Upside/Downside of Buying a Home: Part 2

I felt like I needed to add another post to compliment my last post on this subject because of a recent post I saw by Kirk Chrisholm called “What is the True Cost of owning a home?”

In it he gives a great case for why owning a home is a bad investment.  Not only is it bad; it’s absolutely terrible with the numbers he gives.

Which is why I decided I wanted to run my own numbers myself using his same method and see where I stand.  I don’t think investment-wise owning a home is the BEST investment for sure.  Owning and operating your own business, if you are the type of person who is capable of doing so, is by far the best thing you can do to grow your wealth.  Stocks are another great tool to help build wealth over a long time horizon.  But that doesn’t mean I don’t believe in owning your own home.  There the intangible aspects as well (which I discussed more in my last post), and I don’t think it’s quite as bad as Kirk states in his article.

For one thing, at least in my city home, I don’t need to worry much about the costs he brings up having to do with owning a home (lawn services, siding, etc.).  When I moved into my home, I didn’t need to do anything with the appliances because it already had them.  I did however do things like fix some of the other little things around the house that were done wrong when it was built.  I also needed to pay someone to fix our deck because it used the wrong sized beams to hold it up.  So let’s look at the numbers over the past 5 years and compare that to the current price of our old apartment.

What his calculation doesn’t take into account is that all rental properties I’ve ever lived in ARE NOT RENT CONTROLLED.  This one was not either.  If you are able to get an apartment rent controlled then that may be a different story.  This one has increased at an average of about 5% per year based on the current price and the price when I lived there ($1050/month then vs $1300/month now).  It was also about half the size of my current home with no basement, which for me was another big deciding factor which I won’t incorporate into this exercise.

My current property taxes are at around 1.1%, which also makes a difference for this calculation. Kirk used 1.5% for his calculation.  I also have a mortgage interest rate of 3.5%, which also helps my chances more compared to Kirk’s 4% interest rate.

Kirk also didn’t seem to take into account the fact the interest paid on your home is tax deductible by end of the year, so it’s basically a net-zero payment.  So without any other extraneous expenses, all you need to look at to determine whether your wealth increased or decreased is your increase in equity vs taxes. My calculations are below:

So using this, on an equity and principal vs tax basis over the last 5 years, I’ve gained $5,730.21!

The problem here is that I did not include the costs of upkeep like Kirk added in his model.  From that standpoint I’ve put in around $12,000 into my home, including fixing major safety problems, adding furniture, painting, etc. Which means my net investment is more like -$6,269.79!

 

What a bad investment huh?  Yeah, losing over $6k is not fun, but a lot of that $12,000 I mentioned won’t be occurring every year.  Much of that was due to problems we fixed when we moved in.  Also, a lot of the things I fixed up to this point will last until I’m gone.  Not saying there won’t be other things I’ll need to pay for in the future, but about $2400 per year is much less than Kirk’s advertised STARTING $6,400, which I think is very excessive (for my circumstances at least).

For the fun of it, let’s see what happens to it if it spans over the full 30 years and I include the $2400 every year from here on out (which I feel is VERY generous):

I made less than $100 a year… oh poop!

Keep in mind this takes into account I’ve spent $72,000 on home improvements and repairs during that time, which seems about twice as high as it should be.  Also, the value increase of my home is based on the premise that the price I bought it for was the correct price.  I, the buyer, and he, the seller, agreed on the price it was sold at, but Zillow thinks my house is currently worth at least $10,000 more than what it should be according to this spreadsheet.  You can say the same about stocks: there is always a buyer and seller, and both think they are making the best choice for themselves at the right price, but one of you is wrong.

I also tried making home expenses $2,400 every OTHER year instead of every single year, and I ended up with a $34,000 profit!  So in all likelihood, I’ll probably make out better than just under $3,000.

But there’s one other thing I haven’t talked about yet: The avoided sunk cost of renting.

As you can see, after my first 5 years I did lose money but I also avoided having to pay around $70,000 in sunk costs for the cost of living in an apartment smaller than my home!  And after 30 years with rising rents at the same rate, I would have paid $852,000 over my lifetime that I will never see again.

It is true though that if I had invested my down payment of around $57,000, I would need to maintain a 5% return or more over the long term to counteract the sunk cost of my apartment.  4.5% would just break even.  And over the long term, the S&P 500 Index has a 7% return (even more than that if you look at the last 30 years).  I can’t deny it, it’s probably better from a wealth-building perspective to rent and stay invested.

So in the end I suppose it’s true, a house is a terrible investment compared to investing in the market… IF YOU STAY FULLY INVESTED IN THE MARKET FOR THE ENTIRE 30 YEARS!  Which as history has taught us, almost no one seems to be able to do when everything comes crashing down.  People tend to put all their money in at the wrong time and take it all out at the wrong time as well.

See the chart below I found out about from Wrap Manager, which shows what can happen to your return when you miss the best and most important days in the market:

What this chart shows is if you miss the 10 most important days of the market, you may not even break even on the money you sunk into renting vs owning a home.

So no matter what you decide to do for yourself, whether you would like to buy or rent, always remember to hold onto those stocks, buy low, and continue planning for the long term.  If you do the right things inch by inch, you WILL reach the goal line!  It’s a game of inches folks.  Cheers!