Before you send me a fiery DM because you already bought a home and this title is sending you to the moon with rage, hear me out: There is nothing wrong with home ownership. I have nothing against it. In fact, I think there are a lot of great reasons to buy a home.

“An investment” is not necessarily one of them.

In my work with personal finance clients in the last few years, there were a handful of times I heard this from a prospective client: “I have [insert ridiculous figure here] in student loan debt and about $2,000 saved. I make $45,000 per year. I really want to buy a house next year and I have a lender who will let me put 3% down on something that costs $250,000. How do I save for that?”

* records screech, cars crash, and alarm bells ring *

“You don’t! Please don’t do that. Don’t do that.” I’d plead.

Situations like these (and the society that makes us think we need to buy homes to be successful) are precisely the reason why I felt I needed to write this post.

There are so many angles with which to approach this topic that, frankly, I’m not quite sure where to start – so I’ll start with the abstract.

Money is all about trade-offs. The trade-offs you make when you’re young (and have the longest timeline ahead of you) have the largest ability to impact the trajectory you’re on for the rest of your life. It’s big stuff, people.

Put simply, the largest reason I oppose home ownership for young people who spend their entire life savings on a down payment to get locked into a mortgage for the next 30 years is that they don’t really know what they’re giving up in order to do so (the true cost of doing so).

So often, we treat a home like it’s an investment – and in some ways, it might be! It could be an investment in your family. It could be an investment for your children.

But my friends, please don’t think about it like a financial investment – because there’s no guarantee you’re going to make money on the decision.

If you read this post, understand the math, look at all your options, and still decide that you want to buy a home, then do so knowing that you have examined all aspects of your decision.

My intent, more than anything, is to force all of us (me included) to think critically about these huge decisions – let’s unhook from the traditional script and really examine, critically, if these choices make sense for us. I don’t want to a check a box on my American Dream pamphlet just because the VA loan made home ownership an easy way to build wealth 80 years ago – things have changed.

In this example, I’m going to show you how you’re more likely to end up ahead by renting instead of buying, and investing your down payment instead.

The big fat caveat I want to make to this post is that this is not permission to keep overpaying for rent and blowing all your extra income on bullshit – this is a case for renting so that you can invest aggressively. If you’re renting and spending like there’s no tomorrow, this logic falls apart.

The other big fat caveat is that whether or not your home ends up grossing a profit is almost entirely dependent on where you live, and timing: While VTSAX will give you the same returns no matter where you are in the country, the decision to buy a home can be very market-specific.

With that, let’s begin.

Let’s go on a journey back in time

In 2017, I really wanted to buy a condo. I felt like I was throwing money away on rent – I calculated that I was spending about $9,600/year on rent, and it made me want to throw up.

But I had just started working, and I probably had about $5,000 to my name. Using literally zero logic or reason, I figured something that costs about $200,000 was totally in my price range. (Simultaneously with the house hunt, I began hitting up relatives for a loan so I could put down 20%, or $40,000 – I couldn’t conceive of having that much money myself, but for some reason it felt like a great amount to fork over for a house.)

My (smart) relatives turned me down, and the dream died a swift death – but not before I learned a few things about the lending industry and home ownership in general:

Lenders make their money on people buying homes and paying interest on the mortgage. It’s likely they’ll approve you for way more than you can afford. Case in point? My income barely cleared $50,000, I had basically no savings, and I got approval for a condo up to $300,000 in value.
You pay a penalty when you put down less than 20% called “PMI.” It’s insurance on the loan, since putting down less than 20% doesn’t bode well for your ability to pay back the loan (for good reason!).
Buying a home entails a lot of expenses outside of the sticker price – we’ll dig into how much your mortgage actually costs in a moment, but I didn’t realize that thousands (yes, thousands) of extra dollars are tacked on in the form of closing costs. Plus, after you have the home, you’ve got to pay for all the repairs yourself. In the time I’ve lived in my apartment, my garbage disposal and hot water heater broke. Both of those replacements were made (a) for free and (b) within 24 hours by management. Had I been a homeowner, it would’ve been on me to find a contractor, schedule the repairs, and pay thousands out of pocket to fix it.

That last point is why I painstakingly discourage young people from blowing all their savings on a home. You’re going to need a fat buffer left over (I’m talking a full six months’ worth of expenses) after purchasing the home to feel secure in your ability to keep up with the stuff that’ll inevitably go wrong.

