) On February 29, 2012 at 9:55 AM, JakilaTheHun (99.94) wrote:

Perhaps for a certain group such as people who only plan on being in a certain area for a short period of time, but for people who wish to plant their flag and own a piece of the planet earth to raise a family, sorry after you do the math and the extrapolations, owning will win out PROVIDED you bought something you can afford.

awallejr,

I don't even think you bothered to read my post.  The message wasn't 'no one should ever buy a home.'  

Regardless, my point still stands.  As an investment, the only way you achieve a superior return on a home is via leverage.  If you buy a home with all-cash, you are basically making a 3% return every year, when virtually every other asset class achieves a higher return. 

So leverage is what makes home ownership attractive.  People like to convince themselves otherwise, but economically speaking, this is the only reason why housing is attractive. But leverage is risky.  Nothing wrong with taking risk, except the vast majority of Americans are convinced that homebuying is supposed to be a low-risk venture.  It's not.  It's high-risk; riskier than buying stocks in any meaningful sense.

I may very well buy a condo in the next two years, but it's only because prices are low and I can buy with leverage. I'd be an idiot to take a 3% return every year, when I could buy stocks or bonds, make more money, and keep more flexibility. 

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#60) On February 29, 2012 at 10:43 AM, outoffocus (22.88) wrote:

So lets see if I can some up all these comments:

Treating your main home like a financial investment: Bad

Treating your main home like a lifestyle investment: Good

Using your main home as a wealth building tool: Bad

Using rental or investment properties as a wealth building tool: Good

Assuming that either renting or buying is the best option in all cases: Bad

Evaluating whether you should rent or buy based on personal finance considerations, local market conditions, job prospects, and how long one expects to live in the property: Good

Did I miss anything?

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#61) On February 29, 2012 at 10:47 AM, GNUBEE (29.06) wrote:

awallejr

I'm with you, it appears as you may be the only one concerned with quality of life and family. I agree with your points, and they were major factors in my homebuying. I'd much rather lose a 3-4% investment differential and have a better environment for my four sons be educated (buying in my case made for a better environment), and well adjusted. If it means staking my flag in one spot for 20-30yrs...so be it.

Thanks for your interjections

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#62) On February 29, 2012 at 10:49 AM, GNUBEE (29.06) wrote:

I guess my point is it depends on what you are investing in.

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#63) On February 29, 2012 at 10:53 AM, awallejr (83.97) wrote:

Then there is this:

http://caps.fool.com/Blogs/2-stock-returns-thats-all/714183

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#64) On February 29, 2012 at 12:24 PM, GNUBEE (29.06) wrote:

argg, lost a word and some grammar there. Sorry about that, and taking three posts for what should be one. (stinkin no edit feature)

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#65) On February 29, 2012 at 1:26 PM, Turfscape (45.96) wrote:

>>Did I miss anything?<<</p>

Nope. That about does it!

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#66) On February 29, 2012 at 2:14 PM, Hawmps (< 20) wrote:

outoffocus @ #60) 

I'd say that pretty much sums it up.  I like the good/bad analogy.

GNUBEE @ #61) said "concerned with quality of life and family"  "have a better environment for my four sons be educated (buying in my case made for a better environment), and well adjusted. If it means staking my flag in one spot for 20-30yrs...so be it"

These are precisley the right reasons to buy a home that you mention here.  The Crux of Mikecart1's arguement (IMHO), and most of my comments as well, is that buying a home with the idea of using it as a financial investment vehicle is not necessarily the best choice.  It's all about the "why" you are buying.  It absolutey depends on the individuals situation and I too am a home owner.  From a purely numbers, financial, investment perspective, your principal residence should not be considered your greatest investment as the industry beneficiaries of home sales would have you believe.  Of course a savy buyer could take advantage of current market conditions and do well, but the typical, average, home buyer is not very savy.

I would chalk it up to using life insurance as an investment vehicle.  Yes, life insurane is a very, very good thing.  It is an excellent product you can purchase to protect your loved ones when you kick it.  However, using life insurance as a vehicle to invest in the insurance company's plan to build up a cash value (ie. whole, universal, or 1,000 different hybrids) that guarantees 4% and you have to borrow against it to get at it is not a good investment strategy either.  Buy term insurance to protect your family from the future and buy stocks (or other investments that put more cash in your pocket than they take out) to invest for the future.

Personally, I am a big advocate of real estate as an investment vehicle, but I would specifically exclude buying a personal residence as being considered a good financial investment.  Real Estate is a good investment when some one else (tenant) is paying the bills and "pouring money into building equity" as another poster put it.  You don't have that option with your personal residence; it all comes out of your own pocket.

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#67) On February 29, 2012 at 7:55 PM, devoish (98.54) wrote:

Owning real estate is good start to a diversified conservative portfolio of low risk investments. Living there does not make it worse. Equitys are high risk. Very high risk.

If it is not saving me cash, or paying me cash, I am not buying it right now except with play money.

If I had been reckless enough to buy gold five years ago, I would be dumping it today and spending it to lower my cost of living before the competition from the Chinese consumer drives prices of things I need to live on up. And it is the smart thing to do, whether or not gold "doubles" from here.

