By Steven Krolak
(NEW ALBANY, Ind.)–Is it better to rent a home or to own one?
The conventional wisdom in the United States is that it’s always better to own than to rent, because homeowners can build equity in their property through their monthly mortgage payments and ultimately have something they can then sell for a profit.
But Patrick Lach isn’t buying it.
Lach is an investment adviser representative and founder of Louisville, Ky.-based Lach Financial and incoming assistant professor of finance at IU Southeast.
He has penned an article in the Wall Street Journal demonstrating that the costs of home ownership can make it a poor investment in the short term.
The story appeared in the June 17 issue within the larger feature, “The Most Useful Financial Advice I Ever Got.”
Lach writes that due to the way 30-year mortgages–the most common kind–are usually structured, the first several years of payments go almost entirely toward interest, not principal.
“This moderate build-up of equity during the early years of a mortgage can be quickly erased by the high transaction costs associated with selling a property,” Lach wrote.
So if you sell within the first five years of ownership, you are almost certain not to make a killing.
Lach rented after graduate school, and was able to document the benefits, which included saving enough for a down payment on his starter home when he and his wife arrived at their ultimate destination.
Now he incorporates this and other real-world experience in his finance courses. It is knowledge he believes is essential for students to understand.
“The reason people borrow so much and invest so little is because they do not have an adequate appreciation of the time value of money, and the power of compounding interest,” Lach said.
That appreciation can help students avoid being trapped in debt, and open new horizons of opportunity.
“When I teach students about the power of compound interest, they are shocked by how much they can have at retirement if they begin saving early,” Lach said.