Rich Arzaga owns a luxury home in San Ramon, California, but he's not betting on it as an investment.
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"It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.
Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."
That's right: 100 percent.
The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs — what's needed to hold and maintain the asset — range from property taxes and home insurance to emergency repairs and renovations.
In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.
"I don't have the emotions a lot of people do surrounding real estate," Arzaga says. "I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."
Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners "not to meet their financial goals. They were going to fail."
Some real estate experts thought there was some truth to Arzaga's argument, albeit with several conditions.
"To state that owning a home is or isn't a good investment is too simplistic," says Jeffrey Rogers, president and COO of Integra Realty Resources. "It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn't be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead."
"Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return," says Jed Kolko, chief economist at Trulia.com, a real estate search and research website.
"But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."
"But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."
Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga's. "Home ownership is not so much a creator of wealth as a store of wealth," he says. "The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn't rebate a dime."
The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.
"You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children," McBride says. "There's no sense in buying a home if it's going to deplete your emergency or retirement savings."
McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is."
Then there's the emergency fund, a must for when a home requires unexpected repair work.
"As far as emergency savings is concerned, six months of a cushion is adequate," McBride says. "But only 24 percent of people have that kind of cushion, and about 65 percent own homes."
So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn't pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid.
So why not sell? For Arzaga, it's a lifestyle choice, and one that he doesn't regret, since his big money-making investments are elsewhere.
Here's what I think, and a couple of my friends on Facebook concur, not all the value in homeownership is tangible. A lot of the value in owning a home, to me and my husband, is that it is ours. We rented a house for the first time last year and it wasn't a pleasant experience at all. It started well and quickly went downhill when the house was put on the market for sale. Our lives turned upside down. We had to be available for showings at all times. Granted we were given 24 hour notice, but sometimes we had other things scheduled which made that difficult. The other hard part is having workmen milling about when things were being repaired or improved. It was very disruptive. Plus, some of the workmen were sketchy looking to say the least. I have a newfound respect for our former tenants and what we must have put them through.
Purely from an investment standpoint I wholeheartedly agree with this statement: "Home ownership is not so much a creator of wealth as a store of wealth." Gone are the glory days of rapidly rising market values. We purchased our current home as an investment. We are in an unusual area that sees a lot of short term renters passing through. Most people aren't going to purchase if they are only here for a year or two. We are willing to park our money in this investment. The goal is to pay the house off early and have the passive income supplement what ever we have available in retirement. Yes, we will need to do periodic repairs and improvements, but we have entered this phase with lots of experience in home ownership under our belts...this is house number 4.
The gentleman who has taken the contrarian point of view to most of society purchased a LUXURY home. Yeah, most people I know and hang out with do not own homes in that price range. One thing I think about when we purchase a home is will our lives "fit" in this home? In other words, will I need to totally upgrade our furniture or even add pieces to fill the rooms. That's not to say that I am opposed to adding a few pieces here in there, but I am not interested in having to get furniture that is "above" the way we live. Owning a luxury home or even a home with too much square feet is not for me either. Besides having to fill the house, someone will have to clean it and that someone is usually me. And lastly, the utility factors are always thought about. I am not interested in heating or cooling a McMansion. I am too frugal for that.
What do you think?
Here's what I think, and a couple of my friends on Facebook concur, not all the value in homeownership is tangible. A lot of the value in owning a home, to me and my husband, is that it is ours. We rented a house for the first time last year and it wasn't a pleasant experience at all. It started well and quickly went downhill when the house was put on the market for sale. Our lives turned upside down. We had to be available for showings at all times. Granted we were given 24 hour notice, but sometimes we had other things scheduled which made that difficult. The other hard part is having workmen milling about when things were being repaired or improved. It was very disruptive. Plus, some of the workmen were sketchy looking to say the least. I have a newfound respect for our former tenants and what we must have put them through.
Purely from an investment standpoint I wholeheartedly agree with this statement: "Home ownership is not so much a creator of wealth as a store of wealth." Gone are the glory days of rapidly rising market values. We purchased our current home as an investment. We are in an unusual area that sees a lot of short term renters passing through. Most people aren't going to purchase if they are only here for a year or two. We are willing to park our money in this investment. The goal is to pay the house off early and have the passive income supplement what ever we have available in retirement. Yes, we will need to do periodic repairs and improvements, but we have entered this phase with lots of experience in home ownership under our belts...this is house number 4.
The gentleman who has taken the contrarian point of view to most of society purchased a LUXURY home. Yeah, most people I know and hang out with do not own homes in that price range. One thing I think about when we purchase a home is will our lives "fit" in this home? In other words, will I need to totally upgrade our furniture or even add pieces to fill the rooms. That's not to say that I am opposed to adding a few pieces here in there, but I am not interested in having to get furniture that is "above" the way we live. Owning a luxury home or even a home with too much square feet is not for me either. Besides having to fill the house, someone will have to clean it and that someone is usually me. And lastly, the utility factors are always thought about. I am not interested in heating or cooling a McMansion. I am too frugal for that.
What do you think?
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