Rent, Don't Own
Sometimes, a piece of financial advice gets transformed into a near-religious shibboleth.
Owning is better than renting, for instance.
Not so, according to Rich Arzaga, an investor and finance professor at UC Berkeley. From Reuters:
"It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.
Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor inpersonal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."
That's right: 100 percent.
Bold words. Especially about something that's often conflated with the "American Dream." Here's how he breaks it down:
While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.
"I don't have the emotions a lot of people do surrounding real estate," Arzaga says. "I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."
Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners "not to meet their financial goals. They were going to fail."
Of course, others disagree:
"Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return," says Jed Kolko, chief economist at Trulia.com,
a real estate search and research website. "But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."
Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga's. "Home ownership is not so much a creator of wealth as a store of wealth," he says. "The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn't rebate a dime."
The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.
So if you think you might have to move -- for personal or career reasons -- you're better off renting and investing or saving the money you'd otherwise spend on homeowner annoyances. But what sentient American who is paying attention to economic trends doesn't think he or she is going to have to move?
So if homeownership is no longer a central component of the American Dream, what is? Not lifetime employment in a large company. Not multi-generations of a family living in the same community. There must be something, right?
- Comment (51)
- · Quote
- · UnfollowFollow (5)
Comments:
Oct '10
Re: Rent, Don't Own
Always be ready for a road trip, the less baggage the better.
Edited on March 3, 2012 at 3:23amSep '11
Re: Rent, Don't Own
To me, the American dream has never been primarily about financial security; it's about freedom. My oldest friend's grandfather walked across Europe with his wife and two small children to escape Soviet Russia. He didn't do it for a house, or a better school, or a better job; he left most of his relatives behind, so that his children could live in freedom. That is what it's all about.
Jan '11
Re: Rent, Don't Own
100 percent! Another settled science.
Aug '10
Re: Rent, Don't Own
the way i heard this story start was ..different.So there are three old guys sitting on a bench n miami beach...and it ends with something about : " if it flys,floats, or...."
May '10
Re: Rent, Don't Own
Well, as married retirees with combined 67 years working for our two respective employers, and having never permanently resided more than 30 miles from our parents or 2 of 3 kids, and always owned our own home.....
I am very dubious about the analysis. But even if he is dead on in his financial calculations, I learned long ago that, in the final analysis, it is never all about the financial calculations. Whether owning a home makes sense depends also on a lot of unquantifiable, emotional issues. Do you want the freedom to create a home, or are you satisfied with a house? Do you want to root down in a neighborhood, or are you a rolling stone? Different people, different stages of life, different lifestyles will, in the end, be a much bigger matter than mere dollars and cents.
Edited on March 3, 2012 at 3:37amMar '12
Re: Rent, Don't Own
I don't want to buy a home because it's a good investment; I want to buy a home because I expect that, within the next 15 years, our house is going to include a number of children and my in-laws, and I just don't see that sort of family situation being appealing to most landlords. My in-laws want us to buy because they come from a part of the world where that is one of relatively few safe, secure places to park your wealth. Frankly, the upkeep of a property sounds like a whole lot of aggravation and frustration.
That being said, it's a low priority for us. I keep our emergency savings up, and then retirement funds for me and him, then paying off my student loans early, THEN savings toward a down payment.
My husband wanted to come to America because he believed that, unlike Malaysia, he might get the opportunity to make something of himself here without the constraints of being, legally, a second class citizen. He has and when he's naturalized in a couple years, I think we'd both say he'll have the American Dream.
Edited on March 3, 2012 at 3:49amMay '10
Re: Rent, Don't Own
Of course, owning a boat is an entirely different kettle of fish.
Apr '11
Re: Rent, Don't Own
outstrippOf course, owning a boat is an entirely different kettle of fish.#7 · 9 minutes ago ·Unlike (1) · Quote· Flag· Share· Direct linkQuick, burn a $100 bill. Right now!
Edited on March 3, 2012 at 4:00amMar '12
Re: Rent, Don't Own
Crab bait: outstrippOf course, owning a boat is an entirely different kettle of fish.#7 · 9 minutes ago ·Unlike (1) · Quote· Flag· Share· Direct linkQuick, burn a $100 bill. Right now! · 2 minutes ago
Edited 0 minutes ago
B.O.A.T.=Bring Out Another Thousand
Jan '12
Re: Rent, Don't Own
I agree with those of you who have said that the American Dream isn't about financial security but rather about freedom and the opportunity that comes with freedom.
