My financial avatar gives money freely and happily for me to have a happy place to lay my head at night and enough good, happy food to eat. These two expenses probably take up the largest part of my budget and I am more than okay with that.
I’m happy to sign a lease for a nice apartment for 18 months. I’m happy to pick out happy, sunny Airbnb places in different countries for a month. I’m happy to laze about in a hotel for a night. Happy happy happy.
I tell you this as a preface because I know you’ll probably disagree with the rest of my post. That’s okay. We can still be friends. For me personally, I don’t plan to purchase any Real Property for the foreseeable future. Here’s my reasoning in numbered format.
(1) Real Property is expensive. It’s very likely the most expensive thing any of us have ever considered buying. For a not-really-small chunk of change, in fact for a significant chunk of your total net worth, you can have your name on a piece of paper in a basement office of some government building, proclaiming you responsible for your little slice of the earth.
(2) After forking over a significant chunk of your net worth, you still have to pay rent. Even if you own this Real Property completely and indisputably 100% outright, you really don’t. You still have to pay some monthly amount to someone to have that happy place to lay your head at night. The government is going to tax you on that property every single year. Whether it’s your landlord or your taxman, you will need some cash flow for “rent”.
And I know that I am just a vegetarian hippie at heart, but tween-Thriftygal strained her neck by vigorously nodding her head in righteous agreement while Pocahontas sang The Colors of The Wind:
We’re all renting. From Mother Earth. I know that’s cheesy. I’m not deleting it.
The initial price and the fact that you still have a recurring rent are two of my top three reasons why I don’t think I’ll buy, but that could change in the future because it’s changed in the past.
Yes, I’m still a hippie, but I don’t necessarily oppose having your name on the paper. In March 2012, a friend emailed me the listing of a 1 bedroom, 1 bathroom condo for sale in Chicago right across the street from where I lived. At that time, 29-year-old Thriftygal, five glorious months into post-student-loan-debt-life and building up a balance that sat in a bank account, was reading investment books and contemplating a path to financial independence. Your Money or Your Life guided my thinking about money and my charts, but I wasn’t sold on my older edition’s investment advice.
I wasn’t really considering buying an apartment, but the price tag screamed at me. I loved my neighborhood. I loved that family lurked around several corners. My commute to work was perfect. My plan at that point was to continue working at my firm in Chicago until I hit my financial goals, a prospect that was at least two years away.
The apartment showed well when I toured it and I put in an offer for $70,000 cash for the short sale. That figure was a scary percentage of my net worth at that point, but I had an old 401(k) chugging along as well and I knew that I could quickly replenish it if I only stayed the course at my current job. Most importantly, buying the condo would lower the monthly amount I paid for a happy place to lay my head at night to only $350/month, for taxes and association fees. To put that number in perspective, over the years renting in various neighborhoods in Chicago, I paid anywhere from $750 to $1200 rent per month.
I transferred $1,000 earnest money and then sat and waited for the bank to approve the short sale offer. Deedle deedle deeeeee.
(3) Buying Real Property is complicated. Since the idea of owning a specific location on earth is so fundamentally different to the items we typically buy and consume, there are a lot of rules and fees and you need a whole cadre of people to navigate your way through this labyrinth. I had a realtor show me the house. I’m a lawyer, but I still consulted a real estate lawyer who specializes in short sales. The banks debated accepting the short sale offer. I filled in a lot of paperwork. My god, the paperwork.
(4) Since buying Real Property is complicated, it’s also expensive. If you want to buy Real Property, you not only need the money for the actual property, but you also need money to pay for title searches, owner’s title insurance if you like insurance, transfer taxes, recording fees for the deed, a competent home inspector to tell you of its flaws, possibly a surveyor to tell you its exact boundaries, lawyers to review cumbersome contracts, and homeowner’s insurance.
(5) Financing Real Property is complicated and (6) expensive. I had enough to pay for the condo outright, but I know that is an extremely rare occurrence. If you don’t have the entire not-really-small chunk of change for the property up front, you have to get a mortgage!
Sure, the government lets you claim some money off your tax returns for the interest you pay to the bank for the property in a convoluted distribution of wealth, but there are still fees galore for the pleasure of financing Real Property. If you don’t have the entire price tag, you have to ask the banks for help. And the banks will help, but they’ll demand a lot of things in return: loan origination fees, credit reports, title insurance, points, flood life of the loan fee, PMI insurance, and appraisals.
I’m not going to mention the interest you pay to the bank again because that math makes me uneasy. I know I just did. I’m not sorry.
In March 2012, I didn’t care about reason #6. I just chilled with my earnest money sitting idle while the bank that had the mortgage with the seller and the seller’s real estate lawyer traded occasional phone calls because of reason #5.
(7) Real Property is not a fluid way to keep a significant chunk of your net worth.
If you’re not financing from the bank, you’re still tying up a significant portion of your net worth that doesn’t pay you dividends in the interim.
(8) Real Property is expensive and (9) complicated to sell.
Real Property is not a fluid way to invest your money because it’s as expensive and complicated to sell as it was to buy. You will likely have to pay real estate commission for the realtor working on your behalf and real estate commission for the realtor working on the buyer’s behalf. Depending on the negotiation, you’ll likely pay for closing costs and certain repairs.
