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You're also ignoring the OP's premise of rent savings equalling income.
In my case, my home saves me from spending ~7% of it's cost every year, while maintenance/taxes cost me ~2%. That gives me an approximate 5% tax free ROI plus or minus changes in market value which should track inflation over the long term.
I am not.. The OP's premise of rent saving means they are building up an asset (equity in the home)..
Building up equity is NOT an investment.. Its an asset...
In your case, your home saves you from spending 7% of its costs yearly.. lets recap... It saves you from SPENDING...
Spending, or lack of spending is NOT AN INVESTMENT.. Its a liability..
Spending, or lack of spending is NOT AN INVESTMENT.. Its a liability..
How in the world can lack of spending be a liability?
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I am not.. The OP's premise of rent saving means they are building up an asset (equity in the home)..
Building up equity is NOT an investment.. Its an asset...
This is a distortion of the OP's question. If you buy with cash, you aren't "building up equity" in the home.
Not paying rent simply means that you aren't paying rent, which means you're able to strike that liability from your personal balance sheet. When you get rid of liabilities, it increases your bottom line, right?
Last edited by sterlinggirl; 01-14-2010 at 09:07 PM..
How in the world can lack of spending be a liability?
Regardless of the OP's renting/purchasing, they still are acquiring expenses. Just because something is an asset, doesnt mean its an investment.
You cant justify buying a car as an investment because an alternative is a chauffered driven limousine which costs more. It makes the car an asset, not an investment. (a car is a great example for the OP because it depreciates)..
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Originally Posted by sterlinggirl
This is a distortion of the OP's question. If you buy with cash, you aren't "building up equity" in the home.
Indeed you are..
1) Just because you pay for it all at once, doesnt mean that day 1 you didnt build up equity
2) If the home doesnt appreciate, thereby building up more equity, what type of an investment profit is being made?
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Originally Posted by sterlinggirl
Not paying rent simply means that you aren't paying rent, which means you're able to strike that liability from your personal balance sheet. When you get rid of liabilities, it increases your bottom line, right?
Striking something from your balance sheet does not mean you've gained an "Investment"... It means you have LESS expenses. Less expenses is NOT classified as an investment because it does not generate a profit. It may allow you to spend less, but that doesnt mean you are making money which is what the definition of "investing" is.
use of money for future profit: the outlay of money, e.g. by depositing it in a bank or by buying stock in a company, with the object of making a profit
money invested: an amount of money invested in something for the purpose of making a profit
something in which money is invested: something, e.g. a company, endeavor, or property, that money is invested in with the goal of making a profit
Have you ever thought of using paragraphs to separate your thoughts into readable segments?
If you want to argue that the concept of "a penny saved is a penny earned" is ridiculous, take it up with Ben Franklin.
I am not arguing with the concept that "a penny saved is a penny earned" is ridiculous, I'm arguing with the concept that the rental equivalent of the property is equal to income. If I move out of my apartment to a 5000sqft house, that I pay $2M for, I'm saving $1200/mo, NOT the $7500/mo it would cost me to rent that house, I'm under no obligation to move to a 5000sqft house. Of course the gov't would tax me about $25,000/yr for that house, so I would be losing $25k/yr instead of my current expense of $14.4k/yr, but by your math. The huge house would cost $90k/yr to rent, so I'm making 90-25 = $65k/yr by living in that huge house, or 3.5% gain on the 2M. A huge house is an expense whether you rent or buy it, even with cash.
Using Ben Franklin's concept I would actually be saving the $14.4k so I would be actually sending an extra $10.6k/yr to live there, in addition to the money I'm not making from having $2M.
Your idea is the equivalent of saving buying a season pass + skis and skiing every day of winter is income, because the alternative of getting a lift ticket and renting every day is more expensive a lot more expensive. Skiiing is an expensive hobby, and no-one is forced to do it.
If you have chosen to live in the 5000sqft house or to ski everyday, and you budgeted the rental scenario, then when you decide to go from rental to purchase you have truly earned the difference, after already having paid it in the first place; But if you have neither decided yet to live in the 5000sqft house or to ski all winter then both cases are simply expenses and will increase your bottom line. But you must have budgeted the expense of the more expensive item FIRST before you can say that it is income to chose the less expensive option.
Otherwise you could take the even more crazy example of: A Ferrari would cost me $220K, but a fully loaded Honda Accord would cost me $30K, if I buy the Honda Accord I save $190K, I buy it, the savings is income, $30K in expenses, so the whole thing netted me a gain of $160K. The problem here is that I didn't start out with the $220K as an expense, I just listed it as an alternative to the Accord. Versus keeping my current car tha Accord would be $30K+ in expenses and the Ferrari $220K+, buying the Accord does not give me an income of $160K.
In order for your example to make sense I would have to have the rent of a 5000sqft house budgeted as an expense each and every month to BEGIN WITH. Then if I chose to buy the house and not spend the $7500/mo then I get to count that as savings. The major problem I see with this if you live in an okay neighborhood that suddenly becomes popular and the rent skyrockets, in your scenario you just say you earn whatever the rent equivalent is, but most likely if you were renting you would have moved to a neighborhood about 1 or 2 miles away were the rent stayed reasonable, I doubt your plan in life included paying such high rents to begin with, so how in the world can you say you are SAVING that money, simply because you didn't move??.
