In the Money
Preface
Before I go into any of the reasoning in this post, I’m going to preface this by saying that my preferences are all over this. I’m estimating cost based on my current spending habits. My spending habits are a self prediction of what I would do in the future knowing who I am now and the influence my parents have had on my living standards. One large pre-conception I have now debunked is the idea that “you own the place” has a high value. If I own the place, the value that I derive from owning it is that I can get a nice sink, dishwasher, washing machines, etc. In other words, I can spend more to enjoy more if I own the place.
I look at owning a place as consumption, not an investment vehicle.
Intro
I’ve been looking into buying a piece of real estate. In the South Bay, it’s generally difficult to buy a single-family, detached home without an HOA. If you do find a place, it’ll cost $1.5-ish and be built in the ’50s, which means I would want a rebuild to bring it to the standard of living that I’m used to. I’ve lived in one of these small, Sunnyvale homes before, and they’re not an ideal endgame.
- Walls are poorly insulated for both sound and heat. This is noticeable during the winter and summer.
- Construction quality is really low. Would need new floors, kitchens, and bathrooms.
- Houses are tiny, usually like 1100 square feet. 3 Bedroom 1 bath. 1 Floor
- In specifically Sunnyvale, we had to pay special dues just for garbage in Sunnyvale. They were $120 per month
It costs a lot of money just to buy a house. Over a 30 year, $1m loan, you’d pay $498,427.93 in total interest (again, over 30 years). You might say that if the value of the house increases at a greater rate than the interest rate, then this purchase is still in the money, but I don’t look at the value of the house as an asset if I’m the one living in it and I know that the house price will increase. Also, I can only claim those gains if I sell the asset; however, if I know that the price of the house will increase indefinitely, then there’s no logic in selling it at all. Also, I live in it. It’s my home, and I’ll treat it like it’s my home. I can’t view my condo as some share that I own because I have such a strong emotional attachment to it.
I can sell some stock, I can’t sell some house
Let’s assume that I own the house outright and the mortgage is paid off. If the value of the house increases enough, I can take a home equity loan out against the current value of my house or open a HELOC. This is a terrible idea, and a last resort. It shouldn’t be seen as liquidating an asset the same way selling stock would. You’re re-buying part of your house from the bank for a higher price.
If the goal was to take that money from the home equity loan and spend it on something that would increase your quality of life, you still have to repay the home equity loan and replace the equity in your home. If you want to sell the house, you have to pay this off before selling. There are also costs associated with just making that deal with the bank. Closing costs aren’t fun.
Why Would I sell?
If the price of the house continues to increase, then you’d usually never sell. The only reason would be if you need the cash desperately. In one case, I can see myself selling if the value of the house increased more than the money I sank into unrecoverable costs (interest on the mortgage, homeowners insurance, HOA dues) and I was going to use the gains made to buy a new house. I can’t imagine a scenario where the property tax is so cheap on the condo, that I can rent the unit and make an annual profit on it every year.
If I want to keep the unit so that I could hand it down to another generation of my family, that might be a good move too. It would open the door for someone to make their way to the Valley. If I cared enough about a legacy that I leave behind, this might hold more value for me.
Monthly Loss
Let’s assume I buy a $1.3m condo/townhome with a 20% down to avoid private mortgage insurance (which would be another money sink). HOA costs $460 a month, principal and interest would be $4,965.12 for a $1,040,000.00 30 year fixed loan, let’s say $250 a month for home-owners insurance. This is my opinion, but HOA costs are generally a money sink. $460 a month to cover the cost of maintenance around the area is way too much. Let’s say that $300 of it is just wasted money and the $160 is gettings its value worth. The interest on the loan is what it cost just to buy the house initially.
So $300 from HOA fees, the interest on the loan, and homeowners insurance is just money down the drain in my eyes. I’m not even accounting for initial renovations that people make when they close a sale or the regular maintenance needed per year.
If one could pay for the asset in full from the beginning, you’d save a ton of money. But this would also be out of the money. If you have enough money to buy the asset in full, you should make more money by taking a loan out and using the remaining money that you didn’t spend on the down payment on stocks. You’d be betting that the rate of growth of the stock market is greater than the interest paid on the mortgage. This would be reasonable.
Change in Spending Habits
If I were to settle down in a place, my spending habits would change. I’d be buying furniture, better appliances, and more kitchen-ware. I’d be a full-grown adult. This is another hidden cost that I associate with home-ownership that I want to take into account. I also group this in as money spent as consumption and not money spent as an investment. I have no idea how much money I’d be spending in this scenario because I’ve never been in it, but if I’m anything like my dad, it’s going to be a lot.
Opportunity Cost
What if, instead of paying for a condo, I invested the money for a down payment, then every month saved the money that I would have spent on the mortgage on stocks. How long would it be before I could afford to buy that condo in full, assuming a steady value increase on the condo?
Let’s say that I have $400,000 and I’m about to go in on a $1,000,000 condo. If I drop $200,000 on the downpayment and leave the other $200,000 in the market, after 9 years of growing at the same rate we’ve had for the last 5 years, I would expect that that $200,000 that I left in the market would be worth $825,142 and I’d be $549,980 into the mortgage. Which would mean that I could just pay off the rest of the mortgage if I wanted to.
Fixing Stuff
Right now, I’m renting a house. I spent yesterday afternoon cleaning out the lint in the dryer. There was so much lint, that the dryer wasn’t working properly. I vacuumed the port where the filter goes, then moved the dryer forward and removed that tube that goes to the outside and vacuumed that as well. If you live in a house, this is the kind of hazard that I need to watch out for. I don’t mind the physical work of maintaining something that I own, I do not like doing it for a rental. I have no control over the walls of the house, so once the lint tube goes to the wall, I have no idea if I’m allowed to touch it.
On this thought, I just came home from my parents house. They have a super nice washer dryer set. There are a ton of features on it, but I only use it to wash and dry my clothes. I don’t even use the other features available. This tells me that even if I did have a fancy washer and dryer, I wouldn’t be fully using them. I’d just be using the simplest feature. I don’t think it’s worth it.
Consumption
I think that I need to start thinking about home ownership as consumption the same way I think buying a Model X would be consumption. I could do it, and it would be nice, but my money is better invested and not spent. If I find myself in a situation where I have like half the house in cash, then I’ll do it.