Rent or Buy a House? Investment or Money Pit? What is the Truth? - (W5:D2) Debt Free Millionaire Podcast

The American dream has always been to own a house; but is it the wisest investment? The way most people buy a home is like a Savings Account, and you pay very large fees. Some financial gurus will tell you it’s a bad investment, and you would be better off renting a house. Consider this though, when you buy a house, let’s say for $200,000, you will most likely get a loan for that entire amount, with a 3.94% interest rate. You will pay $1,419 each month (Principle + Interest $687, Homeowner’s Insurance $104, PMI $140, Property Tax & Fees $225, HOA $0). Read more at www.debt-freemillionaire.com/ homeownership/. Over the entire 30 years of the loan, you will pay over $510,840 for the mortgage, and all fees attached. When you sell the house, you will most likely sell it for $384,115 given normal inflation. During that time, you will have replaced all the normal pieces of the house, including siding, windows, furnace, AC, hot water heater, and any other damages, and also will have insured it. In the end, you will pay more for the house than you would have saved. Let’s make this easier to read:

Renting vs. Buying a House ($200,000 house)

 

Own a Home

Rent

Closing Costs:

$2000 Closing Costs

$1,000 Deposit

Mortgage vs Rent

$1,315/month

$1,315/month

Homeowners/Renter’s Insurance

$104/month

$75/month

Replace parts of the house

Min. $50,000 over 30 years

$0, Owner pays

Total Spent over 30 years

$562,840

$501,400

Selling the House

After Inflation, house is worth

$384, 115

$0

Lost Owning vs Renting (Spent-Worth)

$-178,000

$-501,400

Difference in Owning vs Renting

$+323,400

 

Now this assumes what the average American would do when buying a house. Later, I will go through ways you can save money on your home purchases, so you lose $0 when you sell your house. Before we do that, let me explain renting vs. buying a home.

Here are things to consider when buying or renting:

Number of Rooms – How many rooms do you need? Are you single? Do you need more than a studio apartment? Are you married, with no kids? Do you need more than two bedrooms? Are you married with kids? Do your kids need their own room? There are some occasions, but nearly no child needs a bedroom of their own, unless they are the odd number child. When being intentional, you do not need a very large house, unless you find the perfect deal. It is nice, though, to have a spare bedroom for guests, or to use as an office.

Square Footage – Everyone wants the biggest house, but do you need it? Will it hurt you financially? One way to look at it is the price per square foot. Take the price of the house and divide it by the square footage of the house. Most houses in Missouri are $142 per square foot, while California is much higher, at about $286 a square foot for a 1400 sq. ft. house. Buy what you need, or look for a great deal.

Backyard – Do you have kids? Will you or your kids enjoy the backyard? Part of the expense of owning a house is the upkeep around the house. Do you have someone to take care of it? Do you enjoy mowing the lawn? Consider this when it comes to buying. Do you need a yard, or will a condo (much like an apartment, with no land) suffice?

Bathrooms – Do you have enough bathrooms for all the people living there? Do you have certain people in your family that will take the bathroom for long periods of time, especially when you are on a schedule? Does this place have a master bathroom for you and your spouse, so your kids don’t have to use it? These are all things to consider. Only buy a house with enough bathrooms to provide for your family. One is a necessity while any more is more of convenience and increases the price.

Age of House/Apartment – Will it need a lot of upkeep, because of its age? Buying an older house is much more expensive than the purchase price. It also means you will pay for upkeep, since its functions and features will be failing over time.

Rent or Buy – When you are just leaving your family’s home, you do not take that level of house with you. You do not even have to own a house to get started. Your parents lived their whole life to get the good sized home that you just left. What do you need? If you are single, then you just need a place to lay your head, like a studio apartment (where you technically have two rooms: your bathroom and everything else - kitchen included). If you have a small income and no credit, then you will want to start renting, first. As your income increases, you can get into a house.

At the same time, right now, you will pay more in rent than you will pay on a mortgage, with the interest rates so low. You can get into a house for $800 a month, while you would be paying $1,000-1,200 a month in rent. As the interest rates increase, though, so will monthly payments when purchasing  a house. If you close the account the payments will stay the same.

• A $100,000 home, at a 3% interest rate, will cost $709 a month, or $255,240 over the life of the loan.
• A $100,000 home at 8% interest, will cost $1,021 a month, or $367,560 over the life of the loan.

Taking that into mind, right now is a smart time to buy, if/when you are ready. As interest rates increase, you will want to pay cash or rent, because of the increase in monthly payments. At this point, rent and mortgage expenses equalize. But your expenses don’t end with mortgage payments, when you own a house. Repairs are expensive; you may have to add in those expenses and stresses on top of the mortgage payment. 

The way the average American buys a house, shows that we are not the greatest at investments. That is, unless you are intentional. We mentioned that repairs can be expensive. These are some of the repairs that are necessary, may happen while you live there, and you will need to pay for (which is also why we will teach you to set up a rainy-day fund). Here is the average price for specific repairs:

1. You pay a mortgage: $800
2. Your furnace goes out: $5,500-$20,000
3. Your hot water heater goes out: $1,000-$3,000
4. Your AC unit goes out: $3,200-$10,000
5. Your plumbing breaks: $1,200
6. Cosmetic damages: $1,000-$5,000
7. Roof replacement: $10,000-$40,000 

So, your house could be a money pit, and you could spend a lot of money on its upkeep. Keep this in mind before purchasing a house, and be sure to get thorough inspections!