In it he gives a great case for why owning a home is a bad investment. Not only is it bad; it’s absolutely terrible with the numbers he gives.
Which is why I decided I wanted to run my own numbers myself using his same method and see where I stand. I don’t think investment-wise owning a home is the BEST investment for sure. Owning and operating your own business, if you are the type of person who is capable of doing so, is by far the best thing you can do to grow your wealth. Stocks are another great tool to help build wealth over a long time horizon. But that doesn’t mean I don’t believe in owning your own home. There the intangible aspects as well (which I discussed more in my last post), and I don’t think it’s quite as bad as Kirk states in his article.
For one thing, at least in my city home, I don’t need to worry much about the costs he brings up having to do with owning a home (lawn services, siding, etc.). When I moved into my home, I didn’t need to do anything with the appliances because it already had them. I did however do things like fix some of the other little things around the house that were done wrong when it was built. I also needed to pay someone to fix our deck because it used the wrong sized beams to hold it up. So let’s look at the numbers over the past 5 years and compare that to the current price of our old apartment.
What his calculation doesn’t take into account is that all rental properties I’ve ever lived in ARE NOT RENT CONTROLLED. This one was not either. If you are able to get an apartment rent controlled then that may be a different story. This one has increased at an average of about 5% per year based on the current price and the price when I lived there ($1050/month then vs $1300/month now). It was also about half the size of my current home with no basement, which for me was another big deciding factor which I won’t incorporate into this exercise.
My current property taxes are at around 1.1%, which also makes a difference for this calculation. Kirk used 1.5% for his calculation. I also have a mortgage interest rate of 3.5%, which also helps my chances more compared to Kirk’s 4% interest rate.
Kirk also didn’t seem to take into account the fact the interest paid on your home is tax deductible by end of the year, so it’s basically a net-zero payment. So without any other extraneous expenses, all you need to look at to determine whether your wealth increased or decreased is your increase in equity vs taxes. My calculations are below:
So using this, on an equity and principal vs tax basis over the last 5 years, I’ve gained $5,730.21!
Keep in mind this takes into account I’ve spent $72,000 on home improvements and repairs during that time, which seems about twice as high as it should be. Also, the value increase of my home is based on the premise that the price I bought it for was the correct price. I, the buyer, and he, the seller, agreed on the price it was sold at, but Zillow thinks my house is currently worth at least $10,000 more than what it should be according to this spreadsheet. You can say the same about stocks: there is always a buyer and seller, and both think they are making the best choice for themselves at the right price, but one of you is wrong.
I also tried making home expenses $2,400 every OTHER year instead of every single year, and I ended up with a $34,000 profit! So in all likelihood, I’ll probably make out better than just under $3,000.
What this chart shows is if you miss the 10 most important days of the market, you may not even break even on the money you sunk into renting vs owning a home.