The BIGG Successs Show
Are You Throwing Money Away by Owning Your Home?
We often hear you're throwing money away if you rent. We examine the other side. You can find a written summary of today's show, along with links to the resources we mention, at BIGGSUCCESS.COM.
Welcome to The Big Success Show. Today we ask, are you throwing money away by owning your home? The Big Success Show with George and Mary Lynn. Ah, the three essentials, Mary Lynn, food, clothing, and shelter. And the thing is, we definitely rent our food, don't we? Yes. I think so. Do we rent our clothes or do we own them? Depends on how quickly you gain weight. How fashionable they are, right? Yeah. Well, and then there's the shelter, and you know, the American dream, of course, is to own your own home. And there's some good reasons to do that. The most recent Federal Reserve bulletin, actually, that talks about this shows that the average homeowner has a net worth of about $625,000. While the average renter has a net worth of only about $54,000. Hence why you always hear, if you're renting, you're just throwing money away. That's right. Remember I had a boss once tell me that. Mm-hmm. And I always rent it because I was in radio. I mean, it's actually a smart move because you just never know when things are going to change. Your career is about as long as the next commercial, is that what you're saying? Yeah, it can be. And so, but I bought into what he was saying, and I was at an age where I thought, you know, I should own my own home. So I went ahead and bought a house, and about a year later, house was on the market, and I was moving to another market. So, I really kind of regretted that. Well, and actually, Marilyn, you're bringing up kind of what we want to look at today because I saw this statistic. In fact, I've seen it in several places. It's interesting that it says that the average American family moves about every five years or so. Now, the reality is what we want to look at today is the average doesn't matter. What really matters is your situation, like the situation you talked about. Yes, I wish that we could all have our own crystal ball, so that we could gaze into it and determine, you know, how long we're going to be someplace, and boy, we could make great decisions if we had that. I could have used that in Vegas last week. Exactly. You know, we're not offering advice on your specific situation. We can't do that. It's really up to you and your financial advisors to determine what's the best move for you. But what we want to do today is just give you some food for thought. Yeah, because averages don't matter. I mean, real estate is very localized, so you have to look at your own market. That's exactly right. Now, in our example, we're going to look at the average house now, which, according to US government census, data is worth about 314,000, and we assume that it appreciates at 4% a year, which is near the historical average. We've got an interest rate calculated in a 6.5%, which is about the interest rate, according to bankrate.com right now. And then we assumed a 30-year mortgage with a 20% down payment, so we're going to take $63,000 to get us into this home. So using our calculations in the first five years, the length of time the average family owns a home, 83% of the total mortgage payments go toward interest. And as interest rates rise, the percentage that goes to interest increases as well. Yeah, and then on top of that, you've got to pay for property taxes. You know, your landlord would be paying that if you were renting. You pay insurance. Now, granted, you may have and should have renters' insurance, but that only ensures your contents, which is a lot less expensive than ensuring the building and the contents, right? And you also have repair and maintenance costs. Over the first five years, $2,171 per month will go toward rental costs. And when we say rental costs, we're talking about the interest, the property taxes, the insurance, the repair and maintenance. Yeah, because you may not be renting the building, but you're renting the money, right? And then you have to pay the property taxes and these other costs. And the thing is, if your down payment is less than 20%, your rental costs, what we're calling your rental costs goes up because you actually end up incurring even more interest. We also looked at how long you would need to own to break even. And it costs money to sell a property. You've got realtor commissions, closing costs, etc. So we assumed 8% of sale price for these costs. Which is just a number that I've always used. It seems like normally you come in a little less than that, but it's a good barometer. Well, the thing is, if you sell after a year, you're going to be out nearly $10,000 in our example here. Which adds over $800 per month to your cost for shelter. And we haven't even considered the opportunity cost because if we rented, we could have invested that $63,000 down payment, right? So if we could assume we could earn 6% on that money, you would have made nearly $4,000. So by buying, you're actually about $14,000 in the whole. And even after two years, you'd still be in the whole using our example, assuming that real estate prices are rising, which isn't the case in many markets right now. And in fact, it's the opposite, right? So the bottom line here is, as we found with our example, you're actually throwing money away if you buy and sell within two years. But coming up, a strategy to buy a home and make money even if you move within a few years. Today we're talking about whether or not it pays to buy a house if you're only going to be there for a couple of years. We've determined that the bottom line is, it doesn't pay to buy and hold for less than two years. You need to look at your own specific situation. But the thing is, we know some examples of people who've been able to make it work. We have a friend who's in the military, so he moves around quite a bit. But what he'll do is buy a home that he knows would make a good rental property. So whenever he does have to move, he hires a local property manager and rents it out. So he's got the benefits of ownership without the risk of having to sell immediately, and he keeps houses and cities where he thinks you might want to return, live again, retire in. We have another friend who also moves frequently, and he does the same thing only he doubles down. He actually acquires additional property in the markets that he's living in. The thing is, he's now retired and living off the income of his investment properties. So you can make a strategy of living in a home for a short period of time and still owning it work as long as you have an alternate exit strategy. You can get a written summary of today's show on our site at Big Success. That's big with 2gsuccess.com, and you'll also find links to the resources we mentioned during today's show as well. Next time, we'll talk about a popular toy that you've probably played with. That's a great way to track your time. Hmm, my Holly Hobby doll? No. Until then, here's to your big success. The Big Success Show at B-I-G-G Success.com [MUSIC PLAYING] [BLANK_AUDIO]