There is a pervasive narrative about Millennials and homeownership. You know the one: Millennials aren’t buying homes because we can’t afford them. We can’t afford anything, right? Not kids, not homes, not retirement funds, emergency funds, the list goes on about what Millennials aren’t doing with our money.
We’re not saying Millennials don’t understand the struggle. But when it comes to home ownership we might be savvier than other generations give us credit for. There is a more complex reality hiding underneath our reticence to put down that down payment: Some Millennials have discovered that it doesn’t make financial sense to buy a home.
We want to break down some common thoughts and myths around renting vs. buying a home. To start, let’s be very clear, there’s a difference between buying a home because you’re “supposed to,” you think it’s a good investment, or you’ve found your forever home.
Isn’t renting throwing away money?
Nope! We hear that one a lot. Unless you’ve somehow got a sweet rent-free situation, you’re going to be spending money on a place to live no matter what, not throwing it away. And guess what? Buying a home is ‘throwing away money’ too, and sometimes even more.
If you think that putting your monthly rent costs toward a mortgage is an investment, think again.
Much of the money you’re spending when you pay your mortgage isn’t actually money you’ll get back—even if you sell your home for a good price.
Real talk: when you buy a home, your mortgage isn’t just paying off the value of your home. In the first fifteen years of your mortgage (and sometimes even longer) a lot of your money is going toward paying off stuff that isn’t the equity of your home.
Another major factor in this equation that most renters don’t fully understand: homeownership can be expensive AF.
Owning your home comes with taxes, interest, and insurance, just to start. You also then bear the burden of fixing and replacing things when they break. And major appliances like refrigerators, and washing machines don’t come cheap. The Balance suggests using the “Square Foot Rule” and budgeting $1 per square foot per year for maintenance. That would be $75k over 30 years on a 2,500 square foot home. OUCH.
Buying a home is ‘throwing away money’ too, and sometimes even more.
(Want to know all the details about why it often takes more than 15 years to really start paying toward your home’s equity? This breakdown by Afford Anything gets into the nitty gritty details.)
Renting may feel like an endless money pit, but you actually get a lot for your money. Yes, even in New York City and San Francisco where it feels like rental prices are a cosmic f*cking joke.
Here are a few things people take for granted when they rent:
- a location you actually want to live in (we see HENRYs™ [High Earners, Not Rich Yet] often have to compromise on location to get a home they can afford)
- repairs and maintenance aren’t your problem, and
- the freedom of being able to move with little to no lag time (waiting for a 1 year lease to end is a helluva lot different than selling a house).
That last one is a big one. Buying a house locks you into a location and a mortgage payment. So if you want to say “f*** it!” and quit your job or you want to move to a less expensive area to pursue your passion you might be sh*t out of luck – at least for awhile.
So wait, is home ownership an investment, or not?
Here’s the thing, real estate investing and buying your primary residence are two different decisions. If you’re buying a primary residence, you shouldn’t assume it’s going to go up in value and you shouldn’t think of it as an investment.
In order for your home to be an investment two things have to happen:
- go up in value a lot and
- you HAVE TO SELL IT.
Yup, we’re yelling this point. This is a key point that many HENRYs™ who are considering buying a home seem to stubbornly misunderstand.
If you’ve found your forever home and never plan on selling, you shouldn’t think of it as an investment. Here at Stash Wealth we are big believers that any investment decisions should be based on the goals you want to eventually use the money for. Guess what goal makes the most sense to fund with a long-term investment like a house? Retirement. And guess how many people want to sell their house when they retire? VERY few. Turns out “forever home” actually means “forever” for most.
Maybe you’re not there, yet. You’re not looking for your forever home. You just want your first home. Great, so you are planning to sell eventually. If that’s the case, let’s talk about the assumption that your house is going to go up in value. As reported in the New York Times, “It may be hard for people living in bubbly markets to believe, but, over all, home prices in the United States have risen just 0.37 percent annualized, after inflation, for the last 126 years.”
We aren’t saying don’t ever invest in real estate. We’re saying don’t buy your primary residence just because you think it’s a good investment.
If you want to buy a vacation property as an investment with the intention to sell it in a few years, or want to start using extra cash to flip homes in up and coming neighborhoods as a side hustle, those are entirely different circumstances with a whole different set of considerations.
But I’m a grown up. I should own a home.
Not necessarily. This gets to the heart of our clients’ desires to take the next financial step. Just because your parents bought a house at your age (or even younger), it doesn’t mean you should.
We talk a lot about why the financial advice that worked for your parents just isn’t going to work for young people today. This is why we don’t want you to take investing advice from your parents, and why you maybe shouldn’t take their advice about buying a house either.
If the pressure to buy a house is coming from anyone other than you, question it. Just because your parents bought their home doesn’t mean you should. Homeownership just might not make sense for young professionals today.
But what if I just WANT to buy a house?
Setting financial realities aside, there are emotional and aesthetic reasons you might want to own your home. Did you grow up in the same house that your parents still live in? Do you get all warm and fuzzy when you think about ticking away the years as you watch your kids grow, etching their heights into the kitchen door frame? Do you just want to be able to paint the walls crazy colors and install blinds instead of drapes?
The homeownership equation changes if you truly think you’ve found your forever home. The difference here is that you should think of the home as an asset rather than an investment. Remember, investment requires you to sell!
We also want you to think realistically about whether your lifestyle is one in which homeownership really makes sense. Are you being driven by nostalgia and idealism, being pressured by your parents to “grow up,” or are you making a solid, financially and emotionally grounded decision about how and where you want to live for many years to come?
Buying a home is a big decision. We’re not saying Millennials shouldn’t ever buy homes, but we are challenging you to think clearly about why you want to buy a home. If it’s because you think renting is wasting money or you’re just “supposed to,” we urge you to think again.
If you’ve found your forever home, it makes sense financially, and you have a stable job that you love, that’s a whole different ball game. Remember we are all about putting your hard earned money to work and spending it on the things you want most. If that’s a house, we’ll be the first ones at your new doorstep with a bottle of bubbly.