Why Pay Cash for a House?

03 Saturday Feb 2018

Posted by moneygooguru in Debt, Growing Wealth, House

Tags

home, House, investment, million dollars, mortgage, pay cash, rent or buy

Or “How Not to Lose a Million Dollars Buying a House”

How often have you heard someone say “I’m sick of throwing away money on rent so I’m buying a house.” Why do people think this? After all, you can rent from a landlord with little risk or “rent” from the banker with a lot of risk. Why do people think they’ll automatically be financially ahead if they buy a home?

Our house, as an investment, has been awful. We bought it in a great location at a time when home prices were going up, up, up in our area. How could we go wrong with that? Yet we had no idea we were nearly at the height of a housing bubble, and it was about to burst. The short story is, after the bubble popped and even with an economic rebound that continued for ten years afterward, our “investment” gained us a whopping 1% average annual return minus mortgage interest, taxes, insurance and upkeep. A terrible investment. We lost big time.

But we love our home and don’t regret buying it at all. Why? It has to do with the advice that we often give people about buying a house: Buy a house because of the location in a great neighborhood, or the view, or proximity to your favorite people or places, or to have a big yard or grand garden, or to raise a family, or to have a bunch of animals. These “wants” for owning a house, however, will cost you big time. If you’re not okay with that, then keep renting.

All About the Math

The main reason that buying a home is not really a good investment is simple. Simple math, that is, that the banks would rather you didn’t do. If you buy a house and get a mortgage, your home will have to appreciate by up to 7% or more a year just to break even (with inflation factored in this number could be 10% or more). Do the math: Add up the annual cost of your mortgage interest, maintenance, property taxes, and insurance. Divide it by the value of your home. Don’t forget to add the annual inflation rate on top of that. It all adds up to a pretty hefty annual percentage rate. Are home prices going up by that rate in your area? Even if they are, for how long can you count on that before the market has to correct?

If you want to reduce the magnitude of this poor investment choice, then the best thing you can do is pay cash for a house. Seriously, you should.

venus and mars Why Pay Cash For A House?

Answer: Because you may lose a million dollars otherwise.

Example: If you buy a house for $250,000, put a $50,000 down payment, and get a 30 year mortgage for the remaining $200,000, the lost investment opportunity could be worth well over ONE MILLION DOLLARS! Do the math. Assume monthly interest payments made to the bank on your loan balance given an annual interest rate of 5% over 30 years, and what that same amount of monthly mortgage interest if invested elsewhere could have become if it returned 8% annually.

Bottom line is this: Buy a house because you want a home, not fooling yourself into thinking you are making some great investment when you’re really losing a million (unless you pay cash or pay it off way early!).

Buying A House As A Short Term Investment

28 Thursday Jan 2016

Posted by moneygooguru in Debt, Growing Wealth, House

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buy house, home, investment, mortgage, short term

house front Recently a co-worker asked me about buying a house if they didn’t plan to stay there but three years or so. I do have an opinion about buying a house if you’re not going to be living there a long time – don’t do it.

The math may seem to work but there are unknowns you can’t control, like the market. If the market has dived when you want to sell the house, you’ll surely lose money. Yet get this: you may lose money even if the market remains steady because there are many costs in buying, owning, and selling that rob you of potential profit.

There are buyer-pay closing costs. My wife and I just bought a house and forked over thousands in loan and other service fees.
While you own your house there are insurance, taxes and maintenance costs.
There is interest shoveled to the bank if you have a mortgage.
The seller (which would be you in a few years) typically has to pay closing costs and realtor commissions. On the house my wife and I just bought, of the money we handed over, the seller paid $10,000 of it to the realtors. Ouch.

So the problem is, when you add up all the above costs, your house would have to rise in value up to 7% or more per year just to break even (and that assumes today’s low interest rates). Yet historically, home values appreciate by about the same amount as the inflation rate (which has been 3%-4% annually on average). How could you possibly come out ahead given this situation? This is exactly why buying a house short term is a good recipe for losing money.

But you say, “The market is hot in my area right now!” Beware. The market was hot when we bought our last house too. But when that housing bubble burst, home values dropped like a rock in a lot of places. In our Pacific Northwest small town, home values held steady. Our house value never dropped. But because it was overvalued when we bought it, it has not increased in value much since the bubble burst. In fact, after owning it for ten years, even though we’ve done some great upgrades and have maintained it in perfect condition, it is now only worth about 10% more than what we paid for it. That is a very crappy growth rate (about 1% per year). As far as investments go, we’ve lost our shirts! If we would have had to sell our house within the past ten years, or even now, we would lose money.

The main reason to buy a home is for long term, non-tangible reasons. Like to raise a family. We love our house and have no regrets. And we plan to continue living there for many more years. We’ll probably come out okay financially in the long haul.

In my opinion, buying a house short term is not worth the gamble. I would rent. All that said, as long as you know the risks going in and are willing to take them…go ahead, lose your shirt!