Ron Abate

You Don't Own Real Estate - It Owns You

When I arrive back in the country in 2005 after 15 yrs. living and working overseas, I needed a place to live. I rented a place in LV and then started looking at the purchase of a house. I constructed a lease versus buy program on Excel taking into consideration all the costs of ownership. As for the tax deduction I receive from the federal government for the mortgage interest and property taxes, the first $5,000, now $6,000, doesn't count because I automatically get the standard deduction. In 2005, I had the gut feel we were nearing the top of a bubble. Anyway, assuming my rent increased a 4% p.a. and home prices also increased at 4% p.a. renting was a better alternative. I used a discount rate of 8%. What people fail to consider is that money used for the down payment and the monthly principal portion of the mortgage can be invested in other asset classes.

I am still in my rented apartment. My rent has not gone up in 3 years, and after the first year it went up by $25 per month (on a base lease cost of $1,350 per month. I rent 1,300 sq ft. (3 bedrooms, two car attached garage, LR/DR/K combined) facing a well maintained swimming pool in a guard gated community. I continue to look for a house and still the NPV cost is negative to renting. I refined my lease versus buy worksheet. What I found was that the NPV for 1,300 sq. ft. was now competitive with leasing. What made owning uncompetitive with leasing was the additional 1,000 to 2,000 sq. ft. of a minimally acceptable house. This is my quandary. I like nice things like quality appliances and bathroom fixtures, moldings and flooring, educated neighbors with professional occupations, etc, but you don't get them in a 1,300 sq. ft. home and it does not pay to upgrade.

I have also done quite well with my overweigh energy portfolio (even a money market fund out performed residential real estate) versus what I would have invested in a down payment and the principal portion of the mortgage payment.

I may still purchase a house if the prices gets cheap enough and the incremental enjoyment of more space and a more pleasing ambiance offsets my current enjoyment of having money to invest in the stock market (there are places where you can still make money) and the enjoyment I derive from much greater disposable income renting, which allows for a very high grade diet of prime meats and fish, organic fruits and vegetables, fine wines, more dining out and first class vacation travel.

Have to go. If I have time I will post another comment about a study I just completed.

Cheers