When considering assets and capital, we tend to group things based on their general characteristics, and we name these groups by what we call “class”. So when talking about investments, we break them down into “asset classes”, often real estate, stocks, bonds, or commodities, and this makes it easier to talk about these things based on their general characteristics. But this often also makes it easier to forget about their differentiators within the class, the characteristics of each individual asset.
And these characteristics are important.
“Home ownership” is a monolithic term, just as “real estate” is also a monolithic term. Although every house is unique, it is considered as part of a broader asset class. When it comes to the whole “rent vs. buy” debate, which is never ending (because it is so subjective and context-specific), one statement often made in favor of buying is “houses always go up [in value]”. Now, this isn’t technically true, but that’s not really my point. What I want to say, though, is that whether and by how much a house goes up is actually a function of its physical structure, and this has some important implications.
Let’s assume that you have a 5,000 square foot house, a true McMansion. Let’s say that it costs $1,200 every month to heat or cool the place. To own this place, you would literally be paying the cost of a single-bedroom apartment just to heat and cool it.
Does the house still go up in value? Well, that depends on the spread of your costs vs. any potential appreciation.
Let’s assume an even larger house, with 25 rooms. Even if it costs $0 to heat and cool the place, what is the function by which the house is supposed to appreciate in value? Is there a high enough demand for a house with 25 rooms that you could hope to sell it? Ever? Maybe, just maybe, you do sell it, but can you sell it for more than you bought it? Or would that be more of a liability to the buyer than an asset?
I’m not intimately familiar with the sales of mansions, but I’m going to guess the demand for such large houses is very small, and those that are in the market for that sort of thing are going to look for a deal and not buy it as a matter of need. If YouTube urban explorations videos have anything to offer, I think mansions are abandoned far more frequently than people might believe because the cost of maintaining such houses is astronomical.
What this all means is that saying “houses always go up”, notwithstanding other factors such as geographic and sociopolitical location, is not actually true. It might be true at the level of the asset class, but would not be true, necessarily, at the individual unit.
Which means, whether a house is actually beneficial to you is a function of more important factors: ecological factors.
And we can do the same with the renting side of the debate. The phrase “rent is throwing money away” is extremely popular – something I’ve heard dozens of friends say because it is so widespread in the broader culture, and something which I contest. It is also widely perpetuated by the real estate industry and especially realtors, who make lots of money by convincing people this is true. I don’t believe it is throwing money away, I think it is simply one among many expenses for which you get something in return, and moreover has the advantage of avoiding extremely costly repairs. However, let’s assume you are renting a posh $5,000 per month apartment in downtown Denver. Are you actually saving yourself anything over the cost of potential house repairs? Do you need such a nice apartment? At a certain point, it’s difficult to say you aren’t throwing money away, so unless you are a trust fund baby with a cool $10m, you are probably not benefiting financially from such an arrangement. Ever.
Again, the “class” does not capture the essence of what matters at the “organism” level, so to speak.
Or, as I might say, “you can do ‘stupid’ both ways”.
See, one of the big reasons I’m not interested in owning a house at this point in time is the cost of maintaining it. Mind you, you can totally buy a house, pay to maintain it, and still come out ahead with appreciation, but almost every friend I know who has bought a house has experienced sticker shock when it comes to maintenance, which is one reason I think houses tend to be much lower-return that people think (among other reasons). Sure, you have some taxes to pay, that does affect things, but I think maintenance is the real killer. So, if you want to benefit the most from owning a house, you have to be thinking ecologically, about the natural relationships and dependencies that exist within the structure itself and its general relation to the environment, what I call “housing ecology”.
What is the exterior surface area of the house? This has implications for the effects of insulation and the costs of siding.
What is the airspace volume of the house? This has implications for the effects of heating and cooling.
What is the square footage? This has a direct effect on how much it costs to replace hardwood or carpet.
What is the wall space? This has a direct effect on how much it costs to paint.
Is the house in a flood plain? This has implications for the cost of insurance and whether a potential flood might ruin everything you own.
How complicated is the roof? The steeper the roof, the more angles and corners and slants, the greater the cost of materials and labor to replace it. We’ve probably all seen “rich people roofs”.
Generally speaking, a simple one-floor, square layout is going to be the most thermodynamically efficient house. Adding floors adds complexity and potential maintenance cost. Adding bathrooms adds greater potential for water problems. Etc.
The systemic complexity of the house makes a huge difference to how much it costs to maintain, so taking a systems approach to your selection of house can make a huge impact on how much appreciation you can hope to realize from the house itself. In the event you live in a place where the house does not experience appreciation, reducing systemic complexity could still make living there worth it by keeping other costs extremely low. Alternatively, a highly complex house can, in theory, wipe out all of your gains.
The same is true of apartments.
See, I’m happy for my friends who bought many years ago and have seen their houses go up in value, but I don’t for one second think I’ve missed out on anything by not buying a house years ago. Not only would this have been tremendously stupid for me, considering my insecure career even just 5 years ago, but I’m not convinced the ecology would have been in my favor, as a single minimalist of sorts. A house like what I’m renting in costs over $300 per month on average for utilities, whereas my apartment cost $80-130. I only live in a house like this because I can rent here, and the cost of utilities is split between me and my roommate (who actually pays a little more than half on the utilities, ’cause he’s a nice guy, though I’d certainly be fine paying my clean 50%). In the apartment, I was also not responsible for the appliances (aside from the washer and dryer). Granted, a garage would have cost me $75 a month, but having a large house to myself instead would have invited the purchasing of things to fill all the space of the house. Some people buy houses to “save money”, just to put tens of thousands of dollars into filling the empty spaces or doing renovations, which only marginally increase the house’s value. I really think things have worked out better for me by renting than owning a place.
Of course, renting a house like this all to myself, for probably around $2,500 per month, would probably have been dumb. If you needed or otherwise wanted this much space, buying is often better.
In that sense, I think what renting does is open your access to variety, from which you can potentially select an ecological advantage.
So in this sense, “renting” itself is not necessarily the advantage over “buying”, it is more that renting is more closely associated with smaller dwellings, which are typically more efficient. The mechanism of benefit is not so much the “renting” itself, but the ecological advantage that is more common with renting.
Likewise with houses. A small, simple house, all other things being equal, is more efficient than a large apartment. And that’s why it usually makes more sense for families to buy a house rather than rent an apartment or house of equivalent size.
I recently met a guy at my church who lives in a 400 square foot apartment. I thought, “This guy knows how it’s done”.
Of course, I’m not sure I’d want to live in a studio. The nice thing about this house is that there are different rooms to spend time in when I need a change of scenery. Back at the apartment, I had my room and living room, and during the warmer months, I also had the patio. And that was nice.
Also worth noting are some final factors. One awesome perk to this house is that the sun gets the front side walk, so as long as the snow gets shoveled, the sun melts any ice off. Gotta love true solar power. I will never buy a house that doesn’t have this feature.