A House Is A Lifestyle Decision In An Investment Costume

Every time I have mentioned renting, somebody has told me I was throwing money away.

Nobody has ever said that about the $2,600 of mortgage interest I paid in the first month of a loan, which also went to a stranger and is also never coming back.

The first month, in full

Take a $600,000 house with 20 per cent down, so $120,000 of cash and a $480,000 loan at 6.5 per cent over thirty years. Principal and interest comes to about $3,034 a month. All of these figures are illustrative and picked to be easy to follow.

$434 out of $4,284. Around ten per cent of what leaves your account in month one ends up as yours.

The other 90 per cent goes to a bank, a county, an insurer and eventually a roofer, and it goes there the same way rent goes to a landlord.

That share does improve. Every payment shifts a little more toward principal and by year fifteen the table looks very different. But the early years of a thirty year loan are a rental agreement with a bank, and calling that building wealth is asking the word building to do a lot of work.

Run it against renting

Same house. A comparable place to rent costs $3,000 a month. Assume the renter invests the difference at 7 per cent, the house appreciates 3 per cent a year, and both people look up after ten years.

The owner is out $4,284 a month. The renter is out $3,000, keeps $1,284, and also still has the $120,000 that never became a down payment.

$1,284 a month invested at 7 per cent for ten years grows to about $222,000. The $120,000 invested at the same rate becomes about $241,000. The renter is sitting on roughly $463,000.

The owner's house at 3 per cent appreciation is worth about $806,000 after ten years. The loan balance is down to about $407,000, so the equity is about $399,000. Sell, and 6 per cent in transaction costs takes about $48,000 off the top, leaving roughly $351,000.

And now the honest part

That comparison is rigged by its own assumptions and I want to show you exactly where.

The renter's rent does not stay at $3,000. At 3 per cent a year it reaches $4,032 by year ten. Meanwhile the owner's principal and interest is locked at $3,034 for thirty years and only the tax, insurance and maintenance climb, taking the owner's total to about $4,714. The $1,284 gap the renter was investing has narrowed to about $680.

Change other inputs and the answer flips outright. Appreciation at 5 per cent rather than 3 hands it to the owner. Investment returns at 5 per cent rather than 7 does the same. Staying twenty years instead of ten does the same again, because the transaction costs spread over more years and far more of each payment goes to principal.

Which is the argument. A calculation whose winner reverses when you nudge an assumption by two percentage points is not a fact about houses. It is a model being used as a justification when it was never sturdy enough to carry one.

So stop calling it an investment

A house is a place to live that also stores money, badly. Illiquid, undiversified, leveraged, concentrated in a single postcode, carrying a transaction cost around 6 per cent on the way out and a roof that needs replacing somewhere around year twenty.

No advisor on earth would let you put 80 per cent of your net worth into one company in one city and describe it as prudent. Do the identical thing with a building and it becomes the definition of a responsible adult.

The reasons that do justify buying

• You want to stay somewhere for ten years or more and you genuinely know it. Length of stay moves the numbers more than any other input, because it spreads the transaction costs and shifts the amortisation.
• You want to paint the walls, keep the dog, knock through the kitchen, and never have somebody decide in March that they are selling the building.
• A fixed rate mortgage caps your housing cost for thirty years while rent has no cap at all. That is a real hedge against your own future housing market and it is worth money.
• The forced saving works on you. A mortgage payment is a savings plan with a legal enforcement mechanism attached, and for a lot of people that is the only savings plan that has ever held.
• The school district, the family ten minutes away, the commute you can survive, the fact that you are tired of moving.

Every one of those is a lifestyle reason and every one of them is a good reason. I own, and I bought for reasons on that list.

Not one of them requires the house to be a good investment.

Separate the two on paper

Get a sheet of paper and draw a line down it. On the left, write what buying gets you that renting does not, in your actual life, this year. The stability, the dog, the district, the commute, the wanting to stop moving.

On the right, run the real numbers for the real house: total monthly outlay including tax, insurance and maintenance, against the rent on a comparable place, with the down payment counted as money that could have been somewhere else earning something.

Then work out which side of the paper you are buying on.

If it is the left side, buy the house, enjoy it, and stop defending it with a spreadsheet you do not believe. If it is the right side, the spreadsheet has to actually survive your numbers, in your city, for the number of years you will really stay. Mine did not for four years, and then it did, and being able to tell which one you are in is the only part of this anybody should be confident about.