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Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, welcome to Investing for Beginners podcast. This is episode 114 tonight, Andrew, and I are going to discuss a listener question. We got this great question from Jack, and I’m going to take a moment to read the question and then Andrew, and I will do our little back and forth and have some discussion about it. So starting we have, Hello Andrew. I’m thinking about buying a home monthly mortgage costs are currently cheaper than renting in my area, and my family would be able to pay the down payment for me in cash. Do you have any insight into the financial advantages and disadvantages of buying a home? In this case, I have read the buying a home is not a great investment unless you are renting it out due to the hidden costs of home buying. And the fact that a house is a liability until you pay it off. Do you think I should put the money I would use on buying a house to instead invest in a stock market? I’d appreciate any insight you have into this topic. So Andrew, what are your thoughts?

Andrew:                              01:30                     You want to open this candle warm?

Dave:                                    01:32                     So yeah, apparently, yeah, let’s crack it open.

Andrew:                              01:35                     Maybe let’s, yeah, let’s talk about the biggest financial decision that most middle-class Americans make and how that relates to their finances. It’s a very obviously emotionally charged topic. , and there’s a lot of different things and kind of like we mentioned in the personal finance series, it’s very personal. So try to listen through the whole thing without making the concluding decision on it for your own life. , I’m going to try to just kind of think about all of the things I know about it and maybe it will help shine some light for people who are considering this. Maybe it helps if I talk about maybe where I’m coming from with the context of it, I would consider myself the furthest thing from an expert on mortgages and homes that you can find.

Andrew:                              02:29                     I mean, I still don’t know, like I know there’s like multiple agents when it comes to closing and then all this blah blah blah. And I like, that’s all just like [inaudible] I have no idea. I was talking to like a home stager the other day, and she was trying to explain to me how she works with a type of real estate agent. I was just like, Huh. So I don’t know about that aspect. What I do know is the financial aspect of it. And I also know that it’s something that a, I’ve been considering him for quite a while, like in the like half a decade. , B, it’s something I’ve, I’ve run a ton of numbers and spreadsheets I should come to. Nobody’s surprise about the different kinds of ramifications behind it. , I have, I’ve researched some of the historical data too. And so the, there’s a, I think I can help somewhat.

Andrew:                              03:22                     The first thing I guess that comes to mind is you want to think, so for me the, these are some of the benefits I see for buying a home in general because my kind of weird take on it being somebody who’s 29 in that millennial category that I shudder just with that word millennial. But I, I’m in the millennial category, and you know, the typical kind of American dream picture story was always to buy a home, own it and live in it. And retire in it. , and as all the news outlets and internet blogs and websites will love to tell you I’m homeownership is down among millennials. It’s been trending in the opposite direction, and they want to blame either Avocados or student loan debt or Airbnb, I don’t know, pick, pick, pick your poison. Right? So there’s, it’s an evolving and moving landscape.

Andrew:                              04:24                     And I think in general the attitudes around buying a home are changing, at least the public viewpoints on it compared to let’s say like 2015 to 2019. I think people are maybe more open to this crazy alternative where somebody doesn’t want to buy a home. So like in my case, love my parents where they’ve been pressuring me to buy a home for quite a while. I do admit I’m in an area, in Raleigh, in the, in the south where home prices are very, very good and it probably would be a great investment for me. That being said, you have to kind of weigh the pros and the cons when it comes to, there’s a lot of hidden costs and hidden time sinks that come with buying a home. So you want to budget home maintenance, and I don’t know what that would mean for anybody, what I’ve seen online or our figures such as, uh, what is it like somewhere between one to 5% of the purchase price per year is what you should budget for maintenance.

