You must pay for housing, one way or another

The 2 top questions that I get asked by those who stumble on my website are:

1. Should I pay off student loans or invest?
2. Should I buy a home or rent?

In this post, I want to make a simple point, namely that renting is not throwing money away. It’s as firmly of a held belief as assigning guilt to the homeless for being homeless. I am not against buying a home, but that doesn’t make a rent payment an irresponsible financial transaction.

Current housing survey stats

You can view a great interactive page of housing stats on the New York Fed website. You can play around with the graph to see which demographic answered what regarding home ownership and rent. I have a quick summary below regarding Feb 2017 housing surveys.

• 60% of those who were surveyed said that they are looking to buy soon. 
• Nearly 40% of those who are renting, want to own. 
• The majority of those surveyed believe mortgage rates will be 6% once they buy. 
• 65% believe that buying a home in this economy will still make a good investment. 

You have to pay for housing

If it hasn’t become clear to you already, the world is owned by large corporations, also called countries. These countries can completely determine their own laws within their boundaries. Boundaries which are protected by guns.

These large corporations make their money through taxes, fines, fees and licensing smaller corporations to operate businesses within their borders.

Their 3 biggest sources of income are housing, schooling, law enforcement.

So, in summary, if you live within the border of a country (that’s all of us) then you must pay for housing. If you’re homeless then you are breaking the law.

Paying for housing

We have determined that you must pay for housing. Unless you decide to come up with very intricate methods, paying for land is a must. You can pay for housing in 3 ways:

1. rent
2. a mortgage
3. buying the home in cash

1. Paying Rent

When you pay for housing through rent, you must jump through the many hoops that the landlord creates. A lot of these rules are regulated by local municipalities.

The advantage of being a tenant is that you have the ability to get up and leave fairly easily. Despite what many think, you can break a lease quite easily – there is no law forcing you to stay put. Once you break the lease, the landlord must then try to find a replacement tenant and you will only pay for however long there was a vacancy.

If the landlord doesn’t put in due diligence then you can demonstrate that to a small claims court or you can put your own ads out to find a replacement tenant.

The major expenses of the home such as HOA dues, taxes, repairs, risk, and maintenance are on the property owner (landlord). Clearing brush during fire season and major gardening and even pool maintenance is often taken on by the property owner.

As a renter you pay for utilities and repair anything you break.

Though larger real estate groups and property management companies will ask you for ‘3x the rent’, this is quite easily overcome if you can demonstrate that you have a solid job as a professional. And if you can’t do that, you can always look for a private landlord.

Being a renter is like having your money in a savings account instead of locked up in a mutual fund. You have immediate access to your asset though you don’t get much of a return on the money but you also have a lot less headache as opposed to investing the money in a business, in securities or… in real estate.

2. Paying for a mortgage

This one is obvious and works fairly similarly in many countries. You need to involve a bank or a lender who will co-own the property with you. You will put up some of your own money as a ‘good faith’ and pay a specific interest on the rest of the money which was put up by the lender.

Often, to qualify for a mortgage from a traditional lending source, you must demonstrate the ability to pay for the mortgage. This is critical and so easily overlooked.

You want to work part-time… Sorry, the bank probably won’t qualify you for a decent mortgage amount.

You want to work per diem with erratic income… Sorry, without a contract from an employer you’ll get qualified for enough to buy a tiny trailer.

You want to start your own business and write everything off to show almost no income… Again, sorry, this won’t qualify you for a mortgage either.

The cost of a mortgage isn’t just the interest you pay. That’s a really superficial way of looking at it. We’re doctors here, let’s not insult our own intelligence. Not that there is anything wrong with financing a home, but we must account for all costs.

As a collective, we are all driving up the costs of homes by taking on mortgages. The banks, in turn, make their own ridiculous demands and it becomes a cycle of ever-increasing home prices. Consumers rarely profit in such situations.

Even with a 15-year mortgage, nearly half of your monthly payment will go toward the interest portion of the monthly payment on a $500k home. You will pay almost 40% of the home’s value in interest payments.

With a 30-year mortgage, you’ll pay nearly 100% of the value of the home in interest payments over the life of the loan. On top of that, you’ll pay for maintaining the home, insurance, and property taxes.

You are throwing money away on the interest payment of a mortgage just like you’re throwing money away on the rent of a house. Except now, you might be deluded into thinking that you should buy more home so that it becomes a bigger investment.

Let’s jump to the next category, buying your home in cash.

3. Paying cash for your home

If paying rent is throwing your money away then paying cash for your home must be the holy grail of housing. But there are a few factors to consider first.

• your money gets tied up
• you have ongoing expenses to maintain the home
• you are ‘losing’ money in depreciation

I love the idea of buying a home in cash, it’s a wonderful way to mitigate the cost of housing.

For most of us medical professionals, buying a home in cash means that we are likely buying a condo because doctors don’t become rich for the first decade of their working lives.

In order for a medical professional to have, let’s say, $500k to buy a single family home, we would need a few decades of income savings or rich parents or the kind of frugality that involves reusable ass wipes.

Even if you got the kind of dough that allows you to buy a $500k home in cash, you have now tied up that cash into a depreciating asset IRS (even the thinks so). Sure, the price of the home may go up, but price is different from value – without understanding this, it’s quite easy to become as broke as the rest of the 90% of households in the US.

That $500k could earn you $20,000-30,000 every year. If we compound this interest, that $500k would become $800k after about a decade, assuming it’s invested in a conservative securities portfolio.

Is it possible that your $500k home would appreciate to $800k+? Sure. But your securities portfolio likely had an ongoing annual expense of 0.1% while your home’s annual costs are closer to 5%. This includes: taxes, insurance, repairs, maintenance, upgrades, decoration, risk, and moving expenses.

The point here is to consider all the expenses involved in having a home, whether bought outright or mortgaged. A home can be an amazing investment because it can provide shelter, save on rent and possibly appreciate. It’s one thing to buy a home with all those factors in mind and another to buy a home because it’s pretty and large.

Risk is often ignored when talking about ownership. When $500k of your money is in one single asset, you aren’t diversified, you are taking a bigger risk. There are plenty of legit stories that you can refer to regarding those who have lost homes due to landslides (not covered by traditional insurance), intentional arson (not covered), condemned home due to discovered environmental hazard (not covered), major water damage or flood (not covered), earthquake (not covered) or neglect.

Is rent throwing money away?

Let’s circle back to the question of whether renting is throwing money away. Throwing money away can only be used when you are paying for something that is bringing you no value or providing you value above and beyond what you desire.

Rent is NOT throwing money away. Owning a home is almost always more expensive, whether it’s purchased through a mortgage or bought cash.

A few rare exceptions can be made for the household that buys their single family home for a sweet spot price of somewhere in the $200k range. How many docs do you know with homes costing that much? Even then, they are likely living in cities where rent is probably not all that much higher.

The next argument many will make is that real estate is how millionaires are made. Agreed, but that’s referring to those who invest in real estate as a money-making strategy and not buy it as a primary residence.

I urge you to look around at your cohort and ask yourself how many have gotten rich through real estate. Don’t come up with excuses why they did or didn’t capitalize on the investment and that if you were in their shoes you’d be different.

I am not arguing against buying a home, this post is to argue against the idea that rent is throwing money away. If you maintain that belief you will have locked yourself into a poverty mentality.