Buying beats renting. We conceptualize how a house makes you some sweet dough.
It's time to retire, homeowners! From 2016-2017, the median San Fernando Valley home price appreciated from $605,843 to $636,060. That's $30,217, or just about $16/hour, 40 hours a week.
Yes, your house is a full-time Coffee Bean supervisor, entry-level social media strategist, higher-end receptionist, or fast food manager. While you're working your full-time job, your house is also grinding out some legitimate hours.
Homeownership is still our greatest investment. It's a forced savings account with an average 6% annual growth. This doesn't include the tax benefits of the mortgage interest deduction, which makes the today's median SFV buyer another $4/hr. For those that don't know, the interest you pay on your mortgage is tax deductible, saving the median-price homeowner around $8,000 a year. The grand total is $20/hr of funding.
The value of homeownership is furthered by the fact that you can live in it too. Apple stock would have been the better investment, but you can't raise a family in it. Buying gold is reliable too, but you can't celebrate your birthday on it. Heck, even investing in private prisons has been doing well, but is that really what you want to do?
Around the Nation
Although this may sound terrific, the Valley isn't incredibly competitive on the national scale. The more dynamic metropolitan cities see even better hourly rates:
San Jose - $99.81/hr (+$208,300)
New York - $42.17/hr (+$84,340)
Los Angeles - $26.35/hr (+$52,700)
Las Vegas - $16.87/hr (+$33,740)
Dallas - $7.71 (+$15,420)
United States - $7.09 (+14,180)
The highest earning cities have a combination of already-high prices and rapid appreciation. San Jose, for example, increased 20% on an already median price of around $1 million. Isn't real estate fantastic?
While sellers might be disappointed to discover their house's appreciation isn't as ridiculous, this is actually a good thing in the grander scheme. We don't need the Valley to be this inferno of overvaluation. It'll either lead to a bubble, or to aggressive gentrification. Controlled prices means an open market for buyers. Rampant speculation lead to the last bubble. As much as sellers may want to get top dollar, it's important to remember that overvaluation always comes crashing down.
With renting, you're paying off someone's mortgage. None of that comes back to you. Average rents are around $3,000/mo. The average homeowner is making in appreciation $2,450/mo. That's a whopping net difference of $5,450 a month.
Homeownership puts you ahead of your renting counterparts by nearly $70,000 a year. Yes, with renting, you lose money. With owning, you gain money. The stark difference between both isn't the entire picture, but it paints it thoroughly.
Renters often try to save enough to buy. Are you saving more than $70,000 a year? If so, then I'll take you out to lunch. If you're like me, you pay your bartender before you pay off your credit card debt. There's no way you're out-saving the financial damage of renting.
There are some arguments to be made against homeownership, which in itself is a discussion for a whole different article. Three common arguments are:
Loss of cash. Investing 20% down all into a house exposes buyers to risk for other emergencies. This is a valid point. Many buyers will go broke simply buying a house.
Buying at the top of the market. If the market crashes, you could very well be losing $16/hr.
Fees. When you sell your house, you pay 5-6% in commissions. There's also mortgage interest, which eats into profits. House maintenance is expensive too.
These are solid points, but the benefits of homeownership still outweigh these points. When you rent, you lose $3,000 a month. There are no secret loopholes. When you rent, you lose. Even if you might leave to Iowa in a couple of years, homeownership is the cornerstone of a wealthy, healthy retirement.
Conceptualized as Rental Property
It's been said to death, but you'll eventually need to have your money work for you, not you working for your money. Owning a property that you're leasing to a tenant puts you even farther ahead of the pack.
Let's assume a $600,000 house with monthly rent of $3,000. It's difficult to find a great rental opportunity in the current market, but we can say a $300 profit/mo is reasonable.
Additionally, rental properties claim a nice tax benefit called depreciation. Basically, the government gives you a break on taxes because technically, your property's condition is decreasing in value due to age. This is another $3,000/year ($250/mo) saved on taxes.
In other words, your rental property is adding another $550/mo into your pocket! This is in addition to the huge leap you get against renters (-$3,000/mo), AND the appreciation benefits of homeownership (+$2,450/mo).
In this way, we're leveraging a third advantage of homeownership.
Homes aren't just 4 walls and a ceiling. They're the cornerstone of any family's investment portfolio. The house is a fantastic, expensive product that one can put a small down payment on, but receive the full benefit of the asset.
The purpose of this article is to envision a house's purpose in incremental steps, namely hour-by-hour and month-to-month. It's leverage for hundreds of thousands of dollars that increases in value, provides aggressive tax benefits, and just happens to be a place to raise a family.