The Real Cost of Buying a House

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The Real Cost of Buying a House post image

Hi, Ian here.

After a year or so of obsessing over Redfin and Realtor.com, I finally pulled the trigger and bought a house! My decision was fueled by a few things going on in my life:

  1. Last July Dan and I sold our product design and manufacturing business. All the money that had previously been tied up in inventory was finally making it to our bank accounts. Minus taxes, of course!
  1. I moved to Austin Texas two years ago. Since then, I have watched the average home price increase rapidly. Austin is one of the hottest US real estate markets right now. Each year I waited, my cash was buying me less property.
  1. I was in the mood for a major lifestyle change. I didn’t want to live downtown anymore. Most of my hobbies and interests were demanding more space.

Is it a good investment?

Probably not. Even in Austin, one of the hottest real estate markets in the US, I’m have a hard time calculating more than a 3-5% annual return for the next 2-10 years, given all the costs that come along with home ownership, in the best market conditions.

But that’s not the full story. If you’re up for it, I’m going to go through the details of my process, including the numbers, below.

How I found her. Unfortunately the cowboy carpet wasn't included.

Unfortunately the cowboy carpet wasn’t included.

Rent vs. Own

Not worth going into too much detail here because so much has been published on the topic, and everyone seems to have their own opinions. But a major factor was knowing that I plan to use Austin as my home base for the foreseeable future. Therefore, after 20 years of renting in various cities, I decided to buy in Austin, Texas.

I have never felt weird about not owning my own space. In fact I think renting has afforded me a tremendous amount of freedom over the years. Everywhere I have rented has always felt like home to me. Whenever I had the itch to travel, move, or switch neighborhoods, I just picked up and left. I never had to worry about repairs or maintenance costs. I could calculate my monthly housing costs as fixed costs – no surprises. In general I liked renting and can see myself becoming a renter again someday.

What did I buy?

A modest 3 bedroom, 2 bathroom, 1600 sq/ft. house, built in 1985, on 2 acres in West Austin. Oh, with a sweeeeeet detached workshop :)

Didn't think about the costs of keeping this yard so nice...ooops!

Didn’t think about the costs of keeping this yard so nice…ooops!

Suburbs vs Downtown vs Out of Town

I grew up in the suburbs of Washington DC. For me, the ‘burbs’ suck. Not just in DC, but Austin – and, indeed, all the suburbs I’ve ever been to. When I was looking for a place to buy in Austin I toured a few homes that were in the suburbs. I thought about it, but the idea that I was going to be subjected to the lives and opinions of 5-7 complete strangers, permanently surrounding my property, was enough to give me night terrors. Also, I remember growing-up and the types of people that lived in my neighborhood – they all had families and seemed to work a regular 9-5 schedule. Nothing wrong with that, but it’s not where I am in life right now. So, although I’m not necessarily looking to make friends with my neighbors, the chances that we would have common interests seem slim. Also, I have never seen a 5 car garage in the suburbs and, if I’m being honest, that was the final nail in the coffin for me!

Having neighbors while living downtown never bothered me. When I lived in San Diego I actually became friends with a few of them. Downtown, or at the beach, or in any tight-knit community, it feels like everyone is moving in the same direction and on a common brainwave. When your neighbor’s music is pumping at 1am downtown, you are usually pumping with them. I was reminiscing the other day with a friend about the fire pit we had wedged between two apartment buildings in San Diego. Two to three nights a week we would carry on, and have a fire, right outside the widows of at least 10 other people’s apartments. Not once did anyone complain about the smoke or noise. Tolerance is easy when you all have similar values and pastimes, I guess.

Out of town or, as it is better known, ‘the country’ or a ‘rural area’ is where I have ended up. Up until this point, I have never lived more than a few feet away from my neighbors. Now I can only see one neighbor, and I’m working up a fence design this week :)

Initially I had a lot of anxiety about leaving downtown. Would my friends visit? Where would I eat lunch? How would I feel about having to drive every time I left the house? What happens when there is a medical emergency? Hopefully that one will never need to be answered, but I had a lot of unanswered questions and still do. I also considered renting outside of town, to get a feel for it, but availability is sparse and with costs rising so rapidly in Austin I figured that, even if I decided that I hated it, I could get most of my money back.

IMG_8818

Still playing with fire, at least not between condos.

