Crazy Finance: Episode 1 – Why Buying a House Might Be the Worst Financial Decision

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1:27Today on the James Altucher Show. Right. So that money is gone. That money is gone now. Previously, you had$200 ,000 in your bank account, and now it's not there. What are the characteristics of the ugliest investment? It's illiquid, which means you can't cash out whenever you want. In fact, usually the time when you want or need to sell your house is the time when you can't sell out. This isn't your average business podcast, and he's not your average host. This is the James Altucher show.

2:08New podcast episode that I'm doing with my good friend, Doug Hill, about what I would call not necessarily crazy personal finance tips, but personal finance that I would say a lot of people, if not most people would disagree with me. And the reason I say that is because I've written about these topics before, and some people have been so angry at me as to even give me death threats. That's how important personal finance is for the psyches of many people out there. And I have with me Doug Hill, who occasionally disagrees with me. Doug, how's it going? Occasionally. Yeah, James. Now, you kind of buried the lead here.

2:50We first met, Back when we first met, you were living a minimalist life. Yeah. Remember, you had no more than 11 items to your name at the time. Right. I disagreed with that. That was the first thing we ever disagreed on. That's not a good idea. Well, I didn't rent an apartment. I didn't own a house. So I just stayed in Airbnbs. We're going to talk about homeownership in a second. But living in an Airbnb is not necessarily more expensive than renting an apartment. You don't have to pay for any furniture, any utilities. I only had my 11 items. So just think of all the things in your house you've paid for.

3:25And that's whether you rent or own. You've got to pay for furniture. You know, a bed is expensive, desks, all the things in your kitchen, place. Guess what? When I Airbnb'd, all that was supplied to me. So yes, maybe technically if you added it up, I was spending more on an apartment in New York City per month than I would if I rented. But overall, when you factor in all the other costs, I think I was saving money. But what I really want to mention is I think owning a home is a bad idea. And in particular, it's a bad investment. I think people have been scammed into thinking that owning a home is the quote unquote American dream, the white picket fence, the yard, the safe streets for your kids to play.

4:11The whole thing has been a marketing scam for banks to sell you mortgages that essentially enslave you to debt and to a location that you might be tired of, but you're stuck in, and much better to be free. Freedom is worth a cost, but in this case, freedom would actually save you money in the long run. And I could go into the details, but disagree or agree? Yeah, I completely disagree. But I would like to hear the reasons behind, aside from like the, I get the enslavement and the idea that you can't move as freely as you otherwise would. On the other side of that, though, James, when I walk outside my house and I look around, I'm like, this is mine.

4:54I can do whatever I want with it within reason. Sure. And there is a feeling of ownership and control that you get from owning a house that you don't get if you're renting. I hear what you're saying, but that feeling of ownership, what does that mean? That was something maybe your parent, like that's, that has to be given to you. You weren't born wanting or craving a feeling of ownership. Like humans didn't own things for a million years and now they do own things. So that feeling of ownership is some cultural thing. So I respect that. Like you feel better when you own something than when you don't own something.

5:35But I feel better, for instance, when I don't own something. Like I can make the financial argument first. Yeah, let's do that because that's the important piece, right? So let's say, I'm just going to pick a round number. Like let's say you're buying a million dollar house. It doesn't matter if it's a half a million, 200 ,000, but I'm picking a round number, a million dollar house. Typically people put 20 % down. So$200 ,000. So that money is gone. Like that money is gone now. Previously you had$200 ,000 in your bank account and now it's not there. And then you're in debt,$800 ,000. and now you have to pay a monthly payment on that debt, right?

6:15You have to pay the interest and the debt on a mortgage is, let's just say, I don't even know what it is now, 7%, something like that. So you're paying 70 ,000 a year. And so it's, what is that? Like 6 ,000 a month roughly. And then you're paying property taxes, whatever that is, like another 1 ,000 or 2 ,000 a month. So eight or 9 ,000. Then you're paying for maintenance. So like Doug, right now I'm staying in my house by myself. My wife is out of town. And there's just like random people like working all the time, like around the house. There's like somebody doing the lawn. There's someone feeding the animals.

6:53There's just things happening all the time that I'm paying for, I guess. Like the other day, there was a storm. The electricity went out. You got to pay someone to come in. And sometimes you have to tear things up and like replace your wiring or whatever. Like at once a year, there's usually some big maintenance. You know, this is hard to quantify. I don't know what people's average maintenance costs are, but it's more than insignificant. And, you know, supposedly you save a little bit money by deducting the mortgage payment interest from your taxes. That's a tiny, a tiny thing. And the other thing is this has changed lately because of remote work, but you don't really have job flexibility when you own a house.

