Last updated on August 30, 2020
Homeownership is Overrated
You’ve probably seen the studies that say homeowners are wealthier than renters. But are homeowners wealthier because they own, or is it that the wealthy are more likely to own?
Here are 7 reasons to rent instead of own.
Housing Prices Exceed Inflation
In 1950, the average income was $3,300 and the average home cost $7,350. That’s a ratio of 222% between house and income, therefore. In 2014, the average income was $51,017, and the average home cost $188,900. The ratio increased to 370%.
By 2019, an average home cost $226,800 and the average income is still $51,017. That’s a ratio between house to income of 445%.
This means that buying a home, thanks to reckless Federal Reserve monetary policy, is too expensive. Use this inflation calculator to see how out of control inflation is in America that the government doesn’t want you to know about.
Related Reading: Cancel All Student Debt. Now.
The 30-Year Mortgage is Trash
Americans have been conditioned to believe that owning a home is a sign of success. The cultural paradigm is so powerful that people across the country voluntarily assume 30 years of debt to finance their homes.
But did you know that if you borrow $200,000 in a 30-year mortgage you don’t even own half your home after making payments for fifteen years?
This is because the majority of each mortgage payment — for the first 15 years — goes towards interest instead of principal. You can run the numbers yourself to see the amortization schedule for any loan size:
And by the way, mortgage lenders, who do not bear the risk of the loan because the U.S. Government buys all conforming mortgages, encourage their customers to borrow more than they need.
The larger the loan, the higher the mortgage origination fee the bankers get to keep.
Related Reading: The 30-Year Mortgage is Trash
The Opportunity Cost
I have a friend who hates her job. She says she wants to travel abroad, start a food truck, become a nutritionist and get certified to teach yoga. Yet she hasn’t done any of that.
Some people would rather daydream than give up their security blankets. And homeowners have the best security blankets of all: I have bills, Liz! I can’t just quit my job like that and go live in Europe!
No one calculates the opportunity cost of buying a home because it is too depressing.
In my friend’s case, she got married, bought an expensive house and had kids to comply with The American Dream, not because she genuinely wanted that. Sad but true.
Life moves fast these days. If you’re ambitious, creative and have dreams for yourself, don’t weigh yourself down by buying a home. Our economy is tumultuous, globalization is expanding and flexibly is priceless.
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Homes are Expensive to Sell
Unlike renting, a homeowner can’t just break the lease and walk away.
It can take months, even years to sell a home. Everything depends on your local market and the economy as a whole — two factors out of your control.
According to Dave Ramsey, the average cost to sell a house is 15% of the sale price. So if you sell a home for $250,000 you will pay around $37,000 just to sell it.
Related Reading: Retirement Accounts are a Joke.
Rules, Rights and Regulations
When you buy a home, you don’t actually buy the land it sits on.
The Lincoln Institute of Land Policy explains that when industrialization expanded in the twentieth century, the U.S. Government stripped individuals’ right to use and develop their land. So if you don’t pay taxes, for example, the government has the legal right to take away your home at any time.
Not only do you not own the land your house is built on, in many cases you don’t own the home itself! Depending on your HOA (Homeowner Association), you may not be able to plant a tree in your or grow a garden in your own yard.
Other common HOA rules:
- The color you paint your house must be approved by the board
- You are not allowed to grow a vegetable garden
- You may not run a business out of your home
- It is prohibited to rent out a room or level in your home
- You cannot build walls inside the home to convert a 1 bedroom to 2 (ex.)
- No signage of any kind is allowed in your yard
- Your grass must be kept trimmed; fines will apply
- Basketball hoops are not permitted
- Your dog must remain on a leash when outside
- You may not dry clothes on a clothesline outside your home
- You must own visually-appealing cars (no ugly or broken down cars)
And these associations charge anywhere from $50-$300 a month. Fun.
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A Home is a Money Pit
Let’s say you want to buy a $350,000 home:
- Down payment (10%): $35,000
- Interest on a $315,000 loan @ 4% over 30 year period: $226,388 (amortization schedule here)
- HVAC, roof, lawncare, repairs, etc. over 30 year period: $75,000
After 30 years, you’ll have paid a minimum of $650,000 on your home. That is A LOT of trapped capital. However, if you ever need to access the money, the banks are happy to extend you a home equity line of credit or refinance the loan. The transaction will cost you thousands of dollars (in fees) and if you opt for a refinance, the amortization schedule restarts with 99.9% of each payment going towards interest!
What a bad deal. A renter who pays less than 30% of their income on rent will be 100% wealthier than the homeowner.
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No Tax Benefits
Realtors, developers, bankers and agents often tout the tax benefits of homeownership. Unfortunately almost every tax benefit to homeowners was eliminated in the Tax Cuts and Jobs Act:
- The standard deduction was increased to $12k ($24k for couples) which means most homeowners can no longer itemize housing costs
- Deducting state and local taxes (SALT) has been limited to $10k. In high tax states, this severely limits the deduction of property taxes
- Mortgage interest deductions are now restricted to mortgages less than $750k (or $375k for single filers)
In other words, renters win.
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No one tells you how much debt The American Dream actually requires. Whether it’s college, buying a home or using credit cards to go on vacation. The lifestyle adds up and doesn’t seem to bring the desired effects.
I have no proof that homeowners are wealthier than renters, but anecdotally renters seem to be wealthier in spirit than homeowners. Too many people stay complacent in life because they have a mortgage to pay. Renters can jump at opportunities, move on a whim and stay flexible which is a desirable trait in every economy.
Some final food for thought:
- A tenant pays rent to occupy a property.
- A homeowner pays interest on the mortgage he borrowed from the bank.
- Thus, a homeowner’s interest payment is the rent he owes to borrow money.