New American Dream is renting to get rich

Rich Arzaga owns a luxury home in San Ramon California but he’s not betting on it as an investment.

The founder and CEO of Cornerstone Wealth Management who bought the 5000 sq. ft. property in 2005 for 1.8 million and has spent 500000 improving it considers the abode a wonderful place for his family. But ask him to rate his home or any home for that matter as a financial investment and Arzaga balks.

It’s the American Dream to own a home but whoever said that didn’t do the analysis on it says Arzaga knowing he’s taking a contrarian stance to conventional wisdom.

Examining 250 properties around the U.S. and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it Arzaga an adjunct professor in personal finance at the University of California at Berkeley found that 100 percent of the time it was better to rent rather than own.

That’s right 100 percent.

The reason is simple. While a home is the main repository of wealth for many Americans it comes with numerous hefty expenses. The carrying costs what’s needed to hold and maintain the asset range from property taxes and home insurance to emergency repairs and renovations. In a rental situation the landlord covers those costs leaving the occupant free to invest revenue in other areas.

I don’t have the emotions a lot of people do surrounding real estate Arzaga says. I have steely eyes for how investing in real estate works and I’d better be a prudent investor for my clients.

Owning a dream home he says creates a drain on other financial priorities causing homeowners not to meet their financial goals. They were going to fail.

Some real estate experts thought there was some truth to Arzaga’s argument albeit with several conditions.

To state that owning a home is or isn’t a good investment is too simplistic says Jeffrey Rogers president and COO of Integra Realty Resources. It depends. In times of relatively higher rents low home values and low interest rates it makes sense to own a home. But in a reverse market it wouldn’t be economically feasible. Over time those who purchase in down or flat markets with low interest rates come out ahead.

Our lifetimes are a long time and when we look over the long term real estate and other investments tend to have a positive return says Jed Kolko chief economist at Trulia.com

a real estate search and research website. But when it comes to real estate changing your mind is expensive. There are a lot of costs involved in buying selling and moving. If you move every two years it’s probably a bad investment for you. It also depends on your job market. If you’re in a onecompany town and the company goes down there goes your job and there goes your home value.

Greg McBride a senior analyst at Bankrate.com agrees with one point of Arzaga’s. Home ownership is not so much a creator of wealth as a store of wealth he says. The promise of home ownership is that over the long haul it can rebate many or perhaps all of your costs unlike rent which doesn’t rebate a dime.

The trouble he says is that many Americans want a home so badly they neglect other ways to grow wealth and financial security.

You have the other financial bases covered emergency savings retirement savings paying off debt saving for the education of your children McBride says. There’s no sense in buying a home if it’s going to deplete your emergency or retirement savings.

McBride crunched the numbers in a prebubble era 2004 for a home purchased at 200000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30year mortgage 1200 in annual home insurance closing costs of 5500 and maintenance costs of 100 a month along with property taxes he calculated that it would take a selling price 10 years later of 395404 just to break even. His conclusion gave Arzaga’s view credence Homeownership may not be the moneymaker you think it is. See the full chart at link.reuters.comhej66s

Then there’s the emergency fund a must for when a home requires unexpected repair work.

As far as emergency savings is concerned six months of a cushion is adequate McBride says. But only 24 percent of people have that kind of cushion and about 65 percent own homes.

So while home ownership may sound glamorous you need a lot of money to make it work without much guarantee of positive returns in a postbubble era. Indeed Arzaga cites himself as an example of how home ownership doesn’t pay off. His residence is today worth 1.5 million about 17 percent less than what he paid.

So why not sell? For Arzaga it’s a lifestyle choice and one that he doesn’t regret since his big moneymaking investments are elsewhere.

Editing by Bernadette Baum Beth Pinsker Gladstone and Andrew Hay

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