Why Good Debt is a Lie

I probably won’t win any new friends with this posting. In fact, I’ll probably piss off my current friends and have to explain myself endlessly to my family. But I’m not sorry. I simply do not believe there is such a thing as “good debt”. In fact, I think anyone who argues for “good debt” either has something to sell you or needs to validate their own financial decisions.

Before launching into this anti-debt rhetoric I thought I should consult Google for a nice definition of “good debt” just to be sure I’m not living on planet nuts. I must admit, I’m very surprised with Google’s response: “No definitions were found for Good Debt.” Snicker.

good debt

Google aside, most people living on earth would argue “good debt” is money borrowed for purchasing things that retain, and hopefully increase in value over the long term. These things would include borrowing for an education (student debt), a home (mortgage debt), or for your own business (business debt). At the outset, these examples of “good debt” make very good sense. However, what this simple definition fails to consider is borrowing money for perceived gains is high-risk speculation. Since people get absorbed with perceived gains, they also seemingly fail to anticipate the other expenses incurred with so called “good debt”. Let’s consider each form of “good debt” in detail.

1. Student Debt

Many students graduate these days with massive debt incurred from post secondary education. School is expensive, and many students and parents don’t have the funds to send junior off to school. Then why my beef with student debt? It’s simple, when taking on education debt many students fail to consider if the subjects they study can bear the financial burden of debt repayment. Will students who take degrees in Psychology, English, or History be employable in lucrative enough jobs to service and pay off tens of thousands in loans? Yes, I can hear all you English and History majors grumble. But I know several English majors who upon graduation found work at Starbucks. In some cases, these already indebted (and unemployable) students go back to school once again for advanced studies in the hope of improving their employment prospects. I’m not trying to be mean here, just pointing out some honest facts. The problem I think is students are led to believe student debt is good, and therefore it’s OK to study any particular subject without considering if the investment in time and money makes long-term financial sense.

Another beef I have with student debt is it’s easy for students to get loans. So easy in fact many students take on loans before considering ways to avoid debt, such as part-time work and scholarships. I’m really not trying to be insensitive to students as I’ve been on both ends of the student debt issue. I graduated from my first degree with zero debt, and then graduated from my second degree with a whopping 17K in debt. I’ve written and reflected on how I avoided student debt in my first degree and then how I paid off my student debt in six months in my second degree. I must admit, graduating with no debt is the highly preferable option.

2. Mortgage Debt

Another form of perceived “good debt” is mortgage debt. I’ve really dreaded writing this part, mostly because I hate telling people their mortgaged homes are both money pits and terrible investments. I dread conversations where my friends proudly tell me about their 25+ year mortgage and how small their payments are today. They really love to dig in and declare themselves superior to my renting self. They seem to think they’re building huge equity. Not true I say.

The sad truth about buying a house is the actual cost far exceeds the simple sticker price of the home. It’s not hard to spend several times the purchase price of the house when considering all the costs. For example, a buyer of an average $325,000 detached house who takes out a conventional 25-year mortgage will pay for that house twice in interest alone. In the illustration below I show a $325,000 house, at 6.5 percent interest rate, over 25 years (with $2,194.42 in monthly payments) to cost in total a whopping $658,326.98. That’s $333,326.98 in interest alone! Don’t believe me? Try my Loan Amortization Calculator for yourself. Better sit down first.

gooddebtlie_calc1.gif

gooddebtlie_calc2.gif

Isn’t “good debt” fun? Now add 25 years of property taxes, home insurance, normal maintenance, and add a new roof just for kicks and the total cost of buying this house could escalate to a million bucks, easy.

Now I hear all the homeowners out there howling, “But my home is an investment, property values only go up!” Not true I say. A house is a very inefficient means of investing. For starters, consider your house as part of an investment portfolio and tell me what percentage of the portfolio it entails? I bet most people’s homes comprise 50-75 percent of their total portfolio. Now tell me, when invested in a single piece of real estate, how diversified are you? An investor with most of their eggs invested in one basket is not diversified and is very open to market risk.

