May 29th, 2013 | 19 Comments
One 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.
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.
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.
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 myfijourney
© 2014 My FI Journey