The Cost of Downtown for Me

People wiser than me say ‘things change as you get older’. I would say, so far, they are right Some of the things that I valued at 25 are not what I value at 35. Living downtown at 25 felt awesome. I loved going out five nights a week, eating a great meal, having a few beers. I liked the convenience of walking to my favorite pizza shop, easy last-minute trips to the auto parts store 10 minutes before they close. But I started to question what I was optimizing for. If there was one thing that was optimized for, it seemed to be my social life. But that was starting to make me feel empty. Here’s what a typical Saturday looked like living downtown:

Wake up after a restless night around 10am.

Walk to brunch around noon with a hangover.

Come home around 2pm and regret the night before.

Feel better around 4, maybe go for a bike ride.

Start planning where to go out to eat around 6pm.

Eat at 8pm somewhere ‘cool’ on a date or with friends.

Rinse and repeat.

Every weekend didn’t necessarily look like this, and there were certainly plenty of days filled with work, or activities, that didn’t involve drinking beer. But it was very easy to fill my days downtown staying ‘busy’ but never accomplishing much more than picking a new restaurant. I was starting to feel like downtown living was becoming a distraction, pulling me away from the things I really wanted to be doing: riding my dirtbikes more, working on meaningful projects, learning new skills. Not everyone lacks the self control I seem to be describing, and I know a few productive people accomplishing their goals while living downtown. So maybe it’s just me.

It’s also worth noting that not all cities make me feel this way. I just recently spent 2 months living in downtown Barcelona with Dan, where I occasionally woke up with a headache :0 but was also able to walk to the beach, go on epic bike rides and visit some amazing historical sites. If I’m going to live downtown in the future, it’s going to be in a world-class city like Barcelona or New York. Austin does a lot of things right, but the downtown area isn’t my favorite. There’s no public transportation and the traffic is becoming intolerable. In general, most of what I have found US cities to be centered around, including Austin, is the bar and restaurant scene. And, at 35, I have had enough of that for now.

Making progress. With any luck there will be a fireplace again before winter.

Making progress. With any luck there will be a fireplace again before winter.

How Much Did I spend?

$355,000. The asking price was $385,000. In Austin, where houses are typically on the market for less than 45 days and often receive bids above the asking price, everyone was very surprised when my offer was accepted. My friend recently listed a condo in downtown that was sold by noon the same day.

Why did I offer below the asking price?

Because I had nothing to lose. I didn’t need to buy a house. A friend with multiple real estate investments told me two things to remember during the process. #1 It’s not a done deal til’ ink is on the paper and #2 Don’t get emotionally involved. That resonated with me after years of doing business, the principals are similar. But keeping your emotions at bay when buying a house is probably a little harder for most people.  They say things like ‘at 35 we shouldn’t renting anymore’ and, without pulling out a 30 year mortgage calculator, ‘the monthly payments are less than we are paying in rent’.

Also, in the US – and I feel qualified having lived here most of my life to say this – there comes an age when you are labeled ‘a loser’ if you don’t own your home. Certainly, if you are above 60 and have to sell your house to afford retirement, or are still renting, you are a ‘failure’. In my view, these stigmas can be damaging, especially if you are trying to start a business. I believe it only makes sense to buy a house, or apartment, as your primary residence if you are able to do so without impacting the decisions you make in your business. Basically I would not have made the decision to buy if, in any way, it would have hamstrung the profitability or trajectory of my business. Why? Because there is so much more potential upside in my business than there is in my personal US real estate investment.

My realtor told me that he would put in the offer, but that it was offensive. He also intimated that, if this was going to be my approach going forward, I was wasting his time. He was surprised when the seller accepted my offer.

Hired help, not always helping.

Hired help not always helping.

It’s Not Over Til’ Ink is On The Paper

It wasn’t necessarily luck that they accepted my offer. I had done my homework – I was online comparing home prices for sometimes hours a week for the last 18 months, maybe more than my realtor. The house was in need of some TLC, and the owner had previously listed and delisted it at a higher price. I figured out the owner’s name through tax records. I stalked him on Facebook and social media. He wanted to leave Austin and he had a new family. I didn’t necessarily know that he would accept the offer but I felt like the profile was right.

