We asked Rich Arzaga, founder and CEO of Cornerstone Wealth Management, Inc. and adjunct professor in the UC Berkeley Personal Financial Planning Program, whether owning or renting a home is a better financial decision. He says most often the answer is renting, and explains why.

How should someone go about assessing whether to rent or own a home?

There are two different answers to that. The first answer is the classic answer given by any mortgage or real estate person, CPA, or any other adviser. It’s not the best answer but it’s the most common one. And that is based on what you qualify for, which depends on your income, credit and deposits—how much you can put down. Looking at this will help someone very easily figure out what they can buy, but just because you can doesn’t mean you should.

If you can afford to buy a home, why wouldn’t you?

For most people, their decision to purchase a home will actually hurt their long-term financial goals, like living the rest of their lives without running out of cash. There are two big reasons for this. One is that, with needing to put money down, do repairs and maintenance throughout the life of a house, and insurance and taxes, the cost of owning a home is very, very high. It’s much higher than anyone imagines. And the second thing is that appreciation for single-family homes for the past 55 years around the country has been no more than two percent (annually), roughly. And in the Bay Area, no higher than four percent. That’s basically no better than inflation. People are putting all this money into owning a home, but they are not getting much in return. So, when you actually do the math, and we’re talking about an apples to apples comparison of renting or owning the same house, for most people, renting it is better than owning, if you want to meet your financial goals in the long run.

How does the home ownership tax deductions figure in the equation of renting versus owning?

Tax deduction is a factor, but largely, not a big one. The smaller the home value, then it follows the smaller the write off. Some homeowners have no debt, so this would not apply. Also, this tax deduction is subject to legislative risk – it can change at any time, and today, it’s subject to being cut by Congress and the President.

Does the state of the economy affect whether you should rent or own?

No, not at all. This is independent of the economy. Because even when the economy is down, when people own, most don’t cut their mortgage, and when the economy comes back up, they are still going to remodel the kitchen.

It sounds like renting is better. Is it ever appropriate that someone buy a home?

Yeah, sure, it absolutely is. There are ways you can own a house and still make it work at the very end. If at the end, they have another plan to live with their kids, or lower their standard of living, or live in a cheaper community. Or better yet, if they have enough capital, they can own a house and still make their retirement work. For everyone the answer is pretty much the same. It’s financially better to rent, but if someone has enough money to overcome that deficit and still meet their financial goals then why not?

If home ownership isn’t such a good deal, why do so many people want it?

It’s emotional. Home ownership is an instinct; it’s a sense of entitlement for most Americans. It’s the American way. And so it’s just kind of in our DNA to anticipate that we will own a home, and that’s the right thing to do. There’s pride in ownership. People who own tend to keep up their house better. The other reason is you don’t have the risk of being kicked out of your property, the risk of the landlord going into foreclosure, or deciding to move back in. It’s mostly emotional, but there are also the practical reasons.

Do you own your house?

Yes, and we love where live, we are so proud of it. But we can make it work. I am not going to see savings suffering at age 85.

What about the argument that home ownership promotes saving money since you keep the money, rather than giving it to a landlord?

Sure. But most people are not disciplined. They will refinance and pull money out. The reality is that most people behave emotionally around their financial assets, even people who really know how to crunch numbers miss the bigger picture.

Is it just a myth there are people making money off their homes?

It’s situational. If someone in the Bay Area bought in 1993 and sold in 2000, they had a really good experience, but they got lucky. Because, really, who can time the market? Even buying in low, just because it’s cheap doesn’t mean it’s good. The type of real estate that is a good investment is commercial real estate.

Why is commercial real estate a good investment and residential real estate not?

Commercial real estate generates a cash flow.

What if your grandma gave you a house free and clear with no mortgage? Could you rent it and make a profit?

Probably not, because the expenses are still there. It’s really hard to make a single-family home generate cash flow. All of this is not a rule of thumb for everyone, but it is for most.

What else should people be thinking about when deciding whether to rent or to own?

Am I doing this because it feels better or because it is a good financial decision? Sit down and quantify the net result of renting versus owning. The big caveat there is that you have to be very honest with yourself. Every 10 years you are going to have to make a big capital improvement that is going to cost about $40,000 or so – a fence or a roof. If you don’t have good data, then your calculation is a house of cards.