Articles Comments

My FI Journey » Investing, Reflections » Is Home Buying Right for Me?

Is Home Buying Right for Me?

1395503_rural_homeOne of my goals for 2013 was to educate myself on home ownership and decide if buying a house was a good idea or not.  To that end, I read some books and spent a lot of time reading about home ownership online.  After all my research, I have come to the conclusion that home ownership may not be the best thing for me at this point.  Below, I’ll work through my thought process.  Hopefully, some of my observations will help you if you are facing a similar decision.

My Current Living Situation

Currently, I rent a one bedroom apartment.  It’s considered to be a luxury apartment, which means that it comes with such amenities as a gated community, plentiful parking, and a washer and dryer in the unit.  I love my in unit washer and dryer.  Love them!  It’s a nice apartment, clean and spacious, with plenty of room for all my crap. It’s also nice enough to have guests over and not feel too ashamed.  My theory is that if you can get enough wine into a guest, they won’t notice that I live in a one bedroom apartment.

One major upside of my current location is that it’s very close to where I work.  Only about a 15-20 minute drive. I’m also close to shopping and a major train hub.

The downside of this area is that it’s not where successful highly educated professionals reside.  So I’m not exactly pulling in major status points for living here.

I pay approximately $1,500 a month for this place, which isn’t bad for the area.  This equates to approximately 25% of my take home pay.

 

My Current Local Housing Market

It is said that all real estate is local.  Given how many different places I’ve lived over the course of my life, I believe that statement is correct.

I’ve mentioned a few times before that I live in rather high cost of living area.  So what does that mean exactly?  Well, it means that “starter” homes come in around $300,000 to $350,000.  Condos come in a touch less than that.  These prices seem outlandishly expensive to me since this is the most expensive area of the country I’ve ever lived in.  What’s worse is that the starter homes in this area are usually small, old, and dumpy looking.

Why don’t I just move to a nicer area?  The nicer areas are all substantially more expensive with starter homes coming in at a half million, and located far from work.  Given how much I loathe commuting, this isn’t really a viable option.

 

Benefits of Home Ownership

  • You’re officially a real adult.  For some strange cultural reason, home ownership is the gateway to being perceived as a successful and respectable adult.  This becomes increasingly important as you get older and further from the college and young professional crowd.
  • More space.  Generally you’ll get more space for your money with a home than an apartment.  And you’ll get a yard.  So you can let the dog out or challenge your friends to rousing bout of croquet or Calvinball.
  • You can do whatever you want.  If you want neon pink walls, no one is stopping you.  If you want to crank the bass up, there aren’t downstairs neighbors who can complain.  Want 12 cats?  Live the dream!
  • You build equity over time.  Home ownership is a bit like forced savings.  Every month you pay off some principal on your mortgage and thus every month you’ve saved a bit of money as equity in your home.
  • Mortgage interest deduction.  I’m hesitant to consider this a benefit since the tax savings can easily be dwarfed by the mortgage payments.  But the way that tax laws are structured you can deduct the interest paid on your mortgage from your taxes.

 

Downsides of Home Ownership

  • Decreased mobility.  Once you’ve bought a house it may be hard to sell it.  This isn’t an issue if you never move.  But life has it’s ways of throwing curve-balls your way, often necessitating a move when you may otherwise have preferred to stay put.
  • Maintenance.  Once you own a house, you’re in charge of keeping it properly maintained.  Everything from cutting the grass to fixing a leaky toilet now rests on you.
  • Vested interest.  The reality is that I could care less what happens to my apartment complex.  If it catches fire or is damaged in a storm, so what?  I’ll just move to another apartment.  With home ownership, that would be my house and my capital, that just got wrecked.
  • Dead capital.  Homes do appreciate in value over time.  But in most of the country that appreciation isn’t that impressive.  Certainly not as solid as growing dividends and share prices over time.  To make matters worse, you can’t cash in on your home’s increased value unless you sell it.

 

Running Some Numbers

Down payment savings equate to dead capital.

A 20% down payment on a starter home in this area would equate to between $60,000 to $70,000.  If I directed 50% of my take home to the down payment I could save up the required amount of money in a bit over two years.  The downside would be that for those two years, I would not be investing any money in my dividend growth portfolio, thus delaying my financial independence.

Just buying a house would not accelerate my journey to financial independence unless I was able to very quickly pay off the mortgage, thus eliminating most of the housing costs from my expenses.

How much would home ownership cost me?