For my investment portfolio I highly prefer stocks. After inflation, a diversified portfolio of stocks returns 7 percent a year over long periods. The bonus with stocks is I can easily diversify and buy various sectors, including: Financial, Communications, Energy, Health Care, and Real Estate. I actually own real estate in the form of Exchange Traded Funds (ETFs). OK, if the stock market returns 7 percent a year, your house must be making you a fortune right? Nope. The sad truth is houses barely keep up with inflation in the long term. Over at MSN, a fellow with alias SmartMoney does some serious number crunching to show the average real return for houses over long periods is zero. He says:

Houses don’t appreciate any faster than the level of inflation over the long term, so forget about buying a home and put your savings into stocks.

I highly recommend reading his article Why Rent? To Get Richer! before getting angry with me. Ohh, and there’s no guarantee when selling your house the price will be up. Just look at the current sub-prime meltdown, or the deflated home prices in the early 90s, and tell me how fun it is to sell your biggest single undiversified investment during a downswing?

My final point on this matter is addressing those who consider my rent as money thrown away. Fair enough. I pay $1000 a month in rent. Let’s look at my earlier example, the homeowner with a $325,000 mortgage with payments of $2,194.42 per month. Given the alternative, I’m perfectly happy to give my landlord $1000 a month and save the home owner’s otherwise spent mortgage payment of $1200. I take that $1200 and invest in a portfolio of diversified stocks which will return 7 percent over time. Additionally, I save all the “other” costs the homeowner pays, costs on property taxes, home insurance, normal maintenance etc. In reality, I save $2000 a month by renting and I earn a higher rate of return.

Need some more proof? Let me introduce you to Millionaire Mommy. She’s a millionaire who sold her home and now rents. Her thoughts on Rent Vs. Buy: The Hidden Cost of Lost Opportunity are stellar and really resonate with me. Another good read is Jersey Gilbert with Is Your House Really A Good Investment?

3. Business Debt

It is a dream for many people to quit their indentured job of servitude and go into business for themselves. Everyone says being your own boss is the road to riches and financial independence. Watching the news it seems pretty simple, just look at people like Martha Stewart and the Google guys who risked it all to become billionaires. All Martha did was perfect pie crust. And the Google Guys, well, they just search for stuff. Success can’t be that hard, right? Well, maybe. But the honest truth is I don’t think most people have the smarts or the financial acumen to run a profitable business. Most people can’t manage their own personal finances, they don’t have an emergency fund, have little retirement savings, and carry considerable credit card and consumer debt. Now honestly, how the heck can a person with little financial smarts run a profitable self-run business? I think it’s a shame really. I’ve seen a few good people with interesting business ideas go completely bankrupt because certain “experts” led them to believe business loans and debt are the preferable path to success and riches. I think the big-bad-banks sell business loans as the preferable “good debt” path since all debt is good business if you’re on the other end of interest collection.

Despite my negativity on business debt, I’m not opposed to people starting-up a company. There are ways of going into business without going into debt. In today’s internet age it takes only $9.99 to buy a Web domain name and another $100 or so a year to get the site hosted. One no longer needs office space and storefronts to run an operation. There are indeed ways to avoid business debt. Get smart about it! Ohh, perhaps learn to manage your personal finances before quitting your indentured day job. Learning some basic money management skills and having an emergency fund can go a long way when starting a fledgling business.

4. Health Debt

My final point regarding the “good debt” lie is my most important. How much is your health worth? How much is your relationship with your spouse worth? How does debt and the feeling it entails impact your mental, physical, and relationship health? I don’t know about you but when I had “good debt” in the form of student loans I felt like s$it. I felt stressed, tired, and suffocated by the weight of debt. I often had chest palpitations, and I felt as though I were drowning. I also felt tied-down to a job I hated with no freedom or choice. The debt had to go, and I had to work hard to pay the beast off. My relationship also suffered. At the time, my then boyfriend was free from debt and liberated to enjoy some disposable income by eating out and traveling. I hate to say it but I kinda resented his financial freedom. To make matters worse, I was exhausted from working over-time and my libido was dead. I may be female, but I really can’t get a hard-on for debt. It doesn’t turn me on, it doesn’t make me feel good, and it certainly doesn’t put me in the mood to get naked. Libidos aside, the issue was plain to see – my “good debt” was an obstacle and it made me physically sick and emotionally exhausted to deal with it.

