If you’ve been reading some of our past posts you may know that we sold our 3,500 sq ft home and moved into a 700 sq ft apartment about two and a half years ago. Well, our lease is up at the end of July so I started to crunch the numbers once again to see if it made sense for us to buy a house. I wanted to understand what the actual cost to us would be. How would it affect our goals both short term and long term?
Here’s the scenario:
I found a middle-of-the-road house (as far as cost goes) in a neighborhood near where we are currently renting as the hypothetical home we bought. This is a house I think we’d be happy living in, but does not have nearly as good of amenities as our apartment; just more space (which is nice). Since the house would lack the amenities that our apartment currently offers, I included those additional costs in the estimate because we’d have to find them elsewhere (gym membership, yard service, and snow removal). We actually use the gym in our apartment daily, and I haven’t mowed a lawn or shoveled snow for years…and my time is worth something.
Some assumptions I’m making:
- House value: $450,000
- We’d get a 15 year mortgage to minimize the amount of interest we’d pay over time
- The 3.92% interest rate is based on Bankrate’s estimate for Minneapolis, MN as of 5/31/17
- We’d initially put down 21% ($94,500) to avoid paying private mortgage insurance (PMI)
- The monthly mortgage amount is based on Amortization Schedule Calculator using the values listed above
- 3% closing fees (3-5% is average)
Monthly cost of buying:
|Mortgage payment||$2,615||Based on amortization schedule|
|Taxes||$481||Based off of 2016 taxes|
|Homeowner’s insurance||$127||Quote Estimate|
|Up-keep/repairs||$375||1% of house value annually|
|Yard service||$88||Local service provider estimate|
|Snow removal||$15||Local service provider estimate|
|Gym membership||$145||For 2 people|
|Utilities||$180||MN average over 12 months|
|Total monthly expenses||$4,026||($48,315 annually)|
Monthly cost of renting:
|Rent payment||$1,850||Includes gym access, snow removal, yard service, storage, dog fee, and parking|
|Renter’s insurance||$28||What we’re currently paying|
|Utilities||$92||What we’re currently paying|
|Total monthly expenses||$1,970||($23,640 annually)|
Buy vs. rent (The 1st year):
That backs out to a savings of ~$132,672 in the first year and $24,672 each year after that to rent instead of buy! Sounds like rent is a clear choice… not so fast.
Long-term costs and gains
The classic argument for owning a house is that you gain equity and appreciation on it over the years; you’re just throwing your money away when you’re renting. So I re-ran the numbers and incorporated equity gains on the house, plus added a 4% YOY value appreciation (average annual home price increase for the U.S. during the whole 1900 – 2012 period was only 3.1%/year, so I’m being pretty optimistic).
But wait, there’s one more angle to consider: the opportunity cost of not investing the $94,500 down payment and the $24,672 annual savings into the stock market if we were to rent. For this estimate, I used 8% YOY market gains (which is under the stock market average of 10.4% since inception). I used a compounding interest calculator to figure out what our long-term balances would be.
House equity gains:
|Year||House value (4% annual appreciation)||Loan balance||Equity|
Portfolio growth (if renting):
Now I factored in our costs over the years (mortgage, expenses, or rent) to determine what our net gains would be.
Comparing equity vs. portfolio balance:
|5 Years||Total cost||Equity/ Portfolio Balance||Net gains|
|10 Years||Total cost||Equity/ Portfolio Balance||Net gains|
|15 years||Total cost||Equity/ Portfolio Balance||Net gains|
After 15 years, we would have spent roughly $819,000 to own a house that would be worth $810,641. And that doesn’t include the 5% realtor fee we’d have to pay if we were to try and sell it when we retire. Alternately, if we would have rented, we would have spent $354,600 on rent and now have a portfolio of $1,023,259 (based on investing the down payment and the $24,672 annual savings).
This paints a pretty clear picture for us. There of course, can be arguments made supporting both routes that may change the numbers slightly, but I think they generally negate each other (i.e. rent increases, tax increases, stock market fluctuations, real-estate market instability, etc….etc.).
How does this impact our goal of FI?
Our main objective is financial independence and based on my estimates, it would delay us 4 years to achieve FI if we bought a house tomorrow. We also don’t intend to own a home with a mortgage after we retire, because it would limit our ability to travel significantly. Instead of renting in Thailand, Italy, Costa Rica, etc., we would be tied down to where we are paying a mortgage. Obviously, this is different for everyone. If settling down in one location sounds relaxing, then buying a house might make more sense for you.
How does it affect us long-term?
Potentially $1,023,259 in liquid assets… which we equate to time and freedom. On the flip side, our housing costs will remain roughly the same throughout our lives. After 15 years, if we paid off the mortgage, our living expenses would reduce significantly during retirement. If we go the route of renting, we’ll never have “free” housing, which will ultimately make our expenses higher later in life. But of course, in order to pay off the mortgage in 15 years, we’d have to be working that whole time…which sounds awful.