Many people have said to me in the past few months, “I’m going to buy a home.” Or, “What do you think of the idea of me buying a home?” Everyone thinks: Well the housing crisis is now over so I should buy a home. They think: It’s probably a good investment. They think: Time to put down “roots”.
I’ve owned a home. A couple of times. I bought a home once after I sold a business. I then lost that home. I then went almost completely insane trying to sell it. Two things: If you are about to do a startup or if you are in the middle of startup-phase then you definitely can’t afford to waste the time or money to buy a house for reasons I explain below. Second, when you sell your startup — everyone wants to buy a house with the proceeds. Don’t. It’s just part of the American mythology. You know the myth: the white picket fence, the yard, the pool, the walls that you can paint, the keeping up with the Jones family. Just don’t. You’ll go broke. At least, if you are as stupid as me. I might be dumber than most though.
The other story I have of owning a home is still too personal. It’s filled with about as much pain as I can fit onto a page. Oh, I have a third one also from when I was growing up. But I don’t want to upset anyone in my family so I’ll leave it out. Oh, I have a fourth story that I just forgot about until this very second. But enough about me. Let’s get right to it.
There are many reasons to not buy a home
A) Cash Gone. You have to write a big fat check for a down payment. “But its an investment,” you might say to me. Historically this isn’t true. According to Robert Shiller from Yale, in Irrational Exuberance, 2nd edition, inflation-adjusted housing returned 0.4% from 1890 – 2004. And that’s just housing prices. It forgets all the other stuff I’m going to mention below. Suffice to say, when you write that check, you’re never going to see that money again. Because even when you sell the house later you’re just going to take that money and put it into another down payment. So if you buy a $400,000 home, just say goodbye to $100,000 that you worked hard for. You can put a little sign on the front lawn: “$100,000 R.I.P.”
Much better for an entrepreneur is to invest in yourself. Take 1/20th of the down payment amount. Start a business. Your investment might go to zero (which it might also do with a house) but it might also go up 10,000%. Eventually, as an entrepreneur, if you are persistent enough, you will get one of those 10,000% returns. And you will be able to be persistent because you didn’t waste all the money and time that a house would’ve cost you.
B) Closing costs. I forget what they were the last two times I bought a house. But it was about another 2-3% out the window. Lawyers, title insurance, moving costs, antidepressant medicine, therapy. It adds up. Two- to three-percent. Do you like flushing your money down the toilet? But, people say: isn’t that what you are doing with rent money? Absolutely not. See below.
C) Maintenance. No matter what, you’re going to fix things. Lots of things. In the lifespan of your house, everything is going to break. Thrice. Get down on your hands and knees and fix it! And then open up your checkbook again. Spend some more money. I rent. My dishwasher doesn’t work. I call the landlord and he fixes it. Or I buy a new one and deduct it from my rent. And some guy from Sears comes and installs it. I do nothing. The Sears damage repair and my landlord work for me.
When you are an entrepreneur, two things: A) you need every last dime for your business. Not for your dishwasher. And B) you need every last second for your business. Not for your dishwasher.
D) Taxes. There’s this myth that you can deduct mortgage payment interest from your taxes. Whatever. That’s a microscopic dot on your tax returns. And guess what, that whole thing about how rent will go up with inflation? Well your property taxes will go up even faster than inflation. So you lose.
E) You’re trapped. Let’s spell out very clearly why the myth of home ownership became religion in the United States. It’s because corporations didn’t want their employees to have many job choices. So they encouraged them to own homes. So they can’t move away and get new jobs. Job salaries is a function of supply and demand. If you can’t move, then your supply of jobs is low. You can’t argue the reverse, since new adults are always competing with you. That’s one reason for the myth. The other reason is that we have a 15 trillion dollar mortgage industry. That’s a lot of money vested on you believing that owning a home is “the right thing to do”.
And, the benefits of being an entrepreneur is that all choices are open to you. Mobility is not just an option, it’s often a necessity. You aren’t tied down to one factory. The world is your opportunity.
F) Ugly. Saying “my house is an investment” forgets the fact that a house has all the qualities of the ugliest type of investment:
1. Illiquidity. You can’t cash out whenever you want.
2. High leverage. You have to borrow a lot of money in most cases.
3. No diversification. For most people, a house is by far the largest part of their portfolio and greatly exceeds the 10% of net worth that any other investment should be.
Investing in yourself is also illiquid. But it involves less money, and allows you more choice. So do that instead.
Personal reasons to not own a house
A) Trapped, part 2. Some people like to have roots. But I like things to change every once in a while. Starting March, 2009 I was renting an apartment directly across the street from the New York Stock Exchange. It was fun. I’d look out the window and see Wall Street. How exciting! Before that I lived in The Chelsea Hotel with Chubb Rock. Last year we decided to relax and move a little north. Now I look out the window and see the Hudson River. And it’s quiet and I can walk along the river in the morning with no noise. It took us two weeks to pick a place and move. No hassles. I like to live a hassle-free life.
I’m constantly involved in other activities that I care about and love. What do I want the hassle of owning a home for? What if, god forbid, I want to focus on my next start-up?
B) Walls. You can’t change the walls when you rent. A lot of people seem to want to tear down walls. Or paint them. Sometimes when you rent you can’t do these things. Well, make sure you have a landlord that lets you tear down walls. There must be some ancient evolutionary tic that makes us want to tear down walls or put nails in them or paint them. I don’t get it. I like the walls to stay right where they are.
C) Rent. People will argue that the price of the mortgage, maintenance taxes, etc is all baked into the price of rent. Sometimes this is true. But usually not. And often maintenance and taxes will go up faster than your rent.
D) Psychology. Look at your personal reasons for wanting to own. Do you feel like you can’t accomplish something in life until you own a house? Do you feel like its part of getting married and “Settling down”, i.e. creating a nest for your future children? For you, is it a part of becoming an adult. Is this what your parents taught you? Examine the real reasons you want to own and make sure they are coming from a good spot in your heart.
E) Your time. Do you really want to spend all that time working on your house? Is this where your time is best spent towards creating a happy and fulfilled life for yourself?
F) Choices. I feel when I rent I always have the choice to leave. To live wherever in the world I want whenever I want. Adventure becomes a possibility even if I never take advantage of it.
G) Stress. For me (not for everyone) owning a home equals stress. I saw what my parents went through at their worst moments owning a home. I saw what I and others went through in the Internet bust when I first owned a home. I saw what people went through in 2008. People were killing themselves. I don’t like that sort of stress. This is how I deal with stress.
H) Cash is king. I like cash in the bank. I like having access to it. I don’t like it all tied up in one illiquid investment. I want to fill a bathtub with all the dollar bills I would’ve used as a down payment on a house. I want to bathe in that bathtub. I’m going to do that later today in fact.
By the way, this is going to sound like a contradiction: but I think housing is a great investment right now. I think housing prices have gone down far enough and I can list the reasons why housing as an abstract investment concept is going to go higher from here. Suffice to say there are many stocks/REITs you can buy, with leverage if you want to take advantage of the rise in housing. But those are liquid investments. You can get your money back.
There’s also probably many companies you can build where you will get 10,000% returns where you can take advantage of the rise in housing that is about to occur.
But I’m never going to buy a home again. And sit there in the middle of the night thinking, “Why the hell did I do this to myself again?”