I am not arguing with the concept that "a penny saved is a penny earned" is ridiculous, I'm arguing with the concept that the rental equivalent of the property is equal to income. If I move out of my apartment to a 5000sqft house, that I pay $2M for, I'm saving $1200/mo, NOT the $7500/mo it would cost me to rent that house, I'm under no obligation to move to a 5000sqft house. Of course the gov't would tax me about $25,000/yr for that house, so I would be losing $25k/yr instead of my current expense of $14.4k/yr, but by your math. The huge house would cost $90k/yr to rent, so I'm making 90-25 = $65k/yr by living in that huge house, or 3.5% gain on the 2M. A huge house is an expense whether you rent or buy it, even with cash.
Now that you're done making a ridiculous example of extremes, why don't you try it without changing the OP's lifestyle to that of the rich and famous since they made no mention of wanting to live that sort of lifestyle.
Your logic doesn't work with a $200K home versus a $200K rental.
Now that you're done making a ridiculous example of extremes, why don't you try it without changing the OP's lifestyle to that of the rich and famous since they made no mention of wanting to live that sort of lifestyle.
Your logic doesn't work with a $200K home versus a $200K rental.
Actually their logic does work just fine. While its taken to the extreme, these extremes do not change the fact that SAVINGS, or even potential savings is not INVESTING.
Now that you're done making a ridiculous example of extremes, why don't you try it without changing the OP's lifestyle to that of the rich and famous since they made no mention of wanting to live that sort of lifestyle.
Your logic doesn't work with a $200K home versus a $200K rental.
Since you didn't place caveats, it would seem logical to guess that your example of equivalent rent = income would hold in all cases, or at least that you acertain as such. Clearly we can see that it seems to have exceptions for something you seemed to pass as a hard and fast rule so to speak.
Okay so for $200K rental, I'll assume you mean a rental property valued at $200,000. So we are talking a modest 1bd condo in a so-so area then.
Normal Accounting:
Rent: $1050/mo = 12.6K/yr in liability
Buy with cash: $320/mo in HOA, $70/mo insurance, $30/mo maintenance = $420/mo = $5040/yr in liability
"Rent Equiv = Income" Accounting:
Rent: $1050/mo = 12.6k/yr in liability
Buy in cash:
Expenses: $320/mo in HOA, $70/mo insurance, $30/mo maintenance = $420/mo
Income: $1050/mo
Income - Expenses: $630/mo Net Income
$630/mo = $7560/yr in income.
But yet when the year is over the owner will have $5040 less in savings, not $7560 more, hence it is still a liability. The person that purchases in cash may have reduced their liabilities, but just because they did does not mean someone will pay him the amount of the reduction, I think you're misinterpreting "A penny saved is a penny earned" in that regard, their balance sheet may have $7560/yr less in liabilities, so it went up my making the switch hence the penny earned, but it doesn't pencil out in the income - expenses way.
If you listen to kiyosaki as well as others, they say your primary home is not an asset, it's a liability because your own home takes money out of your pocket and not into your pocket.
You can pretty much safely ignore anything Kiyosaki says. Your primary home is obviously an asset, but its also an investment. Its just a bit different in nature than some other investments. Anyhow, its an investment because:
1.) The value of your home will generally at least keep up with inflation.
2.) You receive dividends from your home in the form of well....having a home to live in!
Most of the comments here seem to be based on the idea that you'll be living in a cardboard box somewhere if you did not own your home. Obviously, if you purchase a home cash the money that would otherwise go into rent or mortgage you can use to other ends. That is your dividend. Certainly would should confirm that this "dividend" is big enough to make sense, in some areas where real estate is still inflated (e.g., coastal California) its likely to be too small.
You can pretty much safely ignore anything Kiyosaki says. Your primary home is obviously an asset, but its also an investment. Its just a bit different in nature than some other investments. Anyhow, its an investment because:
1.) The value of your home will generally at least keep up with inflation.
2.) You receive dividends from your home in the form of well....having a home to live in!
Most of the comments here seem to be based on the idea that you'll be living in a cardboard box somewhere if you did not own your home. Obviously, if you purchase a home cash the money that would otherwise go into rent or mortgage you can use to other ends. That is your dividend. Certainly would should confirm that this "dividend" is big enough to make sense, in some areas where real estate is still inflated (e.g., coastal California) its likely to be too small.
You couldnt be further off base.
The definition of "investment" is something bought for the PURPOSE OF PROFIT.. A HOME is not bought for the purpose of profit, its bought for the purpose of not living in that cardboard box you discuss.
There are no permanent rules, but rules conditional on market realities.
If houses are trading at severe multiples to rent, then one should rent for the foreseeable future. Why? The money one pours into a house will not worth the investment, defined as a combination of potential cash flows, tax benefits, and capital gains.
If houses are oversold, are cheap relative to rent, and the market going forward suggests appreciation given taxes and fees, then buying a home makes sense.
Of course, one should consider the financial nature of purchase a houses using investment metrics. The scale of the debt obligation should make this obvious.
At the same time, from a financial planning perspective, it would be imprudent to lump the estimated equity in your home with that of your financial investments, since the latter is extremely liquid and the former is far from it.
S.
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Skiiing is an expensive hobby, and no-one is forced to do it.
