The best time to buy property is when you can afford to buy. If you need more motivation to save for a downpayment, calculate how much you’ll spend on rent in your lifetime. Due to inflation, demographics, and economic grow, rent will always be rising. If you are a renter, you are a price taker and at inflation’s mercy.
If you are an owner, you get to fix the vast majority of your living costs with an adjustable rate mortgage or a 30-year fixed mortgage. Over time, your cost to own will decline in real dollar terms while your equity grows.
If you don’t believe me about the power of homeownership, let’s look at one example of a New York City resident who purchased a condo in Park Slope for $1.2 million in 2010 and sold for $2.1 million in late 2018.
He put down 20% and took out a $960,000 mortgage at 3.5%. Below are some approximate numbers.
- Monthly rent avoided for nine years: $6,000
- Total rent avoided after nine years: $648,000
- Net proceeds after fees, principal pay down, all taxes from selling house: $750,000
- Opportunity cost of not investing $240,000 (down payment) in the stock market from 2010 – 2018 = $240,000 (~100% appreciation)
- Net mortgage interest cost after nine years = $180,000
- Net property taxes after nine years = $90,000
- Maintenance cost after nine years = $20,000
Net cost of living = ($648,000 + $750,000) – ($240,000 – $180,000 – $90,000 – $20,000) = $868,000.
If this simple math is right, not only was my friend’s family housing free for eight years but he was also paid $868,000 to live in New York City. That’s pretty good value for just living.
Although this might seem like a cherry-picked example, the fact is that hundreds of thousands of homeowners in cities such as San Francisco, Seattle, Denver, New York, Washington DC, Boston, Los Angeles, San Diego and more have experienced tremendous property price appreciation since the financial crisis.
How Much You’ll Spend On Rent In 25 Major Cities In Your Lifetime
Hopefully you are convinced after the above example that owning is better than renting long term. If you’re not, check out this chart about how much money you’ll spend on rent for a median-priced home in various major cities in your lifetime. The data is as of 2019.
You should be absolutely shocked at how much money you will be flushing down the toilet by age 30, 40, 50, and 60. It should make you so sick that you should now be motivated to save aggressively to at least get neutral and buy your own primary residence.
If your city is not on the list, don’t worry. Simply add up how much you’ll end up spending on rent for your desired property if you never buy. Then run the numbers like the example above and see where you’ll end up in 10 – 40 years from now.
Key Points To Property Ownership
1) The return on rent is always -100%. Yes, you get a place to live, but if you buy, you also get a place to live. Once this variable is canceled out, what’s left is the owner’s optionality to sell the asset.
2) Nobody every saves and invests the full difference. All anti-homeowners say is that they will come out much better because they’ll simply save and invest the difference if they rent. But the statistics don’t show this to be true, otherwise, why is the average homeowner 44X wealthier than the average renter? Why can’t the typical American come up with $400, let alone $1,000 in an emergency? It’s because Americans are not disciplined enough to save and invest. We are a consumerism culture.
3) Time is your friend when it comes to owning a property. The longer you rent, the longer you will suffer at the expensive of the homeowner who is building equity. Homeownership and renting is one of the biggest reasons for the widening wealth gap over time. Rising rents and rising property prices will crush your financial progress if you are unwilling to get neutral real estate by owning your primary residence or moving to a lower cost area.
4) No risk, no reward. Staying in a rent-controlled apartment is somewhat akin to working at a safe day job with no upward mobility. You’ll likely never starve, but you’ll likely never get rich either. If you take some risk by buying real estate, you might do very well just like if you decided to start your own business or hop to a different employer. Or you can end up losing a lot if you don’t buy appropriately. Always put down 20% and have at least a 10% liquidity buffer after.
5) Massive home equity buffer has been created. There will unlikely be another housing downturn as big as we saw between 2007 – 2010 because of higher lending standards and massive amount of home equity. Therefore, real estate will likely only see a 10-15% correction before a resumption up in prices.
Please Don’t Rent Forever
In conclusion, calculate how much you’ll spend on rent in your lifetime and really chew on that number. Please don’t rent forever. Here’s why I’ll never rent again and neither should you.
There is a reason why all the wealthiest people in the world not only own their primary residence, but also own massive portfolios of rental properties.
Owning real estate has been proven to be one of the easiest ways to build wealth over time. Real estate provides utility, is easy to understand, and has real tangible value unlike stocks.
If you don’t have the down payment, don’t want to manage tenants, or don’t want to do any maintenance work, consider owning real estate through Fundrise, the leading real estate crowdfunding platform today.
Signing up is free and they have geographic real estate investment trusts and individual commercial properties around the country where you can invest as little as $1,000.
I have personally invested in 17 commercial real estate projects around the country to diversify my concentrated real estate holdings in the San Francisco Bay Area. It is really nice to earn passive income.
If you rent for life, you are going to look back 30 years from now with regret. Your kids will also likely hate you for not buying so long ago. If you don’t want to build wealth for yourself, built wealth for your children.