Our mission is to help others learn the benefits of owning assets, and we believe that homeownership is the best place to start. But why? Beyond the American Dream and feel-good factor, why is it such a big deal?
If we dig down to the real core reason – it’s rooted in how the laws of property rights and monetary system are set up, and how this society that we live in operates. If we felt there was a better way to achieve prosperity, well-being, and overall peace of mind, we’d be writing about that instead. But this is it.
In this article, we explore lots of topics surrounding the benefits of long-term homeownership, but cannot possibly cover everything. Everyone’s situation is different, and we understand that. There is no end-all-be-all answer for every single person, and there’s no way to include all factors in just one post, but we’ll do our best. It’s also important to keep in mind what all these numbers, laws, monetary system ruleset, making money, investing, and everything really mean –
That we are, in the end, working towards happiness, stability, and peace of mind. The former are tools to get there.
Property Rights, as defined well by Wikipedia, is a theoretical socially-enforced construct in economics determining how a resource or economic good gets used. In layman’s terms – it means in our society that things like land and real estate are first really owned and controlled by the government, and then the laws and rules that we live by determine how it will be used to benefit the country and society.
By taking “ownership” of a home and continuing to take care of it, you also get to live there and experience the long-term benefits of what it provides to those who take it on. But it’s essential to be aware of the underlying system it exists in. As Robert Kiyosaki put it well in his famous book Rich Dad Poor Dad – stop paying your property taxes and you’ll find out who actually owns your house.
While that’s a different way to see it, the concept of property rights goes back hundreds of years, dating back to 16th-century Europe, and has since become the foundation for many countries throughout the world in different forms. It’s arguably a very stable way to manage societies, countries, and billions of people on earth, even though it does create vast inequality, among other things. The United States is considered one of the most stable places, if not the most stable country, where property rights are such an important part of society, and a big reason why many investors from all over the world want their money here.
The Realities of Home Owning
While there are massive benefits to long-term ownership, make no mistake that there can be some downsides. While researching data for this article, many of the top search results were actually why not to own. Many also argue that owning is actually a liability, not an asset.
The Bills You’ll Pay
Homeownership can be expensive. Every once in awhile you’re spending thousands in repairs, making endless trips to Home Depot, and it feels like the bills never stop coming. Here is a quick list that’s typical in owning any home –
- Private Mortgage Insurance [PMI] – If you put down less than 20%
- Property Taxes
- Property Insurance
- HOA fees
- Utility Bills
- Maintenance – Thousands for roofs, HVAC, water heaters, appliances, renovations, upgrades, landscaping, carpet/flooring.
- Surprises – Tornadoes, hurricanes, fires, floods, hurricanes, pipes bursting, hail, rotted sewer pipes, etc. You’re on the hook for these with a deductible even if insurance covers most of it.
Yes, it’s true these add up, and sometimes to quite a lot. But it all depends, and over time you usually come out way ahead even with the above if you buy right, account for these items, and stay within your personal budget, among other things.
Economic Cycles & Bubbles
Many people also have a version of PTSD from the Great Recession/2008 crisis, where home values plummeted in some areas or at least did not increase in value for a few years. Some regions have not even recovered to where they were in 05/06, but that is because we were in an all-out asset bubble (relative to underlying fundamentals), one that usually comes once a century. Then there are regular supply & demand factors, population growth and decline, and other external factors that can affect expenses or home value.
I can hear you now – Wait a minute, this doesn’t look like any reason to want to buy at all! I encourage you not to give up yet. Read on, but with the realities above to be respected.
Taking a look at the Housing Price Index below though, you can see that even with the latest crash, the overall trendline is clearly up over time if you’re holding for long periods of time.
As a side-note – we did a large writeup on Ray Dalio’s excellent video on how the economic machine and cycles work, which help explain the ’08 crash as well. You can check that out here. It helps explain the graph above and how they got the economy back on track, with the goal to keep general inflation rising.
The Numbers Don’t Lie
Even with all the expenses, horror stories, economic cycles, and crashes (which are temporary), the financial benefits of owning and hanging on to one home cannot be ignored.