5. Conclusions on Debt

I retired my “good debt” seven years ago. I feel great today having zero debt and a healthy diversified portfolio. I think being free financially is phenomenal both emotionally and physically. I certainly hope I’ve made you think differently about “good debt” and why I think it’s a lie. Cause really, how can anything termed “good” make one feel so bad?

Your two cents:

  1. K9-CRAZY February 29th, 2008

    Excellent post – my personal goal follows your path to be %100 debt-free, mortgage included.

  2. thickenmywallet February 29th, 2008

    The leading cause of business failure is poor management experience and poor cash flow management regardless of how much or little debt is incurred. Good debt is a lie if people cannot balance their cheque books. I would argue that people should only incur good debt to the extent they have good cash flow management. Alas, this is sadly not the case for most.

  3. Dell11 March 2nd, 2008

    I agree with you and also disagree with you. I disagree that renting is better than owning a home. I have approx. 20K left on my mortgage. The purchase price of my 2900 sf home was $290K five years ago. At the end of the mortgage (5 years with bi-weekly and anniversary payments), I will have only paid $22K in interest over the 5-yr term and be mortgage free! My final payment is in the Fall 2008. Woohoo!

    I have zero debt otherwise. The reason why I decided to pay off the home is obvious, I hate debt. But in your post, you mention that you pay $1000 for rent and compare it to a $325K home. I seriously doubt you have the square footage in your rental than what that $325K home has. You should be comparing your rental space to a home space that is comparable size and location.

    The other thing, is, what happens if you lose your job (and run dry on your investments)?. How will you afford to pay the rent? If you had paid off your mortgage, then you will live with piece of mind that you still have a place to live without renting or paying a mortgage (granted you still have to pay property taxes, food, etc…)

    Everything else you wrote, I agree with…but there is a massive majority of people who can only dream about being debt free. That is why they look forward to “good debt” as being their safe haven.

  4. Allie March 2nd, 2008

    I do see your point on most of this, and appreciate it. We put a new roof on our house recently and I was later chastised by a friend for paying out of pocket when we could have gotten a home equity loan — “you’re missing out on the tax deduction,” my friend said. I pointed out that we would pay more over time and that was ridiculous, and I got a blank look.

    But we bought a house that was well under what the Realtor told us we could afford, and it is actually less per month than what we would pay in rent (when you figure in that we have pets and would have to pay a pet deposit or “pet rent”) and cost was so much less than 325K that it’s laughable. Even with the roof costs, I think we’ve come out ahead or at the very least broken even. So I’m not sure that rent vs. buy is totally a clear cut thing. I think spending within your means (and changing what you consider to be your means) is maybe the way to go when it comes to housing.

  5. NtJS March 3rd, 2008

    Great post! Seems like every PF pundit wanna be sings the praises of “Good Debt” and how smart they are for investing at an early age, with a ton of “good debt” sitting around. Fools. Glad to see another fellow financial weirdo out there:)

  6. Mark March 3rd, 2008

    Dell11,

    In a lot of places the purchase prices of homes and condos are way out of whack with rental rates. I rent a 950 sq foot two bedroom apartment in Seattle for $1215. I’ve looked around to see what comparable condos were going for and found nothing for less than $250k, even in much worse locations. If I were to buy my apartment as a condo I’d be paying at least $325k, if not more, plus paying HOA fees. Not everyone has the income to pay off a $300k house in 5 years, and so they will get eaten alive in interest.

    If I took the difference between a mortgage payment on a comparable condo and the rent on my apartment and put it into a savings account for a year I’d be able to pay my rent for EIGHT MONTHS if I were to become unemployed. If I don’t lose my job then I’ve got over $9000 in the bank, earning interest for me, instead of $9000 in equity in an asset appreciating at barely above the inflation rate.