You’ll hire a lawyer for the paperwork. You’ll vacate your house while it’s shown. You’ll stage it appropriately and live like super-clean monks for as long as it takes. Your only potential buyers are a tiny pool of people who are looking in that particular area at that particular time.
(10) Real Property is not liquid place to store a large percentage of your net worth because it is expensive and complicated to buy, finance and sell. This limits your ability to wander and adapt.
This reason rounds out my top three for why I personally don’t plan to buy Real Property anytime soon. Having a good chunk of your personal savings in Real Property leaves you less able to squeeze life’s lemons to make your lemonade.
What if climate change picks on your particular neighborhood and batters your house repeatedly with killer floods, stronger tornadoes, hurricanes, earthquakes, sinkholes and killer bees? What if your state becomes ground zero for the next Zika? What if a major industry collapses and leaves the city desolate and depopulating rapidly? What if you have a crazy, psychotic neighbor? What if you get divorced? What if someone dangles the job of your dreams 5,000 miles away?
Dealing with any of those above scenarios becomes a lot harder when a significant portion of your net worth is to tied to not just a single country, but to one state, one city, one neighborhood, one block, one tiny, suffocating plot of land. I’m not saying that you won’t be able to squeeze life’s lemons, but it will take more squeezing.
In September 2012, almost 30-year-old Thriftygal had been waiting for the bank to make a decision on that short sale for nearly six months. I paid a home inspector to tell me about the property and what I could expect. I hadn’t wanted to pay for this unless it was reasonably certain the deal would go through, but I went ahead for some feeling of progress.
I followed the home inspector around as he pointed things out to me and made notes and took pictures. The roof would need to be replaced in a couple of years. The air conditioner was not put in correctly. The back of the condominium had drainage problems. There was a significant amount of mold growing in the building that would likely require a large assessment from all the condo owners.
My lawyer suggested asking the sellers to pay the probable assessment, but the idea of throwing a wrench into the already creaking wheels of this process and asking sellers who were already distressed financially to give me money left me feeling gross. The ominous mold smell and the truly uncertain costs made the decision easy. The bank was still deliberating and, per the contact, I could still walk away. I paid ~$400 for the inspector and $300 for the lawyer and skipped away.
A year later my firm asked if I wanted to move to Sydney. If I had bought that house, that decision would have been a lot more complicated and stressful.
(11) You have to pay to maintain it in the medium-term and long-term as long as your name is on it. I always do my best to maintain my tiny slice of the earth in the short term as much as I can, so I would pay for the expense “maintain your happy place to lay your head at night in the short term” regardless of whether I was renting or buying. Cleanliness is next to godliness.
But, if anything big breaks through no fault of anyone except the inevitable decline of stuff turning into junk, then the owner pays. Whenever something big (or even small) has ever broken in my apartments that I’ve rented, I would just call my landlord and it would get magically taken care of. If the price to fix whatever just fell apart was more than the landlord anticipated and budgeted, I assume the landlord would consider that when negotiating the new lease terms when the contract expired.
Maintenance for Real Property can get expensive. What’s lurking behind the walls? What improvements have been made along the way that weren’t done correctly? What has already far exceeded its life expectancy and will need to be replaced? What necessary updates and renovations will you have to make to ensure it retains its value and doesn’t look dated? Owning Real Property is chock full of unpredictable and annoying costs that you just won’t deal with as a renter.
My attempts at minor home improvement projects at my parents’ house prove that carpentry is not one of my talents. I’ll be a carpenter one day, but right now I’m a petite and weak person without the tools, physical strength or know-how to fix what’s broken, so maintaining the asset would not be cheap for me.
(12) Buying and selling Real Property is time-consuming. This article is getting long and that title is pretty self-explanatory, so that’s all I’m going to add.
(13) The government can pay you for it and kick you out if they really, really, really wanted. Eminent domain, y’all. I know it’s rare.
This analysis only applies to buying Real Property as a home and not about buying properties to buy, spruce up, flip. I am not talking about properties to buy and then rent out for other people to have a happy place to lay their heads at night. I am not talking about properties one would think of as a traditional investment. I know you can make money like that. I can’t. I don’t want to. I watch too much Judge Judy and I have no desire to landlord.
A house, for me, would not be an investment. At least not the type of investment that I like. It’s not fluid and doesn’t pay me any dividends and might occasionally require large cash infusions. The returns are uncertain and possibly negative depending on the state of the market. I know you can say that last sentence about VTSAX as well, but I at least get dividends and can sell small bits.
I know there’s an emotional argument to the idea of owning your own home that I won’t discount. I completely understand and empathize with the lure of developing roots in a community, the nesting impulse, stability for your children, the desire to claim a place as your own, to do with what you please, to renovate and paint and customize to your own taste.
If that’s your reason to purchase Real Property – I say, “awesome sauce” to you. Pure sauce. It’s an official part of the American Dream and maybe, if you’re lucky, the house will have appreciated when you decide to sell it and you’ll make enough to overcome the expensive hassles. I personally know several people who have bought their house, lived in it for a decade-plus, loved and tended to it as required, paid the taxes happily as it was less than rent would have been for something similar in their area, sold it for a hefty profit and moved to another house where they repeat that process. There’s no accounting for luck.
But I think I already depend on luck a little too much as it is, and with my wanderlust, I don’t see myself staying in one place long enough for the cost and bureaucracy to be worth the bother.