Like most things, there are costs and benefits, the yin and the yang, the good and the bad…well, I think you get the point.  So lets look at the benefits of home ownership vs. renting.  This isn’t meant to be comprehensive in any way, but hopefully it will provide some ground work if you are vacillating between buying a home or just renting FOR.THE.REST.OF.YOUR.LIFE!!

Stability

There are a couple of angles to this argument.  First, if you finance your home with a 30-year fixed-rate mortgage, you have stability with regard to your payment.  It will still vary a little as property taxes and homeowners insurance rise, but the biggest part of your payment will remain the same for 30 years – of course, it’s a rarity that people keep a house for that long (and for wealth creation purposes, it may not be the best strategy – check this out) or their mortgage since people have been known to refinance to take cash out of their house to use for a variety of things.  Regardless, if you keep your house and your mortgage for 30 years, you’re principal and interest payment won’t change.  You can’t say the same about your rent; as prices go up, you better believe that the rent your landlord charges you will also increase.

A second element of stability is that you control where you live.  If you own your home, you can live there forever and decorate it however you want and redecorate it to your changing tastes whenever you want.  Conversely, if you rent a home, you may be forced to move if the landlord decides it’s time to sell – for any number of reasons.  If you were lucky enough to have a landlord who didn’t increase your rent much of the several years that you lived there because he liked you and appreciated your on-time payments, you will now likely experience a large increase in your rent payment if you move into a similar home.

Wealth Creation

I talk a lot about this; one reason is because the savings rate in the US is very low compared to other 1st world countries.  We need to do a much better job of saving and, better yet, investing.  The 2nd reason is because while there are lots of great investments, real estate is probably the best.  More millionaires have been made from real estate than any other single form of investing.  With real estate, you get the ability to use leverage.  There are also great tax benefits that help you keep more of your money for investing.  I’ve got a 6-part video series on my website about real estate investing; each video is from 5- 12ish minutes – check them out and you’ll get a clearer picture of why I’m a fan – you’ll find them in the drop down menu.  The bottom line is that when you own real estate, with few exceptions, you will create wealth for yourself.

If you rent, you get to help someone else create wealth.  They enjoy all the benefits of wealth creation that real estate provides.  What is your plan for retirement?  Do you have one?  Many people, dare I say most people don’t.  The right kind of real estate can help you grow your assets while you are working and don’t need income from your rental properties.  When you want to retire, you can switch your real estate to more income-oriented properties.  Check out the video series for some great ideas and strategies on real estate investing.

Tax Benefits

I don’t think people should ever make a decision based solely on tax benefits but they are nice to have.  Buy a home for the stability and the wealth creation capabilities it offers, but enjoy the tax benefits of being able to write off your mortgage interest and your property taxes.  Sometimes the government even lets us write off the mortgage insurance.  If you own an investment property, probably not the first home you will buy, then you get big tax deductions like depreciation and you get to defer your capital gains via a 1031 exchange.  Just watch the video series and you’ll get it all there.

It’s Your Home

In the end, when you own a home, you can do whatever you want with for however long you want to live there.  My parents owned the home I grew up in for 25 years before they sold it after my brother and I were all gone and they moved back to Salt Lake.  I have lots of memories in that home.  Some of the memories are of all the redecorating and remodeling that was done over that period including a MAJOR renovation that they did after my brother and I were out of the house.  Other memories were of Christmas mornings, Thanksgivings with friends, playing baseball and football in the back yard and basketball in the driveway.  I don’t think these memories would be the same in an apartment or home we were renting.  It was our home and I’ve tried to do the same with and for my kids.

Let me begin my story by providing you with a little background so that you will have some context.  I talk to all of my clients about investing. Whether you are a first-time homebuyer or have owned many homes, I want you to understand investing concepts like the time-value of money and considerations when investing like leverage (something real estate investing offers) or accounts like Roth IRAs that allow your money to grow tax free and is tax exempt when you with draw money from it – assuming you are older than 59.5.  I also talk to my clients about the importance of estate planning, especially as their wealth grows.  With this in mind, here is my story.

The Story

On occasion, especially with move-up buyers, I get clients who have a fair amount of money for a down payment.  Many times, they want to put down enough money so that they don’t have mortgage insurance, often without any thought about what they will do with the money they have left over, but sometimes they plan to use the left over money to remodel their new home.  On one specific occasion a few years ago, I had a client who had $150,000 for a down payment plus a little extra for closing costs and he wanted to buy a $300,000 home.  I cringe inside when people tell me they want to put down and inordinate amount of money.  I asked why he wanted to do that, especially considering the fact that money is so cheap right now (rates have been very low for several years now) and he told me that he wanted to have enough money left over at the end of the month to invest.

I told him that I was happy to hear that he was thinking of investing and that most people don’t typically do that.  I also told him that he should look at the numbers to see what’s going to be best for him.  He didn’t quite understand what I was talking about so he asked me to explain.  I told him that he could put 20% down ($60,000 on a $300,000 home) and have $90,000 (of the $150,000 he was planning to put down) left over for a large lump-sum investment.  I further explained that by putting 20% down, he wouldn’t have mortgage insurance which would help keep his payment low like he wanted.  I then put together a spreadsheet for him to compare the difference of putting $60,000 down on his home purchase and investing $90,000 right now vs. putting $150,000 down and investing the monthly savings between the payments on the $240,000 mortgage vs. the payment on the $150,000 mortgage.  More on this in a minute.

