Keeping a Hedge Against Inflation

CJ just relocated from the midwest for her husband's job. Are there any downsides to long-term renting? She and her husband are enjoying the low-maintenance lifestyle they have now.

QUESTION: CJ in Baton Rouge just relocated from the midwest for her husband’s job. Are there any downsides to long-term renting? She and her husband are enjoying the low-maintenance lifestyle they have now. Dave says that buying is an advantage because it’s a hedge against inflation.

ANSWER: The biggest thing you lose is the growth in value and the hedge against inflation, which represents two things. I mean, think about it—what a home sold for in 1970 versus what it sells for now.

I got in the real estate business in 1978. Houses I sold for $42,000 now sell for $242,000, and you lose that over time. Basically, as inflation makes your dollars worth less, that’s called . . . How do you hedge against that? How do you fight against that? You buy things that are part of inflation. So as a 20- or a 30- or a 40-year plan, owning real estate is a great plan.

The second part of that is that these days, the current tax law says the first $500,000—and you’ve already experienced that on your home—that a married couple makes in profit on their personal residence isn’t taxable. It’s tax-free, so you have tax-free growth on an investment that has an excellent long-term track record as an investment vehicle. That’s the biggest thing.

The month-to-month aspect of it—you know, people say, “Well, it’s cheaper to own than it is to rent.” Really, it’s not. By the time you pay your payment, if you have a house payment, even if it is less than the rental payments, you’ve got the maintenance. You’ve got the taxes. You’ve got the other things involved, and you really don’t save a lot on a given month-to-month or year-to-year. The big difference is the long-term aspects.

The last part of the long-term discussion is what a property rented for 20 years ago versus what it rents for now. When you buy, you lock in your housing cost at today’s dollars. When you rent, your rent goes up every year. Think about what your rent on that townhouse would be 20 years ago or what it would be 20 years from today. That gets real freaking scary. It just chews up your income. What we could rent a property for $500—well, I got married 31 years ago. What I could rent an apartment for . . . My first apartment was $235. That same apartment in the same neighborhood—and honestly, that neighborhood’s gone down a lot—is now $700, or three times as much. That was a cheap apartment in a bad neighborhood, which is how we started.

Long term, it’s not a good idea, but if there’s a period of time in your life that you’re saving money or you’re in transition, everybody I think is too fast to go buy. There’s a time that rent on a short-term basis buys you patience, and it buys you the ability to get yourself on solid ground to move. We actually rented one time after our bankruptcy for two whole years. It about killed me because I grew up in the real estate business, but I did. I rented for a couple years, and it enabled Sharon and I to get stable and save like crazy and buy that first house after we went through that bankruptcy 25 years ago. By the way, that particular property we rented then, the rent on it today would be twice what it was then.

That’s the problem. The rents go up. They don’t go up if you own the house. You’ve locked it in. The only thing that does go up is your taxes, and your insurance goes up, but that has to do with whether your local government is managing well or not. Most of them don’t. Most of them continue to overspend. They just can’t resist.

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