The day before my 30th birthday, I made the biggest purchase in my life. After looking at 30+ houses (this must’ve drove my cousin/realtor nuts), I finally decided on a spacious 2600 sqft home in the quiet suburbs for the price of $190,000. My home equity grew $100K in four years and few months thanks to appreciation and paying down my mortgage. This was way faster than I imagined. So in retrospect, was this purchase a good or great investment?
Experts say your primary home shouldn’t be considered an investment and you shouldn’t buy your home based on appreciation. I want to put that to the test.
Get Me Some Equity – Hooray!
Doing some quick math, our home equity has increased by about $20K – $25K per year since we bought it four years ago for $190,500. This figures in the $10,000 down payment and principal payments totaling $20,000. This leaves about $70,000 in true market appreciation. So our mortgage balance is about $160,000 and our market value is about $260,000. That looks like a 9% annual return at first glance (math is 9% = (($70,000 in appreciation divided by ~4 years) divided by original purchase price of $190,000). 9% is not bad at all considering the S&P returns approximately 7-9%.
Interest, Insurance and Taxes – Bleah
Our monthly mortgage is about $1500 (though it varies based on yearly property taxes and insurance). Currently, $350 is going towards principal payments. The rest is towards interest, insurance and taxes. Over the next 30 years, the principal payments will grow from $350 to $797 and the interest payments will move in an inverse direction. Let’s add up the interest, insurance and taxes since purchase: ~$66,000.
But Max, you get a tax deduction on your interest and property taxes, don’t you? Yes, I get to subtract that amount from my taxable income. True. I’m in the 25% tax bracket so interest and taxes come out to ~$1,025 a month: $1,025 * tax bracket 25% *54 months = ~$13,500. That leaves us with a total cost of about $53,000 in post-income tax interest, insurance and property taxes.
Upgrades: These costs really add up :/
When we bought our 2,600 square foot home, there were a few upgrades that needed to be completed. The prior residents had cats that had accidents all over the carpet upstairs. Somebody literally scared the shit out of the cats. multiple times. gross. Aaaand there was carpet in the bathroom – sorry if you have ‘c’ in the ‘b’, but that’s just weird for me. The kitchen floor linoleum was coming bubbling, torn and missing in some areas. The above ground pool was removed but the foundational river rocks were scattered all over the floor. Tried to sell them on craigslist, eventually tried to give them away. A guy came and filled up his pickup and it didn’t even make a dent. We needed rocks out, grass in. Lastly, my wife would grow tired of the pale tan/orangey color of our downstairs walls. All this things add up. I would be remiss if I left out the two homeowners insurance claims we had. We scored a brand new 30 year roof thanks to hail plus new wood floors and modern fireplace thanks to a wall leak for the cost of our deductible plus the upgrades on the fireplace. So let’s add these things up.
- Carpet: $5,000 (~1300 sqft of mid grade carpet)
- Tile: $2,000 (kitchen and three bathrooms)
- Rock Removal, grass: $2,100
- Paint:$900 (super cheap, painters way underbid the job)
- Roof: $1,675 (includes $1,000 deductible plus upgraded shingles)
- Wood Floors / Fireplace: $4,504 (herringbone tile, mantle)
Total cost: ~$16,000. Keep in mind this doesn’t take into account the new faucet, fridge, toilets, washer/dryer, door knobs, drawer handles, lawn mower, etc. I can’t forget all the maintenance costs as well: tree trimming, plumbing, sprinklers, garage door, etc.
Rent: Now there’s a novel idea
My cousin and I were living together before we bought our house. He agreed to tag along for another year and a half after we bought our home. The equated to an additional $500 in rent and $100 in help with utilities/bills. $500 * 18 months equals $9,000 in help! Unfortunately, I didn’t save any of that money :(.
Q: Good or Great Investment?
A: A Terrible Investment. Let me tell you why…
Despite high single digit appreciation, I’ve spent more money on taxes, insurance, interest, upgrades and maintenance, essentially offsetting any gains. Here’s how every thing stacks against each other. At first glance it looks like a winning situation. Especially in year 1.
And it even looks like I come out ahead by $30K
But what inflates the numbers are my own assets being shuffled from my paycheck/checking/savings account for the down payment and the monthly principal payments which add to my cost basis.
If you take those two figures out, I’ve really only gained $15,690 in net worth since owning a home. This equates to ~6% in gains over 4+ years!?! Again, this doesn’t count the maintenance costs or the fact that utilities are probably higher than if we were in an apartment (definitely wouldn’t have 2600 sqft of space). This makes me question whether having rental units are a good investment for us.
It’s Not All About the Dolla’ Billz Y’all
Even though the return on investment (though it’s not an investment) is small, I like owning a home. I like the space between my neighbors and I. I don’t want to hear anyone running around above me or loud music at 2am. And I love having my formal living room as a jam room (stocked with a piano, drums, guitars, basses, keyboards, amps, etc.) The question is: could we get by with less? Less space, costs, etc. Additionally, there’s one more question.
Homeownership and Early Retirement: do the two go together?
How does this impact our early retirement goals? The misses and I had a lengthy discussion about it. Stay tuned for part two where we discuss the pros/cons of staying put, cashing out and renting, and renting and renting.
But in the mean time, what did you think of my analysis? How does it relate to your living situation? Have you thought about it differently?
-Max Out
