You have undoubtedly heard over the years that buying a house is a wise financial investment…the first sign of progress or moving up in the world. In some cases, you’ve seen people going through the home-buying process on television and wished you had the means to do the same.
But if you’re in your twenties or early thirties and want to get ahead financially, I would like you to consider postponing that event until you’re financially well-off. Doing so will save you a massive amount of stress, problems, and money.
The truth is, nothing will consume your hard-earned income faster and more completely than home ownership. Most current homeowners know this but won’t admit it. On the other hand, those who rent are too anxious to buy a home and won’t listen to sound financial wisdom.
An insatiable desire for a home
Owning a home is an American dream, one that millions are pursuing daily. A recent Fannie Mae survey indicates that more than half of American renters (58%) hope to own their home someday, joining the 64.4 percent of Americans who currently own one. They cited many reasons for wanting to buy a home, but financial incentives surpass them all: Seventy-one percent said that home ownership protects against rent increases and serves as a good financial investment.
But in reality, “Home sweet home” can have a financially empty meaning for people who purchase the property with a traditional mortgage and expect to gain financially. Despite the idea of walking away with some cash at the end of a sale, when the math is done, the economic result can be disappointing for those who care to assess the situation.
For most people, home ownership does the exact opposite of what the banking and housing industries say it does. It depletes people’s wealth-building capacity over time by consuming their hard-earned income and cash reserves while restricting their ability to capitalize on other types of financial investments.
My experience as a former homeowner
In my thirties, I purchased my first home and moved my young family into it. Later, I upgraded to a second and a third home for convenience, comfort, and above all, profit. Through it all, I was naïve about the facts of real estate. Looking back, more than thirty years of home ownership experience kept me broke but made me wiser. The following are five things I didn’t know until it was too late:
- Cash is a highly valuable commodity, and everyone wants as much of it as possible. What I didn’t know is that investing hard-earned cash in a home is one of the worst financial decisions an average person can make. Since common wisdom suggests that home ownership is one of the best options for wealth-building, many people deplete their savings (401k plans, IRA accounts, etc.), to purchase a home. What they don’t realize is that the money invested in a home is money gone forever. The cash they once owned in a moderately safe account has been placed on a property that belongs to someone else—the lien holder or lender—and it will never return to the homeowner.The obvious conclusion is don’t put cash down on a property that doesn’t belong to you. You will lose that money forever!
- The real estate industry is full of deception. Mortgage companies, real estate brokers, banks, and even our government (HUD, FHA, Fannie Mae, etc.) love to trumpet the idea that they are in the business of helping people attain the American Dream. What I didn’t know was that these organizations are NOT interested in helping homeowners experience financial success. Encouraging people to assume the biggest debt of their lives (a mortgage) is not a positive way of helping them succeed financially. Instead, these organizations are in the business of misleading the masses for financial gain. Their mantra is intended to pad their own asset base for greater financial leverage. Once a person becomes a homeowner, he or she becomes liable for the mortgage as well as all the costs that are associated with maintaining the property. Having the mortgage and other accompanying home expenses (annual taxes, maintenance costs, home insurance, association dues, etc.), makes it difficult to get ahead financially. The spending never stops!
- Most homeowners look forward to the day when their mortgage payments will come to an end—an envious position indeed—at least, so it seems. What I didn’t know was that once the home is paid in full, all the cash (home equity) is trapped in the house until the owner refinances the property. This is usually done through a reverse mortgage or home equity line of credit, both of which are counterproductive to the homeowner’s plan for financial success. If the homeowner sells the home to recoup the cash, he or she becomes homeless until some or all the cash is used to purchase another property.
- The equity gained at the sale of the property will most often be far less than what is paid in interest to the lender. The appeasing $50,000 or even $100,000 cash equity a person receives after the sale of a home is usually negligible compared to the money he or she will spend on the home during occupancy. The mortgage interest alone will account for almost twice as much as the cash equity—money that could have been invested for financial success. Maintenance and remodeling costs will be extra. Do the math and see.
- Renters can be winners. The mortgage and real estate industries have done a great job of demeaning renters. “Why rent,” they say, “when you can buy for less?” They have come close to calling renters idiots who throw money away on rent each month. What I didn’t know was that one who rents and SAVES money is in a better financial position than the average homeowner. The renter will never WASTE as much money on housing as the home buyer.
For these reasons and more, I have decided to rent again…indefinitely. The idea is to save all the extra money that I would otherwise WASTE on home ownership, and let the landlord pay for upkeep and maintenance expenses.
You may consider doing the same if you want to succeed financially. The sooner you put this concept into practice, the faster you will get ahead financially.
If you’re a homeowner, there is no reason to take drastic steps to rearrange your current housing situation. What has been done, is done. For the time being, you may simply want to consider these facts for future housing decisions.
The bottom line is that more people should be renting a home than buying one. This is especially true for those who are YOUNG and want to make financial headway in life.
To learn more about financial management and housing options, consider reading my new book: Pennies to Power: How to Use Your 20’s to Gain Financial Independence for Life.
Thanks for reading.
What are your thoughts?
Does home ownership make sense to you? In what way?