    It all depends on the spread between the prices and rental rates in your area. Yours is probably different than mine.

  7. Mark March 3rd, 2008

    Also, I disagree with the statement that a “massive majority of people can only dream about being debt free”.
    Some people have dug themselves such a huge hole that their only out is bankruptcy. For most people, however, I believe it would just take a change in priorities. Not eating out as much, resisting impulse buying, not buying a new car every two years.
    Unless your debt is several times your annual income, or you make such a small income that you can’t even feed yourself and keep your lights on then it just takes patience and determination. It’s not easy, but it’s far from impossible.
    Most people have debt because they CHOOSE to have debt. They are not forced to have debt.

  8. Susannah March 3rd, 2008

    As Mark said, the kicker is how much you would pay to rent v how much you pay to buy. I bought my home 10 months ago with 100% financing (no down payment that would otherwise be better used in investments) and currently pay $10 less a month for PITI than I would pay to rent the exact same house. True. My town has about 300 of these babies built at the same time, so I have a genuine number for the cost of a comparable rental.

    Why is this important? Because, in my case, buying was the better solution. There were a few factors that made this possible: a very low fixed 30 yr interest rate on both loans (80/20), the purchase of a house from a FSBO seller who had to sell, and a price significantly under appraisal. Total out-of-pocket to buy was around $1700, and I received $1000 in rent for a month from the previous owners before moving in. $700 down + PITI that is equivalent to rent = free equity now and in the future.

    So: I like my mortgage debt. I agree that a house is not a good investment–it’s a place to live. So, ironically, I have no intention of paying off the mortgage an instant before it’s due. Why? I like diversifying my investments, and I want to ALWAYS have at least twice the money in sunk working investments that I do in a passive investment like a home. This should prevent the net-worth-in-house syndrome.

    Meanwhile, I have a cheap place to live and the stability to finally get some of the fruit trees and asparagus bed that I’ve always wanted. I don’t have to freak out about the dogs ruining someone else’s property. I can get wild with the gray-water harvesting and tankless hot water. I can cut my heating bills by putting in insulation rather than complaining to an indifferent landlord.

    But, Squawkfox, I think my situation is an exception–a “perfect storm” of excellent market conditions that allowed me to do what I did. And if home prices shoot up in ten years, I may sell and put the equity somewhere profitable, as Millionaire Mom did. One of the drivers in our current almost-but-not-quite-technically-a-recession was this myth that future returns would always trump today’s math. That was a bad, bad mistake for whole corporations, not just buyers with stars in their eyes.

    Now that I think of it, I’m going to go through the numbers in a post on my own blog, since I think it’s important for people to do that math before buying. If you don’t object, I’d like to link to you.

  9. fox March 6th, 2008

    Susannah: Feel free to link to me. Thank you for sharing your story.

    Mark & Susannah: It is so true, “the kicker is how much you would pay to rent vs. how much you pay to buy.” The decision should be with the numbers. Albeit, so many people buy based on emotion rather than logic. After writing this story and reading all your comments I felt I should develop a tool to help take the emotion out of this age-old question. So I built a Rent vs. Buy Calculator to help people make this important decision. Let me know what you think!

  10. fox March 6th, 2008

    Allie: Housing is an emotional and at times complex issue. At our basic level we all need a roof over our heads. I was so mixed when I wrote this article since people love their homes. I agree spending within our means is essential when considering housing. When I created the Rent vs. Buy Calculator (link above) I added a tally for “Renovation Costs:” as I was thinking of your new roof. :)

  11. fox March 6th, 2008

    NtJS: Your comment made me giggle. After publishing this post I was honestly ready for a fine roasting on the “merits of good debt.” Perhaps my roast will come. Till then, thanks for siding with a fellow “weirdo”. ;) To be honest, I really love being a little weird.

