The American dream tells us that we should be homeowners. We should get a good job, 2.5 children, a house in the suburbs, and lets throw in a dog just for good measure. Add in the fact that owning a home is an investment, property values nearly always increase in the long term, and suddenly there are countless personal finance gurus out there telling you that you are wasting your money if you rent. They claim that owning a home is the only way to go because you build equity. But are they right? Did they really account for all of the costs of home ownership versus renting?
Costs of Owning a Home
When you compare the cost to rent versus to own, you may consider equal size dwellings. When it comes to strictly square footage, the odds almost always tip in favor of owning the house rather than renting. But this is because there are many costs wrapped up into that rental fee that are more than just principle and interest.
Property Taxes Most people fail to realize that property taxes are paid by the renter. Sure the landlord has to sign the check, but a smart landlord incorporates these costs into the amount paid each month. As a homeowner, you are responsible for all of the taxes. Keep in mind that taxes rarely go down; instead they increase each year.
Utilities Sometimes you can estimate what your utilities will be based on how much they are as a renter. Other times, you get that first electric, gas, or water bill and your jaw drops. Who knew that watering a lawn was so expensive?
Maintenance Any home will have things that break. When you are in a rental a quick call to the landlord sets them straight. As a homeowner you are left paying all of the costs. As a renter you may not have seen the maintenance because the landlord kept on top of things. But those problems are always there.
Insurance If you have a mortgage, you have to maintain homeowners insurance. While it is not generally a huge bill, it is tacked onto that loan. It can make the difference between easily affordable, and a bit of a stretch.
When you look at just paying the mortgage, home ownership looks like a great deal. But when you take into consideration all of the other expenses, suddenly that deal isnt so great.
Increasing Real Estate Values
The one perk to owning, however, is that you do get to capitalize on those increasing real estate values (if you decide to sell). But you should be aware that residential real estate generally only appreciates at about 4% annually (depending on the area of the country). By comparison, the S&P 500 index appreciates between 8% and 10%. Even when figuring in the benefits of deducting mortgage interest, the math shows that putting money into the stock market is almost always a better deal.
Should You Buy?
This is all to say that owning a home is still a great idea. It provides that sense of settling down, allows a place to call your own, and if you like remodeling and other work it provides hours and hours of hobbies. The point of this article is to say that your house probably isnt the great investment that many have led you to believe. If you are considering buying a home because thats what youre supposed to do, then you might want to think twice.