[So NOW They Tell Me!] Renting, Not Owning Is The Key To The American Dream

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New American Dream Is Renting to Get Rich

By Lou Carlozo


  • Rich Arzaga owns a luxury home in San Ramon, California, but he's not betting on it as an investment.
The founder and CEO of Cornerstone Wealth Management, who bought the 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 improving it, considers the abode a wonderful place for his family. But ask him to rate his home -- or any home, for that matter -- as a financial investment, and Arzaga balks.

"It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.

Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."

That's right: 100 percent.

The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.

"I don't have the emotions a lot of people do surrounding real estate," Arzaga says. "I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."

Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners "not to meet their financial goals. They were going to fail."

[Also see: America's Top Turnaround Towns]

Some real estate experts thought there was some truth to Arzaga's argument, albeit with several conditions.

"To state that owning a home is or isn't a good investment is too simplistic," says Jeffrey Rogers, president and COO of Integra Realty Resources. "It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn't be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead."

"Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return," says Jed Kolko, chief economist at Trulia.com,

a real estate search and research website. "But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."

Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga's. "Home ownership is not so much a creator of wealth as a store of wealth," he says. "The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn't rebate a dime."

The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.

"You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children," McBride says. "There's no sense in buying a home if it's going to deplete your emergency or retirement savings."

McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is."

Then there's the emergency fund, a must for when a home requires unexpected repair work.

"As far as emergency savings is concerned, six months of a cushion is adequate," McBride says. "But only 24 percent of people have that kind of cushion, and about 65 percent own homes."

So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn't pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid.

So why not sell? For Arzaga, it's a lifestyle choice, and one that he doesn't regret, since his big money-making investments are elsewhere.
 

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my wife and i started watching that House Hunters show...first "reality tv" I've ever invested time in. Insane in post-bubble America people are still paying $1.3M for a 2 BR, 2 BA a few blocks from sunset strip. How do they possibly think that is "market value"...because some fn imbecilic tacky real estate agent tells them it is? Nobody learns...or, more precisely, people forget lessons very quickly
 

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RT, House Hunters (and the variations that feature people looking for Rental residences) are about the only commercial TV I watch (along with SheBar)

Really shows us how prices in Florida remain too high compared to other decent living places in USA - notably Texas.

The International version frequently visits Costa Rica. Saw one the other day where dude had a half million dollar budget and they showed him three pretty awesome places - two with direct beach access to the Pacific
 

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I think there is some truth to this although owning my own stead is something i wanted to always do so here i am, stuck with a 20% decline according to zillow. However, a year after i bought it (2009) it was up 15% so i will assume its probably somewhere in the middle, or 20% less. Either way while renting is probably easier i still dont feel right living in some other dudes digs, might as well travel out to Nevada and join the Henderson branch of NAMBLA who are all bunked in on Dave sprawling spread (pardon the pun). A Campus of men and boys, living in harmony.
 

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I had seen the article Scott and think the guys a putz with an agenda. The obvious answer is "it depends". I also noticed, he didn't fully touch upon the mortgage interest deduction and all the other deductions that enabled you to take. To make a blanket statement like that is just stupid without taking into account rental rates in your area, the interest rate you paid on your loan, and the housing market you live in. Of course, I'm betting he's completely behind Obama eliminating the mortgage interest deduction and keeping housing depressed for years to come. What would you expect. Mr. Arzaga is just another wide eyed Liberal from California.
 

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I'm sorry, I couldn't disagree more. Based on simple observation and a little deductive reasoning. I know how buying homes have helped people throughout generations.

First and foremost, you build equity save for the minority of people who bought at peaks "and" sold early. Second, people use equity to make other investments or lifestyle improvements. Third, you fix your housing costs and eventually shelter yourself and your family for the bare minimum costs. Fourth, you leave it to your beneficiaries and fifth, the government subsidizes your purchase.

Now the author used the expression "dream home", that implies excessive and buying an excessive house is not a smart thing to do.
 

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Glad to hear you chime in on this one Willie. And Scott, to quote your original text and one of Willie's favorite sayings....

[So NOW They Tell Me!] Renting, Not Owning Is The Key To The American Dream....There is no "They"
 

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I would also comment that this guy picked the perfect time to make a comment like this (since the housing market is depressed). Where was his comment in the the 15 years prior to 2007? Yep, nowhere to be found (that's because he would have looked like an idiot)
 

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Well it is from Motley Fool so the guy is sort of a tout. I always thought ownership was better myself. My own mortgage mess has already been detailed in here. Suffice it to say I threw away a lot of money. But that was my decision and I don't blame it on predatory lending or some BS like that. What bothers me the most is the irony that paying on time every month disqualifies me from the easy refi deals others are now getting......Scott 'Stuck at 6.25' L
 

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Well it is from Motley Fool so the guy is sort of a tout. I always thought ownership was better myself. My own mortgage mess has already been detailed in here. Suffice it to say I threw away a lot of money. But that was my decision and I don't blame it on predatory lending or some BS like that. What bothers me the most is the irony that paying on time every month disqualifies me from the easy refi deals others are now getting......Scott 'Stuck at 6.25' L

I must not have been around when you spoke of your mess. 6.25%....that sucks! And you're right, what this administration has done is reprehensible in regards to the mortgage situation and has been very ineffective.
 

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Well it is from Motley Fool so the guy is sort of a tout. I always thought ownership was better myself. My own mortgage mess has already been detailed in here. Suffice it to say I threw away a lot of money. But that was my decision and I don't blame it on predatory lending or some BS like that. What bothers me the most is the irony that paying on time every month disqualifies me from the easy refi deals others are now getting......Scott 'Stuck at 6.25' L

5.45% for me. Now they are offering 4%. Maybe in three years from now they will just give houses away? Oh wait, just dont pay your bills each month and they will now!?
 

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Well it is from Motley Fool so the guy is sort of a tout. I always thought ownership was better myself. My own mortgage mess has already been detailed in here. Suffice it to say I threw away a lot of money. But that was my decision and I don't blame it on predatory lending or some BS like that. What bothers me the most is the irony that paying on time every month disqualifies me from the easy refi deals others are now getting......Scott 'Stuck at 6.25' L

I thought your mom is gonna co-sign with you for the refi? No?

Fixed rate on 10yrs and & 15yrs are pretty good right now. You can't afford to wait doh....
 

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Snoop they can't as they have borrowed too much against their own equity.

It gets funnier. I'm getting letters from the same bank telling me I'm pre-qualified for a home equity line of credit at 2.34% for 1 year and 3.99 every year after that. So of course the light bulb goes off -- Borrow 150K, pay off the mortgage, and then pay off the loan at this awesome rate. Bank said no, for the same reasons they refure to renegotiate the refi. Considering heading out back and digging up one of the shoeboxes in the backyard :)
 

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I'm at 4.5% on a 15 year mortgage myself. Unfortunately, I doubt I would qualify for a re-fi right now either, but would love to drop a point off our interest. I will have to share a story with you and the others when I get a little more time on an investment property my wife and I own.
 

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I'm looking to buy an investment property in Dallas, TX area, maybe approx $120K - $140K house, renovate it a little bit then put it out there for rent. Interest rates are so low and housing price is at very depressed level now, can't see it goes down any further.
 

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I'm looking to buy an investment property in Dallas, TX area, maybe approx $120K - $140K house, renovate it a little bit then put it out there for rent. Interest rates are so low and housing price is at very depressed level now, can't see it goes down any further.

Run you numbers on that one Snoop. I stayed away from the area because of their property taxes.
 

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