Homeownership- A case study
Today I am happy to feature a guest post from a friend. We have no financial relationships except that we buy each other beers when we are together. I recently discussed the real cost of homeownership since buying my million dollar plus home. It’s not pretty. The point of the article was that a lot of money goes to things other than principal and interest. Thus, when buying a home consideration should be given for the true cost of maintenance.
In talking to the author of this post, he agreed. He lived in Longmont, CO (the home of the famous Mr. Money Mustache), which by all costs has a reasonable cost of living. He lived in the same home for 14 years and recently sold it as the Longmont market has become more “hot”. Him and his family have since moved to Seattle where they will not be purchasing a home partly due to being empty nesters now and also the crazy housing market there.
So how did it go for someone who owned a home the “right way”, meaning for more than 10 years in a market that appreciated? Is it worth the purchase? Here is the post. He gave me the source material and I have edited it some. Enjoy and let me know your thoughts.
Homeownership a real case review
I bought a home in 2003 for $330,000 (the home was built in 2000). I recently sold it in 2017 for $519,000. My first reaction was – WOW! – that is a profit of $189,000 I just made from this house. (ed. Money in the bank yo!) But it isn’t that simple.
Since I put $75K down initially in 2003, and the amount owed to the bank was about $175,000 I did end up with a cash payoff of about $335,000 from the bank. I know that the $335,000 comes with some financial baggage, but I wasn’t really sure how much until I ran some numbers. (ed. I call the baggage “maintenance drag”, much like tax drag for stocks.)
For me, the true profit should be determined by how much money I put into the house minus the final cash I got back.
Money put into the house:
- Down payment: $75,000
- 14 years of financed payment of about $1900 times 168 payments (principal mortgage and interest, taxes, and insurance. No mortgage insurance since I surpassed the required down payment threshold.): $319,200 over 14 years
- Kitchen renovation: $22,000
- Hardwood flooring: $25,000
- Miscellaneous. replacement/renovations and overall maintenance – very hard to measure but let’s guess conservatively (low): $30,000
Total cost of money into the house: $75,000 + $319,200 + $22,000 + $25,000 + $30,000 = $471,200
(ed. Sounds right to me. Homes have a way of sucking up money in renovations and maintenance ($77,000 in this case) and then there are taxes to be paid too.)
Financial setback of a home
So, forgetting the fact that I had a nice roof over my head for the past 14 years, the financial set back from owning a house during that period was my final cash payout from the bank ($335,000) minus the actual money I put into the house ($471,200). That means I ended up spending $136,200 more in 14 years than the final cash I got back at closing. Now that $335,000 at closing doesn’t look as great as it did before I started running the numbers
Renting and investing
Now that isn’t terrible if you consider a comparable home’s rental cost. I would expect to have rented something in the range of about $2000/month in rent (less in the beginning and more in the end) for 168 months. So the cost of renting would have been $336,000 for a comparable place over the 14 years.
The $336,000 I would have spent on hypothetical rent versus the actual $136,200 out of pocket that I spent after the sale of the house is a savings of $199,800 by owning the home. (ed. Not too bad. Seems worth the hassles of homeownership thus far).
But what about that $75K that I lost to the bank on buying the home on day 1. Could I have recouped that in 14 years to make up the nearly $200K? At an expected 6% growth in 14 years on $75K I would expect something around $170K by now. (ed. I used the Physician on Fire calculator and get closer to $151,000 with the tax drag and investment fees)
What that tells me is that, yes, in theory I could have made up that $200K or who knows even surpassed it. It certainly is not black and white, but in my mind, the “home as an investment” is a wash versus “renting and investing”. In 2003 I was more than happy to take on home projects and I needed to fulfill the American dream of home ownership. After 20 years of that (including my other home purchase) I’m willing to rent townhomes (with no yard) and enjoy the new found freedom of not having any yard work or maintenance to deal with.
Ed. So at the end of the day he saved $199,800 by owning this home instead of renting. If he had invested the $75,000 downpayment 14 years ago he could have had $151,000 in growth. Homeownership wins out by almost $49,000. Plus there is the mortgage interest deduction, but I never think that should be the only reason to buy a home.
Thanks to my friend for laying out the numbers here. I found this very insightful because he did all of the right things. He bought a reasonable home in a nice neighborhood with good public schools. Raised his kids there. Sold as the market became hot and when he could downsize. At the end of the day, he netted a profit of $49,000, but with the added cost of time for maintenance, renovations, etc.
This is one case, some people will do better and some (like me) will do worse. What is your story? Any thoughts on this?
31 thoughts on “Homeownership- A case study”
Outside of a handful of areas in the country, I don’t think viewing a home as an investment is ever a good idea. I did make some profit on my first home sale, but we bought near the bottom of the market in 2009, did a refi x 2 to get lower rates, then sold at the peak of the market in 2016. We managed to avoid any catastrophic/major repairs — our new roof was subsidized by homeowners insurance due to hail damage.
I considered renting it out, but it was due for new a AC system, a new boiler (radiator heat), and who knows what else in the next several years, and I wanted the cash on hand to subsidize the baby that was on the way..
