Over the past few weeks, we’ve had several comments and questions (on the blog and on my personal email) about purchasing a single family residence.
In the past, I’ve made my position clear. To summarize, I encourage everyone to think long and hard about taking on a mortgage for a piece of property that doesn’t generate an income.
Let’s itemize the issues and considerations that a potential new home buyer should take into account prior to buying a single family residence to live in:
First, why do you want to buy a home? Will it give you a sense of security? A sense of accomplishment? Is it a dream come true? In reality, it’s none of these. It’s an obligation, even if you pay cash for it, because you have to maintain it and pay attention to it, long after the fairy tale has disappeared.
Second, the down payment. Do you have it? Is it all you have in liquid cash? Is someone else going to give it to you or loan it to you? Is it money you might need for a child’s college education? An emergency? Is it money you could invest?
Third, the mortgage payments. Can you make them every month? What happens if you lose your job or can’t work? Do you have more than one source of income? How long can you make your mortgage payments without getting up every morning and going to work?
Fourth, property taxes, insurance, repairs, and maintenance. Do you have realistic figures on these? Let’s say you want to buy a $1,000,000 home. Do you know someone who owns a $1,000.000? Ask them what it costs to maintain. Suggestion: be seated when they tell you, and have a strong cocktail close at hand. You’ll need it.
Fifth, consider the obligation. What if a great career opportunity comes up in another state or country? Can you pick up and go quickly to take advantage of it? Owning a home complicates that.
Sixth, can you bet on home prices increasing? Until 2007, everybody would have said yes. It’s a new world.
Finally, I’d like to hear everyone’s thoughts, formulas, and experiences regarding what to consider and how to know if you’re ready and able to buy a single family residence.
I know it would be helpful. Thanks in advance.
- BGT
Byron, great post. Another positive aspect about renting as opposed to buying is the time aspect. If you really dont like yard work or are not a handy person, then rent. There is nothing more discouraging than to have a rough week at work only to look forward to fixing the plumbing, or mowing the grass, or doing some household repairs. If you rent you dont have to worry about these things. You can enjoy your weekends again.
Great comment, Mark. I’m the least-handy guy on the planet. – BGT
The more expensive the house, the more money the real estate agents and banks make on the transaction, so it’s in their interest to get you to buy the most expensive house you can possibly afford. But you’re the one who is going to have to make those payments every month, year after year. It’s no fun to live in a beautiful, impressive house if you constantly have to struggle to keep up with the expenses and you never have any money left for anything else.
If you’re going to buy a house, buy one that is well within your means so the mortgage payments and other expenses are manageable. Forget about keeping up with the jonses and impressing people. A modest but comfortable house in a safe neighborhood with not too bad of a commute and good schools if that’s where your children are going to go is all you need.
Yes, they’re expensive, and they’re not always the best investment, but you have to live somewhere and in some some ways building equity makes more sense than paying rent. Before 2007 everybody thought buying a house was a great investment. After 2007 everybody thinks it’s a terrible investment. Neither one is completely true. The key is not to get in over your head and don’t assume that you’ll be able to sell it for a lot more than you paid for it.
As a realtor, I NEVER try to ‘get’ anyone to buy an expensive home. Before clients get in my car, they already have their lender letter with a reputable lender that I work with. I demand all my clients use a certain lender because I know if they use this lender their loan is good. And no, I don’t get a kick-back from clients using that lender. I know this lender and know that he is honest and that my client will close on time. Once the lender tells them what they can afford, I don’t look for one penny over that price. It’s not ‘in my best interest’ do anything dishonest or anything that will hurt or cause hardship for my client. My reputation is everything.
Hi Kathie! My point is that realtors are looking out for their own best interests, sometimes at the expense of their clients. For example, realtors frequently advise their clients who are selling a house to set a low asking price to generate excitement and perhaps start a bidding war among buyers. They say “if you ask too much, the house will just sit there; it will become old news and you’ll have to go below where you should have started in order to attract any attention and create a buzz.” This is almost always bad advice.
An additional 10% on the price of the house is probably significant to the seller, but the listing agent is typically only getting 3.5% of that 10% which is not enough to make it worth waiting an additional six or twelve months. What the realtor wants is to sell the house fast, even if it’s not for as much as the seller could have gotten. The studies that have been done on this show that people who are willing to hold out for a higher price usually get it if they are willing to be patient. But for the realtor the tiny increase in the commission is not worth the delay.
