Upon graduating from business school in June of 2014 I had yet to find a job. My lease was up, I had no income, and my savings were dwindling. I sublet my classmates’ apartments a month at a time thus giving myself shelter and relieving them of the burden of paying rent while they climbed Kilimanjaro. But as the summer drew to a close and the f fell off of unemployment I knew that I needed a more permanent arrangement. At the end of August, with homelessness looming in under a week I found a longterm sublet that was not only in my price range but also in a great neighborhood along Chicago’s lakeshore. Sure, it was a studio (up until that point I’d never lived in anything smaller than a two bedroom) in a “vintage” building and lacked the necessities to which I had become accustomed, like garage parking, washer/dryer, central air, and a dishwasher, but living there was affordable and gave me time to figure my shit out. Luckily, two weeks after moving in I was offered a job that paid just enough to keep me from further raiding my old 401K for survival.
Although it was a relief to once again have stability after months of uncertainty, I was over it before the end of the year. I was underpaid, hated my job, and poor Silver Betty had racked up more parking tickets than she could handle. I started looking for a new job in February and secured one at my current (but soon to be ex) employer by mid April. With a more than 70% increase in my base pay (plus a $40,000 signing bonus), I decided to get my George and Weezie on.
I found a realtor and got to searching for an apartment with hardwood floors, in-unit washer dryer, a dishwasher, and assigned parking all in a safe neighborhood within walking distance of public transportation, grocery stores and restaurants. I quickly learned that getting all of that would cost me upwards of $1700/month for a one bedroom, plus an additional $250/month for parking. After touring half a dozen apartments it dawned on me that I used to pay half of $2300/month to rent a 2 bedroom/2 bathroom condo with an incredible view of downtown and Lake Michigan. It didn’t make sense to me to pay nearly $2000/month to rent a one bedroom apartment when for just a few hundred dollars more I could probably buy a two bedroom.
Had I been saving for a down payment? Had I finished paying off my student loans? Had I even started my new job, let alone received one paycheck?
But I didn’t let that stop me from getting pre-approved for up to $400,000, dragging my agent to every open house in the city, and closing on a condo on June 30, 2015.
I based my decision to re-enter the world of homeownership on the fact that I could afford the monthly payment (including HOA) and the idea that I was getting more for my money. But was I right?
Round 1: Buying Vs Renting
I’m going to use three models for the comparison. The first is the two bedroom/two bathroom condo that I purchased. The second is typical one bedroom/one bathroom “luxury” apartment I was looking to rent at the time. The third is what it cost to rent the two bedroom/two bathroom condo I lived in while in business school.
Maybe it’s just me, but I’m not quite sure that whole “getting more for my money” thing happened. The cost of one year of home ownership cost me $28,345 more than throwing my money away on the one bedroom apartment I initially planned on renting. Hell, I would have even saved $22,895 if I’d splurged and rented a two bedroom/two bathroom apartment comparable to the one I lived in during grad school.
Well maybe it’s not all bad. I did come out of it with an asset initially valued at $360,000. I put $40,000 down, paid another $4353 toward equity during the year, and added $20,000 to my net worth through appreciation. However, if I had put the difference between the cash outlay for one year of owning the condo and one year of renting toward paying off my student loan (which at the time was at a 4.065% APR) I would have increased my net worth by $29,497. Investing the difference in the market at a 10% return would have gained me $31,180.
A Better Comparison
But buying a house isn’t a one year expense. Most mortgage terms are for between 15-30 years. Even if I don’t stay in this place for three decades I would like to not have it be a complete money suck while I am here. Luckily these interwebs are crawling with Buy Vs Rent articles and calculators. I found an awesome one on the IAG Wealth Management blog. You have to provide your email address to get it but it’s well worth giving out your spam account. There is a tab with three ways to compare the cost of renting vs. buying, another one to calculate the costs of ownership and appreciation over the life of a mortgage, and a nifty table that let’s you get an idea of the principal and interest payment on different loan amounts and interest rates. It is the bomb dot com. If you’re thinking about purchasing or have already purchased and want to see if it was a good life decision then I recommend plugging your numbers into the renting vs. buying cost comparison tab.
The IAG template is good but I chose to modify it because it doesn’t account for tax savings and any income generated from the home. I don’t mean money made working from home, but rather income from a roommate or AirBnB guests. I modeled out my first three years of owning this condo, which took several hours of sifting through bank and mortgage statements, tax returns, and closing documents. Wanna see the results?
