Often I have a conversation like this with one my friends:
My friend: My home is killing it. Six years ago I paid $300,000 for it and now it’s worth $380,000! That’s a profit of $80,000!
Me: But if you sell it, wouldn’t you have to pay 6% realtor fees off the top?
My friend: Well, yeah, but everyone has to pay that.
Me: And haven’t you been paying $1,288/month to the bank for the last six years ($92,736 total)?
My friend: Yeah, I’m building equity!!!
Me: And haven’t you been paying $3,600/year in property taxes?
My friend: Of course. You know Uncle Sam is gonna get his!
Me: And over the last six years didn’t you spend $20,000 replacing the hot water heater, landscaping, carpet, driveway and bathroom remodel?
My friend: Sure, but gotta maintain the investment bro!!!
Me: Well it’s not really a “profit” of $80,000 then? Profit is what you get after you take out the expenses.
My former friend: RENTING IS THROWING MONEY AWAY!!! [runs away crying]
Let’s see how he actually did:
Down Payment: $60,000
Mortgage Payments: $92,736
Realtor Fees: $22,800
Total money spent: $217,136
Sale price: $380,000
minus remaining balance on $240K mortgage mortgage after six years of payments: $215,844
Total proceeds from sale: 164,156
Proceeds – Expenses = Profit
$164,156 – $217,136 = -$52,980
That’s losing $8,830 per year. As a percent of the money invested in the home, it’s like a savings account that pays -4% interest. Not so great. And definitely not profit!
And yes, renting costs money too. But with renting you don’t need to put $60,000 down. That could be in an investment working for you. The price of a modest rental could also be significantly less than the big house you bought. So if you limit your costs on a rental and invest the difference you could end up way ahead.
As always, the message isn’t “renting is always better.” It’s not. The message is “don’t buy too much house because you expect it to be a great investment.” It’s not.