So when realtors advise their clients to start with a low asking price they are doing a disservice to their clients. This is especially troubling because many clients rely on the realtor for advice and trust that the realtor is honoring her fiduciary duty to act in the client’s best interest.
My point was really that there are all kinds of reasons why people spend more money on a house than they probably should and one needs to think carefully about how those expenses are going to affect one’s overall financial situation. It sounds like you’ve had some good luck selling houses that you’ve owned, and that’s great. I hope it continues. Not everyone is so lucky. And Byron’s theme is the pros and cons of home ownership. It’s the biggest financial commitment most people will ever make, and potential buyers need to think it through carefully. No one, not even your agent, is going to look out for you the way you should be looking out for yourself.
Good call, and a great comment on the balancing act of managing the expense in order to build equity. Thanks, Amy.- BGT
These comments show you know nothing about the business. First of all- you never get a home loan from a bank. Go to a lender that does nothing but homes. Not a mortgage broker, but a lender. Big difference. Lenders will NOT give you more than you can afford. They go over your ratios with a fine tooth comb. It does not behoove them to give you more than you can afford. And the reason I’m the best at what I do is that I listen to your lender and I listen to you and don’t show you anything that is one penny over that amount.
I agree with everything said by Amy and would like to add that you should make sure that any improvements/enhancements you make to your home increase its value. No swimming pools! Focus on kitchens. baths, HVAC systems, etc.
Not totally correct. I have been a realtor in different states. True, in a place like Virginia a pool does not add value to a home. In Texas a pool DEFINITELY adds numeric value to the home.
Good point. A pool can really be a negative in colder climates though and the cost of upkeep is also a factor.
Good call, Keith. Thanks. – BGT
I am going to be an outlier on this issue. I love the topic, but my opinion differs from almost everybody. Maybe it’s because of where I am in my life or experiences that I have seen. I bought my house after 2007, so I only know modest appreciation and haven’t experienced such a negative hit to my net worth with housing. I did, however suffer badly from 2008-09 in the stock market. I was not as diversified as I should have been, I admit, but I was surprised when my GM stock lost its five percent dividend and then went from $20 a share to zero. I was wiped out and it hurt badly. Being only 24 at the time, I have time to recouperate, but it hurts really badly when you are an amazing saver only to get wiped out. Looking back, I only invested aggressively in stocks to afford the ever escalating real estate prices in the NY area. I learned that you need to go to the source. Don’t take shortcuts. I believe in buying a quality, affordable house in an amazing neighborhood and paying it off ASAP. 30 mortgages are fine, but it should be paid off in fifteen to twenty while still making out retirement plans. So far, it’s my favorite investment. But I live in the east coast. The Midwest is a very different animal. Not trying to sound pompous, but I would hesitate owning land that is in a declining city like Detroit.
Thank you for sharing your experiences, Dario, painful as they may be. Great plan to get that mortgage paid off asap. You’ve got so many of the fundamentals nailed down (saving consistently, investing wisely…). And you’re right to point out how geography, the midwest vs. the east coast, plays into investment plans. Well said. – BGT
Hi Byron. Everyone’s comments are great. I grew up in a time when that is what you were taught to do…grow up, get a job, start your family, and buy your house. That’s what made you an adult in my family. Needless to say, their advice wasn’t always stellar. Story for another day. For me, owning and having my own home is important. But I’ve learned that it doesn’t have to be the expensive, over-the-top house like the Jones’ house. Times have changed, and I believe it’s more important to teach people, especially younger people, about how to manage money properly, i.e. investments, savings, retirement, giving back….and owning a modest home if that is what you really want. But owning a home is not the be all and end all to life. Too many people are trying to buy the most house with the least money with payments spread over a lifetime it seems. It’s better to save a substantial down-payment and pay extra each month so if life does throw you a curve ball, you’re not in a world of hurt with an upside mortgage, no money to get out of it, and having to say adios to that great job offer you got across the country. These are some of the things that people don’t think of when they become infatuated with a buying a house. Lots of words to simply say think rationally and not emotionally, especially when it comes to long-term commitments.
