Should you buy a house?
When we see famous rich people, the first thing everybody notices is their lifestyle. More precisely, their homes. Wealthy people have incredible houses and I mean plural. Everybody knows rich people have million-dollars mansions and for this we instantly associate wealth with big houses. This is no coincidence that, when asked what they would do with lottery money, people always start with "I'll buy a house, then another house for my Mom, then a house for my friend, then a house for my dog... then I'll travel the world."
The problem is with the other people, the big majority who are not rich nor lottery winners. Human has ego and wants what he can't have. For this reason, the common dream eventually goes like "I too want a big house!". And this is the plan for 90% of the world. Everybody wants "MY house". But it would be a lie to say that 90% of people want to buy a property to look like famous people, a big part also want it as an "investment". Because your grandma told you so, right? "When you pay for a rent, you put your money to the trash: buy a house early, at least it will be yours".
To buy or not to buy, that is the question.
Quick answer is NO. If you read this, you probably ain't Bill Gates nor sits on top of more than one million dollars in cash. Buying a house or not has more to do with psychology than anything. Here is why wealthy people have big properties... Pretend I give you 1 million dollar, cash, now. The first you will want to do is: keep it safe. I will ask you "where should I wire the money to?". You will quickly find that you can't just give me your ordinary bank account. After the transfer, very soon you will receive a phone call from your banker asking for the nature of this money, and with shiny investments you have now access to hold this money "safe". Since you are intelligent, you will quickly hear all the blurry warnings your banker throws, like "capital may be at risk BUT DON'T WORRY WE HAVE A CONSTANT RECORD OF +10% EACH YEAR... AHAHAHAHAHA". And very soon you will understand that "safe" is quite relative. So, what will you do? You will start to panic and ask for advices, and soon you will remember some old saying repeating "you should not put all your eggs in the same basket". Yeah, diversification. And now you will start to think more, and somewhat conclude that maybe you should not just keep your money like that on a single placement, maybe you should cut your million in 4 and put 250k in some stocks, 250k in some obligations, 250k as cash if needed and finally the other 250k in some real estate. That would be a much more "safe" play to keep your money. And this is what wealthy people do. They invest in real estate because it makes sense for their level of cash. Who would keep 1 million in cash? In wich currency? USD, EUR, GBP ???? That is too risky my Dear.
Now, don't get me wrong, real-estate can also be pure pleasure and it is. Having a big house on a wonderful island may quite be pleasant. But here is what I don't get: if your net worth is $20.000, would you buy a $400.000 Lambhorgini?! I would not. But still, the vast majority of people have a net worth of $20.000 and crave to buy a $400.000 house. I will even cut deeper: the vast majority of people have literrally $0 in their bank account but ask for credits to buy a $400.000 house. Isn't that crazy?! No?! Well, you should definitely think twice and act like it's crazy because... it is.
Yeah... yeah... yeah... but in 20 years my house will double value
Really?!!! Remember when I said that buying or renting a house has much to do with psychology than anything?! Well, let me develop a bit. I can show you some graphs that testify in your favor. It might be true that 20 years from now, your house will double in value. But this is not the good question. The good question is: are you ready to stay in the same house for TWENTY YEARS? Remember 2000? Yeah, the year 2000, it was exactly 20 years ago. Remember everything that happened to your life since then? What would you say? Would you say your life was boring and steady and nothing changed in 20 years? Can you feel the time that passed by during those T-W-E-N-T-Y Y-E-A-R-S ?!!! Let me rehearse one more time because maybe you didn't get it: TWO TIMES TEN YEARS OF YOUR LIFE. Got it?! In 20 years, a lot of things happen. One can have kids. One can lose people. One can lose job. One can switch carreer. One can divorce. One can get sick. One can just get tired of the same house... and a gazillion of possibilities and excuses to sell and move. Again, I wish I can buy a house myself one day. But my mindset should be cristal clear: I will only buy the house I will NEVER SELL, ever. I will go even deeper: I will buy the house I will never sell myself neither my children and hopefully my grandchildren!!! Yeah!! That crazy engagement.
What is the reationale of that?! It is because of psychology again. At the time of writing, I have no child nor am I married to nobody. But even if I was a good dad and a good spouse, I know life changes and is not a long and steady journey. I'd say it's quite a bumpy one. Would you say you knew the whole world could stay stuck at home during months because of a pandemic virus?! You can't predict how bumpy life can be, but you can predict for sure that it will bump one day.
Now, I get it: "But... dude... if something happens, you can always sell your house!! Duh!!" And this is where you lack of experience flipping houses. Buying and selling a house has a cost: notaries, taxes, agents, bank fees... These costs, which you obviously omit in your equations, are what makes renting on par with buying a home on the short term. And this is precisely what people can't get because: "I just want my house... MINE". These FIXED costs, oblige you to hold your investment for at least 10 years, bare minimum. Before that, well believe me or not, renting is more affordable.