Great! Here they are:
I compared the cost of purchasing my condo to the cost of renting a comparable apartment downtown. I used the numbers from the unit I used to rent (with the world’s best former roommate). I’ll help you get your bearings. The numbers in the own columns are the real numbers (or best calculations of them) for my place. 1) I used the 2014 selling price of my old apartment to get the property value in the rent column because it was within a year of when I closed escrow. 2) The rent is the total monthly rent we were charged while living there. 3) I matched the electricity costs since both places are 2 bedroom/2 bathroom units. 4) To calculate capital efficiency I used 2% annual inflation on my condo’s 2015 value to calculate appreciation versus 5% annual growth on the down payment if I would have invested it in the market for 30 years. 5) I multiplied the annual cost difference between renting and buying (using the net expenses method) by 30 then subtracted that from net home appreciation to get the 6) final value of homeownership.
The cashflow comparison is a simple out-of-pocket comparison. Once I bought the house how much did I have to spend to live there compared to how much I would have spent to rent. The net expenses matchup is exactly the same, except it doesn’t count money returned to me (i.e. what I paid in principal) as a cost. The highest and best use of capital method measures all of the capital I have to spend and compares it to what else it could be used for, in this case I’m going for stock investment.
Although the cost of principal, interest, monthly HOA fees, PMI, taxes and insurance was $18 less than the annual rent on my former apartment, in year one it was more expensive to buy than to rent based on out of pocket expenses. The biggest driver of the higher ownership cost was renovations. I don’t do beige walls or carpet so I had oak floors installed in the bedrooms and the entire apartment painted to my liking. I also got hit with the first installment of a two part special assessment so the condo association could have the building sealed. I did come out ahead with the net expenses and the highest and best use of capital methods (+$1104/year and +$6411/year, respectively).
This time I compared the cost of owning my condo vs. renting it. I trolled Zillow for comparable nearby rentals to get an estimate for how much I’d likely pay for my unit. I refinanced my mortgage three months into the year, thus 1) lowering my interest rate and overall monthly payment. An appraisal was required to refinance and to my pleasant surprise 2) the condo had appreciated by $20,000 which led to a reduction in PMI from $106/month to $50/month. Monthly HOA fees were higher due to a 35% increase needed to cover rising building costs (water, management company, etc.). 3) I paid just under $2000 in closing costs to refinance, but it paid for itself before the year was out. 4) I was also able to write off a full year of paying property taxes and mortgage interest on my 2016 tax return, which gave me back over $5000 in costs. 5) Although I did not pay for gas at my previous apartment I figured any sane landlord would pass this cost to the tenant if living in my building so I factored it into the rental expense. I also assumed that I could just as easily AirBnB this place as a renter so I gave that column the additional income too.
Across the board in year two owning was less expensive than renting. I will admit that refinancing kind of padded the numbers since I did not have mortgage payments in November and December. I did pay extra toward principal but I didn’t include it in these numbers since those payments were optional.
This is where I am at today. I have lived at my current residence for two years, four months, and four days. I once again did the cost comparison against what it would cost to rent my unit versus owning it. I was sick of paying PMI so I wagered that RedFin was telling me the truth about my home value and paid $105 for another appraisal to get my Loan To Value to 80% or less. RedFin didn’t fail me. 1) I saw another $35,000 in appreciation between August 2016 and August 2017. 2) I made my last PMI payment in August. As luck would have it, just as PMI was falling off 3) Cook County property tax hikes came on, causing a shortfall in my escrow account. 4) I am expecting a decline in tax savings since I am paying less in mortgage interest. It’s cool though because my monthly HOA decreased by 14% due to the vacant unit finally getting sold and all 8 owners once again paying dues.
Across all three methods of comparison I am coming out even further ahead by owning rather than renting. I expect these numbers to remain stable for several years as I do not foresee any special assessments or major renovations being needed.
Thus far it appears as though homeownership was a good life decision this time.
By year two the savings, although smaller, even hold up against renting the one bedrooms I looked at. True, I could forego in-unit washer dryer, garage parking, dishwasher, a balcony, and elevator entrance into my unit and save even more paying under $1000/month to rent a vintage apartment or share a place with a roommate or two.
To that I say
Since we all know that buying a personal residence is not an investment, in Part Deux of this series I’ll explore what I got right and wrong (and lucky) about home ownership. In the meantime if you’d like to use my Buy vs. Rent Excel model leave a note in the comments or shoot me an email.