As for home ownership, personally I see that as something very closely connected with where you are in life. For instance, I am in my mid-twenties and single. I have no desire to own a home. Though I have peers who are also single and do own homes, I don't see any point in that right now. I don't even know where I'll be five years from now. If I am ever lucky enough to have a family, would I want to own a home? Absolutely. But as Madcap mentioned above, I wouldn't want the home for financial reasons, but because I wanted the space to fill with family.
Oct '10
Re: Rent, Don't Own
A boat is a hole in the water in which to throw money, as the old saying goes.
Feb '12
Re: Rent, Don't Own
I think the home ownership per se is not the American dream, nor a central component. It seems to me that people come here and live here to flourish in a free society. If that entails a family, then a home is a meaningful aspect of the American dream, but still merely a means within the dream, not part of the dream. Personally, as a single man, I wouldn't know what to do with an entire house.
Jul '10
Re: Rent, Don't Own
Home ownership is more than just about finances. Having just bought a home a few months ago after renting for 15 years, the cost is a wash for me. What isn't a wash is no longer having to put up with neighbors who run up and down the steps outside at 3am. No more trying to figure out just what or who is being rolled across the floor upstairs. No more having to hear the people downstairs arguing. No having to fight for a parking space or fight with the landlord to get them to come fix things. Let me tell you, home ownership is a good thing! Show me a man who says renting is better, and I'll show you a man who doesn't rent an apartment.
Oct '10
Re: Rent, Don't Own
How odd to suppose that the sum of life is financial optimization. We have lived in our present HOME for 20 years now. Our two children graduated from here to adulthood and marriage. We have had several dogs.
We have added rooms, re-built and expanded our kitchen, built innumerable structures to accommodate my wife Linda's, disability. She is a quadriplegic.
We have built our own greenhouse to grow our favorite produce, our garage is storage for our son's contracting business, and we have painted our house a very bright yellow.
Off and on over the years we have had the privilege of providing temporary housing for friends in time of trouble.
None of the above would be possible if we were optimizing our wealth. We have fewer years left than most of the Ricochet crowd, and we can't take it with us.
We have used it to provide a HOME.
May '10
Re: Rent, Don't Own
" The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, "..And from whom does the landlord get the money to pay those costs?
Dec '11
Re: Rent, Don't Own
Rob Long
... according to Rich Arzaga:
Arzaga speaks the truth! As a Florida resident, I would only add that he forgot to mention the dreaded wind and flood insurance.
May '10
Re: Rent, Don't Own
Rob Long:
And where does the landlord get the money to pay for those expenses?
May '10
Re: Rent, Don't Own
So, Rob, of course, you rent in Venice, right? No kids needing space.
Surely, rental properties will take Long Dogs.
Aug '10
Re: Rent, Don't Own
While it's true that I don't like hubby's and my apartment very much, I would choose it over my family home any day:
No pipes bursting and bringing down chunks of the first-floor ceiling. No floods in the basement. No water heaters rusting out. No flying squirrels nesting in the attic and disturbing the night with their scurrying and squeaking. No chipmunks chewing up the telephone wires. No mysterious problems with the electrical circuits. No raccoons hibernating in the garage insulation. No tree limbs threatening to fall and punch another hole in the roof...
About the only problem our apartment has that's comparable is that the thermostat doesn't work (even when we leave a bag of ice on it, it won't trigger the heaters). But hey, our rent is cheap.
What was that you were saying about renting?
Jun '11
Re: Rent, Don't Own
smp16: I agree with those of you who have said that the American Dream isn't about financial security but rather about freedom and the opportunity that comes with freedom.
As for home ownership, personally I see that as something very closely connected with where you are in life. For instance, I am in my mid-twenties and single. I have no desire to own a home. Though I have peers who are also single and do own homes, I don't see any point in that right now. I don't even know where I'll be five years from now. If I am ever lucky enough to have a family, would I want to own a home? Absolutely. But as Madcap mentioned above, I wouldn't want the home for financial reasons, but because I wanted the space to fill with family. · 2 hours ago
wait till you understand what it means to deduct interest from your taxable income. it's not the best investment but what is? for most people, it's a good deal.