  • Mortgage payments. A mortgage payment would just about double net expenditures on housing, meaning that almost 50% of my net income would now be funneled into mortgage payments.  If the rest of my expenses stay the same, I would now only be able to save 25% of my income, thus prolonging my journey to financial independence.
  • Increased utilities.  More house means more space to heat and cool.  All this adds up to increased utility bills.
  • Maintenance and renovations.  The rule of thumb is that 1% of the cost of the property should be set aside for potential maintenance and renovations.  Given the age of the houses in this area, something more like 1.25% may be a more prudent estimate.
  • Association fees (for a condo).  While condos are a bit cheaper than a home, they come with monthly association fees which cover such things as lawn care and maintenance.  While I love the idea of a condo, the association fees must still be considered as I make the decision to venture into home ownership or not.

 

Conclusions

At this time, it does not seem that home ownership fits well into my current goal of achieving financial independence by the time I am 45.  Houses in this area simply cost too much.  If I relocated to a lower cost of living area, I would have to reassess the home ownership situation.  With more reasonable home prices, it might make sense.

After I achieve financial independence, things may change a bit.  Hopefully, my salary will have increased through annual raises and promotions, thus allowing me to save even more money per year.  Perhaps then it would make sense to aggressively save money to buy a house in this area.

If I am blessed (cursed?) with one of those major life changes that necessitates more living space, it may be worth reexamining home ownership compared to renting a larger apartment or renting a single family home.

 

Thoughts

A one bedroom apartment may not be as bad as it seems to me.  Saying that one lives in an apartment complex does not necessitate explaining that you live in the smallest, cheapest, unit in the complex.  Since this is a rather spacious apartment, it’s fully capable of entertaining small groups of guests.  If I invested a tiny fraction of the down payment listed above into interior decorating, I could probably make this place pretty chic. Even if I hired a professional interior decorator to do the work for me, the price would still be substantially less than the down payment for a house.

 

Open Questions

One last consideration worth mentioning is purchasing a multi-family home.  Something like a 2, 3, or 4 plex.  I would live in one of the unit and rent the other ones.  I could use the money from the rents to pay the mortgage each month.  Even if the rents didn’t cover the entire mortgage, this type of setup would greatly reduce my housing expenditures and needs to be investigated further.  Unfortunately, I have not seen many of these kinds of buildings for sale in this area.

 

Readers:  What are your thoughts on home ownership?  Does buying a house fit easily into your plans for financial independence?  Would those plans change if the cost of purchasing a residence increased or decreased greatly?

Written by

Filed under: Investing, Reflections · Tags: , , ,

19 Responses to "Is Home Buying Right for Me?"

  1. Howdy mate, those are some realistic pros and cons, with ongoing maintenance and property taxes being the biggest cons imo.

    The one thing I will note is that if things feel expensive now, they will still feel expensive 10 years from now. The power of inflation is incredible and actually, prices today 10 years later will seem cheap.

    As long as you are investing your money somewhere, then hopefully you’ll come out at least neutral. Renting is shorting the housing market. Only when you own your place are you neutral.

    Sam

  2. I love your breakdown here MFIJ! Too often people just jump at it because they think it’s what everyone should do and there are times when it may not be the best. Overall, I think it has the potential to be good as long as its done for the right reasons and done with financial prudence in mind.

  3. Will says:

    I agree with your conclusion, based on your local housing market. Everyone’s situation is different.

    I own a 2-bedroom condo (bought in 2009) and it made/makes sense for me. I only paid $156,000 for it, and my monthly payment/condo fee only comes out to $1,240 per month. The annual mortgage interest deduction has been huge for me, I am getting another $2,000-$3,000 back in tax refunds each year just based on that. That, to me, has probably been the biggest positive.

    In addition, it’s been nice to have some stability and not have to worry about finding a new apartment every year or two. It’s a nicer place than I could probably afford to rent, and I live right off of the highway. When I sell it, I really just expect to break even or make a very modest profit.

  4. I really enjoy being a home owner, but it is not for everyone. If the timing is right, owning a home can be a great investment. Our house has increased nearly 20% in the past 2 years (not nearly as much as the market, but it’s not completely dead money). That being said, it can be a pain and it definitely makes you less mobile. Plus, our expenses are probably around $500-$750 higher each month than if we were to rent.

  5. Pauline says:

    It doesn’t seem to make much sense in your situation. I bought a 3 bed place when I was working in a high cost of living area, so getting 2 roommates was offsetting most of the housing costs, I paid the same as renting a 1 bed.
    Re mobility I just left and rented the place, but understand it is a extra hassle most people wouldn’t take on, and I didn’t mind having roommates at age 25 but now, not sure I’d do it with the current house if needed.

