Sunday, October 17

Home Buying : The drama, dilemma and true costs.

We are a DINK (Dual Income No Kids) couple on work visas in the USA. Within this amazing country, we have moved for our jobs, we have moved to be with each other and we have moved for the weather. For the past 3 years though – we have lived in the same apartment that is 1 mile down the road from our place-of-work and we have adopted a beautiful dog. One could say that we are enjoying our lives.

Being that we are finance conscious, our friends (home-owners) have repeatedly asked us about our intentions on home buying. The thought does have its merits – after all who doesn’t like the idea of pride of ownership, the idea of putting your stamp on a place, the idea of a white kitchen with a large island, the idea that our fur baby will have an entire backyard to run around, the idea of an awesome vegetable garden, the idea of a converted basement with a pool table and play-station set up, our guests would have their own personal space… The list is endless. If you review this – most of these are fantasies from HGTV and rest are from movies or childhood fantasies.

Being financial independence chasers, we live by the motto: ‘You can have anything you want. You cannot have everything you want.’ The beauty of the statement lies in its simplicity. We recently spent thousands on a 1 week trip to Florida – It was one of the best weeks of our lives and we would do it again in a blink. But we do think twice before buying the 5$ coffee at Starbucks on a work day.

All of our friends have seen 50k-100k increase in their house value in the past 3 years. This area has had a crazy awesome years with the real estate market really booming. Most of our friends live 25-60 minutes away from their offices – in grade ‘A’ school district. We got to thinking – are we overlooking a golden egg laying goose that is staring in the face? As we do with everything – spreadsheet came to our rescue. We did research on whether a buying a house for the purpose of primary residence is a good investment.

Let us say we buy a House for 250,000$ with a down payment of 50,000$. The remaining balance will be borrowed @3 % interest for 15 years which amounts to Total Mortgage Cost of roughly 250000$ or monthly payments of 1400$. So how much should I sell the house for at the end of 15 years for it to be profitable?

  1. 50,000 invested in Index Fund like VTSAX will return an average of 7% every year. My Down Payment would now be worth: 102,500$
  2. Monthly Recurring Investment of 1400$ for 15 Years at an average of 7% every year will now be: 445,000$
  3. Owning a house also comes with additional expenses that I have detailed in another post.  Let us assume a modest 7500$ maintenance cost\property tax etc. When invested in Stock market – this would now be 200,000$
  4. Total amount that you invested in house, if invested elsewhere would now be worth: 100,000$ + 445,000$+200,000$ which is: 745,000$.
  5. Realtor Fees are usually 5 – 7% of sale price which amounts to roughly another 45,000$.
  6. I have rounded off a lot of numbers above. Even so – for the house to be profitable at the end of 15 years – It should be worth at least 800,000$ to just break even.

It is year 2020 and I do not see a lot of houses that sold 15 or even 30 years ago for 250k, now selling for 800k+. Also – 7% is an average market returns number – there are good years and bad that average out to 7%. I highly recommend VTSAX for any investor.

There are also a few other points to note:

  1. If you spend 40 Minutes in Traffic, commuting to work one-way – you are spending the time taken to watch the entire Season-08 of Game of Thrones every week. (Driving is equivalent to Season 08 of GOT: See what I did there?)
  2. If you spend 60 Minutes in Traffic Commuting to work one-way and you are in a 9-5 job for 5 days a week – Your travel time equates to you working 6 days a week as opposed to 5.
  3. If you make 50$ per hour and work 40hr work week and travel 1hr a day on commute – then your essentially only make 44.5$ an hour. If you spend 2hrs a day on commute then your hourly salary reduces to: 40$.
  4. I am not going to go into transportation charges, the odometer reading on your cars, the probability of getting into a car crash on the road etc. But you can guess where that research would lead.
  5. When one owns a house, there is not a lot of flexibility in being able to relocate for an amazing job opportunity.

That being said – I am not against the idea of home ownership. I am against the idea of home ownership for purpose of primary residence and investment. For a well-informed person – home ownership is great. All I wish is for folks to not go blindly into home purchases only to realize later what they have gotten into.

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