Despite what Yahoo readers think, I’m an ardent proponent of owning a home. In fact, I’m willing to take Rich Dad, Poor Dad to task over the subject, because buying a home is definitely an asset, not a liability.
For those of you who are unfamiliar, Robert Kiyosaki wrote the bestselling book, Rich Dad, Poor Dad. One of the lessons in the book is about why buying a home is a liability and not and asset. His primary argument is that homes come with great responsibility. It has tax costs, interest costs and maintenance costs. These obligations never go away. Rent, on the other hand, is a simple monthly payment. Your obligations begin and end with writing a monthly check.
While all of this is true, both sides of the home ownership debate overlook the most compelling benefits to homeownership.
Home Equity is Overrated
What Kiyosaki and many other pro-rent advocates attack is the monolithic faith in home equity. You’ll note that I did the same in US News and World Report in this week’s article. It’s no surprise that home equity is hyped as the big benefit to home ownership. We are a nation obsessed with wealth building and I guarantee that most people’s wealth calculation is going to look a much larger with equity added in.
Yet home equity is nothing more than a calculation on a piece of paper. It doesn’t consider the costs of maintenance in time or money. It doesn’t even consider the costs of converting home equity into money. Worst still, it’s subject to market booms and busts.
If you want to understand the true power of home ownership, you have to get over the idea of home equity as “the big” reason for buying.
Buy a Home, Avoid Rent Inflation
It’s the expense that pro-rent proponents like to ignore; rent inflation. To some degree, rent inflation has been forgotten by many renters because over the last decade rents were stable. Today, it’s outpacing inflation. According to CNN, rent prices are up about a median of 5.6 percent over last year.
You have to make a choice in this life when it comes to housing. You can buy or you can rent. When you rent, your housing costs are subject to the whims of inflation and since inflation has a tendency to only increase, you are always going to pay more money for the same apartment; until you die.
On the other hand, you can buy and avoid the constantly rising costs of renting. At the same time you can bank the opportunity costs of rent inflation. If rents went up 5.6 percent this year to $721 a month, you saved $458.82 this year by not renting.
Buy a Home, Freeze Your Housing Costs
What did you pay for your home? Even if you bought at the height of the housing bubble, so long as you’ve taken out a fixed rate mortgage, you’ve frozen a big portion of your housing costs for as long as you own your home.
Think about the power of this benefit for a moment. To freeze a portion of your transportation costs you would either need your own car manufacturing plant or an oil field and refinery. To freeze food costs, you’d need to buy a large plot of land and farm it every year. Housing is that biggest slice of the average family budget and it’s the only item in your budget you have a chance to freeze. If you pay off a mortgage, your costs will even decrease down the road.
You Cheer Housing Inflation Too
After you purchase a home, housing prices don’t stay fixed either. They usually increase. Currently, housing nationwide is up 4.6 percent this year or $4,600 for every $100,000 your home is worth.
This benefit has lost a bit of its luster in recent years. The housing bust has created a deflation pit that will likely take decades or longer before some homeowners to start benefiting from housing inflation. However, even when you lose you are winning.
Since rent is the only alternative to owning, rent tends to inflate at times where housing is poor and housing booms when rent is stagnate. Either way, you are on the winning end when you own. So long as you plan on owning for 40 years or longer, even homeowners who lost in the housing bubble are likely to come out on top compared to renters.
Home equity is probably going to benefit many home owners, but it’s not the best reason to own. Freezing your housing costs and avoiding rent inflation are big benefits. They don’t change on the whims of the housing market and they aren’t subject to the foolishness of investors. They don’t sound as wonderful as wealth creation, but buying a home is definitely an asset to those with the means, not a liability.
Did I convince you that owning is an asset or do you believe it’s a liability? Is home equity overrated? Why is renting superior/inferior?