7:32I can't just pick up and move tomorrow. let's say I have a job in New York city. And so I paid a million dollars for an apartment, but now I want to get a job in Kansas city or Los Angeles. I can't just pick up and move because I own my house. And you know, so people say, well, you know, it's an investment for the future. But if you think about it, what are the characteristics of the ugliest investment? It's illiquid, which means you can't cash out whenever you want. In fact, usually the time when you want or need to sell your house is the time when you can't sell a house. Like when housing prices crash, or there's a recession.

8:07There's high leverage. You have to borrow a lot of money to buy your house and you pay it off over maybe 30 years. So you don't really own it for those 30 years. And there's no diversification. So when you own a portfolio of stocks, okay, you could buy and sell any of the stocks on any day, like many minute when the market's open, you can buy and sell a stock. Also, you own a whole bunch of stocks. It's diversified. But you're probably the biggest part of most people's personal portfolio is this giant illiquid investment called a home, which you can't sell, and it certainly is not diversification.

8:43It's probably 50 % or more of the net worth of most people. So these are just financial reasons, like forgetting about the personal reasons. So my overall argument is it simply costs more. First of all, on the monthly, you add up the property taxes, the maintenance, the interest payments, and whatever else. What is it? Condo fees. Or when you're in, there's a home ownership association. You have to pay fees there where you have to pay garbage company to pick up your trash and there's utilities. Again, the maintenance. So the monthly costs are probably as much or higher than rent. And when you buy the house and you have to put the money down, by the way, when you add up all the interest payments, you're paying like a multiple of what the house costs.

9:26And when you put the money down, that money is gone. Like let's say it's$200 ,000 down. That's money you could have been making, you know, let's say five to 10 % a year on, compounding in hypothetically the stock market. But that money is just gone. Like it's nowhere. Well, that money is now equity, right? So that will increase as the value of the house increases unless something dramatic like 2008 happens and you have to sell during 2008. That money comes back to you at some point. It's not like it goes into a hole and you can never get it out. At some point, but A, the return on a house is not greater than the returns on almost any other investment like stocks, bonds, whatever.

10:08Actually, it's interesting. The 2020s is the only time in the past 100 years that the average return on the house so far has been a little over 10%. It's always been lower. Like in the 2010s, the average return on the house was 3.8%. Stocks was 13%. In the 2000s, the average return on house was 4%. In the 1990s, it was 2.7%. So it's only been in the 2020s, because of COVID, there was inflation. This is not even taking out inflation, but with inflation, it's 10.2%. There was more inflation. And just like in the early 1980s, or 1970s, there was inflation. So it was 8.7%. That was the next best decade after the 2020s so far.

10:50So it's not like a great investment anyway. Yeah. Yeah, I think you bring up a lot of good points, James. It's hard to argue with you. You used to be in debate club, right? No, no. But people hate me so much. Sometimes I have to be able to defend myself occasionally. Yeah. Well, you're doing a good job. Yeah. I think you're right. I mean, maybe there's this assumption that people make when they own their house, they're going to make money. I mean, my personal experience, the house that I'm in right now, I bought it for X and it's almost X times two, right? we've put a lot of money into it a lot of new capital into it to do kitchen and bedrooms and things like that but the way i look at it is when i move out of this place whether that's in five or ten years whatever that number is that the profits that i'm going to make from selling the house assuming i'm still make profits which i think is a pretty safe assumption that's going to be kind of like found money for me, right?

11:45It's going to be almost like I've saved it in a way that I probably would not have saved in another asset class, like putting it in the stock market or putting it in the bank. And why is that? Because it's sort of a big chunk all of a sudden. Yeah, exactly. Like you're going to redo your kitchen. You know, that's a large number that goes into the house, elevates the value. That money, I don't know, I probably would have stuck in a savings account, which would have made me three or 4%, whatever the number is. And I get to live at a higher level, arguably. That's why you increase the value, build a new kitchen, so that your every day-to-day living situation improves.

12:27So there's intrinsic value in that. But yeah, from a pure financial position, I mean, you own a house, you never really own it, right? You're paying property taxes, whether or not you have a mortgage, right? So if I If I wrote a check today and paid off my mortgage and the bank goes away, I get the deed. I'm still paying whatever dollars every year to live on this property to the state. That's a good point. And you can't control that, by the way. They can arbitrarily say, oh, your house is worth X. And now you owe$5 ,000 a month in property taxes. And you could argue it. Maybe you get it down to$4 ,000, but it's hard to make that happen.

13:05And you still have the maintenance, which is unexpected expenses. like you might not be ready for it and then suddenly you have to redo all your wiring or cable or whatever.

