Home ownership seems to be one of the more polarizing topics in personal finance. Should you rent or should you buy? Are you throwing your money away if you rent? Should you pay off your mortgage early? (We cover that topic in our Raging Mortgage Debate post). Is your home an investment, or just a place to live?
For Us, Our House Is A Home
Although it’s possible to make money on your primary residence, we’ve never considered our houses as investments.
We don’t include our suggested house value in our net worth. Although we definitely have some value in our home, it’s not entirely clear how much we could sell our home for. Appraisals and Zestimate’s are one thing, but could we really sell for these suggested values? Furthermore, our house is surely not a liquid asset – it would take weeks if not months to sell.
We all need to live somewhere, so the question is: Do we live in something we own or live in someone else’s property? For our family’s wants and needs, we’ve chosen to purchase property. We’ve owned three homes over the last 22 years (see journey below) and the primary objective was to provide a safe, secure, and comfortable home for raising our family. Making money on these properties hasn’t been a driving factor.
Our housing journey below shows how we made some money on our first two homes, but we will very likely have a negative financial return on our current home. With the mindset that our house is a home, it doesn’t upset me at all that we will likely not make money in this house as it’s not an investment!
Our Housing Journey
Fresh out of college, Mrs. Need2Save and I were eager to start our adult lives together. We found an affordable apartment and quickly realized why it was affordable. It was 20 yards away from commuter and cargo train tracks! We looked at the apartment at night and didn’t realize that there was a train line running by the apartments. In addition to the train noise and shaking walls, we had some noisy neighbors above us. Both of these were a motivator for us to find a new place to live.
So we went for the American dream of home ownership. We purchased a townhouse in 1995 for $163k after scrapping together a 5% down payment. Yup, even back then it wasn’t too difficult to buy a house with less than 20% down. Having our own home allowed us to get our first dog. We were able to take care of a dog for a couple of years, so why not have a couple of kids :-).
With two growing boys and a dog, we wanted to upgrade to a single family home. Although the environment was better than the apartment, we still had to contend with occasional noise from neighbors (Mrs. Need2Save – remember those Sunday nights with the neighbors rocking out to Bob Seger?). Also, we really wanted to have a yard for them to play in. Could we have made it work in the townhouse? Of course we could have… but it’s not what we wanted.
Single Family Home
After seven years in the townhouse, we sold it for $255k. Of course this wasn’t all profit, but it helped us put down more than 20% on our first single family home. Although the single family house was only a few hundred square feet larger than the townhouse, we had a yard and some separation from our neighbors. We purchased this house for $275k.
This house was older than the townhouse (which was a new build) and was a good candidate for some modest renovations. I consider this to be one of the intangibles of home ownership – learning how to perform basic maintenance and improvements. Although I come from a ‘blue collar’ family, I wasn’t exactly a handyman growing up. Having a garage allowed me to discover woodworking as a hobby, we did a complete master bathroom remodel mostly by ourselves, and I designed and built this deck from scratch (I’m still proud of how this deck turned out)
As our sons grew, we became a bit concerned with the middle and high schools that they would be attending. Although Mrs. Need2Save thinks I’m losing my hearing, the neighborhood was still too loud to my liking due to an apartment complex right behind us. Throw in some lifestyle creep after Mrs. Need2Save went back to work, and it was time to look for a new house.
It was late 2008 as the housing market was starting to really tank. A great time to sell! After just over six years in our home, we sold for $395k. Again, not all profit, but it contributed towards a good down payment on our current house. This was a big step up in regards to size and price. We knew the house was bigger than we needed, but we really liked the location. Although the DC metro area isn’t as crazy as the San Francisco Bay area, housing isn’t cheap.
This house has provided what we wanted – plenty of space, quiet and peaceful location, convenient commute to work, and a pretty good school district. Our kids are out of K-12 now, so we will definitely downsize once they are completely out of the house. Our current plan is to stay here until we retire from the 9-to-5 world, which will hopefully be in the next five years. After that, we plan on selling this house (which will be paid off) and we will be ‘homeless’ for a while, since we plan on extensive travelling. During this time, we plan on short term rentals and a year-long RV journey around the country.
Financials On The Current House
So has this house turned out to be a good investment? Although we aren’t ready to sell yet, we will very likely have a negative monetary return on this house. Let’s look at some numbers.
|Realtor Fees To Sell (6%)||($42,000)|
With the current Zestimate, our current house has only appreciated $45,000. Just to sell this place would cost around $42,000 (6% realtor fees for selling), so it’s pretty clear that this house has not been a good financial investment. We’ve also paid around $207,000 in interest, taxes, and HOA fees over the last nine years! Even when you consider the commonly touted tax savings (33% in our case, although we don’t get the full benefit anymore due to income restrictions) on the mortgage interest and property taxes, we would lose money if we were to sell right now.
Would we be better off financially if we had rented? Assuming a monthly rent of $3,500, that would end up being $378,000 in rent over the last nine years. Given the market returns over this time, I’m pretty sure we would be ahead financially if we invested the difference between what we’ve been paying vs. rent. I haven’t done a full analysis considering the tax savings, likely investment contributions, and other costs. But my back-of-the-napkin math seems to indicate that renting could have been advantageous from a financial sense.
Although the math hasn’t been in our favor for our current house, I still think we made the right decision to buy this house. We’ve never viewed it as an investment and we will own it outright once we sell it in a few years. As we discussed in an earlier post on finding the right retirement location, we should be able to buy our next (last?) house with cash and have money to spare.
Part of the issue with our current house is that there just isn’t much demand at this price range. Owning property in the lower price range, where there was more demand, resulted in more appreciation. Also, although we bought in late 2008 as prices were falling, we didn’t buy at the bottom of the market. Just like the stock market, who knows where the top and bottom are.
If you own a home, do you view it as an investment?