The Carr Report: Is buying a home a terrible investment?

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One of my Facebook followers recently inboxed an article from cnbc.com to me titled, “Buying a home is a terrible investment.” She captioned this article with, “I don’t agree with this advice.”

Here’s the advice: A lot of people will tell you that buying a home is a good investment, but “that couldn’t be further from the truth,” says Peter Mallouk, a certified financial planner and president of wealth management firm Creative Planning.

“In reality, it’s usually a terrible investment,” he says. That’s because, at the end of the day, owning a home takes money out of your pocket: “You’re paying property taxes, you’re paying maintenance, you’re paying insurance. There are all of these other things that happen with your home that you’ve got to pay for.”

Over time, your home might increase in value, Mallouk says, but it probably won’t appreciate enough to offset all of the costs. Instead, if you took what you’d save from not buying a house and invested it in something that’s likely to grow in value, such as stocks and bonds, chances are you’d end up with more money in the long term.

Say you live in Brooklyn, and pay $2,500 a month to rent. If you buy your own place, you might pay $5,000 a month between your mortgage, taxes and other maintenance costs, Mallouk gives as an example. (Other financial experts estimate that, thanks to homeownership costs, buying could cost you about 40 percent more than renting.)

“If you take the difference and you save it, that extra $2,500 you’re saving in a diversified portfolio is almost certainly, over a long period of time, going to grow to be worth more than what your home equity would have been worth if you had just put the money into a home,” he says.

I put this article before my Facebook audience to see if they agree or disagree with this advice. Below are some of their comments.  After which, I’ll give my opinion.

 

I disagree! For starters, to rent where I live, apartments cost on average $1,200 per month. To rent a house costs on average $2,500 per month. My mortgage is $1,315 per month. This payment includes property taxes and homeowners insurance. I have a home warranty that I purchase every year for $400 to assist with potential costly repairs. I think people need to manage their money and understand that there are costs involved, but I definitely recommend buying. Overall I save money monthly.

~ Kia

 

I agree with this person’s perspective. There are pitfalls and unforeseen stuff to contend with in homeownership. The pandemic made me rethink my own position. I bought and sold a home. At the moment I’m living in a rental with on-site maintenance. I am so much happier with this arrangement as opposed to owning.

 

~Sandra

First of all your house is not an investment in the first place. Second of all, the example between the rent and the mortgage payments are far too different to use as a relevant example. Most mortgage companies and rental companies are going to base your mortgage payments or rental payments off of your income. So if you’re struggling to pay $2,500 per month in rent, the mortgage company will not approve a $5,000-per-month mortgage payment. The likelihood of someone being able to invest half of that money over the course of 30 years is very unlikely. Because most people can’t save that amount of money anyway.

~ Jamar

 

Damon here:  The person who sent me this article with the caption, “I disagree with this advice,” is the same person who posed the question, “Should I accept a $2 million offer for my waterfront property” which I turned into an article. I responded to her, “of course you would disagree, considering one of your properties recently increased 260 percent in value in 4 years.” 

I’m shocked that a person who markets himself as a “Wealth Advisor” would promote renting over homeownership. There’s zero wealth accumulated as a renter. Paying rent is like paying 100 percent interest because 0 percent of your rent payments accumulate equity/wealth. 100 percent of your money as a renter goes to the landlord making them (the landlord) wealthier not the tenant. The “wealth advice” given by this “Wealth Advisor” seems counterintuitive.

Nonetheless, I agree with his terminology:  A primary home isn’t an investment per se. It’s an asset that serves as shelter for you and your family. The reason why a primary residence isn’t an investment is because there’s no profit motive. Real estate purchased with the intent to hold and rent out or to improve and flip has a profit motive. In that case, the real estate would be an investment.

I vehemently disagree with his philosophy of opting to rent over owning and invest the difference. I believe that a person should get their financial house in order first, then seek homeownership. While a person is getting their financial house in order, renting a place to stay is OK. There’re also people who opt to rent over buying for various reasons, be it job insecurity, planning to relocate, downsizing, rightsizing, or not wanting to be responsible for the upkeep of the property. If that’s your choice, so be it.

From a pure making your money work for you and a building wealth perspective, owning a home trumps renting a home solely on the basis of owning a home accumulates equity. Renting a home doesn’t.

Why would this wealth advisor pitch the idea of renting over owning a home? His advice is biased and self-serving. A wealth advisor is a stockbroker or registered investment advisor who gets paid to sell investment products. In short, if they can get you to redirect the money you’re saving for a down payment and closing costs to them to invest on your behalf, they get paid. If you have more discretionary income because rent is lower than a mortgage, you have more money to redirect to them to invest so that they can get paid.

The reason why mortgage payments tend to be higher than rent is because a person usually settles for a smaller apartment or smaller house when renting. When it’s time to buy they want to upgrade to something as close to their dream home as their wallet can afford. 

(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website at www.damonmoneycoach.com)

 

 

 

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