Great insight about how some things have changed, and how mortgage payments haven’t: they’re always there, whether you’re comfortable making them or not. Thanks, Bev. – BGT
In 1920 two of our ancestors, who were cousins, came home to the U.S. after serving in World War I. They were horrified at the devastation of European families and their wealth, but also noticed that some families came out of that war with wealth and family intact. These two cousins wanted to make sure that their descendants could never suffer the same destruction of family & wealth, so before they left Europe they did everything they could to find out why some families and their wealth stayed intact, and they discovered that these families invest in four things, and in these four things only: gold, silver, fine art, and real estate. Their primary residences were only a part of their real estate holdings, and were never their first real estate investment.
They developed a plan for raising children who would know how from a very early age to earn money, invest money, and create jobs and businesses for themselves & their siblings & their friends. Today, when our children graduate from high school and begin college they each have enough of their own savings and investments to buy a duplex or four-plex and live in one while renting out the rest. By the time they want a house for their own family, they are already financially independent and do not have to be slaves to a 9-5 job in order to make a mortgage payment on that one house–their previous investments make it possible to own the house they want for their family, and not one child ever asks parents for any financial help, not that they would get it anyway because we believe that giving money to adult children is irresponsible for many reasons.
We strongly believe in raising children to be financially responsible, and thereby raising mentally and emotionally healthy and happy children, who are self-confident & calm & brave, who forge their own way in life, and who are not swayed by peer pressure and popular culture. It’s been working for our family and very close friends for 96 years now, and this way of creating our lives and families has produced strong, happy, and financially responsible families with very, very little divorce.
P.S. In 2007 and after, when “everyone” was trying to get out of the real estate market, especially those whose only real estate investment was their primary residence, that’s when we were buying up real estate.
Very astute move, G. I’d be interested to know if/when you’re thinking of getting out…? Thanks. – BGT
Hi Byron,
We don’t usually buy & sell. We consider carefully, buy low, and property becomes part of the investment portfolio for the long haul.
Glenda
Good call about the long haul. Thank you. – BGT
Thank you, Glenda, for sharing. It’s great to hear about real-world examples of Old Money principles, practiced successfully over time. – BGT
Glenda- Could you please elaborate on this?
They developed a plan for raising children who would know how from a very early age to earn money, invest money, and create jobs and businesses for themselves & their siblings & their friends.
I have two children, ages five and four, and I would love to be able to teach the values mentioned above (earn, invest, and create jobs). What are some examples? Thank you!
Thank you for asking. In brief, I gave an outline-answer to this question in one of Byron’s posts back in July of how we raise kids to be financially responsible–this is, of course, just one aspect of raising physically & emotionally healthy kids:
https://theoldmoneybook.com/2016/07/14/the-down-payment-dont-give-it/
The worst advice real estate agents will give you is that “a prime piece of real estate is the best investment you can make these days”. That’s just typical snake oil that’s supposed to help lining their coffers with more commissions and fees. Having said that, we were renters for 10 years while we had enough liquid assets to buy. We finally bought two residences (one vacation home) in 2011/2012, after prices corrected considerably from their bubble peaks. All cash, no mortgage. Does it feel better to own? Technically no, pretty much the same thing. However, one benefit I really feel is I don’t have to ask the owner when we want to make some changes to the house. We don’t have to justify our wishes to anyone. It always felt like begging, and oh do the owners love to lecture you dumb little renter, as if you were a 5 year old. It feels good to be able to do what we wish with the houses. Financially, I know it’s a losers game. A house to me is a depreciating asset after inflation/maintenance/insurance and opportunity costs. But I get a piece of mind that its “ours”. Having said that, the real estate we live in is less than 10% of our total assets so the financial damage isn’t that large.
I’m sorry you’ve had such bad luck with realtors. Those ‘snake oil’ salesman don’t last long in the business. Reputation is everything.
I just re-read my comment and I realize I attacked a whole industry with many hard-working and honest people. That was not my intention. I wanted to note that the incentive structure with many realtors is very one sided: Get ‘them’ to sign on the dotted line no matter what and the realtor makes their commission. I’ve met fantastic realtors (usually they were not pushy and based their statements on verifiable facts, rather than on hyperbole and opinion) on our house hunting sprees, as well as not so fantastic ones. I guess its like in any industry. Again, my apologies, I shouldn’t have made such a generalization.
