The Value of Ownership
Another beautiful, old building will be razed in my neighborhood in order to put up a massive apartment complex. As the city is looking for ways to offer more housing, city hall is approving every new building permit.
Around the same time, I was discussing home ownership with my partner who is torn as to whether to continue renting or buy a piece of America. Nearly 40 and she has never owned real estate before – I’m strangely jealous.
The privilege of being part of the owning class seems envious to many. In fact, there are plenty of financial pitfalls if owning is pursued for the sake of ownership. Owning can make sense at a certain point in our lives and deserves a bit of perspective for the would-be buyer.
Owning can make sense at a certain point in our lives and deserves a bit of perspective for the would-be buyer.
The Value of Tangible Goods
There is a lot written about whether homeownership makes for a good investment. Some statistics point to real estate just barely keeping up with inflation while there are those who are making millions off of their real estate investments.
I don’t buy a car hoping that I will make a lot of money off of it when it comes time to sell it. Even though there are those who buy and sell cars for a living, generating a respectable income off of the transactions.
Tangible goods, for the most part, depreciate due to market forces, advancement in technology, degradation of composite material, and forces of nature.
There is absolutely no reason to believe that real estate will appreciate any more than say gold, oil, a bed frame, a car or a bandsaw.
Real Estate Price Fluctuations
Physicians often get to experience higher-than-average home price appreciation. This phenomenon is due to the particular neighborhoods physicians often settle into.
As the population works more, they gain more experience, are promoted and attain higher wages. With higher wages comes more disposable income which is put towards cars, homes, and savings.
Up to a certain point, it actually makes sense to spend a portion of one’s disposable income on more reliable transportation, safer housing, better quality food, and education.
This group of individuals is aiming to live in better neighborhoods. The demand for these areas, populated by professionals, will go up over time. As demand increases and supply decreases, the price will go up.
There are a few other factors which are mentioned by economists to explain the rise of housing prices: our population size is increasing, fewer people are able to own, livable land is decreasing in supply, it’s costing more and more to build homes using raw materials.
Art, wine, jewelry, classic cars, antique furniture, rare liquor and other collectible items generally appreciate with time.
Collectors count on this unique feature in order to justify buying and holding such items.
There are companies that make serious money acting as the in-between of seller and collector. Think of the auction houses, cellars, and appraisers.
Speculating on Future price changes
I like the word speculation because it’s a great storyteller of a concept that many of us consumers confuse.
For the most part, we speculate correctly on various events because of our own personal experience and from studying history.
However, to speculate means to expect a certain outcome without firm data to support this trend, perhaps using not much more than past events.
- I speculate that most of my relationships will fail
- I speculate that my investments will grow in value
History tells me that I break up with most of my partners after some time and it tells me that the securities market as a whole, trends upward.
There are far too many factors beyond the average consumer’s comprehension that would allow for accurate prediction, leaving us to speculate instead. And confusing these 2 is a costly mistake.
Why Do We Want To Own?
I hypothesize that the reason the average physician prefers ownership over renting/leasing is that in part it’s a status issue.
Not a status issue because of greed or classism. It’s simply a continuation of what we’ve done in the past, trying to set ourselves apart, get ahead, and compete with those around us in order to succeed.
Visible signs of success are moving out of cheap neighborhoods, being able to afford more expensive items, and attaining skills that others are unable to learn.
Sadly, education and vehicles have fallen into this separation. Many believe that by driving nicer cars or getting an institutional education marks them as successful.
Owning Real Estate
The natural progression of humans is to gain more skills, become “mature” and gain independence.
Oddly, I am witnessing a US economy which is enabling its citizens instead of empowering them. You are a failure if you have a minimum-wage job.
You haven’t made it if you can’t have the white picket fence.
You are an underachiever if you are still driving that beater.
You are doomed to fail without a college education.
People are pushed into the owning class in order to feel successful, to feel like they belong.
Patients who chose to give birth at home, to not vaccinate or to forgo western medical management are believed to not give a shit about their health. They are reckless, they’ll never fit in, they are doomed to fail.
