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149 Comments
- LastVisibleDog, on 10/12/2007, -12/+77"You see, assets make you money. However, the only way you can make money off your house is if you sell it for more than you brought it for."
John Chow does not know what he is talking about - you can do a lot with your equity without selling your house. - shoover, on 10/12/2007, -4/+47Maybe you guys should quit digging him then, his post has some of the worst investment advice I've ever seen.
- inactive, on 01/02/2009, -5/+29Dont digg down LastVisibleDog.
The equity in your house can be used to as collateral to obtain loans. With those loans you can make investments and earn even more money back (note: those investments need to be high-risk). The definition of an asset is something that can be leveraged because it has value, and a house fits that perfectly.
In renting, the rent you pay is not your equity and can not be used as leverage. Only the money you dont spend classifies as an asset. The difference between a mortgage and rent is that you need to pay interest on the mortgage, and that interest adds up fast. You end up saving more money while renting by not paying that interest, allowing you accumulate equity faster.
Something to note: buying a house is great if you rent it out to someone else.
The article is correct (in a lot of situations, renting is better), but does a poor job of explaining it. I made a spreadsheet a few months ago because my parents were nagging me to buy a house which proves this point: http://hkn.berkeley.edu/~casey/House.xls It's very, very technical document, but if you research all the terminology that I use, it's the most solid financial analysis that you can do. The numbers in the grey boxes control the simulation, and reflect projected amounts for the Bay Area over the next 5 years.
Edit: looks like LastVisibleDog isn't getting negative diggs anymore, so n/m that first part. - Ikioi, on 10/12/2007, -1/+24@Kodiak41226
"Assets make you money, liabilities don't. "
And this is why people listen to Chow. Here's some simplified terminology for the financially handicapped... if you can sell it, it's an asset. If you have to pay it, it's a liability. The house is an asset. The mortgage is a liability. Rent is a liability. Credit card balances are a liability. Cash in your wallet is an asset (of the liquid kind).
Assets have nothing to do with making or losing money. That's when you get into depreciation and appreciation of assets. But saying a house is not an asset is like saying water isn't wet. It's not an opinion you can change. It's a fact of how finances work. You either agree, or you are wrong. 2+2=4, pi is irrational, and property is an asset.
In figuring your net worth, assets are added, liabilities are subtracted (though that's very simplistic). If you are perfectly balanced everywhere else, a home owner will gradually move into the positive, because their liability is decreasing and their asset is either fixed, appreciating, or depreciating slower than the liability is decreasing. A renter will move nowhere, or into the negative, because their liability will either remain the same or increase, but they have no asset to offset the liability.
I could explain why a car is not an investment (usually), yet a house is, but both are assets... but for crying out loud, don't they teach this stuff in public schools anymore? - shil01, on 10/12/2007, -5/+24Marked as LAME. This guys has no idea what he is talking about.
After buying my 3rd house and reinvesting over and over in bigger and better houses, using equity for car purchases, finishing basements etc..i can assure you DO NOT RENT.
Writer doenst even take his own advise...HE OWNS A HOUSE! - Suits, on 10/12/2007, -6/+24The answer is simple. Live with your parents and find a companion who doesn't mind the same. Finding a companion who doesn't mind warming up a Hot Pocket every once-in-a-while is the hard part. Ace.
- theone3, on 10/12/2007, -1/+16I can't believe this advice. If, like most people, you raise a family in the suburbs in a large house near the city, and then the kids move on, you can sell, move outwards into a smaller house, and retire in comfort using the profits. And if you have paid off any mortgage completely, you own a house. How is that not an asset? If you lived in a rental house during that time, you'd retire requiring a steady income and have no assets to re-arrange. This guy is assuming that life never changes.
Bottom line, don't get financial advice from speculators (especially random ones), get financial advice from financial advisors. - tknd, on 10/12/2007, -1/+14Who said you have to live in your house?
Do people that own apartment complexes live in their apartment complex? - shoover, on 10/12/2007, -7/+20Yea, I'm unconvinced this guy really knows what he is talking about. One thing he states I really disagree with:
"Pay Your Mortgage Off ASAP"
BS. I have my mortgage @ 5%, and I'm making far more than that on other investments. If you can't beat 5% at investing, then life is tough indeed. I just took out a secured line of credit against my mortgage (effectively stretching it out further) and am investing the equity in my home in other areas - basically I'm borrowing money at 5% and making it at 15% - so I'm leveraging my house and using it to make a 10% profit.