Inflation and Appreciation
These two go hand-in-hand because inflation (defined as a general increase in prices and fall in the purchasing value of money.) exists as part of our monetary system, and all else being equal, can only go up over time if the same system is to stay in place. This study shows that:
“Over the complete history (1891 – 2017), housing prices have increased by 3.2% per year and 0.7% after inflation.”
If you forget supply and demand, population growth, or any other factors affecting home prices, this shows that the simple devaluation of our currency (money printing) pushes real asset prices up, and home prices generally follow this long-term trend. When you have more of something in circulation (the U.S. Dollar) to buy the same amount of goods, prices go up.
Short-term trends are another story, as in the last ten years we’ve seen prices crash in areas, and then some yearly gains of 15-20% to catch back up after the economy was back on track. This is why we are focused on long-term holding of real estate and assets in general. The gains over time are evened out and are more in sync with the general trends. This is also the way it was designed – to keep the game going.
For reference also – national home prices increased 4.4% from January 2018 to January 2019 and year-to-date 2019 looks similar, but keep in mind that real estate markets are local and segmented, with each being different and having their own mini-economies.
Net Worth of Renters vs. Homeowners
At the end of 2016, the Federal Reserve released a study called the Survey of Consumer Finances which shows a staggering figure –
The average net worth of homeowners in the U.S. is 44.5X higher than renters (4,450%!).
Net worth is defined as the total measure of the wealth of a person, which is all assets minus all liabilities. And most of this wealth did come from the benefit of owning a home long-term as a primary residence. The inequality is significantly higher today (end of 2019) since it’s been three years of steady home price gains, and that study was from 2016, but it’s the most recent one we have.
You can see that the average homeowner has an average net worth of $231,400, while renters have $5,200. To put this in perspective, the average retiree (65+) net worth is $229,425, according to the same survey above. Millennials (ages 23-38 in 2019) also have an average net worth of about $8,000, but our generation hasn’t had the decades to save or own a home long-term yet.
The Wealthy Own It
The rules haven’t changed, and it is referenced through decades of studies, surveys and quotes from the wealthier that anywhere from 70-90%+ of them own real estate, and many got there by solely by owning real estate. The advice to hold property spans back to the empire-builders of the ’30s and surveys of today.
The Power of Compound Interest
Why even mention the wealthy, when many of us are just trying to get out of credit card and student loan debt? When many are just working to pay the bills and save a little bit after expenses?
Because at today’s prices and rate of real inflation rates, there’s a good chance that owning property will get you there automatically. If we’re just comparing renting long-term vs. homeowning and keeping all else equal, it makes a big difference.
Here are some quick figures that show buying a home today at different prices, and running compound interest at 3% (average inflation) for 30 years:
- $150,000 -> $364,089
- $200,000 -> $485,452
- $250,000 -> $606,816
- $300,000 -> $728,179
- $350,000 -> $849.542
- $400,000 -> $970,905
- $411,987 -> $1,000,000
- Renting: $0 -> $0
Why the one at $411,987? Because if you buy a house today at that price and pay it off over the next 30 years, with inflation running at the 3% rate, you will have a $1,000,000 asset, owned free and clear. Your purchasing power of the Dollar will indeed be less in 30 years, but owning and holding just this one thing allowed you to not only keep up with the dollar devaluation/loss of purchasing power but thrive and prosper with it. You’ll be an official millionaire, assuming no other debts or assets. We’ll explore why further below as well.
And if you spend the same for housing each month, what is your net worth increase if you rent instead of buy over that same period? Zero.
You can play with this calculator to plug in different scenarios to see for yourself. Plug in your own home starting value, move the slider for inflation, and adjust the mortgage timeframe (multiple years by 12 since it’s in months) –
Hanging onto assets like this is also really powerful because at the end of those thirty years, you may be approaching or are already in retirement, and now you have lots of options.
You can live there virtually for free (aside from yearly property tax + maintenance & utilities) or rent it out for a nice monthly profit that will most likely cover all of your living expenses. Either way, you have options for a comfortable retirement, and you can pass it along to your heirs later on as well.
Lock-In Your Living Costs
When you buy and keep the house, you lock in the cost of the mortgage for the life of that loan, meaning your monthly payment will not go up. While everything else like property taxes, maintenance, insurance, and utility bills go up in cost around you at around the same rate of inflation, your mortgage amount per month stays the same over time. And if you’re renting, landlords are undoubtedly eager to raise those rents at any chance they get, so there’s no escape from higher costs.