Everybody who doubled their money in real estate between 2004 and 2006 got lucky, they were not smart, they overpaid and got lucky. 

Without investment banks selling cash flow to investors gold cannot possibly be in a bubble the size real estate was, and it may not even be in a bubble. It is just worthless to me unless Ron Paul gets elected.

The truth behind the original post depends upon profiting from investments in stocks. Most of you will not, and you will lose more and be taking higher risk than if you bought a house. Let's face it, the post basically says stocks outperform homes. If the stock you buy triples, hurray. But if you put that same money into three stocks and one of them fails and one of them triples and one of them languishes until the end of time, the house is better, hands down.

By the same token, if you lose your job and default on your mortgage you have no gain and start over at zero in three years. But for that same three years, you lost your job and did not buy any stocks and probablt sold them to pay rent and you have zero anyway.

The only thing that really went wrong with real estate, was stupid loan products added money to a market that should have flattened out in 2002 instead of skyrocketing.

Anyway, thats how I see it. 

Best wishes,

Steven 

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#68) On February 29, 2012 at 9:18 PM, ScottmFool (73.01) wrote:

Sigh...here we go again with another anti-(name something that's not stocks) rant...

While I agree that the mantra "buying your home is the best investment you'll ever make" is more urban legend than reality, I also think the real-estate-sucks drumbeat is overplayed. 

 IMHO, there are 2 key attributes to a "best" investment:

1) timing.  

2) knowledge, to identify good value;

 Even a "bad" investor can get lucky if they buy at the right time, be it stocks, bonds, real estate, commodities, or lottery tickets.

Good values can exist in anything if they buy at the right price, be it stocks, bonds, real estate, commodities, etc.

 

These anti-real-estate rants are, admittedly, to be expected on a stock-investment website.  However, to those of you who purport to be contrarian investors: if you are dismissing real-estate out of hand and not doing due diligence, then I submit to you that you are less contrarian (and more group-think) than you realize. 

 

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#69) On March 01, 2012 at 9:46 AM, Turfscape (45.96) wrote:

>>These anti-real-estate rants are, admittedly, to be expected on a stock-investment website.<<

That's an interesting take on this thread. Personally, I don't see this as anti-real estate at all. My take (and many others, from what I read) is that buying real estate and buying a house are not synonymous.

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#70) On March 01, 2012 at 2:23 PM, mikecart1 (98.96) wrote:

Ok I will reply to what I can lol.  Way more comments than I expected.  Either people have a strong stance on this topic or something in my speech sparked an inner opinion that was there for a long time:

blackswan777,

Thanks for the update on percentages.  I still think that is way too much to pay for interest on any purchase.  I think I used mine as an overall average from various sources.  Still good info!

tmathe85,

Not sure if that is a joke or something you really experienced but I can relate to that.  My company has moved already once since I started here and the move was only about 1 hr away from the original place.  That angered a lot of people that had homes because of the long commute.  Some people quit.  Some people retired.  The ones like myself that rent thought the move was great as I got the complex across the street and it takes me 5 minutes to get to and from work.  I can't imagine a life where it takes me 30-40 miles just to get to work just so I can say I live in a 'house'. 

Hawmps,

All your replies have been great.  I don't really have a comment because yours have been informative for all.  This statement nailed it: "A home is the biggest liability people purchase in their lives, not the biggest investment in their lives as NAR, MBA, and NAHB would have you believe.  An investment should put more money in your pocket than it takes out.  A “home” does the opposite. "

outoffocus,

Thanks.

StoneyTerp12,

I think you should take a common metro area and do a quick calculation of a house and apartment in the same area that you would live in and then do the calculation for say 10 years.  I think your deltas will be different than what you originally thought.

SkepticalOx,

Agree.

JaysRage,

These are things underestimated the majority of the time from a home buyer.  There are a couple of people my age (late 20's) at my company that have decided to stop renting and start buying.  One guy is so surprised that he has to pay all this money for taxes.  The same guy also had to pay to have his AC fixed (which isn't cheap at all) and then has to be there in person (unlike what I do since I rent) because there isn't a landlord that is going to let the maintenance guy in the house.  The costs add up quickly and each chunk (say $1000) of maintenance fees makes one quickly think why they even bothered to get a home in the first place.

On top of that, no job is guaranteed as we heard earlier this week about possible turnover.  Other things people fail to consider when buying a home (or at least underestimate) is lawn maintenance, simple things like toilet problems, plumbing, painting, patio modifications, carpeting, appliances of any kind, electrical, renovations, etc.  This is huge money that wipes away any appreciation that might be happening with the housing market.

AvianFlu,

I am one of those that don't feel the need to make modifications to a home.  If I ever did own a home, I'd have all the trees removed, green grass everywhere, and the minimum amount of furniture needed haha.

-Mike

 

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#71) On March 04, 2012 at 8:22 PM, Bays (30.29) wrote:

Im not sure if someone has already mentioned this, I didnt have time to read all the comments, but of course when you look at the return of the actual house and compare it to the average return of the market, there is no comparison.  The market has done better.