Then there is another psychologic effect of buying a home: making it look perfect. You bought your home, right? It's yours !!! Hurraaaaayy!! What's your first move? Go buy some fancy kitchen, fancy sofa, fancy TV that fits with the color code... you start to have what I call the "my house flu". Everything you see could fit into your new home, and... you love your home. Here is the problem. When you will move (and you WILL move one day...) these cool stuff might just not fit with the new home. Plus, the new home has to feel "new"... so you need new stuff obviously. This money is wasted. I hear from here that this happens also when you rent. Really?! I agree that maybe you'll buy a fancy sofa and some useless stuff too, but remember it's not really YOUR home: so you will stick with this simpler kitchen, you will not change windows, the principal door will stay as-is, and the painting in this spare room might just stay like it is. Psychologially, you WILL spend more for your house than a rented one.
The other parameter to consider is the same as wealthy people: diversification. If you have a net worth of $20.000, does it feel secure for you to put all your money plus the money you don't have yet in the same basket: one house?! I agree I am a bit excentric and out of the norm sometimes, but please... what is the concept of going to your local store and say "ok, I want to buy 20.000 eggs with my money, but wait... I also want you to give me 380.000 eggs now in advance and I'll pay them later... Yeah... put them all in this same cart. Thanks!!" WTF?? Don't you feel you are buying something you just can't afford? But in our society credit is king so, why not... But at the very least, don't you feel you commit yourself to work 20+ years to pay the eggs you might not really need NOW? Remember how 20 years feel? 20 years working for something you bought 20 years ago... odd decision to me.
OK, but I have the money, I can invest.
How much money you have? Or put it this way: what cut of your money will you spend on that "investment"? 80%? 90%? 100% ? Why?! Why don't you just invest this money in something that actually brings money in turn and rent your house instead? Let's say you have $250k and have enough to buy a little appartment somewhere. I offer you two options. Option 1, put all your money on this appartment and hopefully see its value skyrocket at $500k 20 years from now. Option 2, put that money on an investment that will grow 8% each year on average during 20 years. What do you pick? Oh, let me do the maths for you: $250k placed at 8% average each year during 20 years will leave you with 1,16 Million dollars. So? Still think investing this money while paying for a rent is a poor decision? I know the next question, I see you coming: "But... what investment gives me 8% a year?!" Aaaaaah now you want to know right!?? Business. Stocks. Or anything that actually generates cash each day. Stocks grow by a yearly 13% on average since 1900. ON AVERAGE. That means sometimes it plumets -37%, and some other years +40%... But on average, it's 13%. By the way, life insurances with guaranteed capital give a 3% return as of writing, this is safe and guaranteed, and your $250k placed during 20 years would give you: $451k for sure (not hopefully if your neighborhood takes value...).
"Aaaaah but I didn't tell you: I want to buy a house to rent it so YES, I will generate cash." That's quite better. I like this idea. Now my questions are:
- Do you think you have THE deal of the year and it will be so during 20 years?
- Is it possible that 20 years from now, the location you chose today might lose its value in profit of some other neighbourhood?
- Do you think that your renters will always steadily pay you during 240 months?
- Do you think that maybe life will bump you up and you will need this money FAST?
- Do you think that maybe life will bring you the opportunity of once in a lifetime and you will lose it because... well, all your money now sits in this house?
Hey... give me a break: I just want a house because life is short. Yeah, I got you. Life is short. Where I don't follow is: why do you think you will enjoy more OWNING a house than RENTING the exact same one? Because you can't legally take down a wall? Maybe you can negotiate that with your landlord? or maybe you can just... find another house without walls to take down? I just want to live on an island too, but I just can't now. Sometimes one needs to accept we can't have everything we want just "because" and appreciate what we already have. But maybe this is just me and I am too crazy. Do buy a house if you feel this is what your life needs to spin around to, fair enough. But, for my personal mindset, I think life is indeed too short to commit it to four walls and one ceiling.
A long article today, I'll summarize as follow:
If you hold some big money: please diversify it and consider real-estate as a good way to keep your wealth for the long run.
If you have just enough money to buy a house: please, consider delaying your intentions until you can afford diversifying your assets. Meaning, at least when you can afford 2 houses. Meanwhile, diversify your money in bonds, stocks, commodities, a business...
If you have just enough money, and think about investing in a house and collect rents: please, remember that real-estate is not the best and more secure investment. It might even be a nightmare in worst case scenarios (think renters not paying, new norms to comply with, or renovations).
If you have just enough money, but really want a house because life is short and this is what you want: please, consider buying the house you will stay in for at least 20 years as a BARE MINIMUM. And I beg you to stop saying "it's an investment", it is NOT: you just accept to live beyond your means in exchange of your dream.
If you don't have enough money, but you really want a house because... because you deserve it too: please, I beg you not to fall for the credit path and commit your life for a dead object, and consider creating a business to create value for others until you get enough money. Sign up to receive my next article on how to create your business
Bonus: For people who have just enough money to afford a house, there is one nice hack to take into consideration: buy a house you can live in AND rent at the same time. This is, by far, the best compromise I have came across. You can put all your money into your house, and still receive some cash in return. Obviously it has its cons: you might still be living with noisy neighbors that won't pay the rent... But hey, that's better than just investing all your money and receive nothing in return.
Subscribe to the newsletter
Follow my stories and be notified when new content goes live.
You can unsubscribe with one click.
Your email is never shared to third parties.