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11 thoughts on “Is It Worth It? Home Ownership (Part 1)”
What is often missing in the Buy vs Rent models is what is not easy to calculate: The ease of mind or personal value (feel-good) of ownership vs renting (depends on who you are). It’s good to evaluate things from a hard cash standpoint, but we should not totally forego/forget our personal feelings toward 1 way or the other.
I personally like the idea of ownership, and while it does not have a direct financial value, it impacts the overall well-being.
Your condo looks good though! Quite the pied-a-terre you got there, chica! 🙂
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Why thank you. It definitely feels like home. And you are 100%. You cannot put a price on the feeling of ownership. I did not come out on the winning end financially with my first house, but it felt so good to own that I had no qualms buying again in the future.
First, love the blog. The writing style is very you and its super easy to read. Second, I should tell you that these words will follow you. I starting blogging post business school and people still talk to me about stuff I wrote 10 years ago. Just keep this in mind as you continue to write. The Internet lives forever. Its cool to see how your thinking evolves overtime, but sometimes I wish I had thought a couple of more times about my writing.
On to the article. I admit, I am biased. I currently run a company that owns and manages 4,000 plus rental homes across the country, but here are the things that people never put a price on in these excel spreadsheet:
1. Flexibility: I feel like I move every two or three years. Given the global nature of the world, it seems that will continue to be the case for many young people. The transaction costs, generally will eat up any appreciation until you have a decent hold period, usually 5 – 7 years.
2. Time: People never value their time. How much time does it take to mow grass, fix stuff, worry about stuff breaking (especially in the extreme hot and cold areas), etc. There should be some value on going online and putting in a work order that gets fix in a set time with no other work from you.
3. Selling Time and Costs: It generally takes time and dollars to sell your home. There will be the inevitable repairs that need to be done for inspections and just for buyer appeal, plus the home will likely sit on the market for 3 – 5 months before the right offer comes in. This ok if you are local, but hard if you need to move right away.
4. Liquidity: People never appreciate the fact that it is impossible to refinance your home during a recession or worst, when you lose your job. When you need money out of your home most, it is generally the hardest to get. There should be some premium place on the fact that your home is much more illiquid than say a stock or bond.
With all of the above being said, there is definitely a case for trying to build a family in a home. If you can commit to being in an area for more than five years, owning gives you the ability to make a house your own. Paint your daughter’s (or son’s) room hot pink. Add a man cave, etc. As long as you dont plan on getting rich and you go into it with the right mindset, a home can be a fantastic place to build a life, just not an investment.
Keep writing. Its a great read.
Why hello there Mr. Cook. Very pleasant blast from the past. Thanks for not only reading, but taking the time to comment. I am appreciative.
I am all too familiar with the lasting imprint of the internet. I’ve been a blogger on and off for over a decade. My last site, while niche, was quite popular for some time. I still get the occasional e-mail from a reader. I fully understand what it means whenever I hit publish.
You are so right about the costs that can’t be quantified. It’s interesting that you talk about the time and stress factor. Another commenter talked about the intangible feeling of ownership that also does not have a price.
I realize that there is an irony to homeownership. It is not an investment in the traditional sense. However, it’s been one of the biggest drivers of wealth in this country as well. The homeownership gap is a big piece of the racial wealth gap.
Ultimately, everyone’s numbers are going to look different based on their housing preferences, the market, and their costs. Hopefully, blogs like this can be a resource that gives a much fuller picture than any lender would.
Oh and you ain’t neva lied about illiquidity.
Please do keep reading and commenting. Also follow and share. The more of us having this conversation, the better.
This is another discussion worth having.
I think the home ownership / wealth gap connection is tenuous. That automatically assumes that but for home ownership more black folks would be wealthy. Its much more of a mindset. Imagine for a second if those black folks that were renting had taken those extra funds and invested them in other investment property, starting their own business, or other potential money making ideas. The fallacy is not that black people dont own homes, its that black people dont own, period.
We fail ourselves when dumb down wealth to home ownership. I dont mean that to be offensive, I only mean that most people lack the discipline to save. Owning a home essentially forces your hand, as every mortgage payment moves you towards the purchase of this big asset. In most instances, outside of New York City / SF / Denver and a handful of other places, that money would be better spent elsewhere.