I had never bought a home before, so the process was completely new to me, but there were some parts that were similar to buying a business. There is a portion of time, after the seller accepts your offer, where you get to conduct due diligence, much like signing an LOI when buying a business. During this time you get to hire all kinds of professionals to inspect the property, survey the land, and tell you what, if anything, needs attention and may, therefore, require money. At which time you can negotiate the price down even further. This period is usually less than 30 days and you are ‘locked in’, meaning that the owner can not entertain other offers until you pass on the sale or the timeframe expires. For me, I did find a few issues, but nothing I wanted to negotiate for given I was already getting 30k off the asking price. During this time most people will also be in the final stages with their lender and, for me, this was the most difficult part of the process.

You took out a loan to buy a house?!

Yes. I have never taken out a loan before, except from my parents to buy a used 1998 Mustang GT. It was a horrible investment. But the reason I had to get a loan from casa-de-parents back then was because nobody would find me credit worthy at 21, and it felt like I ‘needed’ this reliable automobile to get me to work everyday. To my surprise I found myself, at 35, just as uncredit worthy as I was at 21. (At least I’m over wanting some of the worst generation of Mustangs). But, this time, it didn’t make sense to me. I had a successful business which I had just exited from. I also had the better part of 15 years making ‘on-time’ credit card payments with a steady income.

I went to 3 major banks and was declined by all of them. And, at one, I even had in my account an amount over the purchase price of the home, in cash. I was shocked when they rejected me. They said that, because I didn’t have a job and or steady income, I wasn’t qualified for a home loan. All the banks wanted to see salary or w2 income. And, although I technically qualified before we sold the business on my w2 income, they could not accept distributions, one-time payments, cash on hand or loan repayments as acceptable income secure enough to back the loan. They all told me that, as soon as I was paying myself a salary again, to come back with 2 years of accounts as proof.

A quick side note about why the US housing market could be screwed again.

I have a few friends that are not business owners but have also recently bought houses. They are all living paycheck-to-paycheck, with less than 10k in their savings accounts. They all work jobs that I assume will be replaced with software in the next 5-10 years, or before their mortgages are paid off at least. These people, in my mind, are not qualified to take on such a large financial risk given their limited skillsets and abilities to adapt to changing market conditions. From what I understand, there are no trigger points in the US mortgage system to guard against people who will lose their jobs to automation or software in the future. This, to me, is a major blind spot – those who are qualified today may not be qualified tomorrow, especially if they are not in the driver’s seat of their own career or business.

Private Mortgage Insurance (PMI) is another example of how the industry is lending to unqualified buyers. Originally legal and then made illegal after the housing bubble of the 1930’s great depression — it’s back! In the 1950’s, when private lending started to take off again, PMI was re-introduced and today it’s commonplace. It’s insurance that allows you to purchase a home, even if you can’t afford to put down the minimum 20% of the purchase price. If you can’t even make the first payment, a down payment, conventional wisdom might say your financial position is too fragile for you to make consistent future payments. But, in a country where our central bank (The Fed) is using the term ‘irrational exuberance‘, anything is possible!

Despite being ‘out of work’, and unemployed, I finally managed to find a small bank in Texas that was willing to understand my position. They took the time to listen to me. Here’s how it went down:

I talked with senior banking managers, their board voted on my loan and I was accepted with a 50% down payment at 4.875% percent interest rate for five years. This is about 1-1.5 points higher than my friends with jobs were able to secure. The bank in Texas is keeping my loan in-house, meaning they will not sell it on to another bank (a lot of loans are initiated at one bank and then sold on to another). My rate is locked in for five years. After that, they can increase my interest rate by no more than 2% percent per year up to 10%, but I don’t plan to keep the loan that long.

Dat shop. Car parts and tool hoarding full speed ahead.

Why did I take a loan?

Although I could have paid cash for my house, I decided to take a loan out for one simple reason: I wanted optionality, or the ability to use a portion of the cash to make other investments. Each year I keep the loan open it costs me about 10k per year. I felt like this was a number that I could live with to give me the option of making a better return with that $177,500, outside of the house. So far I haven’t found anything I want to invest in with that money, but Dan and I are cooking something up :) It was really hard for me to think about paying interest on something, especially since I have never had a loan and definitely not one for this much money. But I’m warming up to the idea that debt, in some instances, makes financial sense. I will evaluate this loan every 12 months to see if the money is outperforming the loan interest.

