Part 1 – We talked about the hidden costs associated with owning a home such as maintenance and upgrading.
Part 2 – I showed how easy it can be for owning a home to cost a lot more than renting, even in the long run.
Part 3 – I showed how a home can be better to grow wealth if the home is cheap enough and if you don’t move.
True Cost of Owning my Home
Two years ago I purchased a 3 bedroom, 1 bath, 1400 sq-ft home. I paid $155,000 and got a 30 year fixed, 3.75%, USDA home loan with zero money down. My property taxes are about $2200 per year and I pay $1022 per month on the home. That $1022 includes mortgage, property taxes and insurance.
To compare to renting remember from the first post, most homes cost $2,000 per year on average to maintain and another $2000 per year in upgrades.
Since I’m a very do-it-yourself person, my costs are a bit less but not much because it is an older home with old appliances. This year alone I know I’ll spend about $1200 in upgrades by the end of the year. I’ve already replaced water lines and fixed a rotten wall. I started replacing some flooring downstairs and plan to replace a gas line, an exterior door and add insulation to the attic this year. This particular year I think I’ll get away with zero maintenance costs, unless of course my furnace dies before the year runs out. In my personal case, I expect an average of $1500 per year for maintenance since I’m such a DIY kind of guy and $1200 per year for upgrades.
On average, my home costs me a total of: $1247 per month. 1022 + ((1200+1500)/12) = 1247
As before, these comparisons will assume a 2% inflation per year for everything except the mortgage payment. For comparing wealth I will put any money saved per month from renting into index funds that expect to make 7% per year.
My Old Home: The Apartment
Before I moved into my home two years ago, I lived in a 2 bedroom, 2 bathroom 900+ square foot apartment with 1 car garage that I was happy with for $750 per month. It’s not exactly apples to apples but hey, $150k is near the bottom end for buying a home in my area. I actually bought the home trying to start a small business I couldn’t start in an apartment. The business didn’t work out but I still have the home.
I was happy with the $750 per month apartment and with the large gap in monthly expenses, you can already guess where this graph was going to go. Over 30 years of renting I would have a half million dollars in index funds compared to my current home that will be expected to be worth $270,000. The home does become cheaper after the mortgage is paid but your $500k in investments brings in more than enough to cover that extra cost of renting.
$1000 Apartment vs My Home
Today, if I sold the house and moved into an apartment, I think I would be more likely to look for a $1000 per month apartment with an attached garage. They’re rare but exist in southeastern Wisconsin. So here I will compare a more apples to apples $1000 apartment vs my home.
This graph is interesting because It shows that even though renting is cheaper per month for the first 20+ years, the home after 1 year already builds more equity than we could make investing the difference. In this case, even though the home costs more, it should be better in terms of building wealth in the long term.
I think it’s interesting to note how much of a difference a couple hundred dollars per month can have. $750 in rent to $1000 in rent, even though they’re both cheaper than $1247 per month it costs to own a home, $750 in rent will build more wealth than owning but $1000 rent will actually cost you more wealth than owning the same home.
Go Curry Cracker told us about a home he sold that didn’t appreciate in value at all over a couple years, and of course some of us got hit by the 2008 crash. That expected 2% increase may not happen.
I want to do a quick graph that poses the question: What if we move after 10 years? I’m unlikely to actually stay in my home for 50 years. In fact I’m already considering a move to another area of Wisconsin or even another state. We’ll factor in the cost of selling a home after 10 years just to see how it effects our static, live in one home for life, graph. We’ll still assume a 2% increase in home value per year, just because I think that is a long term average we should see. I Factored it to cost $15,000 to sell the home. Which is 6% for realtor commission plus extra fees.
$1000 per month apartment vs owning my $155,000 home and selling after 10 years. After 10 years, I simulate that I purchase another home of the same exact value. The graph is showing a small dent at 10 years but it still takes off earning more wealth for me than renting. This is encouraging to me, maybe I didn’t make as big of a mistake as I thought.
I did talk to a coworker today who mentioned his struggle to rent and save/invest the difference. He’s in the camp of wanting to use purchasing a home as a way to force savings. If you are undisciplined and can’t seem to get serious about managing money, there may be reasons to buy a home even if it’s not technically the most mathematically smartest place to put it.