Some other considerations

I discussed with him the fact that when you have a large amount of money to invest, you have more options for investing, some of these options have a better chance of a higher rate of return than the limited options for the monthly amount.  One possible options is that he could easily purchase an investment property (see my post on Real Estate Investing for a list of benefits) and still have a large chunk left over for some liquid investments.  With only a small monthly amount to invest, he would have limited investment options – usually mutual funds (which can be very good) – that would allow him to set up an automatic investment plan for a specific amount to be invested every month.  Additionally, when things happen like car repairs, home repairs, vacations, and Christmas, it’s pretty easy to justify not making the investment that month so that you can use that money to help offset the “unexpected” costs.  Conversely, when a person has a large chunk of money in an investment and s/he sees it making considerable gains, that person is likely to try to absorb the costs of various expenses by means other than dipping into an investment account that is growing nicely.  This attitude alone will help the bigger investment out-perform the small monthly investment, all else being equal.

Here are the numbers 

I calculated what the value of a $90,000 investment would be in 9-year intervals (I used this interval because I used a fairly conservative 8% rate of return and the Rule of 72 says that with an 8% return, your money will double about every 9 years – it’s actually a little less than that) and after 30 years with an 8% return, it would be worth $984,215.67.  On the other hand, investing $469.48 (the payment savings on the $150,000 mortgage vs. the $240,000 mortgage) every month for 360 months (30-years) with an 8% return would yield a value of $699,697.83.   The difference is substantial:  $284,517.84 in favor of the large lump-sum investment option of $90,000.  If after 30 years he doesn’t need any of the money (in either option) and leaves it invested another 9 years, the disparity is even larger.  The $984,215 doubles to about $1,968,430, whereas the smaller account is only worth $1,399,394.  That’s a difference of $569,036.  The principal of the Time-value of Money says that a dollar today is worth more than a dollar tomorrow because today’s dollar can work for you.  Based on that principal, it’s imperative to get as much money working for you as soon as possible.

Another scenario I see quite often 

Some of my clients want to pay off their mortgage sooner rather than later so they ask me about a 15-year mortgage.  Again, I cringe inside because I know that in the long run, if they are responsible with their money, they will come out ahead with a 30-year mortgage.  The final decision is always up to you, the client, but here are the numbers based on a $240,000 loan.  At 4.25% on a 30-year fixed-rate mortgage (a good representation of where rates have been over the last several months), the principal and interest payment is $1,180.66.  The payment on a 15-year fixed-rate mortgage for the same amount at 3.50% is $1,715.72.  So the scenario is that you pay $1,715.72 for 30 years in either scenario.  With the 30-year mortgage, you pay your mortgage payment of $1,180.66 and a monthly investment of $535.06.  With the 15-year mortgage, you pay $1,715.72 for 15 years until your mortgage is paid off and then you pay that exact same amount to your investment account.  At the end of 30 years, you’ve paid the exact same amount either way but with the 30-year option and an 8% return, your investment account is worth $797,435.24 whereas with the 15-year option, it’s only worth $593,704.04 – a difference of $203,731.20.  I’m not even taking into consideration the extra tax benefits the 30-year option would provide via the mortgage interest deduction.

In closing 

it’s important to make decisions with as much information as possible.  We all have different needs, wants, desires, goals, and comfort levels.  You need to choose what you think is best for you based on the information you have.  My goal is to help you make an educated decision and to have access to the best professionals so that you have the highest chance of success when it comes to preparing for retirement.

When most people get a mortgage, they focus on what the rate is and how low the payment is – which is determined by rate, down payment amount and term. What most people lose sight of (or don’t think about in the first place) is their overall financial picture.

Are You Prepared for Retirement?  

The fact is that most Americans are ill-prepared for retirement. Additionally, they also don’t understand financial concepts and strategies that will help them properly prepare for retirement. The best time to start preparing for retirement is NOW.   Paying off your mortgage as fast as possible is not the smartest financial decision for a number of reasons, perhaps most of all, because there are much better places to put your money when it comes to creating wealth.

Creating Wealth vs. Paying Off Debt

While having a great low rate is important when getting a mortgage, getting the lowest payment is not. Getting the lowest possible payment means putting down as large a down payment as possible which means less money for investments and a smaller tax deduction. This is the other thing that people don’t put enough importance on – tax strategies. While we shouldn’t have a tax deduction as our primary element on which we make a decision, proper tax planning is very important. For instance, a Roth IRA is much better than a traditional IRA. There are many ways to grow wealth and keep it, rather than paying taxes (income, capital gain, estate, etc) to the IRS, if you have the knowledge and the right team in your corner.

Investing in real estate is a great way to create wealth and it has some great tax advantages, too. There are also other liquid investment options that give you the opportunity to create wealth and tax plan. When you use me for your mortgage needs, I will help you understand how structuring your mortgage the right way will help set you up for financial success. I can also introduce you to a variety of financial advisors who can help you put together a financial plan that will set you up for success. Contact me for a free consultation to see how much more you can have at retirement when you consider the bigger picture.  Check out my Case Study post for some actual numbers from a client I helped who wanted to put 50% down on a $300,000 purchase.