Advantages and Disadvantages of Buying a Home

Lew Rockwell ran a piece by James Altucher on using a checklist when buying a house.  Some of his items are meant to be comical, although most of them are valid points to consider.  Altucher has written several times in the past about buying a house.  He is against it, although some of it may stem from his own experience of having a house and going bankrupt.

I am a big advocate of buying investment residential real estate, if you are in the right position.  You should be in a good location where the local government is not too overbearing.  You should have cash reserves for unexpected expenses and vacancies.  You also need to make sure that the math makes sense.  You should not buy for appreciation.  You should buy for positive cash flow.  Any appreciation you get should be icing on the cake.

I view things a little differently when it comes to your primary residence.  I am not completely against buying as Altucher is, but I think he has many valid points to consider.

First, it is important to realize that a house is a consumer good.  It happens to be a consumer good that is a necessity in life, just like food.  You need shelter and I'm guessing most people don't want to live in a tent.  But nonetheless, a house is a consumer good when you are "consuming" it, as opposed to renting it out.

Therefore, anything you purchase that is above your basic needs is really excess.  I am not against having more than you need.  But it is important to realize that you are not buying an investment.  You are buying something to enjoy.  You might pay more for a house for a safer area, for better schools, for a better location, for more space, for a bigger yard, for a swimming pool, or any number of other things.  And they are all valid reasons.  But again, just realize that these are things you want, not things you need.

The best financial time of my life was right after college.  I was in a three-bedroom apartment with two roommates.  I had the smallest room and I shared a bathroom with one of the other guys.  My rent was the cheapest.  My portion was just under $300 per month.  I then contributed for cable, telephone, and electricity.  That was split three ways.  My living expenses were really cheap and I was able to save a lot of money, despite having a low salary at the time.  I did not have to worry about any repairs.  I also didn't have to worry about mowing a lawn.

I think the biggest problem with home ownership is that people underestimate the costs.  They look at their monthly mortgage payments and don't consider most of the other things.  Here are just a few things to consider and it is far from an exhaustive list:

These are just some of the costs of home ownership.  Home ownership is expensive and I think you should be in the right position if you are going to buy a house (or condo).

There are good things about buying your own place.  You don't have to worry about anyone kicking you out, assuming you make your payments and you aren't located somewhere that would be vulnerable to eminent domain.  In addition, paying your mortgage is a little bit like buying a whole life insurance policy.  It forces you to save.  As long as you don't refinance to a longer term or take money out of your equity, then you will eventually pay off the place.  Unfortunately, the people who probably need this discipline the most are also the ones who probably shouldn't be buying a house because they don't have the reserves to do it.

Of course, owning your own home is great because you can do what you want with it (aside from abiding by any local laws or association rules).  If you want to paint a bedroom pink, that is you choice.  In this sense, you are buying a "home" and not just a "house".  Making your wife happy may be one of those intangible things that is worth the money.

In conclusion, I think there are both good and bad reasons to buy a place as your primary residence, as opposed to renting.  But if you are going to buy, don't become house rich and cash poor.  Don't justify a higher price tag because you view it as an "investment".  You aren't buying it to make money.  You are buying it for lifestyle and you should know that going into it.