This new home is going to be a 20-year+ home (barring major life changes I am not currently planning on), and I KNOW I’ll have to replace the AC etc. while I am here. If I had renewed the damn homeowner’s warranty in June I could’ve had it replaced for free (still kicking myself and hoping it dies while the replacement I got is still in effect).
Ha. I am sure my AC, furnace and hot water heater are on the way out. I had debated renewing the Home Warranty and have yet to take the leap. For us it is $600 with a $75 deductible for service. We worked a lot of the kinks out the first year, but is it worth maintaining the warranty for the big stuff? I initially thought yes. The math sure seems to favor it, but what if they limit me to the type of AC unit or water heater I can place? That would kinda stink considering that all these things suck up electric and gas utilities.
Congrats on the positive sale. Subsidizing kids ins no joke. They have a way of sucking up money and time, but mostly time. Still worth every bit of effort and I suspect the memories will pay it forward exponentially.
There are a number of online tools that answer the financial aspect of the rent vs buy question. Here is a good one: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?mcubz=1.
Thanks for sharing the calculator. That is a nice one. To me it is important to look at all of the reasons (costs, desire to change a place, emotions, etc.) and then decide. From a purely financial standpoint it may or may not make sense.
Great post. I think houses are rarely much of an investment. Home maintenance is a nightmare. I fear I have committed myself to ownership for a number of additional years since I adopted a new puppy this week. My house is long paid for but the thought of getting it ready to sell it has always stopped me. I think unless you have beachfront property the best you can hope for is to break even.
A puppy! Congrats. Our dog has kept us from renting and was the big impetus in buying. Today alone I spent 30 minutes figuring out which sprinklers were broken. Now I have to spend another 30 minutes figuring out how to fix them and then fix them…ah home ownership.
No financial relationships? That’s about the best financial relationship a man can have with someone: buying one another beers!
Thank you so much for posting this: we’re in the midst of considering a very similar situation, and I’m wondering how to treat it. I’ve never looked at homes as investments and would prefer renting in many ways, but we’re in a market where home ownership appears to be significantly more cost-effective. Plus the wife loves the idea. So we’ll see…
Thanks again for posting this – it’s exactly what’s on my mind. Glad to know that it’s probably a wash in his case (which sounds like what we would do) – I am concerned that we would come out significantly behind. I’d love it if the whole thing is just a wash anyway.
It is the best kind of financial relationship!
I agree, a home in most cases probably is fine from a monetary sense if you stay with it for at least 5 years. If you think about leaving after a year or two it is hard to make a profit with the commissions, etc.
Good luck on your hunt! Keeping the spouse happy is important for sure!
So cool to see the numbers – I always love a good case study!
We’ve found much the same – that the costs are often a wash between the two and that it usually comes down to the volatility in house prices vs the volatility in your investment if you go the rent and invest route.
The volatility is the scary part of ownership. If you are ready to sell and the market is bad, then you are pretty much screwed. Renting is definitely a nice idea.
I’m glad you mentioned mortgage interest deduction at the end. This would have lowered your friends taxable income by ~ $200,000 over the time of home ownership. Thus he also lowered his tax bill by at least $50k. Also, I agree completely, the interest deduction should never be a reason to buy a home.
I have come out ahead with my home since I do not have to pay the bills. House hacking is a wonderful thing. My roommates (tenants) cover all the bills and pay me to live there; much better than renting
That is a pretty sweet deal. So basically you own it but rent out the spare rooms to cover PMI and utilities? Nice! I suspect as a single person that is easier to do. If I offered to have my friends live in my house with my wife and toddler, my wife would tell me to go find another house.
That’s right, I rent out the extra rooms. Do not have have PMI. The rents almost 2x the mortgage, covers all repairs and maintenance. We split utilities 5 ways but in reality my roommates pay for my utilities as well. Most months clear $1,000+
House hacking is great for single people. Happy wife happy life – don’t offer up that room.
Interesting real life case study… Especially considering it was based on an actual sale and not rough estimates from Zillow. I’ve owned my home for just over five years now and based on my numbers I come out ahead a little as well. No regrets here, but the home maintenance is a horrible chore!
Home maintenance is honestly the worst part. Last night at 11pm I was snaking my tubs drain because that needed to be done and was the only time I had to do it. Not how I want to be spending a Tuesday night.
We currently own but renting is definitively not out of the question. We are thinking about the convenience and flexibility renting would bring us. We could live anywhere in the world and switch it all up at minimal costs compared to owning.
That is part of my desire to rent and also to live in an RV. Flexibility to move every few months once we are financially independent. The other caveat is that we have a 2 year old son. I would not mind a nomadic lifestyle from him but my wife (who is way more practical) would prefer more stability as he grows. I suspect she will win out in the end and we will remain in our current home for a long while.
Thanks EJ; interesting way to think about it. I just did a similar calculation on our house which we paid off a bit ago.
At the current Zillow value, which is appreciated about 60% since buying it (much like your friend’s), we are almost $70K under water.
This is not the result I would have expected; if you’d asked me before I read this post I would certainly have guesstimated being in the black overall instead of the red.