Did it really only cost $355,000?

No. And this is important. There are a LOT of costs involved with buying a home and home ownership. Not to mention the major renovations I’m having to do. After all, my house was built in 1985 and part of my strategy is to try increase the value of the home in 2-10 years. I have begun to document all of the costs associated with buying a place, and I also started a spreadsheet where I throw in all my receipts and contractor costs. Although I’m trying to hire people as little as possible, and learn new skills, there are some jobs I just don’t enjoy, or the learning curve is too steep for the time I have to complete the task.

One such task has been engineering a raised living room ceiling. Renovations aside, I was surprised that the closing costs added up to a little less than $10k. These expenses were: pre-paying insurance, taxes, surveys and related costs during the due-diligence period, also a charge for opening the loan. This is cash I had to come up with outside of my down-payment. Luckily, when you are the buyer, you don’t pay either the buyer’s or the seller’s realtors – but when you sell you pay both of them. In Texas that’s 6%. Something to consider when estimating how much money you will make, or lose, on your home purchase.

What have I done. No construction experience, no problem.

What have I done? No construction experience, no problem.

Is it a good investment?

Probably not. Even in Austin, one of the hottest real estate markets in the US, I’m have a hard time calculating more than a 3-5% annual return for the next 2-10 years, given all the costs that come along with home ownership, in the best market conditions.

To put this into perspective: in 1992 my house sold, for just over $90,000, to the previous owner. Let’s say that the previous owner also put down 50% or $45,000. In 1992 the average mortgage interest rate was around 8%. So, over 30 years, they would have paid about $73k in interest, 33k in taxes, 20k in insurance, 25k for the shop, and 20k (very conservatively) in maintenance. That adds up to $261,000. Now before you panic, yes I’m sure they refinanced their loan at a better rate, but there is still a massive chunk of change going to the mortgage company. When they sold the house to me for $355,000 they had to pay the 6% due to the realtors, so take out 21k. This means that they made about $73,000 in 24 years, or 1-2% annual return.

That money in the stock market, from 1992 to 2016, would have grown about 9% on average per year.

You could have bought a Ferrari F40 for about $400k in 1992 and sold it for $1.6M in 2016 at a 6% yearly gain.

Last year, before we sold our business, we were chugging along at a 20% return on investment per year.

In the context of a business, and other financial instruments, it’s alarming on paper how bad an investment a house can be. For some, this ‘investment’ is the main reason they will spend 8 hours a day, 5 days a week, working for the next 30 years. For me, this is 100% unacceptable.

So, when I thought about this purchase, I decided that I would not put myself in a position to buy a house if I thought there was a chance that I would lose the freedom of movement, and also the ability, to grow and start businesses. The transparency of the US real estate market (on a small, individual scale), to me, is a signal that its value will always be out performed by larger financial instruments such as a small businesses.

Stay Tuned

I hope to keep everyone updated on my renovations and costs. So far, I’ve totally remodeled the living room and kitchen, along with updating most of the electrical systems. There is still a lot of finishing work to be done, but I’m happy with the progress to date and grateful to have a few helping hands in Austin. I plan to share all of my expenses and spreadsheets as well as progress photos, along the way. My goal is to show the true costs of home ownership.

Everyone except me hates the blue. I hate the idea of having to repaint them.

Do you invest in real estate? Got questions about this article? Would love to hear from you in the comments.

Cheers,

Ian

Published on 09.06.16
  • http://salesability.co Damian Thompson

    LOVE the blogpost. HATE the blue…

  • http://www.tropicalmba.com/ Dan Andrews

    you may have cost bossman 1,000’s :D

  • http://gregmberry.com Greg Berry

    Awesome post! I like the blue! It’s more like blueish gray… finish it with dark granite countertops and I think it will look baller.

    I have a ton of thoughts on this, which I hope to comment later on. Mostly in complete agreement with you.

  • https://www.alasdairplambeck.com Alasdair Plambeck

    Great read —please keep us updated! I find the same thing on a smaller scale with credit card applications. No one cares if I have money in the bank, available credit and a long credit history. They care if I have W2 income. I have the suspicion it is because it has less to do with loaning money to qualified people and more to do with who the banks are likely to make money from. I doubt the banks are as dumb as they appear…

  • http://TimConley.co Tim Conley

    The argument between renting vs buying is as Ian said, “opinions.” Each point for or against are subjective and emotional.

