I took a little break from this series as I sold my Buell motorcycle and went off to a beer festival. Now I’m back to finish off the series reviewing my own personal home on the subject.

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.

My_Home_750

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.

True cost of owning a homeThe apartment is cheaper on a per year basis for the first 22 years or so until inflation and eventually paying off the mortgage take over.

True Cost of Owning a HomeThis 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.

True cost of owning a home$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.

 

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8 comments on “True Cost of Owning A Home-Part 4

  • I think one thing to remember about the GCC analysis is that he forgot about the huge swath of the United States where the property values are so low relative the prevailing rental rates that it makes his analysis seem silly.

    I live in a $65K house. I also have a roommate paying $450/month (which is below market rate). Renting this place would cost at least $950 (I know because that’s what the previous occupants were paying). How ridiculous is it to say that renting is cheaper than buying in my case. You can’t beat a 15% ROI in the stock market. Even if my property only treads water on value, we’ll come out ahead. That being said, I don’t think we’ll ever buy a property that’s worth more than about $200K unless we become uber-wealthy and have money to blow on those kinds of things.

    • Totally agree with your analysis. I found that out a couple posts ago, if you can find housing cheap enough relative to rent costs, you can come out way ahead owning in certain cases. Even in my case, I was eyeing $1000 per month apartments and the analysis clearly shows I’m better staying in my home, even if I sell after 10 years. I enjoyed the learning process going through writing these posts. In the future I may look for an even cheaper home to move to.

  • Crazy interesting. When we buy, we want it to be forever. I don’t know that we’ll count our home in our net worth for this reason, but the extra money after the mortgage is paid off will be nice. Our rent lies somewhere between those two numbers. I think it’s also important to note that rent goes up; what you can get for $750 today will more than likely not be available for the same rate ten or even five years from now depending on your local market. Maybe that’s accounted for in here and I missed it due to lack of understanding on my end, but that’s another major factor in its wanting to own.
    Femme @ femmefrugality recently posted…What to Do About Your Rising Energy Bills This SummerMy Profile

    • I did factor in that the apartment is expected to go up in rent by 2% inflation each year. This was compared to owning a home where the mortgage may not go up, but the property taxes, insurance and maintenance cost is expected to go up by 2% each year as well. All parts in the series included inflation in their analysis.
      I think your home value is worth including in your net worth *but, I would have a note with it. Yes you can’t easily touch that money unless you sell or put a mortgage on it, but there are options you have with that home that renters don’t.
      If you want to keep your home and are trying to use the 4% rule to know if you have enough saved, then I definitely wouldn’t include your home in those calculations.

  • I think the renting vs. owning debate is one that will go on forever. Renting may be “cheaper” in the long run, but not owning a home will make your expenses higher in retirement. Personally, I like to own – not just because owning is cheap in my area but also because I enjoy a better quality of life. I like having control over my property and would not like having someone else dictate whether I could paint walls or change out a ceiling fan. That’s worth the $ of owning to me.
    Holly@ClubThrifty recently posted…Save Money on Your Next Road TripMy Profile

    • I guess the series was meant for people like me who are driven to retire as quick as possible, If rent is cheap enough, I would stay there as long as I’m happy and you may get to retirement a year or two quicker. Some people, like my coworker, are not disciplined enough to save that difference. Owning can often be the better choice even if it isn’t cheaper for some people. Just like the debt snowball method is better for some people even though it technically costs you more money.
      Control was a big reason I purchased my home. I like adding my personal touch, I like doing carpentry and I like having the freedom to do what I want without landlords. I just like to have all the data before making decisions so I think it’s worth doing these calculations even if you still go with owning a more expensive home. I probably average 2 hours a day researching random stuff. That’s how I diagnosed my fiance with celiacs disease.

  • A nice conclusion to the series. As noted by Holly, it is likely that the rent vs. buy question will likely go on forever … and always be debateable. I believe your series highlights a key component in the debate, often overlooked by most, and that is determining what is most important on an individual level and then making decisions based on the numbers. It is less about which is ‘better’ and more about understanding what your specific goals are and how renting or buying will impact your plan for reach said goals.
    SavvyJames recently posted…A Richer Understanding: Physical and Fiscal FitnessMy Profile

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