I say stay mortgaged to the hilt, just make sure your investments (or at least a portion of them) are backed with equity and your risk remains low. If your house is paid off, all you're doing is throwing away an opportunity to make lots of money. - smokinjuan, on 10/12/2007, -1/+14finding a partner that wants their hot pocket warmed up is hard as well.
- Crest444, on 10/12/2007, -1/+12Try living in Vancouver. The average house here cost $699,000!
- lateralus, on 10/12/2007, -1/+12San Diego here...
$420k for 1075sqft.
Someone shoot me. - rockefeller, on 10/12/2007, -2/+12Holy *****, I've just read about 2 people taking out home equity loans to put into high risk investments.
WTF r u thinking? - inactive, on 10/12/2007, -6/+16Good discussion on the "joys" of renting. I am both a renter and a home owner, so I can appreciate this article.
- Urusai, on 10/12/2007, -1/+10Good reason to rent--the American housing market is going to crash, and crash hard, sometime in the next few years (I'm thinking 2008-9). The economy is a bubble, and the housing market is a bigger one. Best be renting when it pops.
- streak, on 10/12/2007, -0/+9There are major flaws in your argument. for example. (1) Not everyone can afford to live (rent or buy) in their dream home, not now, not in the next five years, maybe never. (2) People typically rent the most comfortable dwelling they can "afford". And for some, after paying the rent, no money remains to save for a down payment.
- bluenash, on 10/12/2007, -17/+26you lost me at "your...home is not an asset, it’s a liability." it quickly became: blah, blah blah...and then the old clikeroo
- skellener, on 10/12/2007, -1/+10This guy is a nutball. I bought my place 7 years ago. Refinanced once. I pay less in mortgage than if I was renting. In fact I pay one quarter of what I would be paying if I rented. So the bank owns the deed? Who cares? I'm in no hurry to pay the place off. I have a cheap place to live here in L.A. and for all practical purposes it's mine. No one can tell me I have to move, I can fix the place up however I want and I get a nice write off on the interest each year. Yeah, I want to give that up to rent a place from some other guy at 4x the price - I'll pass.
- q3ctf4, on 10/12/2007, -0/+8No brainer. If you plan on living in your home for years then you are better off buying. In the long run inflation becomes your friend and the original Principal loses its value. Two Bedroom apartments rented for $700.00 in Boston almost 15 years ago, today you would be lucky to find the same place for 1500.00. Over the years, a landlord would adjust the rent according to inflation, but the banker can't do the same to the principal. In today's economy however, where real estate values have become overpriced, renting is cheaper.
When real estate is in a normal market (we are in a correction now), the P/E a landlord would pay for purchasing an apartment would be 150 monthly rents. So, if it rents for 1,000 dollars a month, the landlord would sell to another landlord for 150,000. In bubbly areas this is not the case, and that is why nothing is selling now.
http://realestate.yahoo.com/calculators/rent_vs_own.html - nihilitas, on 10/12/2007, -1/+9Zelig, while the national deficit may be decreasing, the national debt continues to grow.
- oOLiquidNightOo, on 10/12/2007, -11/+18chow just lifted the rich dad, poor dad angle.
http://www.fool.com/news/commentary/2006/commentary06092620.htm?ref=foolwatch
and frankly, it wasn't that great an idea to start with. - TheWalkingDude, on 10/12/2007, -4/+11A house is also an anchor, if you like to stay mobile. I'd rather have a passport and a suitcase than a white picket fence and an automobile.
- grumpyrain, on 10/12/2007, -0/+7How can a single investment strategy be valid for ALL people reading this article.
Where I live, there is nearly 1500 a month difference between average rental and mortgage repayment should you have the deposit saved and borrow the rest. If one took the $1500 and invested it in even low risk managed funds you would probably be ahead. In fact once you take into account rates, strata, water and other costs that are the responsibility of landlords (here anyway), 1500 a month is probably 1700 a month.
Our housing market did a dot com thing about the same time as the dot com thing and it is now in decline. Of course at some stage the market will pick up again, rise sharply and then pop.
Regardless of whether it makes sense or not from an economics perspective, there is something about the idea of owning a home that is attractive, and there is something inherently unattractive about knowing you can be told by someone else that you must move.
