As a dad, you need a place for you and your family to live. This opens up the perennial question: whether to rent vs buy your principal residence.
My wife and I own our house. We live in a nice neighborhood in North York, a former borough of Toronto that lies just north of the city core.
I love living where I live. It is just a ten minute walk to Yonge St., Toronto’s main avenue. In my neighborhood, Yonge St. is lined with great shopping and great restaurants. It is one of the areas of the city where there is a strong Korean community, which is important to me for my family to stay close to our roots.
My house sits on a wide lot with a deep backyard. For Toronto, it is a pretty big plot of land. I love seeing my little one play with her toys in the yard. I love teaching her how to run and play outside.
For me, buying my house was a no-brainer, for reasons I will get into in Part 2 of this series. But I know that buying real estate is a controversial topic in the world of personal finance advice, so this is my attempt at wading into the morass.
I read an awful lot about personal finance, and what comes up often is the question on whether to purchase real estate.
I think that most of the articles regarding home ownership really misses the point. There are two main arguments, both having to do with money, that are widely given to persuade you to either rent or buy:
- “A house is a great investment/A house is a financial sinkhole”
- “Use a Rent vs Buy calculator, and that’ll tell you all you need to know”.
While I agree that financial concerns are important when it comes to real estate, as a family man, these are actually secondary matters. And focusing on the financial investment question is a pretty good way to get really confused and disillusioned about why you should buy your home.
Let’s look at each of these perspectives.
A House is a Great Investment/It’s a Bloody Black Hole Where Money Goes to Die
Let’s get this out of the way: a house costs a ton of money to maintain. If you purchase your home, expect to shell out for mortgage, property tax, and maintenance, and expect that amount to be higher than you expected.
Usually the house-is-a-black-hole-for-money argument comes up as a counter to the belief that a house is an investment. You know how the argument goes:
“A house is a great investment. After all, they’re not making any more land.”
And then another guy yells out:
“What? Think about the property costs, the taxes, mortgage… a house is the worst investment you can ever make!”
People are too focused on the rise and fall of house prices, especially in a real estate-mad city like Toronto, where I live.
Sure, a house may rise in price and thus increase your net worth. Even so, big deal if your house rises in price. It does not help your lifestyle one whit. A house will never pay your bills or buy your groceries. It’s just not that kind of investment.
And also, big deal if you sell and realize a huge capital gain. You need to live somewhere, and if you buy again in the local market you merely swap one expensive house for another.
I can hear the screaming already from many people I know in Toronto who have become real estate millionaires in the past few years. Hell, I’m one of those people. Yet my lifestyle has not changed an iota due to the insane run up in prices for my house, and neither has it helped anyone else I know.
If you account for all the costs associated with it, a house is the worst investment you can make, unless the appreciation rate is absurdly high. It is illiquid, the transaction costs are horrid, and in the vast majority of cases you have to leverage yourself (i.e. borrow) to purchase a home.
For me, a house should not be considered to be an investment. Even with high appreciation, real estate comes with very high overhead costs, and is illiquid to boot. The arguments for having your principal residence as an investment should only be a secondary consideration when you are thinking about buying your own house.
Sure, you should understand how a house can be an asset that can be sold and the proceeds used to purchase, say, another house.
But as soon as you start getting obsessed about price increases etc., you have already lost. Why waste time thinking about that stuff when you should be focusing on other ways to make money, such as your career or business?
** Side note: I realize that real estate is still very much a means to gain wealth. Understand that this blog post is not about buying secondary properties that you develop, rent out, and flip. I know lots of people who have done well with that approach (and also some who have lost their shirt). What I am talking about here in this post is how you, as a family man, should approach buying your principal residence, not investment properties. **
Why Rent vs Buy Calculators Totally Suck
There are tons of these rent vs buy calculators out there on the Internet. They take various assumptions such as the expected appreciation of real estate in your area and the rise in the stock market. These calculators then determine whether it is financially better to purchase an expensive home as an investment, or to use the purchase money to invest into the stock market and rent instead.
I have a ton of problems with these calculators. First off, they assume fixed rates of everything: home appreciation, interest rates, stock market growth rates, and rental rates. And they assume these rates will hold steady for DECADES.
That is insane. Home appreciation rates and the stock market are choppy as hell.
It is a colossal mistake to rely on these calculators to determine whether to rent or buy. Here’s my personal experience:
- I live in a city where house prices have both gone up 33.2% year-over-year as well as crashed as much as 19% in just four months. In Toronto, these percentages can mean gains/losses as much as half a million bucks.
- I live in a country where interest rates averaged over the last ten years will DEFINITELY not be the same as ten years from now.
- In the past couple of years, rent prices have doubled in some parts of my city.
- The stock market can bull run or bear crash. Remember 2008?
- Most people really have no idea how long they will live in their residence—surprise relocations are always a possibility.
These rent vs buy calculators rely upon far too many unknown variables to base a decision on home ownership. Moreover, they rely upon a series of compound interest equations, where even slight differences in the input variables (interest rates, appreciation rates, etc) make a huge difference a few years out.
These rent vs buy calculators should not be used to make a home ownership decision. They are just too fraught with error.
Rather than a rent vs buy calculator, I think that any prospective buyer should first make a decision if home ownership is a life goal, and then look at mortgage affordability calculators to determine what is affordable.
So Then, What Are the Real Reasons to Buy a House?
I think that heavily weighting the decision of home ownership on (a) investment dreams and (b) rent vs buy calculators is the wrong approach.
The question of “rent vs buy”, the argument over the investment quality of a home—all of these financial questions obscure the real reasons why you should consider owning.
Financial concerns are of course important, and you should ensure that you can actually afford your home. This can be done with an appropriate mortgage affordability calculator. You should also take into account that your home should track well relatively speaking to the local market that you think you will stay in for the long term.
But these financial considerations should be secondary to the REAL reasons to own your principal residence. This is the way it should work:
Do you want a house? ⇒ If yes, find out the price ⇒ Pay the damn price.
When you see a house, a plot of land, and a living space that you simply must have, then you are getting close to the real reasons why you should purchase real estate.
The second part of this series elucidates why everyone is so hell-bent on home ownership—and why it is OK to embrace it.
More to come…
Part 2 of the Rent vs Buy series reviews the real reasons for buying a house. You can find it here.