  12. Investing & Passive Income March 24th, 2008

    All debt sucks. however there are a few times in your life when going into debt for a short period of time can reap financial rewards.

    for example, buying 2 homes with a 4.75% mrtg (assuming you have sufficient income to cover mortgages) and renting one out would have been a great idea in 2002-3. Provided you liquidated when the investment went up significantly in 2005.

    its not the debt that is good. its the timing and use of it. debt is always bad. good post.

  13. Lucas March 27th, 2008

    Great post,

    I run my own mortgage management and basic financial planning skills company in Australia. Generally my job is to get them out of the situations they put themselves into . eg. over borrowing/committing. I advise all my younger friends/clients to start investing and rent, followed by making an informed decision when the time comes, if they want to buy.

    The downside to this mentality is people in Australia love bricks and mortar and it is perceived safer, however with our rates around 8-9% and house prices stagnating, ideas like this are gaining momentum.

    give up the good work. and can i use your rent vs buying cal. its a good tool.

  14. Lucas March 27th, 2008

    keep up the good work * ( 2 thoughts at once!)

  15. success blogger March 27th, 2008

    I wish I had seen this when I was still in college.

    It’s all a lie. I am still paying my college bills . Thanks for that.

  16. John March 27th, 2008

    I don’t think you understand the concept of good debt. Good debt is literally defined as borrowing money at a certain percentage rate and using the borrowed money to make money at a higher percentage rate, essentially gaining money by paying someone less to use their money than you are earning with it.

    Like anything, there is always some risk involved, but by using debt as leverage to magnify your potential gains (and losses) you can effectively speed up the process. It takes a lot of skill and courage to use debt, which is why I understand your feelings against it.

    Personally I am debt free. This is because I don’t feel like I have a good way established to use the power of good debt within my current risk tolerance. When I have reached a point where I have developed it and the risk is within my tolerance, then I will use it as leverage.

  17. John March 28th, 2008

    You can go rent and invest the difference. I’ll be richer for it, because your rent makes me rich. What you miss about debt is that it is a tool, used correctly, it gives leverage whereas a small investment plus debt can make a large return.

    Another place I have used debt, is within the principle of opportunity costs. By not having all of my money tied up in the equity of my assets, I was able to take advantage of quick opportunity where something of great value was being sold at a great discount.

    As a tool, our education system is a failure in teaching life skills to young people about the dangers and proper uses of money. Without proper knowledge and unrealistic whims, people misuse each of the areas you listed above and compound the problem by inproperly using the tool.

    For example, many people buy a fantasy home and want all of the latest features. The trouble is, this is an emotional decision and not a calculated financial decision. Once you have over paid, you may never return a profit. On the other hand, if you buy based on financial calculations at a discount, it could return a handsome profit. It is all in how you use the tool.

  18. Tom March 28th, 2008

    I will post here that there absolutely is such a thing as Good Debt! I will kick it up a notch and say that debt is crucial to everyone reading this. A well developed capital market is essential to raising a countries standard of living out of poverty. Debt is one of the mechanisms by witch capital is moved from unproductive places to productive ones (Retired people needing income to young people wanting to innovate). The other way being equity investments such as stocks. If you are a company needing capital, debt is generally cheaper than equity because equity investors demand a premium for the risk that they are taking. Just because so many people misuse debt, you cannot say that all debt is bad.

    Let’s look at the examples in this post:

    Student loans:
    The argument here is because some people got student loans to get through school and ended up working at starbucks, all student loans are bad? How about the millions of people who used student loans properly and came out of school to become doctors, lawyers, businessmen, or any number of other professions? The problem in this case wasn’t the student loan it was the way it was used. A student loan is an investment in oneself. If you don’t do the work necessary to succeed (including research on a career paths before you go down one), it’s not the loan that is the problem. It is you.

