Money Rehab with Nicole Lapin - Why Nicole Rents— and Doesn't Own— Her Home

Episode Date: July 11, 2024

For decades, the American Dream has been defined by homeownership. But for Nicole, she's been able to make her money work harder for her by renting, and not owning, her home. Today, she follows the money trail of renting versus buying, and challenges the cliche that homeownership is the best path to financial freedom. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Brokerage services for alternative assets are offered by Dalmore Group, LLC, member FINRA & SIPC. Brokerage services for treasury accounts offering 6-month T-Bills are offered by Jiko Securities, Inc., member FINRA & SIPC. Banking services are offered by Jiko Bank, a division of Mid-Central National Bank. Securities investments: Not FDIC Insured; No Bank Guarantee; May Lose Value.  Brokerage services for Regulation A securities are offered through Dalmore Group, LLC, member FINRA & SIPC. Risks at public.com/disclosures/alts-risk-and-conflict-of-interest-disclosure See public.com/#disclosures-main for more information.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. It's time for some money rehab. When I tell people I am renting and I don't own a home right now, they are shocked. But renting has actually allowed me to grow my money better than if I had bought a house.

Today, we're going to follow the money trail of renting versus buying, and it's going to make you think twice about the conventional wisdom that buying a home is the actualization of the American dream. Let's start with the major argument that people make in support of buying a home. I hear it all the time. People will tell me that I would get rich if I own a home because I would be building equity and will essentially get all that money back, plus real estate appreciates. So long as I'm renting, I am just flushing money down the drain. But here's the real shocker. If you own a home, you are also flushing a ton of money down the drain. You just now own the drain. So good for you. I'll explain. Let's start with the appreciation part. Yes, historically, housing prices have indeed gone up over the long term. So from 1963 to 2021,

the average annual increase in home prices in the U.S. was about 5.4%, according to the Federal Housing Finance Agency. But this is a trend and not a guarantee. The housing market has its ups, it has its downs. 2008 wasn't that long ago. But even if you do get 5% return on your home investment, inflation and maintenance costs are really going to eat into those gains. Over the past three decades, inflation has averaged around 3% per year. So that would knock your 5.4% gain to around 2.4%, which is still a return. But then there's maintenance, property taxes, insurance, unexpected repairs, and all of this stuff adds up really, really quickly. If you own a home, you are the landlord, and you are responsible for all of the upkeep. Annual maintenance can usually cost you between 1-2% of your home's value,

so that brings your 2.4% adjusted return to 0.4%. Oh, and we can't forget the closing costs that are 2-5% of the home's purchase price, and realtor fees when you sell the house, which are typically between 5 and 6% of the selling price. These are substantial chunks of money that are just expenses, not equity. But speaking of, let's talk about this whole equity situation and the idea that you get your money back when you pay off your mortgage. Let's see how those numbers really shake out. Say you have a 30-year mortgage on a $500,000 home at the average mortgage rate right now, which is a little over 7%. Say you take out a

30-year mortgage on a $500,000 house at the average mortgage rate right now, which is a little more than 7%. If you shell out 20% for a down payment, which is a cool 100K, then you have a 400K loan over 30 years and you'll end up paying $567,000 on that loan in interest alone. And you certainly do not get that money back. If your house does appreciate at the historical 5.4% average, it will be worth $1.3 million after 30 years, which is amazing. But just to really make this set in, you're paying over a million dollars for $1.3 million in equity.

That wouldn't be the best deal I've ever closed. But if I were to rent for those 30 years at the average monthly rate for a rental, which is, by the way, lower than the monthly payment would be on a mortgage for that $500,000 home, I'd spend $493,000 in rent. Holy freaking moly. That is a lot of money. And no, I will not get that back. And I will not own that rental, even if I live there for 30 years.

But here is the really cool part. I can take that money that I would have spent on that 20% down payment for a home and the money that I'm saving every month on rent and invest it. And sure, like I said earlier, a house can be an investment and give you a sweet 5.4% return. But the annual rate of return in the stock market is about 10%. And that's nearly double what history tells us to expect from our home investments. So if you invest what you're saving by renting and you get a 10% return in the stock market, you'd have more than $4.3 million in 30 years. And again, a house would

probably be worth something like $1.3 million. Having said all that, the tough part about making a decision on your home is that the upside really changes depending on where you live. I use the average mortgage rate and the average rental rate in the United States, but if you're comparing rent in a really expensive city like LA.A. against a mortgage that you can get with a first-time homebuyer's loan for a house less than $500K, the numbers are obviously going to look different. And maybe a house in an up-and-coming neighborhood would be a better investment. For me, I have used renting as a way to free up my principal, that money that I would have tied up in a down payment and a mortgage so that I could make my money work harder for me in my investments and the seed money I used, by the way, to start this company. But it's not all rainbows and butterflies and 10% returns. My landlord could decide to raise my rent at any time and the potential for instability is super stressful. So at any

point, it might make sense for me to buy a house, either financially or emotionally. But the most important thing here is the lesson that buying a house, either financially or emotionally. But the most important thing here is the lesson that buying a house is not always the answer. Sometimes it can be, but it's not always the answer. You can get rich owning a home. You can get rich renting a home. Your financial situation might make renting a better opportunity for you. Or maybe even if renting is a better financial move for you, you value stability and that is more important than optimizing for your investments. I can't answer these questions for you. Questions about housing are deep and complicated and they are wrapped in financial trauma, but I can give you

the money trail to follow so that you can take that into consideration in your own very personal decision. For today's tip, you can take straight to the bank. If you do end up buying a house, choosing a 15-year mortgage instead of a 30-year mortgage can potentially knock off hundreds of thousands of dollars in interest. Remember how that 30-year mortgage on a $500,000 house costs you $567,000 in interest? That very same home at that very same interest rate would cost you $250,000 in interest with a 15-year mortgage. Of course, some things gotta give here. And so in this case, that means your monthly payment is higher. But if you can swing it, you'll end up keeping more of your money in your pocket over

time. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me.

And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.