Build wealth – don’t buy a house

Socially, it is difficult to go against the popular assumption, even when it is foolish. Like the current belief that you must own a home at all costs. When stopped on the street and asked if a person wants to buy their own home the answer is a resounding, ‘yes.’ When you ask these people why, you are inundated with a dozen reasons that range from stupid to the utterly fantastic.

First, people will quote media reports that rents have quadrupled in the last year. When asked for an example those same people quote the media or shrug and say, ‘I just heard it.’ There is a saying, ‘a fool and their money are quickly parted.’ And, there is nothing more foolish than buying a house just because your friend told you too.

The second reason for buying a house is even more absurd. Peer pressure, a motivational factor that we should all have left behind us before leaving high school. Yes, it is embarrassing to rent when a friend owns, but what is a little embarrassment when you can look back twenty years later and own two properties with less debt. It is possible.

Many of the young people are falling for the housing trap. They are buying their homes five years earlier than the post WWII generation, with higher mortgages, and monthly payments. Their only objective is to own a home, and if that is all you want out of life then go for it. All the power to you.

However, if you want to build wealth, and retire in comfort, there are a few things to take into consideration before buying a house. The smart thing to do is sit down with two sheets of paper, one pro house ownership, on pro rent.

Write the monthly payments needed for both types of housing at the top of the page. This is merely the starting point. It is the cornerstone that you’ll use to decide which is the best route for you to take.

Next, write 25 years later at the bottom of the page. That is the length of the traditional mortgages. If you’ve been thinking of a 40 year mortgage or an interest only mortgage then you can attach a second piece of paper and continue this exercise at the bottom.

About half way down the page write ‘10 year mark’. At this mark include the price of repairs to the roof, furnace, water heater, and flooring to the ‘own house side’. If you rent, the landlord will pay these costs. This could range from £30 – 50,000.

You also want to write down the cost of council taxes for the first 10 years – about £30,000.

The utility costs can be eliminated because you’ll pay roughly the same for both houses.

Do not worry about a potential increase in rent and interest. These usually run in tandem with each other. When the housing market drops, rent decreases.

Realistically you will want to include the cost of moving to the rental side. Of course, you have the freedom to move up to a nicer house in a better neighborhood. You’ll also have the opportunity to move into a home with a more affordable rent. Most renters take advantage of these opportunities, so you need to include this on your chart.

Don’t worry about moving. If you move from a home that you purchased within the first ten years then you might as well draw a big red ex on the housing side. Real estate fees, moving costs, early repayment fees, the fear that you’ll have to sell the home in a bad housing market, mortgage closing fees, and still owing more than half of the mortgage capital will leave you in a negative equity situation, especially if you buy in a housing boom, or you have a 40 year mortgage.

On the ‘rental’ side of the paper, add the amount that you do not have to spend on improving the home.

Of course, if you are taking this test seriously then you’ll have left me far behind and you’ll be working diligently on your charts. There is the cost of housing insurance, often much higher than renter’s insurance. There are also incidentals like replacing a broken window, home improvements, redecorating, and the cost of having someone clean out the gutters. The incidentals can really add up.

When you are done, calculate how much extra cash is on the renter side. You’re not done.

On the ‘buy home’ side, put down the value of your home. No – do not put down the value of the home when you purchased it. You need to put down the value of a 25 year home. At the current market, an older home with 3 bedrooms is still one hundred thousand than a loft with 2 bedrooms.

On the rental side, you have enough to purchase a very nice home – which you probably did ten years earlier when the housing market crashed and you picked up a great house from a repossession auction.

Something to consider at your next party when your friends are bragging about the new home they purchased.