Andrew:                              05:36                     So, you know, you might be living in the house, and the roof needs work, or the HVAC goes out, you know, your toilet or your sink gets clogged. These are all things that may be in the past. If you’re renting with an apartment complex, they will take care of that. Now you have to take care of that. And so I think a lot of people, particularly first time home buyers, obviously I’m going to be a first time home buyer. That’s something to consider. Uh, secondly, you know, there’s going to be a lot of maintenance, particularly if you have a nice big backyard here in Raleigh. We have lots of trees. And so I have a friend who’s around my age, and he recently bought a house. And then the thing about having trees everywhere is you have to trim them down. Some of them kind of die and they might, again, I’m not an expert, I think.

Andrew:                              06:26                     I think if you have a sick tree, it gets the other trees sick and then they can collapse and ruin your home. Uh, you have to trim them. You have to cut them down. And you have to get a specialist to cut them in the right way, so it doesn’t crash into your neighbor’s home. , you have to clean the gathers because a lot of trees will make a lot of the leaves. Uh, lots of different things. And then if like my friend’s family in southern California, it’s an unwritten rule. If you have a bad looking lawn that you’re pretty much your life’s out of control. So you need to make sure you have that maintained. And, and for a lot of people that come from my area where I grew up, that means hiring maintenance people, groundskeeping people because, uh, generally we’re so busy with our lives anyway, so a lot of, a lot of times sinks.

Andrew:                              07:15                     So for me, you know, the trade-off between having a home and renting, renting is more expensive. It’s not the best financial decision. But for me, uh, with how busy my schedule is, how entrepreneurial my drive is, uh, that’s why I rent. However, a huge benefit of buying a home. I think this should be obvious too, is when you retire, uh, if you have a home that’s paid off, then that’s one huge expense that you do not have to pay. And so now when we start to combine that with the things we talk about with the stock market and investing, now you can live on a lot lower of a dividend income, let’s say because you don’t have a $2,000 rent payment or mortgage payment that you’re paying for. You pay that off. So for me, longterm, I’m looking at, okay, cool, if I can pay off home by the time I’m 65, well then I can kind of get the best of both worlds.

Andrew:                              08:13                     And so when I’m, when the time is right, then maybe financially that that will help. There’s so many different other financial advantages and disadvantages when it comes to the down payment. The even we’re not talking about yet, like the potential returns for mortgages versus, you know, real estate versus the stock market. I don’t want to get there. Yeah, I don’t want to get too far ahead. So that’s, that’s the context of my kind of backstory on why personally I don’t have a home, but I plan to have a home and a lot of it eventually has to do more with lifestyle than it does with financial, with finances.

Dave:                                    08:56                     But there’s also that huge factor of let’s still remember retirement and the fact that having to pay off home by the time you retire is going to be huge. So that’s kind of where my first thoughts are. I would agree with all that. Those are all fantastic points. I like the point about the lifestyle part of it because that kind of hits home to me a somebody that has both owned homes and we lived in apartments and gone through the buying of the home and the selling of the home and all the ins and outs and funds of that. And then the, I guess relative ease of renting an apartment and then moving in. You know, I have to admit as somebody who lives in, in the Midwest and has to endure the winters, and I do say in endure, uh, the fact that you don’t have to shovel your driveway to go to work every day is a blessing, uh, beyond all measure.

Dave:                                    09:52                     And you know, the that’s one of the things that a lot of people don’t, it’s not discussed as much is the aspect of the upkeep slash maintenance of a home when you buy it. And Jack is talking a little bit about the potential liabilities, and that may not be up necessarily in money or large chunks of money, but it is going to be, as Andrew said a time sink. And those are things that will take up a large portion of your time. I was, uh, I was having nightmares slash flashbacks of uh, Andrew talking about a home with lots of trees in the backyard because the first thing is two things pop into my mind though. The shade would be cool in the summer. And then the nightmare part of it would be the leaves that you would have to pick up in the fall.

