Let me save you the suspense. This answer to this question is pretty much down to each individual case. It differs from one person to the next. Nonetheless, I still think it’s legitimate to put on the table some arguments. Personally, I prefer renting.
It’s not “building or increasing immediately your equity”
Some of my friends, after settling on the decision to become a home owner, told me that they wanted to start building equity. However, what exactly does “building equity” mean? In the trading world, equity means stocks. In the accounting world, it’s the difference between total assets and total liabilities. Hence, equity in the personal finance world simply refers to the difference between one’s assets and one’s liabilities.
Let’s say if you have $100k in cash and want to get $300k in mortgage, in addition to $50k from your own money, to buy a $350k house. Excluding all the administrative expenses related to buying a house, the moment you buy that house, your equity doesn’t increase immediately. Your original equity was $100k since that was what you had in assets and no liabilities. After you buy a house with the mortgage loan and half of your cash, the house and the leftover money will push your asset to $400k, but your liabilities will also increase to $300. The notion that your “equity” is built or increased immediately upon the closing of a house is simply false in my opinion.
“It’s a high return investment”
Yes it is, but with caveats. When you invest in stocks, unless you are day-trading which may involve fees and continuous monitoring, there is no other expenses involved. Personally, I spend time on researching which stocks I like and want to buy. Afterwards, it’s a case of “sitting on my ass and letting my return compound”. I don’t spend a single dollar on anything else. To become a home owner; on the other hand, can involve a lot of other expenses such as home improvement, broker fees, house evaluation fees, mortgage payments, maintenance, housing taxes and so on. One of my friends was told by a seller that she would have to pay to repair the street leading to the house in question after closing the deal. It would have added another $20,000 to the equation.
Similar to the fact that noone can tell with certainty whether a stock will go up or down, noone can predict exactly when to sell a house to get the biggest profit. Take this current crisis as an example. The housing market was great before February. After the crisis hit, it is in shambles. It is an opportunity for those who can afford to buy as houses are cheaper, but it’s an absolute disaster for those who were poised to sell as the prices won’t be as good any more. The point is that owning a house comes with a lot of expenses that can make what seems to be theoretically a sound investment no longer sound. Of course, if all works out well, investors can reap out much bigger rewards from a house than from owning stocks. One has to be aware that there will likely be numerous expenses involved and that a big payout is not guaranteed.
An unpredictable event can turn your investment on its head
Ask yourself this question: would you borrow to invest in a stock that you don’t know will increase in prices?
If the answer is no, then put some more thoughts on whether it’s a good idea to borrow money to invest in a house. Institutions have teams working 8-10 hours a day to come up with models that can help the institutions make as much money as possible with their assets. Do you think car dealerships put you on a payment plan with lower downpayment out of the goodness of their hearts? Do you think banks give you a mortgage simply because you are a good and nice person? No, they do it because they believe that they can have a reasonable return on investment. If you default on the payments, your car or house or your other assets can be collaterals. If you think you own a house, try to default on your 29th or 30th year of your mortgage and see who actually owns the house. Covid-19 put many out of their jobs and stripped their ability to pay mortgages. Nobody could foresee this pandemic. How many can actually factor this kind of crisis in their investment plan?
The way I look at the idea of owning a house is that I’d have to borrow money at a significant interest (compounding), endure a lot of expenses in a foreseeable future and still have no desirable outcome guaranteed. It’s an awful lot to ask. That’s why I prefer renting and investing money into stocks which offer a much better degree of liquidity, a much lower level of maintenance and still reasonable odds of return on investment. Of course, when there is an emotional reason to invest in a house, there is no counter argument as it’s purely personal. From purely a logical investment perspective, my choice is rent, for the time being.
Minh Quang Duong 