Taking real inflation numbers from both fifteen and thirty years ago, we can see it in action. If each mortgage started back in 2004 (fifteen years ago) and 1989 (thirty years ago) at $1,000, you can see what the equivalent rent would be these days, again just keeping up with inflation.
Buying a home fifteen years ago with the mortgage of $1,000 back then, you’re still paying $1,000 today, effectively still owning the home in 2004 dollars, but everyone else renting is paying $1,338.15 in today’s dollars for the exact same thing.
Running the numbers for thirty years, you can see you’re paying about half of everyone else for the same home. $1,000 is equal to $2,038.52 in today’s devaluated dollars. This also means that the U.S. Dollar has depreciated over 50% in thirty years.
Everyone else would be paying that $2,038.52 if they started or renewed a lease today, but if you owned a house and kept it longterm, your mortgage portion of the house remains the exact same at $1,000, in the higher-valued dollars from decades prior.
Inflation really is the silent killer in terms of how this economic system is set up, and is why we put so much emphasis on the importance of owning assets over the long-haul to keep up with it.
Keep The Faith
While the $411,987 number above (to get you to $1M) might seem high in some areas of the country, it’s actually lower than many metro average home price values. And at today’s low-interest rates and some options for a lower down payment (anywhere from 3.5-10%), the payments can be quite reasonable, and still cheaper than renting.
If you have a good job, have a dual-income (married/partner), or have your personal debt-to-income ratios in order, you can probably make it happen. And no one says you have to spend that much. The median home price in America is about $240,000, and that will still approach $600,000 at regular inflation rates after thirty years.
If you can’t buy right now – do not lose faith. Dive into the great resources available, whether it be us, other websites, books, courses, and take pride in doing what it takes to be able to buy a home. It will take hard work and sacrifice. We all had to do it, and it’s worth it.
Buying and Selling
The #1 Buying Rule
This might be a good time to mention the number one rule of buying a home that I know of, after buying and selling homes and investing for over a decade now. And that is –
Make sure your total expenses to own are 10% less than what that same home would rent out for.
Put the opposite way:
Make sure the same home would rent out for 10% higher per month than all your costs to own it.
So if a home would cost you $1,500 per month in total (including all expenses listed above), make sure it could rent for at least $1,650 per month ($1,500 x 1.1/110%). Include the entire list of expenses above for your costs, not just your mortgage. The extra 10% is to account for a general cushion and small profit for things like maintenance/replacement items, vacancy, utilities, trash, sewer, and other surprises.
When you can own the property for slightly less per month or per year vs. what it rents out for, you will stay solvent and always cover your costs to own it, and hopefully pocket a little profit as well. If you have to move for things like a new job, a sick family member out of state, or something else, this allows you to keep the home and rent it out, and not worry about covering the costs of owning. Understandably, there are many scenarios to want to sell and let go of a home, but this rule at least gives you the option to keep it long-term.
If you’re already using a site like Zillow.com, they have a helpful built-in calculator that gets you most of the way there on every single home details page. But you have to add in the rest of the items they don’t automatically include.
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It’s Expensive to Sell
As of right now, Realtors & the MLS still control most of the market for buying and selling homes. And in fact, they are the second biggest lobbyist in D.C., spending more than $64M in 2016 alone to hang on to their business.
What does this mean for you? While big venture capital money and startups are trying to bring down transaction/selling costs, for now, and the near future, it will cost you 5-7% of your home value to sell it. This is because the seller usually pays the commission to both the buyer’s and your (seller’s) agent. Add in title fees, seller concessions, and lots of other costs, and it really adds up. It’s painful to watch all that money fly out the window, trust me!
Using the national median home price at the end of 2018 of $240,000, that will cost you $14,400 at a 6% full agent commission, not including the rest of the fees. At a 6% fee, here is what you’ll pay in higher price ranges:
- $300,000 -> $18,000
- $400,000 -> $24,000
- $500,000 -> $30,000
- $600,000 -> $36,000
- $700,000 -> $42,000
You get the idea, but those higher numbers are what most people make in a year! I’ve got nothing against real estate agents that are helpful and provide value, but that’s serious money that you can keep by not selling.