    When it comes to the math between them, every pro rent post I’ve seen uses shoddy math. They hold the price of rent to that of mortgage and they say that a $2000 lease is equivalent to a $2000 mortgage. Only in places like San Francisco is this true (just add a zero though). Nearly everywhere else you get a lot more home for the $2000 a month mortgage than a rental at the same price.

    Everyone of these posts also stop at 30 years — the length of a typical home loan. After the home is paid for the math diverges dramatically. Rent continues to go up with inflation and demand while the homeowner has to only pay increases in taxes and insurance (which are lumped in with the renter).

    There are a lot of pros to buying a home over renting, but Ian is correct in that it isn’t an investment in the traditional sense. However, it is an investment in living rent free in the future.

  • http://www.tropicalmba.com/ Dan Andrews

    cheers Greg, love to hear them!

  • http://TimConley.co Tim Conley

    Ian, when do you plan to refinance your loan? After making payments consistently for a while, you should be able to get a new loan at a much lower interest rate and at 20% of the value of the home. That would allow you to pull out some of the original down payment to free up that money for other investments.

  • BostonRob

    Congrats on closing! And good on you for not buying outright. It’s very useful for your credit to be making continual payments on a source of “safe debt.”

    As I consider a pivot into mostly R.E. investments, I worry about selling my business for similar reason to what you experienced with the banks. I hear banks can be quite bearish giving mortgages to anyone without regular income, regardless of available assets. So if you want to, say, go out and quickly snap up 20 mortgages to start generating rental income, forget about it unless you have at least some side biz on Amazon or something.

    One thing that may help mitigate this barrier is generating an in-person relationship with any bank where you keep significant holdings. Few people do anymore, so it makes a difference. Take the manager to a ball game some time, continually ask for an increase to your line of credit and make good cases for it. Whatever keeps you in touch with people you may need to rely on some day.

    As for one’s home as an investment – really – I think most of the time it should be seen as more of a long-term illiquid form of savings. They don’t generate revenue/dividends and capital appreciation is not as reliable as it once was.

  • http://teachingyourchild.net Nathan Bills

    Good read!!!

    I echo many of the same sentiments after having just gone through the same buying process.

    I was terrified of moving out of the city but pleasantly surprised at how damn nice it is to be out of the gridlock and always on inner city mindset.

    Pretty damn funny about the social media stalking. That is some serious PRE-Due diligence. I guess that is what an unemployed 35 year old credit risk has the time to do.

  • Bunty

    my sentiments exactly. I’m in a similar place…

  • http://www.r32media.com EricTimmer

    Great post Ian! What a pain in the ‘assets’ buying a house was. I didn’t have to deal with the no income selling a business stand point… More of the… Oh your international money is dirty so we will need all kinds of needless BS paperwork in order to give you a mortgage with over 50% downpayment…. They really don’t want to give people that work outside of the normal channels mortgages.

    Well at least now my battle wounds have healed a bit over the past 2 years and some change.

    PS. Can I hide a dirt bike from the wifey at your place….??? (^_-)

  • Myles Barrett

    Making $73k , or 1-2%, is still better than renting and making 0% on your money. Plus, with renting you usually get more for less, and no one cares what color you paint the walls… or cabinets ;)

  • https://www.coworker.com/ Leanne Beesley

    Wow that’s a big garden!

    If I was to buy a property again that I planned to live in, I’d only buy a house – not an apartment – to avoid being subject to the whims of random inflated invoices…

    I bought an apartment in central London that I found up for auction 8 years ago. Got an amazing deal because although it was in a great building in the perfect location, the apartment inside was A MESS. I had to strip everything to a shell – new floors, new walls, new fittings, etc – but as I had contacts in the building trade I was able to do it up at wholesale prices.

    Lived here for 2 years then rented it out when I moved to Asia. I sold it recently for almost double the price I paid for it so it was great from a capital gains perspective.

    BUT I would never buy a residential apartment in London (where 99% of the time you are a long term leaseholder as very few buildings are freehold) again because:

    1. Extra (and often excessive) costs appear out of nowhere all the time.

    Broken elevators need maintenance – gotta pay £6k, new communal boilers need fitting – gotta pay £2k, something random unrelated to my apartment needs fixing – gotta pay £x, etc.

