Hello fellow bloggers and subscribers,
Thanks again for stopping by The Dividend Dudes Blog. I recently discussed homeownership with my neighbor and told him about the mathematical analysis I found when crunching numbers associated with homeownership. It was astounding. My last post demonstrated how much I lost personally by purchasing my home for just three short years. Now let’s examine how much the prior owner lost or gained during his stay at the “Ole Money Pit” for 24 years! Without a doubt, I should prove if owning this home was a good investment from the previous owner? Some people call home an investment? Let’s see. I understand that geographical location has a lot to do with price appreciation. Still, this home’s location is actually in the top real estate markets in the state of North Carolina. Just imagine homes in rural areas with negative appreciation.
The background of this home:
· Single Family Home in an upscale neighborhood in Cary, NC.
· Year built: 1993
· Heating: Forced Air, Gas
· Cooling: Central
· Parking: 2 spaces
· Lot: 0.56 Acres
· Price/sq. ft: $184
The previous owner built it in 1993 on a lovely spacious ½ acre lot. The home and lot were purchased for $278,500 in 1993 and sold for 475,500 in 2017. That is 24 years on this “so-called investment.” Let’s say the previous owner put down 20 percent ($55,700) and financed the remaining balance of $222,800. Now let’s take a look at the interest rates below.
Interest Rates in the 1990s: Average 8 percent
Interest Rates 2000-2005: Average 7 percent
Interest Rates: 2005-2010: Average 5 percent
Interest Rates: 2010-2015: Average 4 percent
Let’s take the lowest of these interest rates (4 percent) for a 25-year mortgage. Interest Paid =$130,006
Homeowners Insurance: $28,000
Average Maintenance/Repair Percentage on Home is 1-4 percent of Total Value (let’s use a conservative 2 percent) =$113,040. This equals 4,710 dollars annually for repairs and maintenance, including grass.
Property Taxes (estimated): $73,407
HOA dues (estimated): $15,000
| Purchase Price | 278,500 |
| Property Taxes | -73,407 |
| Loan Interest | -130,006 |
| Repair/Maintenance | -113,040 |
| HOA | -15,000 |
| Home Owners Ins. | -28,000 |
| Sold Price | 475,500 |
| Purchase down payment | 55,700 |
| Sale Proceeds | 141,300 |
| Gross Expenses: | -359,453 |
| Total Loss: | -218,153 |
I classify all expenses into two categories:
1.) Help me expenses (Help build wealth)
2.) Hinder me expenses (Hold you back from wealth)
Help Me expenses of a home would be renovations (only if they increase resale value), principal payments on loans, etc. These are actual expenses that help you get ahead with a home appreciation known as equity (in this case).
Hinder Me expenses are most of the costs above in the chart (property taxes, loan interest, Repairs/maintenance, HOA, etc.) These don’t help with home appreciation and are dead weight in your budget.
Now, let’s determine the home appreciation average from 1993-2017.
The home appreciated roughly 2.2 percent annually ($6127 per year), although it cost the previous owner approximately 14,977 dollars annually to live in the house just in “Hinder-me” expenses, as shown above in the chart.
With each passing year, $8,850 or $737.51 monthly was not in Dave’s pocket living in this home (just paying hinder-me expenses). Those unsettling expenses were never recovered even when sold, resulting in a loss of over 200K in 24 years. It is safe to say; most home ownerships are negative investments. You may ask yourself, why would someone invest in a negative investment? Are they listening to society? Have emotional attachments to their home? Some want a piece of land and home paid in full, so they can sleep better while losing their asses. Some gauge financial success by having a home that is paid off!
How much would the previous owner have if he rented and invested for 24 years (assuming an average 10 percent return)?
If he rented instead of buying, he would have had the down payment of $55,700 to invest instantly in 1993. That sum of money would have turned into approximately 600,000 thousand dollars by 2017! Wow! Just imagine, this isn’t even considering fresh money that would have been invested monthly by not having to pay all of those “Hinder me” expenses. Instead, he lost approximately $218,000 (which would have been even more if that would have compounded).
Conclusion:
After reviewing this home’s average market appreciation percentage of 2.2 and comparing it to the S&P 500 index of almost 10 percent over the last 30 years, there is no doubt that it would have been a smarter move to rent and invest the remainder into index funds, etc. Before purchasing a home, examine the real deal intrinsically and extrinsically. If any purchase (house, car, etc.) has more “hinder me” expenses than “help me” costs, the purchase probably isn’t the best financial move. Besides, who wants an aging home that is only gaining 2.2 percent annually, meanwhile property taxes, repairs, etc. are increasing at unimaginable levels; meanwhile, the S&P 500 index is averaged at 10 percent consistently even through recessions. Remember, the average repair costs range from 1-4 percent of the total value of the home annually. Where do you think a 20+ year-old house will fall in this range with repair/maintenance? My guess is on the higher end (closer to 3-4 percent). Remember investing involves consistency, and many home-related expenses are inconsistent from month to month. My personal opinion is owning a home is only a good investment option if you are not diligent enough to save monthly; otherwise, homes aren’t good investments due to multiple reasons described above.
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