Dave:                                    10:44                     That is a very long, tedious process. Now of course you can pay somebody to do that, but then that starts to creep into this as an investment part of it when I guess, so questions that I would ask myself as if I was in Jack’s shoes is he’s mentioning that the mortgage costs are currently cheaper than renting in his area. You know, I know none of us to have a crystal ball, and we could see into the future. I certainly don’t. And I’ll give you an example of what I’m going to illustrate here. If something that happened to me personally. So my wife and I, when we bought a home in Minnesota, when we live there, uh, the mortgage costs were cheaper than renting a because we were renting a home before we moved into another home and it was cheaper. But what happened was, as the city that we lived in, uh, they decided in their wise decision making to raise our taxes.

Dave:                                    11:43                     So at first it was just an additional $100 a month on our mortgage. Then it became $300, and then in two years, it went from our mortgage payment is what it was to be $400 more in a little less than two years. And with more conversation about, I’m raising it higher. So it quickly became way more expensive than we were anticipating and that was a very unpleasant surprise. Then you have to tack in all the other things that you have to do. The yard that we had for the home, which was nice, was also bigger and it was far too big for my old bones to have a push mower. So I had to buy a driving more, which are substantially more expensive than a push or I could do a service, which is also very expensive. So you know, those are all those things that I, we didn’t talk through and have a plan for.

Dave:                                    12:39                     What were we going to do when we got involved in that? Excuse me. And I also want to illustrate something that Jack said that he said it’s not a great investment and that is very much a truth. A, there’s a lot of fallacies out there about different things, but buying a home is not an investment, and it is. I’ve talked to bankers and mortgage brokers at Wells Fargo, and I work there, and they all said the same thing. It is not an investment. Uh, if you’re looking at it as an investment, then you need to do other things with it, like renting it out or something along with those natures. , it is not an investment. And a banker said to me one time, which I thought was kind of, uh, an astute judgment. By and large, we’re going to be paying for somewhere to live for the rest of our lives.

Dave:                                    13:27                     And what is more important than necessarily owning a home is finding something that’s going to fit your lifestyle. Andrew talked a lot about a lifestyle and how that fits in with thing. And that is crucial because you’re going to be spending, you know, you spend 40 to 50 hours a week at work depending on what it is you do. And you spend the rest of that time at your home for the most part, unless you’re like Andrew and you’re a party animal, and you’re out all the time. , he’s not a party animal, but, if, uh, so you’re going to spend a lot of time in your home, so it has to be somewhere, you’re comfortable with you like you want to be. And it, it, it, I guess the crucial thing is to think about what it is you want for your life beyond just the money part of it.

Dave:                                    14:14                     You know, where do you want to live? If you’re okay living in an apartment and it fits all the different parts of your life that you want, then that’s great. And if you want to be in a home because that fits your life and you know, you love being outdoors; you love doing all the outdoor stuff, you, you ha, you know, you’re way more handy than I am. I’m so not handy. And so having that ability and those skills and wanting to do all that stuff, then a house is going to be perfect for you. It’d be, you’d be miserable living in an apartment if that’s the case. Uh, so those are things that I guess kind of spring to mind we are doing, we are reading over this question and Andrew, and I were talking about earlier, that was one of the things that I thought stuck out to me.

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Dave:                                    15:10                     Do you have any other thoughts?

Andrew:                              15:12                     Yeah, no, I love that. , the idea that a house is not an investment I think is

[inaudible]

to the guy’s point. They that you were talking about. Yeah, you do have to pay, what is it, death and taxes, the only to certain things in life. So exactly. You even you pay off the home, you still have to pay those property taxes as you talked about in your example too. So like you say, you’re always paying to live somewhere. The one thing I, and I don’t want to like attack real estate investors or anything like that, but I think the, I, there’s this idea to where I hear the lot, personal finance, podcasts, the personal finance world. This idea that well, I’m going to buy or I’m going to get a mortgage and then I’m going to use renters to pay the mortgage.