    That’s on top of the regular £3k annual maintenance fee.

    A friend of mine bought an apartment in London last year and within 3 months got hit with an unexpected £25k bill for her share of a roof replacement (which the council owners decided was necessary even though there hadn’t been any leaking).

    It’s frustrating to spend all that money on buying your own place then being subject to all these invoices for random stuff that’s out of your control.

    2. You have zero say over the contractors they use for all this work and the fees they charge. And it feels like a racket.

    When the 4 elevators in my building were replaced, the total cost was £1.4 million.

    When my friends roof was replaced, the total cost was £1 million.

    I’m pretty certain these things could be done for much less. My friend and the other landlords / owners in her building actually took the council to court to appeal the cost of the roof repair, but to no avail. There is really nothing that can be done except suck it up.

    —-

    I’ve just reinvested the money from the sale of my apartment into 5 different units across the UK – a mix of commercial (serviced offices) and residential (student accommodation) each with guaranteed annual returns of between 7.5% – 9% net.

    These will have shitty capital gains due to the nature of the properties so they are not the best investment types for everyone but after doing a ton of research they seem to be the ideal hands off, maximum short term yield type that are best suited for me at this stage in my life.

    I also know I could have maximized my investment more by taking out a loan for the new properties instead of paying cash (to buy more properties or to keep more aside for other opportunities) but I’ve never taken out a loan before and haven’t quite built up the nerve for it yet. Plus I’m properly unlendable without knowing it anyway!

  • http://www.adventurous-soul.com/ Shayna

    Fascinating read! Thanks for sharing the details and rationale. Looking forward to seeing updates.

  • http://www.TropicalMBA.com/ Ian

    Wow Leanne, I have started to hear some of these stories about the UK market, seems very expensive and somewhat risky to be blindsided by these costs as a leaseholder. Interesting to see your shift.

  • http://www.TropicalMBA.com/ Ian

    If cash is unlimited I would agree, If it’s constrained I might argue it’s better to rent and deploy the cash somewhere you can make better returns.

  • http://www.TropicalMBA.com/ Ian

    Honestly, this is not the first time someone has asked me to hid something motorsports related in my garage from their significant other :)

  • http://www.TropicalMBA.com/ Ian

    LOLZ. Never thought about myself that way but you are right Nathan!

  • http://www.TropicalMBA.com/ Ian

    Agree on the long-term illiquid for of savings and developing a face to face banker relationship. In retrospect I probably should have gotten pre-approved when I had more stable W2 income. Something to consider in terms of strategy for next time. I will say they did ask for company financial statements, so this is to say I’m sure the bank has seen a lot of tricks :)

  • http://www.TropicalMBA.com/ Ian

    Yes, I think I will consider maybe after 12 months. But honestly if I haven’t found another vehicle for the cash I may just pay it off. Don’t really like the idea of paying 10k a year for optionality if I’m not exercising it.

  • http://www.TropicalMBA.com/ Ian

    agree!

  • http://www.TropicalMBA.com/ Ian

    It’s more gray then blue… that’s what I tell myself..

  • http://spartantraveler.com Clayton Cornell

    Great post Ian. Thanks for sharing the nitty gritty details here.

  • Myles Barrett

    Not being able to go FHA, as a first time home buyer def., hurt your ROI. Though, if you think about what your previous owner would have paid in rent for a similar house over that same time period the numbers look quite different. No +$73k plus -$xxx,xxx.xx in rental expenses.

    On the bright side, once you get a ‘real job’ and 2yrs of W2s under your belt you can get a cash-out refi and put some of that equity back in your pocket. Plus, think of all that sweet dirt bike storage rental income your going to be collecting!

    Cheers and congrats on your new purchase and finally becoming an adult! ;)

  • http://www.ripenecommerce.com David Rekuc

    Ian, great post. One of the other expenses that comes with owning a home that’s usually under-addressed is property tax. I own a home in NJ at a value of $268k and pay almost $9k in property taxes annually (3.3% effectively). There are a lot of towns that can run substantially lower property tax rates because of business in the area. For instance, there’s a big AT&T corporate presence is in Piscataway, NJ. Piscataway is able to run a residential property tax rate of 2.2% because of the income from local business. If AT&T ever decided Piscataway should be closed up or moved, anyone owning a home there would see a surge in residential property taxes to compensate for the lack of income for the local gov. Just a good example of how badly exposed to local market changes owning a home is compared to most other kinds of investments.

