This Just In: The Real Cost of Home Ownership

In August, we closed on our home of seven years in Denver, Colorado. And against all odds, with a raging pandemic, unprecedented unemployment, and a very uncertain future, we sealed the deal on an offer far better than we anticipated.

In this post I run the final numbers on the economics of our seven years of home ownership. Despite the often-touted rule-of-thumb that home ownership is a great investment….well…was it for us?

This is part 3 in a series. To see other posts on the subject, check out Part 1 and Part 2.

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Almost exactly one year ago I wrote the first two parts of this home ownership series (featured here and here), where I broke down the yearly percentage return on investment, compared to what we could have made if we rented and invested the surplus all along.

Based on estimates at the time, it appeared that our home value had increased 7.6% yearly for seven years, well above the typical average of 3-4%. However, over the same time period, my favorite index fund, VTSAX, returned 9.9% per year. But with the cost of rent foregone by owning, which I estimated to be over $141,000, we were certainly coming ahead by being a home owner.

Right…?

(Before we get going, I should note that this analysis doesn’t accurately capture the time-value of money. All dollars are today’s dollars.)

The Costs of Home Ownership

Everyone ignores the (often staggering) costs of owning a home. It’s easy to think:

Sale Price – Purchase Price = Money in my sugar-lined pocket

Nay. Owning a house is often a colossal money pit. Let’s examine some typical costs, and what we paid over a seven-year period of home ownership.

Mortgage Interest: $53,175.94

We purchased our home in 2013 for $374,000 with a 20% cash deposit and a $299,200 mortgage loan.

That mortgage loan started accruing interest, at 3.5% in our case, immediately.

What folks don’t seem to understand about debt in general is that early payments often go mostly, if not entirely, towards paying down interest.

How many times have you heard someone say….

“I keep paying my bills, but they’re not going down! Aghhh WTF??!!!”

Yeah, that’s interest, my friends.

Even though we aggressively paid down our 30-year mortgage in seven years, making our last payment back in April, we still paid $53,175.94 in mortgage interest payments above and beyond the original cost of the property.

Had we paid only the minimum required payment each month, it would have cost us even more. However, there’s more to the story there, too. Hang tight.

In essence, even though the purchase price was valued at $374,000, we paid $427,175.94 to own our home, before other (hefty) costs are even considered.

Maintenance/Renovations: $52,684.92

Holy guac, man! Yeah, that’s a big one. And this isn’t atypical. Some people drop $50,000 on renovations within months of buying a home.

As I mentioned in Part 1, our spending here was variable. Some of this could be characterized as intentional improvements and renovations (i.e., landscaping, new appliances, renovated bathroom). However, a good chunk of these expenses were happy little accidents and inevitabilities of home ownership. Think new roof from baseball-sized hail (we only paid the insurance deductible), dying water heater, fridge-turned-harbinger-of-death-while-we-were-out-of-town, carpet replacement, HVAC maintenance…you get the idea.

All this stuff happens when you least expect it and always seems to cost thousands of dollars.

Oh yeah…how’s that emergency fund??

Escrow: Property Taxes and Home Insurance: $21,898.05

There’s no such thing as a free lunch, and there’s no such thing as a free house either. Even once a mortgage is paid off, insurance and taxes are the persistent roaches of the home ownership experience.

I’m reposting almost exactly what I wrote a year ago. Not much has changed, so why reinvent the wheel?

The only difference between death and taxes is that death doesn’t get worse every time Congress meets.

Will Rogers

Yum. Nothing tickles the loins quite like taxes and insurance.

Property taxes are simply the tax you pay to own property, and the rates vary considerably across the country. Our home in Denver carries a tax rate well below the national average, 0.515% of assessed home value, compared to 1.080% at the national level. We pay about $2,300 in property taxes per year.

You can play with tax rates in your area with this online calculator.

High Deductible Insurance

For home insurance, we’ve elected to carry a high-deductible plan. The logic you ask? Well, we don’t like to pay extra each month just because of the irrational fear of what could happen. Insurance companies rely on the consumer’s “what-if” instincts to charge higher premiums to protect stuff that said consumer probably doesn’t need anyway. And most people have no choice — there’s no money to cover an unexpected event.