Now, I’m in a place where I actually could afford to put down 20% on a $300,000 place

And now, you couldn’t pay me to do so – not because I don’t want to live in my own house (I do!), but because for me personally, I need that $60,000 to keep growing in the market so I have options later on (read: early retirement).

One of the most prevalent misconceptions about home ownership is that it’s an investment – to some degree, there’s truth in this concept. Your property is an appreciating asset, so it’ll probably retain its value (unless the housing market crashes or you buy at the peak of a bubble, in which case, it’s likely you’ll lose money). But your house isn’t an investment in the same way your cash is an investment.

To illustrate this, I want to run two parallel scenarios: Taking $50,000 and using it as a down payment on a home, and taking $50,000 and investing it in an index fund that tracks the total stock market.

Scenario #1: The house

So let’s say you buy a $250,000 home, which means your 20% down payment would set you back $50,000.

In Dallas, a $200,000 mortgage (plus property taxes and insurance) would cost $1,381/mo. (the mortgage is $843, the taxes $400, and the insurance $88). This is a rough estimate via a Zillow mortgage calculator (see below). When I first set out on my house hunt a few years ago, I wasn’t using a calculator that was inclusive of everything – I was only seeing that $843 mortgage (“P&I” = principal and interest) payment, and thought, Well, shit! I can afford that!

*From Zillow’s monthly estimate calculator.*

So that’s your general breakdown:

$50,000 toward the down payment
$1,381 per month toward your mortgage

If you’re looking at $1,381 per month and thinking, Holy shit, I pay that in rent, keep that in mind for later.

Scenario #2: Investing

Now that you’ve seen Scenario #1, let’s look at the second scenario, wherein you invest your $50,000 instead.

For comparison’s sake, let’s say your rent is $1,381 (the same as what you’d be putting toward your home).

It pains me to even do this, because I know you can get an apartment for a lot less (I’ve never paid more than $900 in rent in Dallas), but I want to make this as “even” as possible.

General breakdown?

$50,000 in an index fund, like VTSAX (total stock market)
$1,381 per month in rent

How things play out

It makes sense to first figure out how much your $200,000 mortgage is actually going to cost you over the years.

Recall that $843 is the portion of your monthly payment that represents your mortgage – the other few hundred bucks go toward taxes and insurance.

The mortgage described above ($200,000 on a 30-year fixed, 3% rate) actually ends up costing $303,554.90 over the life of the mortgage. That means if you were to fully pay off this $250,000 home, in the end, the loan ($200,000) and down payment ($50,000) actually equal $350,000.

*From BankRate’s “true cost of a loan” calculator.*

Even if the taxes and insurance never went up on the property, if you were to pay that same $530/mo. in taxes and insurance over this hypothetical 30-year period (in order to pay off the house), that tacks on another (are you ready for this?) approx. $190,000.

So the true cost of this $250,000 home over 30 years is:

$50,000 + ($1,381 * 12 * 30) =

$547,160

Of course, there are two things I’d be remiss not to include here:

Home ownership comes with tax breaks – you can deduct things like your property tax and mortgage interest payments to lower your taxable income, which may save you a few hundred (or thousand) in taxes each year if you itemize your tax return.
Most people don’t live in the same house for 30 years, so you’d probably sell the home before you paid it off – the difficult thing about that gamble is that you may not make enough on the sale of the house to cover all the upfront costs of initially buying it, like the aforementioned thousands of dollars in closing costs and the interest payments you’ve already made.

What happens if you move after 5 years and sell it?

I did the back of the envelope math on what you would’ve spent if you sold after five years, and it’s about $135,000 – you would’ve spent $135,000, and you’d still owe $177,000. Got that? Your home “costs $250,000,” but five years in, you’ve spent $135,000 and still owe $177,000.

$135,000 + $177,000 = $312,000.

This means in order to break even (that is, pay the bank back for the loan and recoup the money you’ve already spent), the home would have to sell for at least $312,000 five years after you bought it for $250,000. In some markets, that’s a fair gamble. In others, not so much. And that’s just to break even – you’re not turning a profit in that scenario.

There are scenarios, of course, where you live in an area wherein the cost of living skyrockets. I have a friend whose parents grossed $1M on their home in Ft. Worth, TX after living in it for 20 years – but you shouldn’t buy a home expecting that to happen, because it rarely does.

In the example above (assuming you actually kept the thing for 30 years), you’d pray that the $250,000 home you purchased would be appraised for at least $550,000 so you could break even – that is to say, recoup the money you spent on it.