    Mortgage Debt:
    Without debt we would be living and working in huts! How would any of our big cities and suburbs have been built? Another thing, the renting he is talking about is just another form of debt. If you sign a 1 year lease do you pay for that year all at once? If not then you are in debt to that person for the payment of the remainder of that lease or some predetermined exit price (if you don’t believe this just leave early and see what happens). Finally, the author here is not very financially savvy. He compares a 325,000$ mortgage to a 1000$ lease. How is that accurate? At 6% the interest alone on 325000 would be aprox. 1600 per month. If you can find a landlord that dumb by all means take advantage of him before he goes bankrupt. In reality when you lease you are paying all the owners expenses plus a profit (check the financial statements of Avalon bay or Post properties if you doubt this). The author also seems to have no concept of the time value of money. He illustrates a 325000 loan at 6.5 percent and is awe struck by the final 333K paid out in interest. But what did that loan really cost. If you are in the 28% tax bracket you can deduct 28% from the 6.5%. That brings the rate down to 4.7%. If you calculate inflation at 3% (which the author does latter in this same article when talking about a after inflation 7% return on stocks when historically the return has been 10%) that brings the effective rate of the mortgage to 1.7%. Now run the calculator at 1.7% and you get just under 75K in interest (your true cost in today’s dollars).

    Business Debt.
    For small businesses all the arguments I used for the student loan hold true. For large businesses, look at the balance sheet of all the fortune 500 companies and find one that doesn’t carry debt. If debt where so bad why would all the most successful businesses in the country have it. Many could have paid all there debt off years ago but they choose not to. Why? The answer is they feel differently about debt than our author.

    In conclusion, Debt when used responsibly is a good thing. In my lifetime I have gone from being poor to fairly well off through the responsible use of debt. I have had a student loan, a home mortgage, and many loans for the business that I own. I am financially independent and lead a comfortable and enjoyable life. The fact that you all think debt is so bad will keep you from abusing it so you might want to warm up to some of the more productive uses for it.

  19. bob March 28th, 2008

    Where I live Keene, NH you pay $1200/mo rent on a $150,000 home not a $300k+ one. That means with mort., ins.,and txs. you pay $1200/mo. same as rent. So it seems at least here you weigh the cost of maint. long term against the appreciation plus the security of knowing the landlord can’t decided one day he wants to rent to a relative.

  20. bob March 28th, 2008

    Also because the cost to rent about equals the cost to own from a cash flow standpoint there isn’t money left over to invest in stocks.

  21. Frank March 28th, 2008

    Wow! Intelligence on the internet. Amazing! Keep it up.

  22. misanthropope March 28th, 2008

    so you would sincerely advise a student of limited means but MIT grades and test scores, to go part-time to a community college instead?

    university education, home-buying, and starting one’s own business are all situations where taking on debt can immediately and significantly improve one’s “balance sheet”. of course, some careful shopping is in order before making such decisions.

  23. Bob April 1st, 2008

    What about this scenario:

    We own and live in a 3,300 sqr ft fully developed 3 year old house that is worth $550,000.00 at current values.

    It is fully loaded with Air Cond, Brazilian Cherry hardwood floors, Stainless Steel applicances, 5 bedrooms, and 4 bathrooms etc.

    It’s a great house in a great location within 15 minutes drive of downtown.

    We pay $1,350 per month on an interest-only mortgage that never needs to be paid off. (Think of what time and inflation will do to the principal over the next 40 years. Similar to buying a house in the 70′s for only $50,000.00. Time murders principals.)

    We also benefit from the 3-4% annualized growth of the value of our house over the next 40 years.

    Our property tax is $200.00 per month.

    Insurance is about $60.00 per month.

    Maintenance is about $100.00 per month.

    Now I know that interest rates may go up but even if they do, I think we are still better off than a renter.

    What renter could match this scenario?

    Who is better off here?

    A renter or us?

  24. Bunny April 2nd, 2008

    Honey, you’re so smart… nice article…

  25. Dana August 11th, 2008

    Love this post! Man, this should be on the front page of cnn.com! This should be taught in schools! We well into the “got to own a house” to be successful trap! The housing market sucks right now. I now owe more then I paid almost 5 years ago – now that is some funky math. We hope to sell it in 2 years time. Then we will go back to renting… and be so much richer!

  26. telly August 21st, 2008

    Great post!