Leaving Money On the Table By Selling Often
Research shows that the average homeowner keeps a home for just over eight years. This means that most will sell their house at least three times over thirty years (typical mortgage length). Not only will you be paying roughly that 6% commission each time, but you also have to restart on a whole new mortgage.
This is key because when you run amortization on a mortgage, you’re paying mostly interest for the first ten years or so. When you run the actual figures, after eight years, you’ve only paid down 16.6% of your loan balance. The rest went to interest payments, which is also just pure profit to the bank or the owner of your loan.
If we take the median house of $240,000 on a 30-year loan with 20% down ($48,000) at 4% – after eight years, your loan balance is still about $160,000 on an original mortgage loan of $192,000. You’ve only paid it down $32,000, and now you have to start over. Banks know this, and most, if not all, mortgage contracts do not allow you to transfer any loans to new properties. This allows them to make lots of profit off the interest you’re paying while keeping the loan balances high and rolling into new loans continuously.
We want the money in your pocket, not theirs. And you do this by keeping the same loan and home, ideally forever
I won’t go into a ton of detail on this, as there is a lot online about the different scenarios and tax benefits, but they are substantial. Whether you’re keeping or selling a home, there are a few things to note –
Mortgage interest can be deducted from your taxes, specifically through IRS Publication 936. This can often be a significant deduction to offset your income, which you don’t get from renting. You can also deduct maintenance expenses and some other things, and it’s good to research the tax law changes in 2017 as well.
Capital Gains Tax Waived
If you do need to sell your home, you can pocket the gains if you meet these IRS rules. –
If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic No. 409 covers general capital gain and loss information.
Don’t Sell, Treat Your Home Like a Bank Account Instead
HELOCs and Cash-Out Refinance
When you keep a place long-term, in addition to all those benefits above, you can cash out periodically as the value goes up over time. You may have heard of HELOCs (home equity line of credit), or cash-out refinance options (you can get a new mortgage and “cash out” the equity that you’ve built in your home). These options allow you to use that money for something else but you keep your home instead of having to sell it.
HELOCs operate like a regular loan that uses your equity built up in your house as collateral.
Cash-out refi’s put you into a new mortgage, adjusting your new monthly payments to represent the loan as if you just bought a new house at a higher value, and then you pocket that extra money. There are some excellent calculators online that allow you to run different scenarios.
Don’t Blow It
It should be noted that you might want only to use these options to buy other assets that also generally go up in value over time, but it’s understandable if you need the cash for emergencies or other life situations. What you absolutely should not do is take this gained money and blow it on depreciating liabilities, like fancy cars, toys, or vacations that you cannot afford.
Many households were crushed just before the ’08 crisis, and hard lessons were learned. When the market turned south, it left many people with too much debt and not enough income to pay off these debts, in addition to destroying net worth due to the houses dropping in value. When you take on new debt and the value of those items goes down, that money is gone. But the debt remains. This is a core reason why people go bankrupt and lose everything.
But when done responsibly, these options allow for strategic use of the cash and gains you’ve built up, all while keeping the original asset (house), riding through the hard times, and continuing to benefit from that into the future.
Buying Homes vs. Other Assets (Stock Market)
While it’s true that asset gains have historically been higher in some other asset classes, like the stock market (12% on average, 7% inflation-adjusted), there’s one critical piece to that –
You can buy 5-10 times more of an asset vs. other assets when buying a home instead.
Wait what? With stocks, for instance, if you want to buy one share of Apple at $250, you need $250 of cash. If you put down 20% on a house, you are buying five times (1 divided by .2, also 500%) more of an asset. This is due to leverage, or taking a loan/mortgage out to buy it. Some call this good debt.
If you’ve saved $20,000 for a down payment on a house and you put down 20% with the mortgage – you can buy a $100,000 home. That’s 5X or 500% of the money you have available. If you had $20,000 to purchase stock, you own $20,000 of Apple (1X or 100%).
Now if you put down less, this time 10%, with $20,000 saved up, you’re now buying a $200,000 house (or 10X the asset). If home prices increase at the 3% rate above, this also means:
Putting 20% Down – Example
Putting 20% down means your ROI (Return on Investment) is 5X the 3% gain, or 15%. You put down $20,000, but if $100,000 goes up 3% per year, that’s a $3,000 increase. The ROI calculation then is:
$3,000 gain / $20,000 down payment = 15% Return on Investment.
