Expert: Russel Ray - 11/16/2010

Question
QUESTION: This question is more about places to live in general. It seems like a very American thing to want to own ones own house, but even in the long run isn't it cheaper to rent an appartment? I mean sure you can't gain equity from that, or full legal authority over an apartment, but for those who really like to save money wouldn't it be the best choice? Also is there anything else out there that gains equity like a house would?

ANSWER: Hey, James.

Somehow your question just got posted to my question board even though it is dated 11/12. Sorry for any inconvenience.

If your intent is to buy a home, live in it, raise a family in it, retire in it, and perhaps even die in it, that equity is very valuable. It's like paying rent but getting it all back at the end.

The only thing I know of that gains equity like a house would is owning and operating your own business.

Hope that helps, and again I apologize for the delay regardless of where it originated.

Russel

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QUESTION: Ok, but what makes that equity so valuable? Even when the housing market sucks right now? If I were to compare a house that is the same size as an apartment and everything else is equal which would cost less to live in factoring in the equity one gets from it? I wouldn't mind living more modestly if I had the chance to save more of what I earn. What is the true value of house equity?

Answer
Hey, James.

That equity can be particularly valuable if you have a catastrophic health problem that is not covered by insurance, or where insurance caps it. If you're renting, you'd have to pay twice the rent to cover something like that, once in rent, and then the equal amount of rent into a savings account.

That's really all equity is, a savings account. So while you are living there and paying your mortgage, you're actually putting your mortgage money into a savings account, called equity.

Where people get into trouble, as we have seen these past few years, is that they use the equity not for catastrophic events but to go on a vacation, or buy a new car, or even furnish the house. Then, when they need that equity savings account, it's not there. Your vacation money is spent, the car and furniture depreciate.

If you think long-term, which is what you have to do when you buy real estate, stocks/bonds, and collectibles (stamps, coins, autos, etc.), they always appreciate. It's the short term where people have problems, and it sounds like you're thinking short term.

Do a quick calculation. Let's say that your rent is $1,500 a month and that you live there for thirty years. You've just spent $540,000.

Let's say that your mortgage is $1,500 a month and that you live there for thirty years. You've just spent $540,000, but when you go to sell after 30 years, you get that $540,000 back, or at least a good portion of it depending on where you live. Here in California, after thirty years, you'd probably get triple that amount back, if not more.

Hope that helps.

Russel