The way you have to look at it though is what has the greatest return for your dollar?  For example, if I only put 20% down on a $100k house, and that house appreciates 5%, well that's $5k on my $20k investment, which is indeed a 25% return. 

You're making money on OPM (other people's money).  

You cant walk into a bank, and finance a $100k purchase of the S&P 500, or else I'd agree with you, you're definitely better with stocks.  

My home, and my rental property, have on average provided a ROE of 15% over the last 5 years.  Now that is hard to beat!

Nonetheless, I enjoyed reading your article.

Bays

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#72) On April 15, 2012 at 3:33 PM, duuude1 (< 20) wrote:

Mikecart1,

Sorry I'm coming to this party late - I take it from your comments that you are in your 20's.

Can't tell you how psyched I am to read your thoughts - many kids are heavily influenced by their parents and "buy" into the "home is the best investment" mythology.  Many kids, and I've hired quite a few college grads, engineering majors, seem to fall into this mental rut. 

But not all.  The best thing you can do is to talk to your friends - your peers - and convince them to do the analysis - crunch the numbers - and make the best financial decision and not to blindly follow old folk's advise.

Show them the online or other tools that are available to help analyze ALL the variables (including depreciating or appreciating home values) - or even better build the spreadsheet skills to model their assumptions on their own.

A real estate buddy of mine had put together a spreadsheet buy/rent calculator, and these are the variables he included (by the way, he personally, as well as the real estate associations he is a member of - believe that homes will lose value for a while):

Buying Your Home 
 Purchase Price of Home =
 Down Payment =
 - If downpayment >= 20%, you don't pay PMI (private mortgage insurance).
 Amount remaining to be covered by Mortgage.
 Real estate agent compensation - Buyer's agent
 Legal fees, Title search, etc.
 Home Inspection
 Pest Inspection, Lead Inspection
 - Optional.  Usually only if home inspection reveals an issue.
 Total Cost Upfront to Buy Your Home
 
Living in Your Home 
 Monthly Mortgage Payments
 - Rates vary.  Contact your lender for exact figures.  Currently, 30-year fixed loans run around 4.75% and higher.
 Monthly Property Tax
 - This can be found in Public Records or on the home's listing sheet.
 Monthly PMI / Private Mortgage Insurance
 - If down payment >= 5%, monthly PMI = (Mortgage Principal) / 1500
 - If down payment >= 10%, monthly PMI = (Mortgage Principal) / 2300
 - If down payment >= 15%, monthly PMI = (Mortgage Principal) / 3700
 This should drop to $0 once your Mortgage Principal exceeds 20%.  You may have to contact your lender to get them to stop charging you.
 Monthly Home Insurance
 - Fire insurance, theft, etc.  Check with your insurance agent for this amount.
 (Mine ran around $800/yr for a $480,000 home in Westford)
 Monthly maintenance, appliance repair, etc.
 - A basic home warranty costs around $500/yr, covering most home appliances and systems.  Repair/Replace runs $95, no matter what work needs to be done.
 Monthly Utilities, Lawn Care, Snow Removal
 - Not included in this comparison.  You'll probably pay similar amounts whether you're buying or renting a home.
 Monthly Opportunity Cost of $ Invested in Home Equity
 - What alternative income will you be missing by having this money invested in your home rather than in the market or elsewhere?
 Average Monthly Mortgage Interest Deduction
 - You pay more mortgage interest in your first years in your home.  Thus, your interest deduction slowly decreases over the years as you pay a higher % of mortgage principal with each payment. 
 
 Total Monthly Upkeep Costs
 
 
Selling Your Home 
 Sale Price of Home
 How many years will you live there before selling?
 Total change in home value
 Annual rate of return as a result of change in home value
 Real estate agent compensation - Seller's agent
 Legal fees, Closing Costs, etc.
 Home Staging
 Home Inspection pre-sale
 - Optional. 
 Misc. painting, etc, before showing your home
 Total Costs to Sell Your Home

Great job duuude!  Keep up the good work!

Duuude1

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#73) On April 15, 2012 at 4:54 PM, awallejr (83.97) wrote:

Living and raising a family in your own house - priceless ;)

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#74) On April 16, 2012 at 3:12 PM, mikecart1 (98.96) wrote:

duuude1,

Hi.  Thanks for the comments.  I am in my 20's and my net worth is soaring right now thanks to the snowball effect and not having taken a chunk of money out for a down payment for a house or buying a new car.  Math is great when you sit down a few minutes and calculate everything.  I didn't do the costs you stated in your posts but it is more of the same theory I have had with buying a house.  So much lost potential of using money for investing in the market or other things - even starting your own company - or even taking smaller chances at other investments, they are all but gone when you do your down payment and start the 15-30 years of financial prison aka 'paying off a house'.  I just don't see myself doing that.  I would rather take mobility and freedom over sticking myself somewhere for decades or more in the same place.

And selling a house, yeah even more of a pain in the rear lol.

awallejr,

Living and raising a family in your own house - priceless?  I think not.  That price is real and it is NOT spectacular lol.

:)

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