Enjoy this chapter excerpt from the new book Guerrilla Home Buyer by Brian P. Callahan.

Buying a home is better than renting.

The largest single benefit to buying a home comes on the day when you send in your last mortgage payment. It is likely that no event in your life will bring as much financial security as well as a profound sense of accomplishment.

Your home, whether rented or mortgaged, likely represents the single largest item in your monthly budget. Imagine if you had no mortgage or rental payment. You would be in a position many of your peers would likely be envious of. Many options would be available to you without the monthly burden of a mortgage. If your income stayed the same, or increased, you could accelerate your retirement savings. If you paid off your mortgage at age 45, you could spend the next ten years seriously building up a retirement portfolio and maybe retire at 55. If you love your job and have no desire to retire, you might be in a position where you could simply cut back on your hours or take more vacation time.

There are many options depending on your own values and stage of your life when the last mortgage payment is made. You may make that last payment just in time to make the first payment on your child’s college tuition.

To own your home outright and not have a mortgage should be, in my opinion, the ultimate goal for a home buyer. My advice is to not focus too much on your home’s value as the years go by. The value in your home is intrinsic to you and your family. The financial value comes when it is yours alone and you no longer have a mortgage payment. The value of the house after it is paid for is a side issue. Over the last couple of decades, people have increasingly looked at their house as an investment. They think of it the same way as a stock and check the value on Zillow.com and get giddy to see it increasing in value. They ask themselves, “Should we sell?” or “Should we cash out with a home equity loan?”

These value-obsessed home owners often overlook a couple of important economic concepts.
First, the properties within a local market tend to move up and down in value together. If the value of your home is up 50% in the last 10 years then it is likely that other properties in your community are up about that same percentage amount. If you were to sell and buy another house in your area, you are not realizing any actual increase in purchasing power. It’s the same problem as inflation; if your income is up 10% in the last year but inflation is also up 10% then you are not any better off.

If the value-obsessed homeowner decides not to sell but rather take out a home equity line of credit, commonly referred to as a HELOC, then they may actually decrease their purchasing power should they decide to sell in the future. It depends on what they do with the home equity loan. If they thoughtfully update the house with the money, it may create enough new value in the home to offset the loan amount. However, if they go out and buy a boat, a new car, or pay for college, then they are actively decreasing the purchasing power of their home.

There are, however, some situations where a true gain can be realized. A homeowner might be able to play a little geographic arbitrage; selling where prices have risen a lot and then buying in an area where they have been flat or have risen a lot less. This can be done in certain areas and during certain periods of time. During the housing boom, I remember hearing about people who were selling their modest homes in San Jose, CA for huge amounts and moving to not-so-far-away Sacramento where they could buy two or three times as much house for the money they sold their small homes for. One story in particular stood out as a great financial move. A retired couple who had owned their small ranch home in San Jose for decades, and had no mortgage or home equity loans, sold it for $750,000 then bought a large new construction home in Sacramento and had $200,000 left over to put in the bank. Awesome.

Downsizing is another situation in which a seller may realize a benefit from selling a home that has increased substantially in value. Many empty nesters, or others who are experiencing a life-changing event such as divorce, may wisely consider selling and moving into a smaller house, town home, or condo. This is sometimes a great way to pay off a mortgage or home equity loan early and to then pay cash for the smaller home. Again, in my opinion, the faster you can own your home free and clear, the better.

Buying a home is an inflation hedge

“Hedge” means to offset risk. With regard to inflation and your housing costs, buying a home, especially with a fixed rate 30-year mortgage, will provide complete protection against future inflation. Once you buy and have that mortgage in place, you will probably have a coupon book with 360 coupons, each one with the same payment amount.

You just locked in housing payments (excluding property taxes) for the next 30 years. If the U.S. starts printing more money and causes a huge run up in inflation and interest rates soar, your payments will not change. Even the value of your home would likely be fully protected, as it would probably increase at least equal to the rate of inflation.

Renting, on the other hand, leaves your housing budget fully exposed to the ravages of inflation, unless you can find a 30-year lease with a fixed monthly payment.

Renting versus owning example

To really become convinced that owning a home is much, much better for your long-term
financial security, let’s look at a simple example.

Say we have two people, Renter A and Owner B. They both move into the same neighborhood at the same time and live in identical houses. They each also have $40,000 in savings.

Renter A thinks that owning a home involves too much commitment and is also scared to buy because of all the nightmare foreclosure stories he has heard. He signs a yearly lease agreement every year with the lease amount rising yearly at the same rate as the inflation rate. The first year of his lease is $1500 per month. Renter A keeps his $40,000 in a savings account accruing interest at a rate equal to the inflation rate.

Owner B is a Guerrilla Home Buyer who has educated himself on the benefits of home ownership and has learned how to limit his risk when buying and owning a home. He buys his home with 20% down (using his savings of $40,000) and has a 30-year fixed rate mortgage at 6.4% with a $1500 monthly payment which includes principal and interest as well as insurance and taxes. $1000 of the payment is fixed for 30 years and represents principal and interest. The other $500 represents taxes and insurance, which we will presume rise at the same rate as the inflation rate.