I don't see buying your own house as an investment (of course it is an asset), but there are of course good and bad times to buy. - monergism, on 10/12/2007, -2/+9As a renter for ~9 years and a home owner for 1.5, this guy doesn't know what he's talking about.
I pay my mortgage and make money based on average return in equity. - andreo, on 10/12/2007, -1/+8I agree with theone3. The end goal of owning a house is that it will eventually be paid off. That will eliminate one of the largest living expenses that a person has. And the blogger's parents were right, when you rent you are paying someone elses mortgage.
When I rented out my first house I used a very simple formula for setting the rent price: the yearly taxes / 12 + monthly mortgage payment. This allowed me to own 2 houses yet my paycheck was only paying for one mortgage.
As for repairs. I had one large repair bill, that was for the in-ground pool at the second house (which I knew needed to be fixed when I bought the house). Other then that both houses combined never cost me over $200.00 a year in repairs or regular maintenance. If he's spending "thousands of dollars a month" on repairs then he has some serious problems with either his house, repair people ripping him off, or really needs to learn how to use a hammer and other common tools and do the repairs himself.
And the biggest plus to owning a house: It's yours. You get to paint the rooms whatever color you want. You don't have neighbors dancing on floor above you in the middle of the night, nobody is going to take your favorite parking space, you know all the quirks that the house has and react to them as you see fit, you don't have to wait for maintenance to come out to fix a problem, nobody is going to be doing any yearly inspections to make sure that you are wrecking their property, and the list goes on.
Bottom line: Home ownership ftw! - fatdog789, on 10/12/2007, -4/+11Can we please add this guy's site to the list of blocked sites?
I'm pretty damn sure he's the one that keeps submitting them under different accounts. - Magnitude, on 10/12/2007, -1/+7Grammar check: it's 'bought', not 'brought'.
As in, 'I bought a house'. - firemillen2, on 10/12/2007, -1/+7how is this john chow guy a "dot com mogul" when his house is only worth 500k? doesn't the word mogul need several more 000s?
- argoff, on 10/12/2007, -2/+8People seem to forget that buying a house is debt. A lot can change and go wrong over the period of 15 to 30 years, the length of most mortgages. They just always assume that there will always be equity, that homes will always go up, that all traffic lights will be green, or worst of all that interest will always be low. They always assume that they can just sell, or that they will never need to live anyplace else. Is being on a debt treadmill for 30 years really more secure than renting?
A house may be leverage in terms of paper money, but it is not leverage in terms of real wealth. Before the federal reserve act of 1911, it was very common for young couples to save up 2 or 3 years and buy a house cash. Sure house values will go up as long as the fed is constantly forcing new money into the system in the form of loans, but when they over saturate the economy with too much debt - that is a good reason to buy gold (to protect from a currency collapse), not a good reason to buy a house on credit. I don't think people really understand how dangerous this all really is. One more thing, if someone goes into debt and invests money into a business, that creates direct new productivity, but going into debt for a house does not. People don't understand that the system is set up to encourage unhealthy debt.
Unfortunately, at this point the US economy has more debt than it can pay off. At minimum, people should be preparing for disaster like by buying gold and getting out of debt at great effort. - YankeesSuck, on 10/12/2007, -1/+7What happens if you buy it for $400k, and end up selling it for $300k?
- dissident, on 10/12/2007, -0/+5this was bad advice back 10 or 20 years ago, but for the next 10 years it will be good advice, because whether you want to believe it or not, housing has peaked and will be a bad investment for many years. Everything goes in cycles, and housing is now out. Supplies are very high, driven by speculators, and demand is falling. You can whine all you want about this but it's going to happen and if the value of your house has doubled in the past 10 years expect it ultimately 10 years from now to be what it was 10 years ago or worse.
Don't say it can't happen, because it happened in Japan, and they don't exactly have a surplus of land to work with, yet it still happened. It will be worse here.
Wow, $2300 a month to rent... and I balk at places that try to charge $500 around here. :) - dancpsu, on 10/12/2007, -1/+6Assuming real estate values always go up, you're right. But if you have to sell for even or lower, then you're screwed.
Let's say housing values ar $500k and slip to $200k. The renter is $0 in the hole. but the buyer is $300k in the hole. - crocos, on 10/12/2007, -2/+7A companion with a pre-warmed hot pocket is better still!