    I’m also scared of debt (it gives me the serious heebie jeebies!) but I have to admit, there are a couple areas of debt that don’t haunt me quite as much. I actually refer to them as “good debt”. :O

    The 1st is two rental properties that we own that are, and always have been cash flow positive over the course of the years. The other is our margin account where the dividends received are greater than the interest paid. This debt doesn’t seem to bother me.

    The home mortgage though, that bothers me. We have a pretty tiny mortgage (to go with a pretty tiny house :)) that will be paid off within 10 years of purchase and your mortgage calculator tells me buying will surpass renting after 5 years. Since we’re at 4.5 now, I don’t feel too bad about this one. :)

  27. Confused August 21st, 2008

    In general I agree with your assessment of debt but you are incorrect in that there is no good debt.

    Mortgage debt is good debt and I will explain why. While you are quite right to suggest that a home is not an investment and that the total costs of home ownership are much more than just the mortgage, a home for most people is a great forced savings plan. Even if home prices just manage to keep up with inflation as you suggest you are still better off than renting.

    To use your example, assume that the inflation rate averages 3% over the 25 years. That means all else being equal your $325,000 home would be worth just over $680,000. The total cost of the house plus the interest payments, by your calculator, is just over $658,000. Therefore you have basically capitalized your interest payments as you will get them all back when you sell. At this point you are roughly $22,000 ahead.

    Lets assume that property taxes and maintenance will cost about $200,000 over the 25 years ($5,000 intital guess adjusted every year for the same 3% inflation rate and then rounded up to the nearest $100k). I neglect house insurance as it is insignificant to total cost. The net cost of the house over the 25 years is therefore approximately $178,000 which averages just under $600 per month. That handily beats the assumption of the $1,000 per month rent.

  28. Brien May 23rd, 2009

    …a very polarizing post. What I found most interesting about the post (and the comments) is that everyone leaves important details that defeat their position. The numbers you used were concrete, but the comparrisons were apples and oranges (as many pointed out); but the commenter’s who lobbed numbers back at you left out so many important details, their arguments were equally invalid.

    Rent where I live is equal to the cost of a first mortgage on the property. If the property owner put 40% down on the property, then they are making money on the rental. That is good debt. in this scenario, someone who has to take out a first and a second on a property is going to pay significantly more per month to own than a 40% down buyer. Renting is probably a better idea.

    There are all sorts of variables that could totally invalidate that last paragraph. Interest only loans, down payment on a home vs that same money in a portfolio, bad property market, bad rental market…I think the best take away points of blog and comments are these:

    Your home is not an investment, it is forced savings.
    Live within your means. Understand that “means” does not equal “the largest burden your paycheck can bear”

    What I would love to see is an article about how to estimate optimal rent/car/savings/investment ratios.

  29. Stan August 19th, 2009

    “Your home is not an investment, it is forced savings.”

    I agree it is forced savings, but I would think a home is an important part of a retirement portfolio. The ability to live rent free, or to sell and move to a smaller home once the kids move out, or even a reverse mortgage are all great options and much safer than the stock market.

    But the OP is right only if you use 0 down 25 year monthly amortization. Complete waste of cash. People should aim for better, say 25% down, 15 year bi-weekly.

  30. Alice January 15th, 2013

    My parents and I had a discussion about what I would do if I won 2 million swedish kronor (do your preferred convertion yourself – the code is SEK).

    My argument was that I already have a loan that will end up on half a million. I would happily spent the rest of the first million on my bfs student loan. My parents said: No, why would you not spend it on an investment instead? Like a house?

    I can’t see how buying a house would be a better deal than cutting away a huge debt? I don’t even feel good living in a house! I love living in a small apartment! I love that I just can call the owner of the apartment and they fix whatever is wrong!

    Well, I don’t have that one half of a million yet, but when I do, it will not be spent on an “investment”.

  31. Mike November 24th, 2013

    Some of these comments from 2008 are really funny to read…especially the guy with the interest only note on a $550k home.

    It’d be fun to see where he/she is now, as well as getting a fresh perspective from everyone on this rent/buy debate.

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