13:17Take a quick break. If you like this episode, I'd really, really appreciate it. It would mean so much to me. Please share it with your friends and subscribe to the podcast. Email me at alcatra at gmail.com and tell me why you subscribed. Thanks.

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14:29For one thing, you can post a job. LinkedIn's new feature can help you write job descriptions and then quickly get your job in front of the right people. You get qualified candidates. At the end of the day, the most important thing to your business is the quality of the candidates. And with LinkedIn, of course, you can feel confident that you're getting the best. Based on LinkedIn data, 72 % of small, medium businesses say using LinkedIn helps them find high-quality candidates. Find out why more than 2.5 million small businesses use LinkedIn for hiring today. Find your next great hire on LinkedIn.

15:00Post your job for free at linkedin.com slash altature. That's linkedin.com slash Altature to post your job for free. Terms and conditions apply. The other thing is, let's say you have this chunk of money at the end. What do you do with that money? Well, I invest in your crypto pictures. But where are you going to live? No, no. Well, yeah, that's the next thing. It's like, well, that's like downsizing and finding a new place to live. I mean, if I had to choose, I mean, I love Virginia, but it's a very expensive state in the northern part of the state. but if I were to go someplace less expensive, someplace more out of the way, arguably you're going to get a better place for less money.

15:41But yeah, that's a good question. So, but that's a trade-off, right? So there's some aspect of the quality of life that might go down because you might not be near a city or a cultural center or whatever, but there's a trade-off. You might get a bigger place with more property and so on. But you're just going to take that money though and essentially put it all into another house. This is why once you put that first down payment down, you really never see that money again. It's gone because it's going to go from house to house. Yeah. And if that's the case, I mean, once I sell this place, if I buy a place, it's going to be a lot smaller.

16:15We got this when we had kids around. Now it's just me and Mary. So just to compound the issue, I just bought a place down in Dominican Republic that we're haven't built. So not only do I own one house, James, and I own two, really just flying right in the face of your argument. But that might not be, so I say never buy a home, but what the place in the Dominican Republic, that is like an investment property, right? You're going to rent that out. So then for whatever reason, that's when people sit down and do the math. They don't do the math on their actual home that they live in, but you figure, okay, I'm going to pay$300 ,000 for a place in the Dominican Republic.

16:57I'm going to pay this in mortgage. I'm going to be able to charge this in rent. The management company has told me they take care of the utilities and other stuff. It's all going to cost this. You have a very clear idea. Oh, I'm going to make $2 ,000 profit a month. There might be an occasional small maintenance thing, but not really. So you do the math and you say to yourself, at least I'm going to make all my money back and then the house will appreciate and I'll make some money. You don't do that math on the home you're living because you're not renting it out. You're living in it. So all those expenses, whether it's, you know, property taxes, maintenance, interest, all that is born by you.

17:38And when the interest is born by you, that in total price of the house, like my whole point is that it ends up, you never really calculate. I don't know anybody who actually knows the cost of their house. I don't know the cost of the house I'm living in. Oh, no, that's above my pay grade. But I bet you do know the math on the Dominican Republic thing. Yeah, because that's more recent. But yeah, for example, I don't know what our property taxes are here. Yeah, even though you pay them every month. Every year. But yeah, I'd have to ask Mary. Mary would tell me. But like, you know, every dime. And it's not because I don't think it's because it's recent.

18:13You know, every dime of the Dominican Republic thing, because your goal is to make money. So you do more due diligence on the number. Yeah, and we're going to go down there and visit there as well. But I think for the most part, like 10 months or 11 months out of the year, that thing will probably be rented or I'll attempt to rent it. But I do know the numbers. I do know what the expected cash flow is, to your point. Yeah, because you had to study that to make a purchase decision. Like when people buy a house as a home, of course they do the math and they're like, like, can I afford this? And what's my monthly, you know, expense is going to be.

18:50But they really are just looking at, yeah, this feels like it. Like somebody says, this feels good here. Like there's more about feelings and not about actual numbers. And, and, you know, furthermore, you know, so, okay. People say, well, when you, when you're renting, you're just throwing money down the toilet. I would dispute that by saying, no, I'm, I kept my down payment. so now I either can sleep more easily at night because I have plenty of cash in the bank and no debt or you could say, I'm going to invest this money. Maybe$200 ,000 down payment would have been investing in or starting yourself like four or five different startups or more.

19:31So there's so much opportunity cost with that down payment, I feel. Like, again, I don't know if your house is higher than a million, less than a million, whatever. But with$200 ,000 just sitting there with the goal to eventually make money from it, you might invest in a good investment. You might several, you diversify. You might start a company or help your kids start a company. And you're still paying the same amount per month, roughly, like rent and all the other costs. Sometimes it's less, sometimes it's more. People say the rent matches that usually, but I don't know if it does. Sometimes it does, sometimes it doesn't.