- shoover, on 10/12/2007, -2/+8I have friends who own 3 houses in the city I live in, and have lived in 5 different countries in the past 4 years. They have made in the neighbourhood of 700k off of those properties in that time - equity which allows them to do *alot* of travelling.
It is an anchor only if you don't plan for it. - RequiemAristos, on 10/12/2007, -0/+5Dude, waitresses buying multiple properties isn't a sign to buy. It's more like getting stock tips from the shoeshine boy back in '29.
- inactive, on 10/12/2007, -3/+8Kiyosaki wasn't the one who invented that concept. He just made it famous.
- z.unit, on 10/12/2007, -0/+4I live in NoVA about 2 miles from DC, my mortgage is 2000 bucks a month and that's apparently good!
- octico, on 10/12/2007, -5/+9You are kidding $1500 is cheep where do u live? Ozarks ?? wait bfe?? Be real please I pay $1600 for a 2 bedroom apt. in the OC
- Obsidian743, on 10/12/2007, -0/+4D.C. area here. $1350/mo RENTING a 1 bedroom. Talk about pissing money away but I have no choice!
- rdizzle, on 10/12/2007, -2/+6this is total garbage
- shoover, on 10/12/2007, -0/+4In Calgary, house prices just doubled in the last 18 months. 1500 sq feet in a half decent area starts at 450k now.
- bennyb1anco, on 10/12/2007, -3/+7What happened to the interest on the loan? What happened to the money spent on property tax / condo fees?
The first few years of a repayment on any loan (even a non-interest only loan) is primarily paying off the interest.
Considering the fact that the value of a house is unlikely to increase much over the next 10 years, is it really any better to buy than rent if you don't plan on staying there for a long period? - zyrotin, on 10/12/2007, -2/+6I'm on my 2nd home now, the first place I bought was a condo with about 3 grand down, a year later the value had gone up about $40k. I was able to pay off most of my credit card debt, and put $20k down on my new house. With the credit cards paid off, I can afford the higher mortage payment. Before this my wife and I lived in a string of crappy apartments. Our first mortage on the condo was only about $100 more a month, but we found a way to afford it. The idea that renting was somehow better is crap. Yeah i didn't have to mow my own lawn, but i also couldn't paint my own walls.
Freedom baby, Freedom. - persecutor, on 10/12/2007, -0/+3This guy said it best:
I’m certainly not going to attempt to change the flavor of the article, but what chaps my hide is the fact that a basic necessity of life (shelter) has become yet another commodity. Everyone talks about their homes as just another investment rather than their protection and (what I to be) a basic human right along with food, medical attention, etc. Something is lost when we size up our residence regarding its cash value rather than its intrinsic value. I’m not so naive that I don’t understand the economics of this situation, but economics are often psychological.
My home is not very large, but it costs more than it is worth to me. When I rented I didn’t worry about mowing 2 acres of lawn. I didn’t worry about cleaning and maintaining a pool. I did’t worry about sealing the driveway with icky goo. I didn’t worry about the roof, the basement flooding, etc. Over the last couple years we’ve put in a wood stove and new windows. That was $25,000. But what is all this in my time? I’m a damned slave both economically and chronologically to this place. No, I don’t HAVE to be here. I can move somewhere else. But when you are responsible for others, you can’t always do what you want. When you own the place, everything you look at is a potential problem. Everything screams for your attention: Wash me! Fix me! Caulk me! Mow me! Weed me! Replace me! Upgrade me! Paint me! Prune me! Empty me! Worry about me! All this stolen time would be better used contributing to my community, spending it with my family or learning to play the cello. But that is just me. Some people actually like doing this stuff. More power to them.
I’m not whining, per se. I’m just sad that this world is so consumed with money that even the basics of life are commodified. And if you think the house you “own” is yours, try not paying the taxes or doing construction without a permit or buying chickens when you are not zoned for it. I could go on. Renting, buying… all a lousy trap. Yeah, it is the best we’ve got, but it still sucks the time, energy and money out of us. In the end, we’re all working for someone else. I may have to do it, but I can still bitch about it. ;)
Sorry for the rant. Now if you’ll excuse me, I have to clean the gutters.
Frank Black
Tyler Durden says, “The things you own end up owning you” - threemagic, on 10/12/2007, -0/+3This is useful if you buy your home outright. If you pay a 30 year mortage on a 300k house you end up paying 1 mill. Hardly an investment... and the equity would have to work very hard to make that 700k back PLUS make you money.
