New American Dream is renting to get rich

Wed Feb 15, 2012 12:05pm EST

Photo by Rick Wilking/Reuters

Photo by Rick Wilking/Reuters

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(Reuters) - 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 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 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,

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 one-company town and the company goes down, there goes your job and there goes your home value."

Greg McBride, a senior analyst at, 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 pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 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

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 post-bubble 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 money-making investments are elsewhere.

(Editing by Bernadette Baum, Beth Pinsker Gladstone and Andrew Hay)

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Comments (88)
Democrat4Life wrote:
So what do the owners of those rentals have to say about this article. LOL! These people that spend $2M+ on property and then cry about how much it’s worth make me laugh sometimes.

Feb 16, 2012 8:32am EST  --  Report as abuse
paintcan wrote:
Homeownership allowed the buyer to deduct the mortgage interest and sometimes the maintenance expenses.

The social cost of renting is the tendency of transient neighborhoods to be anonymous and for the tenants to run down the property. Absentee landlords tend to be abusive and not care about the appearance of the property. I can only imagine that neighborhoods full of absentee landlords will become slums very quickly and the value of their investment will diminish rapidly. Decaying neighborhoods are notorious for being primarily rental property especially if they are multifamily buildings.

In this period of federal and state budget cut backs, the towns and cities will have to make up for lost aid by raising property taxes.

My Aunt and Uncle rented out their Mother’s home after she died and before they could sell it. They don’t want to do it again. They had a single mother tenant who reneged on the rent. I think she was having difficulty getting support from her ex and they spend about a year, I think, in court fighting to evict her. The repairs to the house had to wait while she was living in the house and as soon as she was gone they were able to fix it up and sell it. Tenants are seldom as careful as owners.

Maintenance of the property, especially of the interior, will usually have to wait until the unit is vacant. They will still have to be insured and I wouldn’t be surprised, but can’t say from experience, whether homeowners get better rates than landlords.

This article is spin on a bad situation. Large numbers of absentee landlords means a neighborhood is on the decline. It is easy to argue that the landlord’s take is parasitic and not truly what that unit should cost an occupant to live in.

A better alternate would be to allow for owner and tenant occupancy but many residential areas have zoning rules preventing apartment rentals in zones restricted to single family neighborhoods. That is one of the reasons why real estate was so successfully over speculated. Zoned density restrictions artificially limit the supply. Rural towns are doing the same thing with dedicated or deeded conservation land. The man who wants the rural character of his vicinity preserved can deed it to the town and not pay property taxes on the “estate” he can insure is out there with out neighbors. But that reduces the potential developable area of the town and also reduces the number of taxable property in the town.

And it should never be forgotten that if oil and gas costs rises appreciably, and they probably will, vast amounts of suburbia are going to take a hit. This country could build sprawl because it was inexpensive. Towns a will have to rethink their zoning and allow for higher density before the mega houses and Mac Mansions become the graveyards of white elephants.

An aging population with smaller families and higher costs of living are not going to be able to live in them. It’s happened many times before and people tend not to notice that. And unfortunately – the Mac Mansions are not built as well and are not generally as compartmentalized due to fashions in architectural design and floor plans. They won’t convert to apartments as easily as the older and larger 19th century house types could be. They must also be equipped with larger parking areas because zoning laws will require that. Few modern suburban subdivisions will allow for parking on the street, especially during the winter in the Snow Belt.

Feb 16, 2012 8:38am EST  --  Report as abuse
dareisay wrote:
Property tax…..just keeps going up and up! Owning a home is just not worth it anymore!

Most of it is school taxes…never had a child….but I keep on paying for it! I’d sell if I could, but every other home is for sale in this area…and many have been on the market for years!

Feb 16, 2012 8:41am EST  --  Report as abuse
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