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January 16, 2006


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I've long believed that I'm way better off owning than I am renting. A sizable chunk of my net worth is in home equity. I'm trying to lower the percentage of net worth that I have tied up in home equity by saving and investing more. (I'm accelerating my mortgage payoff too though so it makes it more challenging).

Anyway, I completely agree with your take on this. Buy a house you can afford and then work to pay it off.

Here's a twist on the homeowner theory. I met a young woman who was in college and renting. We got to talking & she mentioned she owned 3 rentals and her first purchase was a rental! She actually became an investor before a homeowner. Happy New Year Free money and keep up the good work.

I constantly have this same arguement with DD from Young Professionals Financial Blog. I own a home, my second (not at the same time) and he rents. His rent is fairly low for the area and he makes some good arguements for why his renting is fine. The main arguement is that he is paying rent of about $8400 a year and my taxes alone are about $8500 a year. So, he is able to save a lot of extra money for investing right now. The problem is, I will hopefully be able to sell my house for a profit, while he will have nothing when he moves. Tough call.

I like that last little bit. I am not itemizing this year, and I bought a home on February 1st. I had just over $5,000 in mortgage interest (I made 10 mortgage payments). In 2006, my mortgage interest will be a bit higher, even though $1,000 was applied to my principal, because I will be making 12 (plus an extra) payments. I was not really prepared for itemizing though. I will certainly be prepared for 2006, but I still may not get to the point where it will be benefitial, as the standard deduction is going to go up.

It kind of throws a wrench in the works for the "you should always carry a mortgage" crowd. I have always look at them like they were retarded... (I could never figure out in my head how paying some to use their money made sense if you didn't have to, call me crazy) now I see that I was right. Of course, you can claim mortgage interest for up to two properties that you own... so, if you are investing in a rental property, you can deduct that mortgage interest as well. And it all of a sudden becomes quite attractive.

All well and good. What if you refuse to stretch your finances to the breaking point persuing a "house you can afford?". I can't afford a house in Seattle, so I rent and save money. I'm not going to go bankrupt trying to get into a house.

I'm not against buying an asset like a house, I'm against over-buying an asset like a house.

I, like Baselle, do not want to attempt the impossible by trying to buy a house in Silicon Valley on my 49K a year income. I think this article, like any general rule of thumb, is just a guideline. I'm 36 and make 49K a year and have a net worth exceeding 150K, so it is definitely possible to buck the system and have a decent net worth even if you're a renter. Renting and maxing out my 401K and IRA (I can't always afford to max out both, but I have in some years) has worked for me.

Housing is money you're going to spend anyway, it's just a question of how much. In the long term, you'll almost always do better to buy than rent. Once you factor in the tax advantages, and the real estate appreciation you almost have to come out ahead. Unless you lived in certain areas of Kailforneeya throughout the 1980's, it's hard to lose in the long haul. Even the horrible CA markets of the 1980's came back and eventually experienced some fantastic appreciation. Seattle is extremely expensive and has gotten dramatically worse in the last 10 years. That's why they invented Kent and Auburn.

I have been a renter for the last 10 years and I have been able to accumulate 1Million+ in net worth. No major stock options or lottery tickets...its all savings and investments...I live in silicon valley and could never justify the overblown prices. Granted that I could have made another 300k+ if I had bought a house 5-6 years ago...But, I never regretted my decision and always enjoyed the low rents and the freedom to move.

Well hang on a second guys..... When it comes to renting vs buying, you have to look at your opportunity cost. If you're going to buy a home at $400,000, you're looking at an upfront deposit of 20%, which will be $80,000 out of your bank account. You're then looking at, lets say 10% interest rate to keep things simple, which is $40,000 a year just in interest, yet alone principal. So your first year of living there has already cost you $120,000 from your bank account and weekly income. Plus when you own the property, you're looking at costs such as these:

• Closing costs
• Interest on your mortgage
• Property taxes
• Property Insurance
• Private Mortgage Insurance (doesn’t always apply)
• General Maintenance

Buy renting the property out, you may recoup some of your cash flow costs, but you'll usually get no more than 5% rent per year. If you left your money in the bank account, you would automatically be getting 7%+ per year with the right account set up. So this already beats the return you're receiving from renting the property out.

So you're going to want to hope that 1. You dont lose your job and get stuck on mortgage repayments, which in this case would be about $450-$550 per week. 2. Interest rates don't keep on rising and 3. The property's value increases by AT LEAST 10% each year just to cover the interest you've paid on it for that year to break-even. If you bought at the wrong time of the property cycle, either during or at the top of the boom, you could be waiting quite a while to see that equity come through.

Now, say you rent. Lets say you rent a $400,000 property. You'd be paying about 4-5% per year in rent, so approximately $200-$275 a week. You dont have any up front costs except 2 weeks rent in advance, ($400) and 4 weeks bond ($800)= $1200. So you've got that extra $78,800 in your bank account that you wouldve paid on a deposit alone. If you run your own business, you most likely would agree that it'd be better to spend that $78,800 in expanding your business, through professional or product development and research, marketing, etc. This will most likely make you more money than what you'll gain from your property. Alot of people who rent property, invest their money in shares. So although they dont own a property, they still own assets as shares in companies. If they play their cards right, they can diversify their $78,800 investment,(one thing you can't do with property) and hopefully make some good money. In the case that they need to sell and get some cash back, say for example the market is crashing, they can sell their shares overnight, - so other investments such as shares are much more liquid. So while the graphs in the first link in the article above say the average renter (income $30-$50,000) has a networth of only $10,600, they may well have $78,800 invested in shares, their business, high interest accounts, term deposits etc.

So at the end of the day, by buying a property and just holding onto it, you dont have the flexibility to sell up over night if times go bad, and you have to hope you didnt pay a premium price and have to wait 10 years to gain the same equity you could make from the share market in 1 month. However, say you bought a property and improved the value, such as by renovating or sub dividing, you may well pick up 10% over night, in this case $40,000. So at the end of the day, you have to think about what else you could invest that money into thats going to give you a higher return than locking up a large sum of capital in one investment, that bares all the risk, and is usually very long term.

Self Made - has made some good points, however, I have never purchased a home for just financial reasons....I own rentals for keep on renting...but I do have a question.. Where do you automatically receive 7% + interest in a bank? Need the name of that institution.

Now I wonder how many people who read this column back in 2006 took the bait and bought? How many of you foreclosed by now? Now do you think the article is great? Ha! Knife catchers.

The real scoop is if you can honestly say that your career will last the same amount of time as your mortgage and your income would grow as fast as your payments.

Moral of the story: Check the fundamentals. Therw were bubble blogs even back in 2006 warning about the massive fraud in mortgages, realtors and by individuals lying about their incomes.

Also personal finance books never ever considered real estate an investment. None of these books ever said your retirement plan is best served by investing in real estate.

Buyer bewaare. I'm not bailing you out no matter what the Messiah Obama orders. I have municipal bonds, gold bullion coins and series I savings bonds. One is tac free and the others are not taxed until I take the cap gains.

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