Wednesday, October 6, 2010

Misleading Financial Post of the Week

I came across the following article on Yahoo! Finance where an individual by the name of Steve Thompson gives 10 reasons why he lives "mortgage-free".  By mortgage-free, the author doesn't mean that he has paid off his mortgage; he means that he is renting rather than owning.  With the tanking of the real estate market, more and more people are giving renting a second look.  For some, renting does make more sense.  However, Mr. Thompson makes a less than compelling case for why he rents.

First, he says that when you rent, you don't have to pay property taxes, aassociation fees, maintenance expenses, utilities, or homeowner's insurance.  While it is true that you don't have a separate bill for these things, what does that matter?  Yes, you don't have to write a separate check to the city, the homeowners' association, the handyman, the electric company, or the insurance company.  Instead you write one check to your landlord.  Big deal.  Unless you are worried about the cost of replacement checks, the only thing that matters is your bottom line cost.  The author even alludes to this by saying, "Unbeknownst to us, taxes might be built into our rent, but at least there are no surprises."  The only surprise is when the landlord decides to raise your rent... 

...or take a month to get back to you about the leaky faucet...

..or use the "low cost provider" when repairing the water heater...

...or forgets to pay the electric bill and suddenly the power is shut off...

Mr. Thompson adds idiocy to illogic by following up "Free Utilities" with "Lower Utilities".  I suppose free is lower than not-free.  However, his lower utilities logic comes from the fact that he has rented condos and townhomes, which are smaller than single-family houses.  That is true.  However, what does that have to do with renting versus buying?  It's not like you can't go out a buy a condo or a townhouse.  How does he think the landlord acquired his rental in the first place?  Besides, if his utilities are free, what does it matter how much his electric bill is? 

Next, he says that renting is less risky than owning.  Renting isn't less risky; it is just risky in a different way.  Yes, when you own you have the risk that the price of your home will drop.  However, when you rent, you have the risk that rental prices will go up and up.  Yes, when you own you have the risk of foreclosure.  However, when you rent, you have the risk of eviction plus the additional risk that your landlord will be foreclosed upon.  How would you like to pay your rent dutifully every money and still be kicked out of your home?  It seems pretty risky to have the possibility of being evicted for actions that are beyond your control.

In fairness, I do agree with him that renting can provide opportunities to invest.  However, that assumes two things.  First is that you actually end up saving money by renting versus owning.  When you have a mortgage, three things happen:  
  1. Part of your mortgage goes towards building equity in your house that you can get back when you sell.
  2. Part of your interest gets refunded to you on your taxes. 
  3. When you sell, you may not pay any taxes on the profit you made on the sale of your house.
These facts need to be taken into account when you factor in your savings between renting and owning.

The second assumption is that you actually invest the money that you are saving by renting.  That requires a certain amount of discipline that some people just don't have.

Finally, I happened to stumble across another article written by the same author where he states the following:

"If you've always rented your home, start thinking about buying. A house is an excellent investment in your future, and you will be much better off financially if you own your home upon retirement."

I can't make this stuff up!

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