We’ve moved many, many times in the years we’ve been married. Incidentally, I am also a realtor. Sometimes we bought our homes, other times we rented. The last 4 years we lived on the East Coast we rented. When we moved back south we bought a house and paid cash for it. The value of this house has doubled in the few years we’ve lived in it. We are debt-free and that is very important for us. We have paid cash for every improvement. I have never believed in buying my ‘dream house’, but rather buying outright and turning what I’ve purchased into my dream house – it’s also more fun that way. To me, anyway. We have made a lot of money off of every house we’ve sold. Right now if we sold we’d make good money, but why? There is such comfort in no house payments and only spending money on improvements that I want.
I am so sorry that so many of you have had such bad experiences with realtors that most of you think we only have ‘our’ best interests at heart. Where I live and work, I’m in the majority – I never put ‘my’ best interest first. I always do and give advice in the best interest of my clients. I believe in telling the truth about a transaction even if I know they don’t want to hear it. And the only time I have ever advised someone to price lower than the comps was because they were in a huge hurry to sell. Maybe this is why I am successful and keep clients for years.
I think if you do a few real estate transactions over a lifetime, you’re certain to run into realtors with hidden agendas. And I’m certain the world would be a better place if we had more realtors like Kathie. – BGT
Kathie, that’s great! I’m glad you’re one of the good ones. I wasn’t speaking so much from personal experience as from studies I have read about conflicts of interest in residential real estate transactions and the tendency of some realtors to be less than scrupulous in honoring their fiduciary duty to their clients. I certainly didn’t mean to suggest that they are all bad.
Let’s not forget that the topic of this post is the Old Money approach to buying a single family residence, not “let’s pick on real estate agents”. It’s good to know you’re adhering to high standards. Keep up the good work!
I agree with everything that Amy and Glenda have said. A major advantage of home ownership is that for as long as you own the home the monthly principal and interest payment will not rise (assuming a fixed rate mortgage of course). While insurance and taxes will increase, they will be less than rent increases imposed at the whim of a landlord. Count on your landlord always making money off you so that you the renter will end up paying all his expenses including principal, interest, taxes, insurance, repairs, plus profit for him/her.
“For as long as you own the home” is a major part of that concept. For those who stay in a house for a long time, savings compared to rent are significant, I think. Not buying more house than you actually need and visualizing actually paying off the mortgage are also key. More often than not, moving often, whether by necessity or to keep up with the jones, is generally a bad idea financially. Every sale involves a cash flow to a variety of third-party players: agents, lenders, appraisers, inspectors, title companies, etc. There are only two possible sources of that cash, the seller and the buyer. You are both every time you sell and buy another house.
Trying to beat the game by counting on rising prices is very similar to trying to time the stock market – you either have to be very lucky or very knowledgeable regarding the market forces that determine local prices. Speaking for myself, I am not a professional in either field, so I am limited to luck. Which explains why I neither flip houses nor day trade the stock market.
Despite all the negatives, those who purchase a house they can afford in a safe neighborhood and pay it off with the least possible flipping are almost certain to reach old age having paid significantly less for housing than a renter would have for a comparable property. In fact, they are likely to spend their last years paying neither rent nor mortgage payments.
There is also an aspect that more closely aligns with the theme of Byron’s blog, namely that of Old Money. What better legacy to leave to one’s descendants than real estate? Even if the children sell the property it will serve them well as a down payment for their own house or to help pay off an existing mortgage. If the lessons that Byron teaches stick and each generation adds to the cumulative wealth and financial stability of the family, there will be a leverage effect that will allow the development (one would hope) of culture and civilized behavior that are hallmarks of the OMG.
Thank you, Charles. Good comparison to the stock market, which is making everyone nervous at present. – BGT
I agree with all the posts above, but have a different perspective. Putting money and affordability aside, for some families health considerations can also play into the equation. We rented for several years with very nice landlords, waiting until we could save a decent down payment. However, I developed a very severe mold/dust allergy and none of the landlords we talked with could guarantee that their rentals would not have or develop mold or dust conditions. So we decided to purchase a modest house in an area specified by my doctor at a very good price (pre-foreclosure) that had no mold, no dust and was unlikely to develop it because of the construction. Could we have rented for longer and saved more money to take out a smaller mortgage? Yes, most definitely. But my allergies would have worsened and my husband felt my health was more important than the money we would have saved. We are not looking at our house as an investment or a legacy or for additional income. We are looking at it as a healthful living environment. Oh, and we had a fabulous real estate agent who understood my allergies and worked with us to find the right house at the right price.
