July 20, 2017, BUY YOUR PRINCIPAL RESIDENCE NOW before it’s too late. Home values will be going up soon and interest rates have been at historical lows. Download this book from Amazon, “THE SIX MILLION DOLLAR RETIREE” for more information:
Brian Lund, freelance writer wrote this article on July 19, 2014, “The Worst Investment You Can Make: Buying a Home”. http://www.dailyfinance.com/2014/07/19/the-worst-investment-you-can-make-buying-a-home/ .
In his article, Lund claims that you will end up saving $3 million if you rented a comparable house instead of owning one for $350,000. That is, if you invested the savings you will realize by renting instead of owning a comparable house. Lund adds, “Of course there are numerous tweaks you can make to this scenario -– for example, factoring in your home’s price appreciation or the tax benefits -– but no matter how you slice it, owning a home doesn’t come anywhere close to making financial sense.”
I can cite a few problems with his article:
- He uses a 30 year fixed rate at 4.5% interest. Today you can get a much lower rate for a 15 year fixed.
- He assumes that the rent for a comparable dwelling is 75% of the monthly principal and interest payment and has no provision for rent increases over a period of 30 years. This is ridiculous.
- He does not factor in the loss of interest mortgage deduction and real estate tax deduction that will generally put the homeowner into a lower tax bracket. Conversely, he does not consider the fact that there is capital gains tax on the interest the renter’s savings earns, so it can put the renter in a higher tax bracket increasing his marginal tax rates, perhaps from 15% to 25% to 28% to 33%.
- He assumes zero appreciation for your home. There is no way to predict if housing is going up or down but assuming zero appreciation over 30 years is unrealistic. According to the National Association of Realtors (NAR) existing homes appreciated 5.4% annually from 1968 to 2009 on the average. The nationwide average annual increase of existing homes from 1987 to 2009 according to the Case-Schiller Index was 3.4%. Also, at the time of writing, there is a $250,000 ($500,000 couple) capital gains exclusion on the profit realized on the sale of a principal residence. See IRS Publication 523, https://www.irs.gov/taxtopics/tc701.html
- Check on the above mentioned IRS website to see if you qualify for the exclusion. On the other hand, long term capital gains are currently taxed at a rate of 15%, see IRS Publication 551, https://www.irs.gov/taxtopics/tc409.html
- He neglects to consider that after 15 years when your house is paid off, you pretty much live rent free. Yes, you will still pay for real estate taxes, upkeep and higher insurance and utilities than a renter pays but the house is yours. Real estate taxes will continue to reduce your taxable income even after mortgage payments end if you itemize.
- Finally, he fails to consider that many people will not save the savings they will realize by being a renter. They will find a way to spend it.
In his article “Five Things You NEED to Know before Buying a House”, James Altucher declares, “I hate buying houses. I don’t “hate” many things. But I’ve lost millions of dollars buying houses. The stress is unbearable when you need to sell. And you have no money when you need it. It’s a prison. The white picket fence is the prison bars. The bank is the guards looking in. And the need to protect your family keeps you in a solitary confinement of guilt and anxiety and stress.” Wow James you’re a real loser! Who can lose millions of dollars in real estate? The truth is James is really telling the truth. He really had a string of bad luck that most people will never experience. No one can lose millions of dollars in real estate without really trying. Especially not if the subject real estate is your principal residence. James Altucher indeed lost at least $2 million in real estate. He was unlucky enough to buy at the wrong place at the wrong time. Real Estate burnt him that is why he hates real estate and won’t go near it anymore. As the story goes, Mr. Altucher bought a $1.8 million condo in the Tribeca section of Manhattan which is in the downtown area not far from Chinatown. Then he put in $1 million in renovations. Shortly thereafter, the 9/11 attacks happened. He ended up selling his condo for $1 million. So I guess he was not exaggerating after all. Contrast his luck with that of a distant relative of mine who is in the advertising industry and claims NOT to know anything about real estate. Let’s call her Jane. She bought a pre-construction 2-bedroom condo at the Orion building near the Port Authority bus terminal in NYC. Jane went into contract in 2006 for a pre-construction sale price of $900,000. When the unit was ready for occupancy in late 2007, its value had already increased to $1.2 million. Moreover, the building had a long waiting list of buyers. For some reason not disclosed to me, 3 years later, Jane went into contract to buy another 2 bedroom unit at the just completed Rushmore building on Riverside Blvd in the upper West Side. The pre-construction price of her unit was $1 million. To make a long story short, she sold her Orion unit for $1.7 million and bought the Rushmore unit for $1 million. How is that for buying low and selling high to make a hefty profit? And here’s the kicker. She got a 3% 15-year fixed mortgage loan and her 2 bedroom condo which is now worth at least $2 million. Call it fortuitous timing or the luck of the Irish, but certainly, real estate treated Jane much better than it did James.
I admit I’ve lost thousands (not millions) of dollars in rental properties which is why I will NOT recommend them, but rarely can you go wrong in owning your home. Do the math and make sure to consider all the different factors and you will see that typically, owning your home is cheaper than renting a similar dwelling. With regard to Altucher’s calling a house a prison, an apartment is also a prison only smaller. The landlord is the warden looking in. You can be thrown out of jail within months if you do something the warden does not like. On the other hand, maybe you can stay for 3 years in your house even if you stop paying the mortgage. It takes a long time for banks to go through the foreclosure and eviction process and on top of that there are many delaying tactics you can employ to delay foreclosure and eviction. Even after foreclosure the bank may have a hard time throwing you out on the street.