Andrew:                              16:03                     But we, what would you need to understand is for one and Ramit Sethi, he’s a personal finance expert. He, I saw a tweet months ago when he said this, but for one rent and Margaret’s prices don’t always go up. And he had like a perfect example where, I think it was in New York or something, but alike a real-time example of, of how rents didn’t always go out. Margeson didn’t always go up. So you lock in the mortgage. If the rents in your area go down, well, what are you going to do? Either kick out your renters, or you’re, you’re just going to have like a negative cashflow. And that’s in an ideal state, a case. What about the nonideal case where let’s say we have a recession and now people are flocking from whatever your house was renting that to something a little bit less, you know, maybe like lower-income type apartments.

Andrew:                              16:57                     And now either you’re, you’re struggling to find renters, or you’re having a lower what your prices were and now your, your cashflow negative or used to be cashflow positive. Or you know, what I think might even be more, more of, more of a potential issue is as you can’t even fill it. And so now you have a front the hole costs yourself and now all of a sudden you’re not, it’s not like an investment for you. Not to mention. , there’s a reason why man, whether you call them, the people who like Dave, like the people who do maintenance on the home and they have them like, like attached to real estate investors. That name is, it’s slipping my mind. A handyman likes management companies who, yeah, they, they say like, oh, a turnkey real estate investment. Is it like management companies? Yeah, I think so.

Andrew:                              17:53                     People have the like deal with the renters, deal with noise complaints, deal with the maintenance of a house. Like either, that’s going to be you, or you’re going to have to hire that out, and you know, it’s not just this free thing. So I think Dave Ramsey says all the time, it’s like you’re, you’re, you’re giving yourself a full-time job when you become that. And today’s point, if you like to do that kind of stuff, then great. But realize that that’s another time liability versus the stock market, which we love to teach that you’re not giving yourself a job. You’re researching the stocks and then occasionally updating yourself on what’s going on with these stocks, but you’re not putting in, you know, 10 2030 hours a week maintaining properties or anything like that. So the idea, I think that’s an older idea that has, I think through the years, especially through the housing bubble, it’s, it’s an idea that’s changed over time.

Andrew:                              18:50                     That real estate’s just like a no-risk investment. There’s a lot of risks and a lot of ups and downs and, and a lot of liabilities both from expenses and from time. So thinking, yeah, it’s, it’s a great investment if, if you’re renting it out can also be, it could not be. So I think to be careful with that. The other thing that pops to mind that I can give some contacts on being the type of person I am with, you know, obviously wanting to see how the stock market returned over very many decades. Lots of studies, lots of data, lots of research saying that around 10% per year is what the stock market returns. You take out the inflation; it’s a 7% normally nominal, nominal. Uh, so after inflation it’s about 7%, 10% for the dollar amount. When it comes to real estate, it was around 5% over a very, very long-time period.

Andrew:                              19:50                     But what was interesting about that was depending on the area, the Oh the values of real estate can fluctuate a lot more. So I think that’s something to keep in mind. Yes, I think it can be a good investment. Yes. I think buying a home, you know, and having it as an as a substantial asset for the rest of your life, that’s a possibility. But I think some of the narratives behind the in the past has always been, well, it’s like a guaranteed investment, whereas you really need to be thoughtful and try to plan for all of the potential liabilities that come with it and understand that it’s not anymore guaranteed than putting money into the stock market is. And it’s a potentially a lot more hands-on than the stock market would be.

Dave:                                    20:40                     All right folks, we’ll, that is going to wrap up our conversation for tonight. I hope you enjoyed our conversation about buying or not buying a home and whether it can be an investment or not. So those are some very deep things to think about. And this, as Andrew said, it’s going to be the word just for most of us asset wherever ever going to own possibly. So trying to think through all the ramifications before you do it is very, very critical. So without any further ado, I’m going to go ahead and sign this off. You guys have a great week. Go out there and invest with a margin of safety and we’ll talk to y’all next week.

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