Each house is valued at $200,000 when Renter A and Owner B move in. We will assume that the rate of inflation for the next 20 years is a constant 3%. Let’s see how their respective housing finances look after 20 years, in terms of both their housing costs and accumulated wealth.

Renter A has made total payments of $483,663 on their monthly rent, assuming it increases by 3% every year. Renter A has accumulated $72,883 in his savings account which has been earning interest at 3% per year (compounded daily).

Owner B has spent $161,221 in property tax and insurance payments, which have been rising at 3% per year. Owner B has made mortgage and principal payments totaling $240,194. Total payments for Owner B equal $401,415.

The mortgage balance is now $88,536. The value of the home has risen with the rate of inflation (3%) and is now worth $361,222.

Owner B has accumulated wealth of $272,686 (difference between the current home value of $361,222 and the current mortgage balance of $88,536).

To look at it another way, Renter A is out $410,780, representing the $483,663 that they spent on their rent minus the $72,883 in their savings account.

Owner B, however is only out $128,729 (the difference between the total payments of $401,415 minus the accumulated equity of $272,686).

The net difference between renting and buying in our example is $282,051.

That’s right; the renter is out $282,051 more than the owner ($410,780 versus $128,729). As bad as this sounds for the renter, it’s actually much, much, worse.

The renter, after 20 years, is still fully exposed to inflation risks and will continue to have large housing costs. For the owner, the end is in sight. In 10 more years he will have no mortgage and his housing costs will plummet. He will only need to pay property taxes and insurance.

On top of this, we did not even include in this example the potential tax benefits of deductible interest and property taxes. This would add another dimension to the already wide benefit gap between renting and buying.

The internet has completely changed how people shop for homes. You can search for homes on some of the data intensive websites like Zillow.com and Trulia.com or on Realtor affiliated websites like Realtor.com or local broker websites.

There are iphone and android apps available that will tell you which houses are for sale as you drive down a street. High quality digital photos combined with virtual tours and aerial or satellite imagery provides consumers with instant access to a home and gives them the ability to immediately consider it or cross it off their list.

Searching for homes will be completely digital in the coming years and it is likely that the traditional real estate yard sign will go the way of the old traditional print media for advertising homes. There will be no reason to use a sign. In recent years, yard signs have become an advertising medium for the agent or broker rather than as a way for potential home buyers to learn that a particular home is for sale. The vast majority of buyers who are actually looking for homes will find them online, it is highly unlikely that an actual buyer will first learn about a listing from a yard sign.

A recent phenomenon I have noticed in the last year or two is that home owners will stop and consider whether they need or want a sign in their yard. Many have concluded that it brings no additional marketing value and choose to not have it in their yard.

There is no single, or nationwide, MLS. Each MLS represents one or more local broker association(s). The MLS is usually a separate entity from the association(s) and is governed by a board of directors representing the broker members of the local association(s). In essence, it is a group of brokers who agree (some might say “conspire” or “collude“) to share their property listing information and to offer a commission to any broker within the group who procures a buyer for their listing.

The commission amount offered by a broker who has listed a property for sale is included on the listing. Historically, the commission amount was based on a percentage of the sales price and usually reflected a one half “split” of the total commission being paid by the seller. For instance, if the listing broker had a 6% listing they would commonly offer 3% in MLS to any broker who procures a buyer. At closing the listing broker would receive 3% and the buyer broker would receive 3%. Most listings were sold by a broker other than the listing broker. The amount of the co-broke tends to be very uniform within a MLS.

The listing contract is between the seller and the broker with the seller agreeing to pay a commission upon sale of the property. The listing broker will in turn offer a co-broke commission to all MLS participants in order to induce them to use their efforts to effect a sale by presenting the listed property to their buyer clients. The listing broker is acting as a contractual bridge between the seller and the entire realtor community. The listing agreement is a bilateral contract in which the seller agrees to pay a commission and the listing broker agrees to perform certain marketing functions. The offer of the commission in MLS represents a unilateral offer from the listing broker to all MLS participating brokers. A participating broker may form a contract with the listing broker by performing the terms of the unilateral offer, i.e. by finding a buyer ready, willing, and able to buy according to the seller’s criteria.

As a seller, it is important to have information regarding local market commission trends to understand what represents a competitive co-broke commission rate. In the metro Chicago area, which is home to not only the National Association of Realtors but also the largest MLS in the country, 2.5% is by far the most common co-broke commission rate offered within MLS. Nowhere in an MLS listing does it show what the full commission amount to the listing broker is. It only shows the amount being offered to other MLS members as a co-broke.

The Realtor code of ethics contains a relatively new requirement that brokers inform their seller client what they will offer in MLS as cooperative compensation. If you had a listing in Chicago with a broker charging a 6% commission, the broker could offer, say, 2% in MLS. This could put your listing at a disadvantage on a commission basis, as the co-broke would be lower than most of the other listings. Also, if you listed your home with a broker who was charging only 4% but was offering 2.5% in MLS, you would not be at a disadvantage in terms of the MLS offer of compensation.