    A quick note about PMI. When a bank evaluates someone for a mortgage, there’s two independent decisions being made. 1. Do they have the capability to pay the mortgage and are the reliable enough to do so? For this they look at credit score and income to expense ratio. 2. In the event they are unable to pay the loan, can we recover our money? This is where the 20% down payment rule comes from. If you only loan for 80% of the value of a home, chances are you can get that money back via foreclosure & sale. PMI is just gap insurance for a bank, it covers the difference between whatever money is put down and the 20% mark. So, if you put down 5%, PMI is basically insurance for 15% of the home in the event of a default. It has no reflection on whether you can or cannot repay the loan. Whether that’s faulty logic or not (probably), that’s its function.

    Anyway, good article, thought provoking.

  • mikedariano

    @TimConley:disqus thanks for commenting. Yours and Ian’s comments on “opinions” struck something and I thought, those aren’t opinions, those are priorities. Altucher (Ian’s link destination) doesn’t have the priorities for home ownership (e.g. getting his kids in a good school district).
    Ian’s priorities are to retain some optionality but also be a homeowner.
    My priorities are to live someplace with space, and change things as I’d like.
    The next time I hear “opinion”, I’ll think replace it with “priority” to get a better understanding.
    Cheers.

  • DavetheDad

    Great interesting article in many ways… good luck. I like what I see! The mathematics left out any tax benefits from the interest and taxes paid(if you have income!). And I would have subtracted out the rent cost you would have incurred – then your expenses related to ownership are isolated.

  • http://www.TropicalMBA.com/ Ian

    You are right, I didn’t subtract out the tax benefits of the loan. Mainly because in my case they are so minimal. I don’t anticipate having this loan for more than a few years. But in most people’s case that do have a mortgage for 30 years this can be a number worth considering. In terms of the rent number, yes you are usually paying rent somewhere if you don’t own. But that’s where this equation gets tricky – rent can vary widely. In Austin I could probably pay as low as $400 if I rented a trailer and sky is the limit somewhere much nicer. I wouldn’t necessarily rent in the same neighborhoods or types of dwellings I would buy in. Again too I brought up the argument for mobility via renting and that’s a hard currency to put a dollar figure on.

  • http://www.TropicalMBA.com/ Ian

    David, agree on considering the property tax as part of the equation. Wasn’t aware that in some areas this is subsidized by local businesses, that’s interesting. In terms of the PMI, that’s what I understand as well. The point I was trying to illustrate is that it is allowing unqualified buyers to participate in something that could be a greater risk to themselves and the economy. You bring up another point however, which is that we assume that 80% of the listed price will actually be the value of the home in the future. From some of the houses for sale I see in California and the uncertainty the the economy this could be a bad assumption.

  • Paul

    Dan and Ian,

    It’s been so funny listening to you one trick pony’s over the years.

    All this talk about screwing the man, doing your own thing, making stacks of cash –

    …and Ian buys a no nothing house, in a no nothing suburb, in a no nothing boring city in the US that anyone making a basic salary could buy.

    And then you guys try your best to make some kind of “story” out of it.

    Hey Ian, congrats on overpaying for a shitty house, in Texas, at the top of the US housing market –

    …Yah, you guys are really savvy.

    Holy fucking yawn – how long can you guys draw out “we sold our business” for?

    You went from self described portable professional all stars to real estate fix and flip bench warmers.

    Tropical MBA?

    Maybe Ian can lose some weight, fix his breathing problem, and convince Dan he’s not a bicycle shorts wearing one trick pony before their “stacks” of dollar bills go bye bye.

    From anywhere other than Austin,

    A True Business Owner

  • http://benhebert.com/ Ben Hebert

    Love the blue. Ready for the party.

  • Rich

    heheh isn’t that the point of optionality though? ;)

    Paying small bounded, regular costs for the chance of capitalizing on a big opportunity when it pops up?

    Although, 10k/year is arguably not small.