Ouch. I think my prior mindset was based on knowing how much interest we’d paid cumulatively, but not really giving the other costs (insurance, RE taxes, the renos, etc.) enough credit for their impact.
On the other hand, with a family of 6 we would likely have been renting a similarly-sized home, and such rentals around here have been between 2500-3000 for a long time. Call it $450-500K.
Great comment and thanks for posting! It is interesting to see how these things add up. I am sure that on my first 2 homes I lost money despite selling for a “profit”. I am hoping my current home is my last or at least my home for a long while. I am still being very cognizant of things like renovations, etc. There are a bunch of things I want to do but am just biding my time.
Great breakdown. Most people use much higher level numbers. You’re right the return is nowhere near what the sale and loan payoff amounts make it seem. House hacking is a great way to help take care of a lot if not all of the costs you’ve outlined above. For many people, it’s a great way to get their finances into shape!
House hacking? Now you have peaked my interest. Do you have a post about this?
The industry definitely drives up the expected returns on home ownership. This is also in Longmont where the market is currently hot. So who knows how this would translate in a less then hot market.
Scott Trench wrote about it as a pillar to his FI path in his book Set For Life. A brief overview here: http://www.coachcarson.com/financial-runway-early-financial-freedom/
Thanks for the comment. I just read the article. Arnold Schwarzenneger actually did the same thing when he first moved to LA. He bought a apartment building and rented other units to his friends. When he sold the property it was the first time he made a million dollars. Not through movies, but through house hacking….so flex those muscles!
We own our home 100% outright now. If we ever move from here we’ll likely rent though – at least for a few years. A big part of that reason is that we don’t know where we would settle. We think we might enjoy “testing out” a few cities over a 10 year period of so.
We’ll see. 🙂
That is awesome. I wish we owned our home outright but currently I want to save since I am not sure how long I want to keep working. Enjoy the “testing out” life. My goal is to do some RV living but currently I have a 2 year old, so those plans are on hold for a while.
Probably a good idea. My wife and I sold everything – literally – about a dozen years ago. We were still working (running our own business, so could work from anywhere). We bought a large boat and had plans to live on it and travel the coasts full-time. At that point we had a dog, cat, and young daughter.
Our intent was to homeschool. It all seemed like a good idea, but it was a lot harder than we thought. Harder on our daughter more than anything. Not having some steady friends and more consistency of life was hard. We took a (big) loss on the boat and moved back into a house within the year.
Waiting a while, and even doing some low-cost test-runs, is a better idea than what we did.
Brad that is great advice. I just read your comment to my wife while we are eating breakfast and she was impressed. Thank you for writing. I will keep this in mind every time I consider pulling the trigger on our nomadic lifestyle. At least we will stay steady for the next 7 to 8 years. Then maybe in middle school do a test run like you suggest.
Longtime reader, first-time commenting. I’d agree that the return on investment, even for someone with timing as fortunate as your friend, seem less impressive when you run the numbers.
As with most MDs tired of the peripatetic life that our training demands, I was dying for a home with a garden to lay down literal and figurative roots when I came out of fellowship. My wife was the calming force in helping us hold out for quality. Like your friend, we lucked out with timing – my wife sold her Back Bay condo Boston in 2005; we kept our taxable funds in cash equivalents to save up a downpayment; bought in 2009 (nadir year in our area of So Cal). and while we are quite happy where we live, there are certain pleasures (the flood that claimed most of our ground floor; the plumbing catastrophe that spilled feces on our hillside garden the week before we hosted our first Thanksgiving with 11 family members sleeping under our roof) I could have done without.
There are also the rookie mistakes – I’d have chosen a place 2/3 the size of our current (first and only) home. While it has appreciated more over time for the added square footage, the smaller mortgage and reduced maintenance would have helped our cash flow considerably.
There are also those well-reasoned posts where renting seems to have the upper hand:
Appreciated your article’s contribution to the discussion. Here’s to making peace with our debts…
Crispy Doc thanks for commenting! Flooding and feces down gardens sound quite terrible. I used to live in the South End and can imagine selling a Back Bay condo in 2005 was a win. Nice work.
That is good that you have held onto the one home. I often imagine downsizing but the costs of selling do not make it a win for us. Hope So Cal living is nice. I was there last week and it made me reconsider Nor Cal living.
We’ve started the process of looking at buying a house so this was great to read right now. Home ownership is obviously the biggest financial decision most people make, but I think it’s also the most emotional one. There’s pressure from family, expectations based on status and place in life, and owning property as being a core part of the American Dream.
While most of us on the FI path are finding a new way forward, there’s still a lot of people attached to that original ideal. At the end of the day it’s about putting the math before the emotion. And while we can’t predict the future, I think it’s better to have planned and lost than to have never planned at all.
Thanks for reading Matt. It is a tough decision for sure. I often get emotional about this decision too as I have bought 3 homes in my life. Best of luck for figuring out the home ownership.
Our families also gave us expectations of home ownership, kids, cars, etc. It is tough saying no to their ideas of success, but we are trying to set up our own.