Sometimes this happens, sometimes it doesn’t. My parents bought a home for less than $250,000 and sold it for $350,000 after living in it for 25 years. It was a great home (and we wouldn’t have done it any differently), but it certainly wasn’t “an investment.”

Which is an incredible segue – you know what actually did help my parents a lot when they retired in their early fifties? Their actual investments.

Back to the investing scenario

So instead of buying the house and dropping $50,000 on the down payment, let’s say you had invested your money instead. We know how things play out for the homeowner, who put $547,160 at a minimum (just mortgage, interest, taxes, and insurance) toward their $250,000 home.

What happened over 30 years to the $50,000 investment?

Even if you never added another dime, a 7% rate of return (which is a safer assumption than a real estate market boom) would produce $380,000 of cold, hard (invested) cash, with which you can do whatever you want (up to and including buying a house outright).

*BankRate’s investment growth calculator.*

The shitty part of this scenario is that you would’ve spent (again, simply multiplying the amount vs. trying to guess how your rent would change every year) about $497,160 on rent. YEESH. So to get super clear on the outcomes, let’s line them up.

Compare the outcomes

Spend about $547,160 over 30 years on your $250,000 home (interest, taxes, and insurance) and hope that by the time you sell it, it’s worth at least that much. Keep in mind this doesn’t include the cost of maintenance, repairs, or renovations.
Spend about $497,160 over 30 years on rent, but have $380,000 in an investment account.

Do you see why this can be complex? Unless your house appreciates by $297,160, you’re not coming out ahead, but if you’re spending $1,381 on rent every month, you’re still “wasting” money, to some degree.

Where the math heavily shifts in favor of renting

So for the sake of the comparison, we used a rent payment of $1,381 – but I’ve found in most cases you’re capable of finding rent for much cheaper in a market where $250,000 will buy you a small home.

If you rent for, say, just $1,000 per month (instead of $1,381) and invest the $381 difference, now you end up with $826,174 in your investment account and have only spent $360,000 on rent.

Any scenario wherein you’re spending a few hundred less on rent than you’d be spending on your home’s all-in monthly payments (and investing the difference) is going to make it pretty impossible for the house to end up as your better financial outcome, unless you buy in San Francisco in 2010.

Final considerations

Real estate can be an investment. It’s actually one of the best ways to earn passive income: Renting out room(s) in your home and charging tenants rent can cover your mortgage (or more!), and that throws this entire comparison into a tailspin.

You do have options with real estate. You’re also providing your family a home. I love the house I grew up in, and I’m so grateful that I got to live in the same house for all 25 years. When my parents sold it, I was devastated.

But please, for the love of God and all things compounding, don’t feel like you have to buy a home to get ahead. As you can see from the math in this scenario, you absolutely don’t need to. In fact, you may come out much further ahead by simply investing instead.

Here’s a checklist that may help you determine whether buying actually makes sense for you:

You have at least 20% of the down payment, and it represents a small fraction of your total net worth (in other words, don’t drop $50,000 on a house if your total net worth is $60,000)
You plan to live in the house for at least 10 years, which is enough time for you to hopefully recoup the cost of closing in the (hopeful) appreciation value when you sell
Your total monthly housing cost (in this case, $1,381) is 28% or less of your monthly income (in this scenario, you’d want to make about $5,000 per month for this to work comfortably)
You’re excited about buying and you won’t mind if the home actually goes down in value

I don’t intend to buy anytime soon

For the time being, I don’t want to buy.

Money represents options, and keeping my “options” in investment accounts (read: liquid) allows me to work toward things like early retirement.

To me, a mortgage is just one big obligation. It’d be very difficult to feel comfortable retiring early knowing I had a hundred-thousand-dollar debt hanging over my head.

But that’s me personally – not everyone dreams of retiring at 40 (although, I don’t know why you wouldn’t at least want the choice?), and if you’re going to have children, a home makes that a hell of a lot easier.

Go into this decision with your eyes wide open

Buying a home can be a great decision. It can also be a terrible one – it depends on your financial situation. The house is not the get-rich-quick option – it’ll actually slow you down. Is that okay? Sure. Is it worth it? Yes, depending on what you value. A home that brings you happiness, stability, and comfort is worth being slowed down for.

But it’s not how you’re going to get wealthy (unless you’re renting out the rooms, remember?), and you certainly shouldn’t feel bad if you can’t afford one.

Now, let’s talk about how to get you spending less than $1,000 per month on rent…