HOMEOWNERSHIP has always been considered the pinnacle of success. It is the dream of every Filipino. After all, a home is considered one’s pride and joy, and nothing less than owning his own castle is acceptable. No argument here. But the question is, “When is the best time to own one?”
This million-dollar question is best answered by learning from the example of my mother.
For the longest time, we have only been renting. In fact, mom never experienced what it is like to own her home. Not for the lack of searching though. For the past 20 years, we have been scouting all potential and feasible properties but without success. I personally stopped counting after we hit 50 houses; and that was years ago. Several times we came close to buying one, but there was always a variable that won’t make the sale push through.
Proponents of homeownership would have argued that we are just throwing away good money month after month because of renting. We’re making others rich while we are not building any equity for ourselves.
Argument deemed valid and accepted. But there’s also a good side to renting that most people fail to see. Since Mom is not bound by any mortgage, all her excess funds go to her savings. As a result from decades of prodigious saving and investing, she has created a sizeable retirement nest egg. Best part of it: All of it is liquid.
When we were onsite for the tripping, the broker told us how one of his potential buyers was turned down by the bank because he couldn’t raise the required down payment. I thought the bank did him a favor. If the buyer couldn’t raise that amount, he would definitely be burdened by the monthly amortization. Since all of his funds are supposedly invested in the house, he now has zero liquidity. In financial planning, we have always emphasized the need to maintain three to six months of liquidity in case of an emergency. That home equity won’t bail him out in the event that happens.
Furthermore, there is the psychological pressure of needing to keep up with the monthly amortization and cost of maintaining the house. Long before Robert Kiyosaki came up with the term “rat race” and shocked the world when he declared that a house is not an asset but a liability, the Chinese already gave this precarious situation a name: wu lu which means “slave to the house.” You become too focused on making money to pay for your home that it saps you of the energy to enjoy living in your home. That is the real liability.
Ever wondered what the truth behind American homeownership is and how it became a cult following? Corporations didn’t want their employees to have too many job options and so they encourage their people to go out and buy their own home. The government played its part in offering low interest rates and easy access to loans. Initially, there was the momentous feeling of accomplishing the “American dream,” but later on, a lot of homeowners realized that they were trapped in a seemingly never-ending cycle of slavery and could not take a lot of risks, like switching jobs, even if they wanted to. The subprime crisis that erupted five years ago only exacerbated the situation and compounded their fears.
A recurring theme in my favorite Japanese manga, Crayon Shin Chan, is that the father of the five-year-old protagonist often complains about their 35-year mortgage, and how he’s stuck in his work because he has to keep up with it. Our mortgages may not be as long as the Japanese’s but it’s not really a comforting thought of having to pay that in the next 15 or 20 years. As a rule of thumb, no more than 30 percent of your take-home income should be allotted for the amortization. Otherwise, it becomes too burdensome.
Mom made sure of that when she finally found her dream home and she opted for a term just long enough for her funds to generate interest until she pays the full mortgage off. She could have settled for a pricier and bigger home, but she realized, “It won’t make me any happier than I already am.” Best of all, she used only 30 percent of her resources for the property. She was wise enough to leave 70 percent to continue earning passive income for her.
A broker-friend once said, “If you’re looking to buy a home, see it as a place for you to live in and not as an investment because in case you ran out of cash, you might be forced to sell it at a loss.” Mom did not see it as an investment. She saw it as “the place she’ll retire and play with her grandchildren.” (Still working on it, Mom.)
I learned a lot of money management principles from my mother. I’m adding buying a home to that list.