I have been having this discussion with my 25-year-old daughter, Kayla, for about the last year. Should she buy a home or just keep renting?
Tradition says, “Own your home and don’t throw money down the drain on rent.” You will have the pride of homeownership and your home will become a valuable asset for you in the future. My Dad has already told her that if she wants to buy, he would help her out and same with her boyfriend’s parents. This is a good example of how the traditional thought process about owning your own home is still pervasive in our society. But should she?
My answer is no. She is better off renting and investing her money. What? That doesn’t make sense coming from me. Almost my entire business is based on getting people into homeownership or helping them stay in their home. It’s true, I think she should keep renting, and that homeownership is a bad idea.
Why would I say such a hypocritical statement? Financially, hands down, she is better off renting than owning. Let’s look at the facts.
If you were an investor and you bought a home today with the intention of renting it out, you would be challenged to make a positive cash flow return with a 20% down payment here in Reno, NV. Homes are expensive, and even though rents are going up, they always lag home prices. As an investor with a single-family home in Reno, you will have to speculate on the chance that you will make your money by appreciation. You can’t make a good return by cash flow alone. This fact instantly makes renting the better financial model. The renter has the better deal.
“But Greg, that home will keep going up in value and the investor will be the winner in the end since they will have paid the mortgage for all those years!” Maybe. Maybe not. No one knows exactly what the future holds. Even if that was the case, calculating out the actual return on the home with the appreciation is usually still a poor investment. It’s all about timing, and since you don’t buy and sell your home you live in based on timing the market, chances are, your timing won’t be good.
However, Kayla has the luxury of doing exactly that. She can time her purchase if she is fine with renting until then. And that is the key factor here. Is she mentally and emotionally okay renting instead of owning?
Owning a home is a not the best choice, financially. She can make way more money by investing in our funds which she has been doing since she was 16 years old (with a little help from me). She knows how to save money and she’s had the advantage of being able to invest it at better than 10% returns for her investing life.
Her decision comes down to an emotional decision and a financial decision. If emotionally, she is okay with renting, then it’s a no brainer. If emotionally, she must own her own home, then that’s a decision she will have to make and be happy with. No spreadsheet of mine will be able to come up with that answer.
Today’s millennials are much less enthused about being tied down to one place for a long time. They like their mobility and they should. The world has continued to get smaller due to the ease of travel and our ability to work more remotely these days. If mobility becomes more valued than the pride that comes with homeownership, then the emotional decision to not purchase a home becomes even easier.
We’ll make this decision more real by looking at the numbers. Let’s assume Kayla’s house would be $300,000 and she would get 3% appreciation per year which equates to $9,000 per year.
With a $60,000 down payment, Kayla would have a $240,000 mortgage. Let’s assume a 4% interest rate amortized over 30 years. That would amount to $86,577 in interest for the first 10 years of the loan or an average of $8,657 in interest per year. (See why we like being the bank?)
We can assume her homeowner expenses (property taxes, insurance, maintenance, repairs, etc.) to equal out to be about the same cost as her rent payment. So that leaves her with $9,000 in appreciation but $8,657 in interest expense per year, which essentially makes purchasing the home a wash. This also doesn’t include any of the cost in selling the property which would be approximately another $20,000 to $25,000.
If she invested the $60,000 instead and could sustain a 10% return for 10 years (over the last 7 years she has sustained better than 10%), her $60,000 would be worth $155,625. That would put her ahead by $155,000 with none of the headaches of homeownership, not being tied down by her home, and not having to sell the property and bear the expenses when she needs to upgrade, move, etc.
Financially, the numbers tell the story and there isn’t a question about the decision to be made. Emotionally, I can’t answer that one… only she can.