Monday, May 7, 2007

Housing -- Renting is not better than buying

I have a Chinese friend that I used to work with. He's maybe 24, graduated from college 2 years ago, brilliant guy. I've been counseling him on investing, and he's doing pretty well. First off, he's actually setting aside money from his paycheck. Always a grand first step! And he's now buying stocks, and doing pretty well, I believe. We trade investing advice - he's the one that convinced me to steer clear of investing in NFLX, which I now thank him for.

He emailed me regarding this article, which basically postulates that renting an apartment instead of purchasing a residence will leave you in much better shape over the long haul. He lives in an apartment and wanted my advice on this issue.

Renting or buying - I have seen this issue tackled by many a blog, and I will not rehash what they said, nor will I address the calculations put forth in the linked MSN article.

What I will tell you is this - do not think of your main residence as an investment. First and foremost, an investment should be a tool you use to reach retirement. Your primary residence, as discussed here earlier today, should not be used as a vehicle towards retirement. It's a place to live - a place to while away your time when you're not at work. More romantically, it's a place to have candlelight dinners with your wife, to host your family for Christmas. It's a place to raise your kids, to watch them take their first steps, to read them stories. It's a place to make memories that last a lifetime.

Can you do these things in an apartment? Yes. And do you leave those memories behind when you move, as many homeowners do? Yes, perhaps.

My wife and I have no plans to move, and we actually own an apartment building, so I come at this from a different angle than some. But I am a sappy romantic - I love our house and already have so many great memories in the 6+ years we've lived there.

Why can't you do the same things in an apartment? First off, in many ways you cannot make an apartment your own. Many landlords do not allow you to paint (I don't allow painting - the walls stay white). I do not allow my tenants to affix DirecTV satellites to my building, so they're stuck with cable or broadcast television. My building has hardwood floors - if you want wall-to-wall carpeting, you'll have to move. Light fixtures, bathroom fixtures, appliances - you're often stuck with what's there. You can't add a room or renovate to your tastes.

Many apartments don't have much of a yard to play in. My daughter would be crushed if she didn't have her Little Tykes playground to play on. And if there isn't a yard or common area at your apartment complex, where are you going to BBQ?

While the house next store can still throw a wicked party, you're much more likely to be disturbed by your apartment neighbors - noise comes through those walls, even plaster walls. And if you live below someone, hopefully they don't walk around in their hard sole shoes, because trust me, you can really hear that! And if you're really (un)lucky, you might hear the couple in the next apartment doing "other things."

And apartments, all other things being equal, are not as permanent as a home. As long as you make the payments on your home, and don't live near the latest highway-widening project, your home will be yours forever. In an apartment, your rent can be raised. If your apartment is in a very nice area, the rent could get raised to levels that you cannot pay, forcing you to move. Or the building could be turned into condos - unless you buy your unit, you're out. Many people don't want this uncertainty.

So without running the numbers (and the numbers on home ownership aren't even that bad), I posit that owning a house wins hands down! Just buy a bit below your means, and your finances upon retirement will still shake out just fine.

2 comments:

Anonymous said...

The numbers ain't that bad, eh?

Sure you have the memories and the good times. But utilities cost money. Upkeep costs money. Filling that house with furniture costs money.

The decision on renting vs. owning should be taken solely by the person who is looking based on THEIR financial situation. Most people can't afford to pay for a mortgage, plus taxes, plus utilities, plus maintenance, plus a car payment, credit card bills, etc. I don't know many 24 yr olds that can pull this off right out of college.

Living in an apartment is MUCH cheaper from those perspectives. Supplying electric & gas and water to a 1000 sq.ft. apt should cost less then $160 a month. Try that in a house, nowhere near. What about the grass? Snow removal in the winter (if applicable)?

Everyone looks at the appreciation and the long term, but if you buy in a falling market and you can't keep up with the payments, you're going to be in a bigger hole then you started with.

Q at $1 Million to My Name said...

Anonymous,

Very true regarding the 24 year old's situation. I got married and bought my house both at 30 years of age. Up until 30, I rented. And I actually do have fond memories of living in a one bedroom apartment with my wife (how simple was life then!?!?)

Some of these calculations I see posit that it's better to live in an apartment your whole life. I think if you run the numbers on it, depending on the size apartment you choose vs the size of house you choose, the apartment would likely come out ahead.

My point is that there are some things in life you cannot run the numbers on. Should you have a child? It's a terrible financial decision! The latest figures show that the average cost to raise a child is over $440,000, before factoring in college costs. I'm about to have my 2nd child - I'm in for over a million in expenses including college (plus two weddings, I have two girls, yikes!)

But, for me personally, these numbers were never studied - having a child has been a most wonderful experience. Worth every penny, so to speak. I sort of feel the same way about housing - it's more than just an investment of money - it's something special.