Posted in Money on September 19th, 2016
Some of this article originally appeared on our old blog and we’ve updated a few items to make it more relevant with the time.
If there’s one thing that bankers and real estate agents agree on it’s that real estate agents cannot be trusted.
Some people fantasize about owning their own home in a rich suburban area surrounded by white picket fences with several bathrooms, a two car garage, a large swimming pool, and – of course – a massive theatre room. They hand over twice the cost of the house in interest, property taxes, insurance, and all sorts of maintenance over the course of the house’s life, falling more and more in love with their home and talking about it like it’s an actual person. All of this behavior and rationalizing is their own choice, but when asked about it, they refuse to admit there’s any other way than owning a home – “renting is throwing money away.”
Home ownership offers financial benefits for some people and no superior alternative exists for these people’s situations, which won’t be discussed in depth for this article as people belonging to this situation know exactly who they are (they never say “renting is throwing away money” either because they know how irrational owning a home is in many cases). A quick example for the benefit of new readers: A doctor who plans to live in his area for life should not consider renting for one second because the cost of renting over the course of his life will probably exceed the cost of owning a home. Notice that I wrote doctor and not computer engineer, welder, or coal miner, all of which are bubble jobs which will soon be sent to the unemployment line. For these people, renting offers the key to build wealth and we’ll show why this is the best route that most of you should choose. Before we start, do not ever try to reason with the people we described in paragraph one – they will never grasp your logic because a human pyschological factor is that we value what we work for, even if it pays us nothing or it costs us everything. Humans cannot see past this since it works against our nature.
Renting offers mobility. One of the new paths to significant wealth in this century is mobility. When the United States entered 2008-2009 recession, the coastal areas in the country saw unemployment rates quickly rise to the double digits. However, the Midwest did not see this rise. In some places in the Midwest, the unemployment rate fell. A person who can drop everything where he lives and move to where jobs exist has a strong advantage over his competition. Case in point: one of my close friends purchased Las Vegas Sands for a $1 a share during the 2008-2009 recession because he worked in an area where his job was secure and his estimated $20,000 risk at the time, even in a loss, wouldn’t have cost him everything (he knew that he could keep his job). Las Vegas Sands is now $53 a share and pays a $0.65 dividend quarterly (20,000 shares would equal $13,000 every three months – the exact same value as 2015 median household income). Compare that to another friend of mine who lived in California without a job, but wanted to stay in California even though several open positions existed for his profession in Nebraska: he went three years without a job, collected some unemployment, but as of 2015 is still paying off debt and needs a second job.
Renting provides you with the opportunity to drop everything and move because many rental agreements include an unemployment clause, or if they don’t, these can be negotiated. If you find an agreement without an unemployment clause, do not rent at that location unless they add it – this is non-negotiable (you’ll thank us later). An unemployment clause simply means that if you lose your job, then you pay the final month and are free to move. Again, never rent without this clause included in the agreement. You will not need this if you agree to a month-to-month contract.
Renting means no property taxes. The concept of income taxes demonstrates how stupid every politician is since the notion of taxing income discourages work (or potential work, like innovation). Property taxes in some states (often with sales taxes) offer an alternative to income taxes, encouraging people to work extra hours (or jobs), which benefit all of us. Property taxes, unlike income taxes, discourage income inequality, as the rich are more likely to own than rent, meaning the rich end up paying more taxes because of their property (or properties). They also encourage people, who are building wealth, to rent over owning and this makes it easier for people from poorer backgrounds to break out of their poor backgrounds. Remember, that unlike mainstream media, the readers of this blog know that 80% of millionaires have never inherited any money and are self-made (according to Dr. Thomas Stanley). How do property taxes help someone build wealth? Consider that a 4% income tax on median household income, which is $52,000 as of 2015, equates to $2080 in taxes on the income. Compare that to a property tax of 1.6% on the median price of a home, which is $190,000. The individual in that case would pay $3040. The result is that the renter saves an extra $3000 a year and doesn’t have to worry about rising property tax costs (especially when the home’s value is assessed at a higher cost). The result is that an individual from a poorer background, who is trying to build wealth, rents until he either (1) enters a period of financial stability or (2) creates a job (or work) that will always be needed in his area.
I’ll also caution readers here that some countries work with real estate developers to intentionally push the price of real estate up for tax revenues. I’ve spoken with several real estate developers over the course of the last ten years to hear this exact plot: they work hand-in-hand with governments to make sure real estate prices rise, so that tax revenues also rise. What this means is that if you purchase a low-cost home and more people mimic what you’re doing, some governments will find ways to increase the value of your home through tax-assessed adjustments, making you pay even more property taxes. Home-owners tend to love the feeling of being richer when their home price increases, but forget that a higher home price means more property taxes.
Renting doesn’t have maintenance costs. Most homeowners do not track their home maintenance costs, as these include costs higher than simply paying for repairs. One of my friends calculates this more accurately than most by measuring both the (1) time he spends maintaining his home, and (2) the money he spends on maintenance. An example: if you spend two hours repairing a plumbing issue, which cost $120, you lose the two hours plus the $120. If you make $75 per hour, you actually lost the $150 + $120, a total of $270. Most people don’t think this way (which is why they’re average), but when you do, you begin to realize how much money you lose on home repairs. Ten hours of home repairs a month for a person who makes $100 per hour costs $1000 a month – and that doesn’t include the items needed for repairs! You can always pay someone else to do it, but that will cost too – plus, you have to work with their schedule, and depending on the issue, that may create another problem.
Unless the renter breaks something, most rental agreements require the landlord to repair and pay for the issue. Never sign a rental agreement that works differently, as this is part of the cost of ownership that the landlord must pay.
Renting discourages consumption. We’ve all visited those homes of people who live on their own. They have a four bedroom house and yet it is filled with tons of stuff. The human brain generally sees empty space as “this must be filled with something” and the more empty space someone sees, the more likely they are to fill it with something. Anything. We can all think of these stories of that person who talks about their plastic cup castle collection that fills their living room because what else would they do with all that space? Others post pictures of New York, even though they’ve never been to New York, or some other far off location that they have no intention of visiting since they have far too many empty walls. The cost of all of these items over time adds up: not only do people lose the time decorating, that time and money often could be spent doing other more productive activities.
Renting has 0 interest costs. When you rent, you pay for what you exactly what you need (unless, you decide to rent above what you need, in which case, you should just waste money buying a home). By doing this, you pay 0 interest. When we look at the cost of a home for a 15 year mortgage, most people end up paying about 50% in addition to the value of initial purchase of the home in interest; meaning, a purchase of a $200,000 home, results in $200,000 of principal plus $100,000 in interest (this varies by rate). This is one of my favorite examples when talking with foreigners about how mathematically stupid some Americans are: any deduction of interest on taxes is still a financial loss regarding the interest – saying, “Well, you get some of the interest you paid back in taxes” is quite possibly the most ignorant thing someone could mathematically say regarding interest. You lost money; the end. Renting has no interest payments.
If someone rents above what they need – and this is as irrational as buying a home in most cases – they are paying interest because the person is losing money on something they don’t need. Even though this isn’t what we call interest, it wastes money like interest wastes money.
In December of this year, relative the course’s success, we’ll be covering two techniques for completely covering your rental costs in our course retire early with cryptocurrencies. These techniques will help you cover your rental costs so that you can spend your income on other things, while being hedged in the case of a housing price increase.