  • http://bradonomics.com/ Brad West

    For those looking for some detailed math, without having to bust out spreadsheets, The New York Times has a calculator: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

    It includes a lot of details to make sure you are comparing apples to apples. For example a lot of people forget to include property tax. I think Tim is right about the subjectivity and emotion that get wrapped up in housing decisions, maybe this can be a tool to remove some of that.

  • http://www.tropicalmba.com/ Dan Andrews

    me too!

  • http://www.tropicalmba.com/ Dan Andrews

    cheers thanks Brad

  • http://www.horizonapp.co/ Drew Meyers

    Those interested in investing/real estate should take a good look at Point.com. They are changing some dynamics that have existed for years by introducing partial equity ownership – http://geekestateblog.com/partial-home-ownership-equity-down-payments-thoughts-on-point/

  • Kowloon Bay (Landlord)

    Ian, Thanks for your information.

    I invest in the properties market in Hong Kong. I am not familiar with the US properties market. So I just share my views only (with 2 cents).

    I did some research on the US real estate market, and I finally gave up. Reasons is the heavy tax and the high finance cost (comparatively). However, I do believe that the price is going up and up now.

    Following questions I would ask myself whether I should invest in real estate in particular area/country:

    1. Expected price movement. If you believe the price will go up. It is an important factor. I believe, from an investor point of view, the price is going up in USA. Austin is a good place. I have been there in 2004.
    2. Interest rate movement. The interest rate is high to me (maybe it is low to you). I bet the FED will adjust the interest rate in December 2016 (while i don’t think Nov is a good time)
    3. Rental price movement/Supply of houses. The more and more supply of houses/apartments, the rent won’t go up higher. It may be just in line with the inflation. Also, due to depreciation of the house and furniture/home appliances, more maintenance cost expenses are expected. It will lower my net rental income.
    4. Tax and relevant government expenses. The tax rate in USA is kinda high. Comparatively, tax rate in other countries is lower. It makes the real estate unattractive.

    Overall, I believe that the price is going up and up. However, for long term, I do not think investing in USA real estate is a good idea. I would rather invest in UK/Hong Kong/China. (my opinion is definitely biased)

  • kat_raz

    Great post Ian, thanks for sharing! Renting vs. owning has so many opinions and there are so many variables in terms of where you live, what you do for work, lifestyle, etc. but this sounds really exciting. Congrats on the new home! One thing to note is that there are some tax benefits to home ownership in terms of property taxes and mortgage interest which could be written off, worth considering if you’re buying a home.

  • http://www.TropicalMBA.com/ Ian

    Agree there are some tax benefits. Didn’t bring them up because in my case they are minimal. But you are right!

  • http://www.TropicalMBA.com/ Ian

    Thanks for your comments and insights. It will be interesting to see what the Fed does this year.

  • Todd Spencer

    You must consider the costs of selling a house when you figure the investment potential. This is especially critical if you expect to stay less than 10 years or can’t expect much appreciation potential. You pay more than just real estate commissions when when you sell. The seller’s closing costs are higher than the buyer’s. They typically add up to nearly 10℅ of the selling price. That’s several years of appreciation just to break even only figuring home value. Add in the financing costs, maintenance, improvements, taxes and more and you’re in the negative quickly. I develop houses in Washington state where we have sales tax. With all our expenses when we sell a spec home here it adds up to roughly 17℅!. The house I’m finishing right now will cost $60-70k just to sell on top of construction and soft costs. We struggle to make much return on several hundreds of thousands of dollars spent. And if a spec takes several months to sell, add in the carrying costs to that. Home ownership is not an investment. Its a liability that can only be justified by priorities which isn’t a bad thing if it’s what matches your lifestyle. I bought a relatively inexpensive home that’s pretty modest and I honestly hate being stuck with it. Once it’s appreciated enough that I can sell and not lose money, I’m out. The flexibility and opportunity costs of having cash outways the need to have the “American Dream” for me.

  • Johnathan Solorzano

    Good read, thanks for sharing your experience Ian.
    I’m 26 and bought a house in NYC. Had to come up with 120k (20%) down to get approved. The house went up 30% since I bought it a year ago.
    The housing marketing is crazy right now in the US and thats why I agree with about the housing market may be being screwed again.

    Planning on selling before the year ends to cash out and invest in my remote business.

    Cheers

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