- willclarke, on 10/12/2007, -0/+3There was an article about this in USA Today a couple months ago. Basically said that in most major markets, the average mortgage payment is so much more than the average rent, that if you can rent you should do it. For example (I have the article next to me), the median mortgage payment in DC is $3277, and the median rent is $1109. That's a difference of $2186. If you rent and invested to leftover $2186, you're going to be way better off after 30 years than if you had just your house and no cash.
The flaws in the logic are that people who rent don't invest that much cash (I know I certainly don't) and the place they're renting is probably not as nice as the house. But in my personal situation, I'm paying less than $1000 a month in rent for a 3 bedroom house that would cost me $1500 a month if I was paying off a 30 year mortgage. In my opinion, renting is a better deal for me right now. - moronpatrol, on 10/12/2007, -1/+4 two comments on this article.
One the fact this guys ramblings keep making it so high up on digg is telling of diggs teenage readership...his business might be good and he might be good at *that* but the rest of his articles are poor advice.
two. what the hell are teachers teaching?
First off you HAVE to live somewhere. That cost money.
look its simple. You pay rent, doesn't matter how much 1 dollar or 1000. Your return = 0 dollars, a negative 100% return. You get -0- back for every dollar you spend. If you lost 80% by owning, you would still be better off than renting.
The problem is everyone the last few years has been looking at thier houses like retirement funds when traditionally its been a home, or a safer investment meaning you might gain, you might loose, or breakeven...but you probably wont loose 100% like you can in stocks. I own 2 properties I would like the 2nd to make money, but if i loose a few percent that is fine, i chose to put a certain % of my cash in small realestate years ago as a safer investment.
You pay a mortgage of lets say at 6%, now yes you will pay for maintenance, repairs, property taxes. Now in a good market your home/land appreciation might beat those costs...if nothing is special about the property probably not. Houses are not assets, land, location is. Houses are depreciating assets, they break, wearout, etc..thats why they get torn down...land, location, etc doesn't unless a neighborhood goes to crap.
However lets say your mortgage is 6% and lets say your realestate appreciation does not outrun your mort. interest,repairs, prop taxes,etc. Even if you lost 44% / year in depreciation,repairs,etc + 6% mortgage interest (50% loss on your investment aka mortgage payments that year) you would still have 50% more than if you rented.
If you buy a house and the neighborhood goes to crap, you loose 50%, thats 50% less than you lost by renting. This is assuming your not assine enough to buy some grossely overpriced property with no value.
In order to loose money owning instead of renting you would have to loose in repairs, house depreciation, taxes more than you are willing to pay to rent.
If you rent for 1000 dollars / month you would have to spend that in a month on property taxes, repairs, maintance,etc with a house for renting to make sense (keeping in mind roofs go bad,etc)
Now if you buy a house, and pay someone to mow your lawn, seed your lawn, clean your pool, wash your windows, wipe your ass, own an old home needing lots of repairs, like to remodel kitchens every 2 years, then yes renting can make more sense....just do the math.
Houses typically need remodeling every 10-15 years unless you can live with it, air condition needs replacing, pools need remarciting, roofs need replacing. All things to consider when buying a home.
Also since rent cost is based on those same things (prop tax, repairs,etc) that is not likely because as your landlords property value, property tax, maintenance goes up so does your rent. - spudnic, on 10/12/2007, -1/+3Yeah, he lost me at "a mortgage is more expensive than renting because you'll go for a more expensive house" (paraphrasing)
Dude should listen to his parents - pozzoe, on 10/12/2007, -1/+4@Ikiol:
I agree with the definition of asset, that's the right one. However, definitions are just that, they are ways of abstracting concepts to help the thought process. As I see it the poster is redefining the concept of assets to make it more useful to some people. This isn't the first time I read such thing (Rich dad, poor dad?)
As an example of redefinition of concepts: 2+2=0 is also true, if you use integers mod 4. ( http://en.wikipedia.org/wiki/Integers_mod_n ). Definitions are just that, they are not concepts, just names assigned to concepts. - flyindutchman, on 10/12/2007, -0/+3Trust me restaurants are not gold mines! At VERY successful restaurant will only make 10-12 cents on every dollar. Most will be closer to 6-8. Restaurant ownership is not fun or easy. I hope you have lots of experience in the field. Also, equity loans are usually a bad idea. They usually have a variable rate and people almost never spend or invest them wisely.
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