A good friend of mine sent me an article this week regarding the disadvantages of owning a home. This CNBC article, titled “Millionaire: Your home is NOT an asset — it could be a trap”, quoted a wealthy real estate investor, Grant Cardone, describing home ownership as the “American Nightmare”.
Apparently, Mr. Cardone believes “a home is a terrible investment”, and argues against (you) owning a home: “your home is a trap because you can’t move, don’t ever truly own it and have to spend to keep it”. Moreover, “unless you have $20 million bucks, you have no business buying a house”.
I thought that it was one of the most self-serving informational opinions I have ever read. Of course, this self-described “Real Estate Millionaire” makes these types of comments, because he probably has made his fortune owning homes that people need to rent.
I like real assets, so I prefer to own property and land, as opposed to renting from a landlord.
There are many valid reasons to own a home, easily found with a simple Google search. However, for every one of these advantages, there is a legitimate disadvantage. I have listed a few below:
- Tax benefits. But…tax laws can change with a stroke of the legislative pen.
- Historical Price Appreciation. But…prices can depreciate as well, as in 2008.
- Predictability of mortgage payments. But…taxes and insurance may increase.
- Freedom to decorate or modify. But…the upgrades are the owner’s expense.
- Ownership. But..the bank holds the mortgage (ownership) until fully paid.
The list goes on, but the purpose of this post is not to deal with the easily “googled” pros and cons of buying vs. renting. The bottom line is that there are valid reasons for taking either route, and the right answer depends on your personal situation and established goals.
However, I want to propose a different reason for owning property and land, and it is counter to the conclusions of the “Millionaire” article I mentioned above.
What is the simple reason to buy a home?
At the end of your peak income generating period of 25-55 years of age, you will own a place to live debt-free for the balance of your life.
The thirty-year period between 25 and 55 is normally characterized as healthy, productive, employable, energetic and enthusiastic. Before 25, most young people are learning and exploring their capabilities and interests. After 55, most people are worn down and less likely to embark on an ambitious new income generating career path. So, 25 to 55 years old is most likely your “wood chopping” period.
I certainly am not concluding that under 25, or over 55, are unproductive years. Some generate their wealth after 55, but usually as the result of investments or based on the foundation established in the preceding “wood chopping” years. So as a general rule, this period between 25-55 years old, presents the best opportunity to generate income from your direct work.
Now unless your ultimate objective is to end life with a whole bunch of electronic numbers on a computer screen as your reward for decades of work, you should buy hard assets like a home.
It doesn’t matter if there are maintenance expenses and taxes, for example. Over the years, you would pay higher expenses anyway as a renter, in the form of escalating rent, renters insurance, costs of moving, costs of landlord uncertainty, no mortgage tax deduction, for example. These types of expenses and costs, whether renting or buying, are best handled during the “wood chopping” years, not before or after.
Some people say, “but it will take 30 years to pay off a home!” It is an important to remember that the “wood chopping” years are going to pass, one way or another, but at least at the end you will have a tangible asset for your efforts (a fully paid-off home).
My in-laws purchased a lovely home in Kingston Jamaica, approximately 50 years ago, as they started their family. They had fully paid off the mortgage debt, when they recently decided to immigrate to America to be with their grandchildren on our North Carolina farm property. The sale of this beautiful asset yielded financial security, and the flexibility to pursue their future goals. If instead they had rented the home over the last 50 years, they would be in a much weaker position.
Think about it. Let’s say you are 25, and have to make a decision to rent or buy a townhouse. The costs per month are roughly the same. Even if you don’t want to live in THAT home during or after 30 years, you will always have shelter if needed in later years, or an asset to sell for financial security.
Even if you wanted to live a highly mobile life during the “wood chopping” years, it would still make sense to buy the property at 25, and rent it out while you traveled the globe. The rental market is very good now, because many millennials do not want to commit to a long mortgage believing that it constrains them. Of course, the rent they could charge on a property, would likely cover the mortgage payment. In other words, someone else buys the home for you.
As I mentioned before, you must decide what you want to possess after decades of hard work. If you buy a home over the “wood chopping” years of your life, you will at least have something tangible as a reward for the hard work.
Additionally, blind faith in the future purchasing power of your money (extra savings), in whatever form (electronic, paper) has risk.
History has shown that central banks always depreciate the value of money over time. It’s called inflation. The Federal Reserve Bank publicly states that their ideal goal is 2% annual inflation. That means that your money declines in value every year, thereby reducing your purchasing power in the future.
For example, I was born in 1966, forty-nine years ago. The purchasing power of $1 in 1966, is now equivalent to roughly 14 cents today!
Therefore, it is much better to acquire real assets earlier rather than later in life.
If you rent, also consider the potential cost of a landlord’s natural greed. There is a limited time guarantee on the dollar amount of the rent. Let’s say you are locked in for another year. Things are going well, and your family has developed neighborhood relationships and a comfortable routine. Of course your family wants to stay, but what if the landlord recognizes that rents have skyrocketed?
The landlord, after the guaranteed rent period has elapsed, can increase it to whatever amount he believes it should fetch. If the landlord is clever, he will not raise it too much to cause your family to move, but just enough to make you squeal.
What if the landlord decides to sell it next year, but doesn’t want you to cease taking caring of the property (for that remaining year)? Of course, the landlord should share this decision immediately, however his “street smarts” tells him to wait until the latest, morally acceptable moment, maybe two months, to share the decision with you. So ten months from now, a notice arrives informing you to pack up and leave in 60 days, because he wants to sell the property to a buyer. How much is avoiding that pain worth?
Once again, there are many valid reasons to consider when deciding whether to buy or rent. I recommend buying a house/land because at the end of your “wood chopping years”, you will have a place to live for the balance of your life.