America’s favorite billionaire Warren Buffet has said “All things considered, the third best investment I ever made was the purchase of my home…” We’ll compare homeownership to investing, and we need baseline assumptions to understand the comparisons.
Over a lifetime, your mortgage payments, taxes/maintenance (including amortized capital costs) will equal roughly similar housing for free-market rent. If I buy a house right now, the mortgage, taxes, and fees added up might be about the same or less than I’d pay for rent in the same area. Homes in the same area may be rented out for more than the average mortgage payment, but sometimes it’s cheaper to rent.
Housing cost nets out. Some believe that when you buy a home, you’re not only investing, but you are also getting “free housing.” This is not the case. What we’re really comparing is the down payment plus any large mortgage reduction payments vs. same amounts invested in the stock market.
Here are the four reasons that homeownership is better than investing:
1. Homeownership is More Familiar
You can touch and feel your investment. You live, eat, sleep, play, and possibly even work on this tangible investment! Compare this to stock investments, where you see a squiggly line on the screen with a green or red arrow. Even if the market crashes and the value of your house plummets, you still feel safe knowing you have somewhere to live.
There is nothing else in the world like the benefits and infrastructure of mortgages. Average folks can get huge loans with standardized application processes and brokers/bankers to help you. In Korea there are no mortgages! There, you have to buy your home in cash. Oftentimes, Korean parents have to help their adult children buy homes. If you have other examples of how easy or hard it is to buy a home in other countries, please let us know.
Warren Buffet said that the 30-year fixed mortgage is “the best instrument in the world.” Not only is it easy to borrow a home loan, but there are also huge tax benefits such as deducting the interest that you paid. Not many loans let you do that. There also used to be more deductions available for SALT (state and local property tax), which we discuss in other episodes. To put this in perspective: if you have $50,000, you have possibly $600,000 to $1,000,000 in purchasing power. You can’t get this kind of multiplier in buying power with stocks.
3. Tax benefits
Owning a home means a deduction for mortgage interest and no capital gains on the first $250,000 (or $500,000 if you are married). For many people, the mortgage interest deduction makes the difference between paying a large amount of taxes vs. a reasonable amount. As mentioned above, the downside is that SALT deduction benefits have been limited.
4. Forced savings
Mortgage payments are a form of forced savings. If you are not disciplined to save, a mortgage is the way to go. Every month that you make a payment, you are also paying down debt on a huge amount of equity. With investing, you have to have discipline to save (not spend) and not to tinker, buy/sell (let the index compound and do its work!). The more a task requires willpower, the less likely you are to succeed. Having a forced system like mortgage payments can be beneficial. The temptation is not there to do something else with your mortgage payment money; you are required to pay your mortgage! The looming threat of homelessness is quite a motivator!
Learn more in my book “How to Buy Your Perfect First Home.”