20:07People usually buy a house or a car based on what they can expect to pay per month. And whatever that gets them, that's what they get. And so, like you said, they'll do the math on, can I afford this home? Oh, it's$3 ,000 a month or whatever. I didn't get the home, so I'm going to go rent. Well, I could spend$3 ,000 a month. Right. So, you're spending the same amount per month, more or less, but you're out the$200 ,000 down payment. Right. Now, you say you get it back. Oh, okay. When are you selling your house? Are you selling your house next year? No. When are you going to sell it? five, 10 years, maybe?

20:43So, okay, when you're in your 60s, if I may be so bold as to say. How dare you? How dare you? And so you've been buying houses. Presumably, you haven't been downsizing since the very first house you've owned. You've probably been buying better and better. So basically, that initial down payment, you've never seen the profit on it until finally, if ever, you make the decision to downsize. So it's like a 40-year period that that down payment is just gone from your life. And it was a big amount when you first put that first down payment down. Yep. And in some points, you didn't sleep easily at night because you were worried.

21:20Yeah, that 2008 period, that was a tough one. Oh, man, I lost my house during that period. Yeah, I mean, 2010, I lost my job when we had to move, and it was no good. Yeah, and just when you need to sell, that's the time when you can't sell. So again, characteristics of an ugly investment. It's illiquid. You can't sell when you need to. And it's not diversified at all. So James, what do you call that? So like, you've convinced me, right? Yeah, it's probably not the best investment. Financially speaking, is that the left brain, right brain? I don't know. It's one side of the brain that is deciding, okay, this may not be a good investment, but I'm not going to sell my house because you've proven to me that it's a bad investment.

22:08I'm still going to own my house. What is that? Is that like a cognitive dissonance or something? No, because you've already said this other reason. There's like these ephemeral reasons. Like you just feel good owning something. Like, even though, like you said, first the bank owns it, then the government owns it. Even after you pay off the bank, the government forever can take this away from you. And, but you could change the walls. You could, no one's going to kick you out. If you love the place, a landlord's not going to kick you out because he's decides to live there himself or has someone else who wants, or he wants to jack up the rents five times.

22:41Like you never have to worry about that. So that's, you're paying for some degree of peace of mind. Although the counter aspect is that when you're stressed about your house, it's a really stressful situation. So that's, you know, but maybe you have five years of peace of mind for every one year of stress. Maybe it's even 10 years of peace of mind for every one year of stress. But again, there's this idea that you're trapped a little. Also, if you lived in New York city during COVID and prices were down because so many people were selling and you wanted to leave too, but you couldn't because you couldn't sell and make enough profit to put a mortgage down on the next place.

23:18So sometimes you're stuck. Factories would sometimes lend the money for employees to live in the factory town because they don't want people to have any flexibility to move. They want the factory workers stuck. They can't auction themselves out to the highest bidder. They have to just stay working for the factory that maybe pays less. So there's kind of this thing of being trapped that I don't like. But okay, maybe you said, okay, I know I'm going to work around here. There's plenty of jobs. I don't really need to move. And then the other thing too is you and I might be different. I tend to think you like a little bit working on your house.

23:59I've seen you in situations where you didn't like it, but... There were lots of those early on when we first bought this place. We were going to build, but then we couldn't find the land we wanted. This had the land, but the house was a mess. So we wanted a project. We just didn't want this big of a project. But yeah, now that we have it, now that it's eight years now, but after about three or four years of really working on it, we were very happy. But yeah, it took a lot of time and there was a ton of stress early on getting it to the point where we could actually live in it. Yeah. And my, look, despite me saying all this, by the way, I should, full disclosure, I own my house.

24:38James, you stole my thunder. I was going to be like, okay, James, that's a good point. Why do you own a house again? Well, okay, here's the thing. And this is not like a sexist thing or anything, but I think in general, women like to own a house more than men do. And I think, you know, who knows? I don't know if this is true or not. It's just my own experience. that women tend to like to own. Cause it's like their nest that they build to raise kids in and they want kids to be safe. And I get that. And also I think, you know, typically, historically, men have earned more income than women. So for women, this is historically, it's been a good way to claim, you know, some equity for their own.

25:18They can't own your income. Like there is divorce law where they do own your income. And I think that's correct and fair, but with a house, they can really own half the house. And so I think there's different cultural reasons, at least in America, why women like homeownership, maybe a little bit more than men. Now, I'm not saying all men hate owning homes and all women love owning homes. Just that's what I've noticed in my own personal experience. And my wife really wanted to own a home. Robin really, really wanted to own a home. This is like all she would think about. And so because I just cave in to what everybody else wants, I also have a hard time choosing myself.