  6. You’re right, the “American Dream” is highly overrated. If I were starting out now as a young person, I would DEFINITELY buy a multi-family and live in it. Another variation on that plan is a SFR but invite roommates in.
    One other benefit of owning, though, is that your housing costs can go down as you age (paid off mortgage, refi, etc.) whereas rent will always go up over the long run. Building in a model where your housing cost can drop-off at the right time in your life, vs. sitting out there as an unknown, can be a nice piece to the puzzle.

  7. Sounds like you’ve certainly thought it out. As I was reading I was thinking that a multi-family home sounds like the perfect move for you. Further down the road it could become purely an income generating asset should you move out at some point. It sucks that they aren’t very prevalent in your area, they make up a large portion of the housing where I live.

  8. MFIJ,

    Enjoyed your thoughts on home ownership.

    I decided a while back that, for the most part, home ownership just doesn’t make sense for me. If I wanted to raise a family and have a yard for the dog to run around in and all that…then it would probably make sense. But not necessarily financial sense, but rather emotional sense. I think home ownership is best if it’s a lifestyle decision rather than a purely financial one. Because I think in most markets here in the U.S., you’ll be better off renting and investing the spread between the costs of renting and home ownership. Prof. Shiller agrees with that assessment, and has said so often recently.

    However, the idea of owning a duplex and living on one side does intrigue me. That would be a great way to leverage home ownership and a rental property all in one neat package. The only issue is that most of the duplexes in every area I’ve ever lived in are always in dumpy neighborhoods for some reason? Strange.

    Best wishes!

  9. I think that buying a multi-family housing unit would work under the right circumstances!

    I’m a homeowner but my current location makes it a no-brainer. Housing in my area is dirt cheap. If I lived in a high cost area, I would probably do things differently.

  10. I used to be a hard and fast believer that home ownership is the way to go, but I’ve changed my thinking in the last year or two. It seems like your apt is just right for you now, and the cost of it fits perfectly into your financial independence plan. If I were you, I’d probably keep my eye out for a duplex or triplex, but other than something like that coming up, I’d stay in the apt. Remember the Millionaire Next Door. Who cares about status? You’ll be having some huge status when you can retire at 45. :-)

  11. Michelle says:

    I like owning a home, and that is mainly because owning a home here is similar to the cost that you would pay to rent an apartment. I also like having a place to call my own!

  12. Andrew says:

    Great post! I’ve been debating this just recently. It’s been stuck in my head that owning a home is a must and renting is a waste. But I live in NYC where houses are well over $500,000 in a decent area. Coops are an option, but they are very restrictive. I also rent a one-bedroom but will have to make a decision as to my next move because my wife is expecting. So I’m going to have to decide on renting a bigger place or buying house/coop/condo…we’ll see.

  13. [...] Is Home Buying Right for Me? on My Financial Independence Journey [...]

  14. [...] My Financial Independence Journey: Is Home Buying Right for Me? [...]

  15. No one knows your situation better then you and what you are trying to accomplish. If you goal is to be at a particular point by 45 you need to look at your options for getting there. If you want a home and plan on getting one they 5-10 years from now it could be a lot more expensive if you wait. To me home buying isn’t for everyone and sometime leaving in an apartment is best or at least having roommates.

  16. I’ve owned a home now for 4 years and I think it was a good decision. I mean you’ve got to live somewhere, and owning a home does give you a great number of benefits both emotionally and financially. At the end of the day you get tax savings and also the ability to recoup a chunk of the money you’ve sunk into the home if you sell, not true for renting. So run some numbers, but I think owning a home is a good way to go.

  17. [...] TeacHerFinance is buying a condo! Congratulations!  But on the other hand, My Financial Independence Journey dissects why buying a home is not right for him at this time. [...]

  18. scott says:

    I think it may be helpful to provide your readers with a few more details on the tax savings on mention in the article. This statement “…you can deduct the interest paid on your mortgage from your taxes” is not necessarily true. It is important to understand the interaction between the standard deduction and itemized deductions. Deducting mortgage interest may provide zero incremental tax savings for a number of taxpayers.

  19. Evan says:

    Having just moved from my condo (which is owning property in the truest sense) to a home I just bought 4 months ago all I can say is WOW. I have spent a lot more than expected on random stuff/repairs.

    I think the most important take away from the post is that maybe just maybe all those things everyone told us were “Financial Rules” might not be so solid after all. Hell, your entire blog is based on that idea!

Leave a Reply

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>