My parents, blessed their hearts, bought a small home in Indiana to retire to after owning a large home in the suburbs of Chicago over 10 years ago. That home is worth about what they purchased it for today. If anything, I would suggest that their ownership actually lowered their overall wealth. However, when I factor in their love for riverboat gambling, the house is probably the better “investment”. This is our issue. If we dont have discipline, then perhaps buying a home is our best path to savings. After 30 years, even the worst saver will have an asset worth hundreds of thousands of dollars.
My dad used to tell me how he worked two jobs and had a new “caddie” every year. Imagine if that caddie money had gone to investment property, stocks or even bonds. Hell, I would have even taken a 529, as I am still paying off my Cornell loans (low interest rate, so I slow pay). Not only did he not use the money to build wealth, he was essentially modeling the worst possible behavior for an impressionable young son.
But alas, our issues are bigger than that. The real wealth gap is financial education. It is not taught in schools. Its taught in secret at home. Its me telling my daughter about private equity funds and 401ks. Its me telling her to save her first bonus. Its me talking to her about her 529. Its me and my wife not keeping our salaries and financial habits secret. Its me showing her the value of deferred gratification. And yes, its me gifting her with her first apartment building when she graduates college. None of the above revolves around me owning a home, but all of the above will put my children on better footing to start building wealth than I had. The gap is that we will be the first generation doing this, not the 10th or 20th.
I think the Black people aren’t wealthy because we don’t save theory has been debunked time and time again. We tend to keep our money in low risk vehicles with little growth. I did not say that if we owned our homes the wealth gap would disappear. I said that home ownership is one of the drivers of the wealth gap. What else drives it? Lack of generational wealth transfers, the wage gap at all education levels, housing segregation, financial help to families, and most of all the fact that we are GENERATIONS behind White Americans because we were BARRED from wealth creation means until maybe 40 years ago (ya know racism and shit).
Like it or not, home equity makes up 2/3rd of wealth on average, period. So yes, the homeownership gap does influence the wealth gap. Owning a home (or property of any kind) does not necessarily make someone rich. And if you bought too much house with too many costs in an area that won’t even get you inflation appreciation then you’re going to come out on the losing end of the deal. However, if we look at the numbers at scale, access to the asset of a home generation after generation has helped drive the Black/White wealth gap. Now do we all have to buy a house? No. You are right in that the bigger picture is ownership in and of itself. And remember, I said at the end of this piece that buying a personal home is NOT an investment.
I do agree that personal finance and how to use money as a tool and make it work for you is not taught nearly enough. I know that there was so much I did not know when I graduated undergrad and started my career. I was lucky that I had two things working for me. I saw how money problems destroyed other people’s lives and I had a healthy fear of fucking up. Also, I was around people who knew about money and talked about it so I learned a ton.
The intention of this series is not and should not be read as, “Go buy a house!” I think that I am very clear in saying that this is MY personal experience and here is how you should think through this major purchase. I did not put this level of thought and rigor behind my decision and it is only by sheer luck that it’s worked out for me this time.
You are right on a lot of levels here. It cant be discounted that the majority of wealth is passed down from generations and we simply havent had access. That will continue to drive the wealth gap for more generations.
The pay gap is another driver as well. In addition to the blatant racism, their is also the dont rock the boat mentality that both minorities and women have that our counterparts dont. The adage, “have the courage and voice of a mediocre white man” is real. We dont ask and we dont get, hence the name of your blog.
Ultimately, we have to control the controllables. I dont think suggesting people own a home as a shortcut to savings is a bad idea. Complex concepts and frankly, lack of start up capital generally makes a home the easiest investment you can access. There are very few other things you can put 3 – 5% downpayments on and get an inflationary returns.
Its also very easy to understand. Everyone has lived in something their entire life and so they understand the tangible concept of it. Regardless of education, its much easier to say buy a house than explain how a 529 works or to explain risk adjusted returns.
On top of that, we also have to face the facts that people generally arent savers. Its often not a lack of knowledge, but more a lack of will or perhaps both. My previous comments werent meant to disagree with you, just to broaden the discussion. At some point, we have to get to the more complex conversation around personal finance.
We also have to ask ourselves why basic financial literacy is not taught in school. I am required to learn biology, which there is a 90% chance that I will never use after I graduate, but I am not required to learn personal finance, which there is a 100% chance I will need after graduation. This simple thing speaks to the systematic way that poverty is perpetuated. A broader financial education beyond the basics is the only way to break this cycle.
And let the church say AMEN!! I’m so glad that you engaged here. This is good for people to see.