If buying responsibly, and sticking to the #1 buying rule above, one can argue that putting less down means higher ROI. This will only work if prices rise, and hurts you proportionally bad if prices end up going south in the short term, so it’s something to be careful with.
Putting 10% Down – Example
With 10% down we can use this $20,000 to buy $200,000 home. If it goes up 3% per year, that’s a hefty $6,000 increase. The ROI calculation then is:
$6,000 gain / $20,000 down payment = 30% Return on Investment.
And that’s just the first year. The numbers are real, and the gains are real. This is the power of real estate and using leverage (loans) responsibly to supercharge your net worth over time. The system is designed this way, and this is why it’s so crucial in the long-run.
While everyone’s situation is different and these variables can change over time, we believe this is a big reason why at least starting out by owning and keeping one house is so powerful.
Real-World Examples – Decades of Gains
We just used 3% inflation per year above for calculations, when in fact in the gains in most areas have been much higher. If you throw in things like population growth, supply and demand, renovations, and other things – it can really boost the values over time.
When you buy a house on a foundation that is attached to a piece of land, you own a scarce asset. No more of this exact thing will be produced on this piece of land in this location. Therefore, over time most of the property values increase at a faster rate than just the regular 3% inflation rate.
It’s hard to find exact figures from 30 years ago, but let’s take a look at a few random houses in different cities around the country going back in time. Each house was checked on the actual property tax assessor’s website for recorded sales:
1982 (37 years ago) sold for: $39,000
Recently sold for: $165,000
Total gain: $126,000
Yearly compounded appreciation rate on total home value: 3.98%
Compounded rate of return assuming 20% down payment of $7,800 on a total 37 year gain of $126,000: 7.8%
1985 (34 years ago) sold for: $212,500
Recently sold for: $867,000
Total gain: $654,500
Yearly compounded appreciation rate on total home value: 4.8%
Compounded rate of return assuming 20% down payment of $42,500 on a total 34 year gain of $732,500: 9.54%
*This was an expensive house back in 1985, and it’s still an expensive house now, but this shows that if you can get into a higher-priced house at the right time, your gains can be pretty staggering through the years.
1994 (25 years ago) sold for: $63,239
Recently sold for: $348,000
Total gain: $284,761
Yearly compounded appreciation rate on total home value: 7%
Compounded rate of return assuming 20% down payment of $12,648 on a total 25 year gain of $284,761: 13.27%
1975 (44 years ago) sold for: $38,637
Recently sold for: $437,000
Total gain: $398,363
Yearly compounded appreciation rate on total home value: 5.67%
Compounded rate of return assuming 20% down payment of $7,727 on a total 44 year gain of $398,363: 9.6%
These show a few examples among the 138 million homes built in America, and there will be variables such as the condition of the property, local economies, neighborhood desirability, and lots of other things. But I do believe it shows the value of holding a house long-term and riding the wave.
Final Thoughts & Summary
With the combination of buying right, using a mortgage (to buy a large asset relative to other options), and hanging on to property through at least one or two economic cycles (ideally forever), among other things, you can see how your wealth builds steadily and surely.
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The Incredible Benefits of Buying (and Keeping) Just One Home In Your Lifetime
And what we really tried to do is just show what the benefits are specifically of just taking the money you would use for rent anyway and buying instead, along with the home only keeping up with historical inflation.
There are pros and cons to everything, and saving up for the down payment and keeping the house for the long-haul will take some sacrifice, work, and planning. But when you consider the opportunity cost of not buying or owning large assets, that is also the real and silent cost that will continually be an ever-stronger headwind.
There is a lot more to all of this, and we respect that everyone is in different stages of life, with different goals and in different situations. This is also a long term game, requiring planning for ten, twenty, or thirty years out. But in general, we do believe in homeownership and wanted to show how owning just one home in your lifetime can reap incredible benefits financially and otherwise.
If you might like to share your own story with others about the struggles or benefits in your own journey on the path to ownership, we would love to hear from you! The more we can help each other on this endeavor, the more we can all prosper.