Great comment, Kellie. You made a very good choice to prioritize your health. Thanks for sharing. – BGT
We bought our primary residence in CT over 20 years ago. We borrowed very little, but we also bought a relatively small house with some land. A mortgage no more than 10% of the monthly gross income was our rule. Then we bought our summer house on the ocean in Nova Scotia 15 years ago, but again, relatively small, but a beautiful spot. No need to rent it out, but friends can stay for free.We could have squandered what family money we had on more. Living below our means is what we do. Our children went to private schools.
Thank you, David. The 10% rule is a solid one. I know a lot of readers have been searching for some benchmarks. – BGT
Interesting post and responds, Byron.
In terms of value, I strongly encourage everyone reading Carl Menger’s Principles of Economics (https://mises.org/system/tdf/Principles%20of%20Economics_5.pdf?file=1&type=document), An Introduction to the Theory of Value by William Smart (Smart he was in deed!) (https://mises.org/system/tdf/An%20Introduction%20to%20the%20Theory%20of%20Value_2.pdf?file=1&type=document) or/and an original by Eugen von Böhm-Bawerk. Value is subjective!
Now, in terms of ownership a primary residence, I suggest any of you call your water and power supplier and tell them you no longer need their services. Tell them that you have your own well with pure and perfect water and that you can generate your own power. If they will turn you off and let you use your well and generate your own power, you no longer will pay property tax; than I acknowledge you are the owner of your house. That will never happened, of course. The law uses nice language to convince you that you are the owner, but you are not. The only owner of all property is the government. Your job is to supply government with big portion of your wealth. This is explained here (https://mises.org/system/tdf/Anatomy%20of%20the%20State_3.pdf?file=1&type=document) I already posted this link, however people seem not to read the pamphlet. Smart do, other do not.
I asked my almost nine years old to go over your post and responds. And he says that Glenda does not have to ask anyone’s permission if she wants to cut or melt her bullion coin, or throw it in to the ocean, and certainly no one knows how many of these coins she already passed on her grand children.
That’s how Old Money live – quietly.
Interesting post and responds, Byron.
In terms of value, I strongly encourage everyone reading Carl Menger’s Principles of Economics, An Introduction to the Theory of Value by William Smart (Smart he was in deed!) or/and an original by Eugen von Böhm-Bawerk. Value is subjective!
Now, in terms of ownership a primary residence, I suggest any of you call your water and power supplier and tell them you no longer need their services. Tell them that you have your own well with pure and perfect water and that you can generate your own power. If they will turn you off and let you use your well and generate your own power, you no longer will pay property tax; than I acknowledge you are the owner of your house. That will never happened, of course. The law uses nice language to convince you that you are the owner, but you are not. The only owner of all property is the government. Your job is to supply government with big portion of your wealth. This is explained in The Anatomy of the State by Murray Rothbard.
I asked my almost nine years old to go over your post and responds. He he says that Glenda does not have to ask anyone’s permission if she wants to cut or melt her bullion coin, or throw it in to the ocean, and certainly no one knows how many of these coins she already passed on her grand children.
That’s how Old Money live – quietly.
Thank you, sir. Great contribution and great resources. Appreciate you sharing. – BGT
Hello Byron,
Pardon me, I’m new to the old money thing, and I have many questions. I bought your “Old Money” book, and I loved it, and I absolutely love reading about old money lifestyles and hearing their perspectives on life. I get on this website frequently, but I need to catch up. On this latest post, are you truly suggesting that it may be better to rent a home instead of buy? Here in America, owning a home is the end all, be all of human existence, and renting goes against that. My biggest reason for wanting to own a home is that I don’t like living by someone else’s rules; that is, I can do what I want without a landlord’s permission. Other than that, however, I personally don’t have a problem with renting. There certainly are a lot of expenses that come with owning a home.
Thank you, sir.
Thank you, Heather, for the kind words about the book and the blog. The comments on this topic were varied, articulate, and many. I think the best way to summarize might be this: given these economic times, fewer people might really be in a position to purchase and own a home and have that be a good financial decision for them. And those that choose to make the investment might do that later in life than previous generations.
Given the fact that appreciation in value over the long term is now not a given for single family residences in America, potential home buyers must be very circumspect about making this type and size of investment. The job market and the cost of a college education also throw some nuts into the salad.
I would simply conclude by saying that buying a single family residence should be a financial decision, not an emotional one. – BGT