The US economy seems to enable citizens to rely on gov’t bailouts, social security, minimum wage laws and unions. Though these are amazing safety nets, I don’t believe that reliance on these structures was the point of their creation.
Instead, they serve as fantastic examples of what each of us should create for ourselves.
The point of owning your home was so that you could get rid of your rent payments. Unfortunately, owning these days can be as costly, if not more, as renting.
The point of owning your own car was so that you didn’t have to borrow one from others or use expensive rental car services. Unfortunately, overengineering of cars has led to expensive repairs and unaffordable vehicle maintenance costs.
The Math of ownership
The own vs. rent discussion comes up a lot. The older generation touts how important it is to own your home in order to save on rent, while the newer generation sees little value in owning.
Rent is considered throwing money out. We’re told that we’re just putting money into someone else’s pockets. And I thought that’s what I was doing when I buy coffee or go to a surgeon to have my appendix removed. So, the argument sucks intrinsically.
However, it’s true. You are spending money in order to rent which you could put towards a mortgage in order to own your home.
But think of your mortgage, assuming you are financing your home. Look at the interest portion of your payments. That’s what you’re paying in “rent” so to speak. Because that money sure ain’t going into your pockets – it’s going in the bank’s pockets.
You get to deduct a minuscule amount of your interest and property taxes. The rest is money you will lose.
The Disruption of ownership through the sharing economy
I am not chastising anyone for owning their goods. There are a lot of great arguments for ownership. However, it’s important to push past the pressures of our society and evaluate each decision to own independently.
I can go on Turo and drive a McLaren. I can rent a $20 million beach house on Airbnb. I can rent a $5,000 floor buffer from United Rentals.
Therefore, it’s not the luxury for which we are putting in the effort to own. Luxury can be had on someone else’s dime.
How about security? I don’t think there is any more security in owning your home, owning your car or an expensive tool. Now that Car2go, Reach Now, Uber, Lyft and other sharing services for vehicles are available, owning might actually be more costly in the long run.
Now that the sharing economy is taking off, individuals are saving on the cost of ownership by renting a part of their goods out to others. The owning class is taking on the majority of the risk, the cost of upkeep and the headache of ownership while I get to enjoy the luxury of renting.
Of course there is a time to own, as well. I can easily make the argument that at some point owning is easier and maybe even cheaper than constantly renting. We’ll get into that in a bit.
The flexibility of renting
There is something else to be said about the flexibility of renting versus owning. Especially when we are young, when we have kids or in a phase of transition, owning might end up keeping us hostage.
With so many players in the game such as insurance companies, banks, state agencies, lawyers, repair experts, etc., owning is no longer as cost-effective as it seems.
Even if there was appreciation of the owned item, it would have to be enough to offset the cost of ownership. It’s not easy keeping track of this cost, it’s temporal, emotional and financial.
The future of personal finance
In the future, I suspect that unless you are someone who can control their income such as an entrepreneur, you will be hurt by the owning mentality.
It’s said that some of the things you own can end up owning you. It’s a euphemism directed at those who see intrinsic value in owning and don’t do so for the purpose of maximizing value.
I dunno why but I smell something fishy going on with the world’s financial books. I see too much cash floating around and I am witnessing insane cash valuations.
If money had real value then it would never swing this wildly. If it’s more like monopoly money, a piece of paper used to control the destined goods, then it can be artificially inflated and deflate in order to secure the acquisition of real estate, natural resources, food, etc.
As doctors we have the power to buy and banks will loan us mad money in order for us to own. With student loans already stretching us out quite thin, adding more debt for the sake of ownership could hurt us.
In the future of personal finance, I could see those who rent their most expensive goods instead of owning them to be much more likely to secure wealth. What they do after their wealth is secured likely won’t matter as much – whether it’s owning, renting, sharing or bartering.
Many physician households will reach a level of wealth where it doesn’t really matter which side of the own/rent equation they fall on. Until then, it’s important to do the own vs rent calculation for ourselves, using our own data and not listening to the media’s definition of wealth.