The beauty of being financially independent is that we can afford to cover an expense that would otherwise bankrupt many others. If a B-52 touches down through our kitchen window tomorrow, we’ll take it on the chin for $10,000 and go on with our lives.

According to Mr. Money Mustache, insurance might just be a tax on people who are bad at math.

But it wasn’t always this way. Early in our home-owning years, we paid much higher premiums. Our drive for financial independence re-framed our perspective here, much like it has so many other facets of our life. We took action and greatly lowered a recurring expense: Neat!

We now pay $1,050 per year to insure our home.

All in all, we paid $21,898.05 in taxes and insurance for our home.

Selling Costs: $41,000

Don’t be fooled: selling a house ain’t cheap.

First off, there are realtor fees, which typically come in around 6% of the home value. Now don’t get me wrong, we had a fantastic realtor, and she was worth every penny. If you need a BAMF Denver realtor, I got you. She bossed the entire process while we were gallivanting around in the mountains of Wyoming and Montana.

(Related Post: One Month on the Road: Getting a Groove)

Other costs include last-minute renovations or maintenance, or in our case, concessions for the buyer to do the work. We kicked $4,000 back to the buyer for some necessary work, which was fine by us.

Once other miscellaneous fees are included, this article suggests that closing costs could amount to 10% of the home value. Our costs didn’t turn out that high (~6.5% for us), but depending on how much work your house needs to sell, 10% seems pretty damn realistic to me.

Selling costs are one of the many reasons that owning a home less than five years is not advised.

Total Costs of Home Ownership: $542,758.91

Although it could be easily said that we bought a house for $374,000 in 2013, we really paid nearly $543,000 for the privilege of home ownership.

Precious few folks truly consider all the real costs of home ownership. Don’t be one of those people, my friend. Carefully track your spending!

Selling Our Home for a Profit

Luckily, the market in Denver (and many other places) has been absolutely crushing it over the last seven years, pandemic be damned. We sold our house for $626,000, well above our original asking price.

Selling Price = $626,000

(minus)

Expenses = $542,759

Net Return = $83,241

So, despite the hefty costs of home ownership, we made a profit of $83,241.

And considering we probably would have paid at least $163,500 to rent over the same period of time, home ownership seems like an obvious win…

…Right?

However, if we amortize that profit over the seven-year period of home ownership, we only made a 2.1% yearly return on our investment. It was a return, but we hardly kept pace with inflation!

The stock market often returns 7-10% yearly, on average. So, if we wanted to have an “investment”, shouldn’t we have just bought an index fund instead?

Opportunity Costs of Home Ownership

Remember that big, portly down payment of $74,000 we made in 2013?

Do you know what we were not doing while we were saving for our down payment? We weren’t investing.

But what if we had?

According to my calculations, my favorite index fund (VTSAX) returned an incredible 11.1% yearly growth since the day we made our down payment, even after that pesky little devastating market collapse back in February and March of this year.

Compared to our paltry 2.1% yearly return on our “home investment,” we seemingly could have made a hell of a lot more money just investing in VTSAX instead.

Opportunity Cost

Well, obviously we need to consider the cost of renting, which we would have been doing if not living in our mortgaged house. After all, we all have to live someplace.

Based on what we were renting at the time in early 2013, with some very nominal hypothetical price increases over the years, we probably would have spent in excess of $22,000 per year, and over $163,000 total over the seven-year period! Yeah man, Denver rent is expensive!

However, we would have been free to invest not only our original down payment, but we also would have invested the excess payments we were making to our mortgage (about $1,487, on average, per month).

If you put all that data in this handy compounding machine, it tells me we would have returned over $331,000 by renting and investing instead of owning a home!

Investment Returns = $331,389

(Minus)

Cost of Rent = $163,000

Net Return =  $168,389

A Final Comparison: We Made Less Money by Owning a Home

We made over $83,000 by owning our home. Pretty cool, right? We had a roof over our head for seven years, and made a profit!

The common assumption is that rent money is gone forever. And that’s true.

However, a renter who is investing the surplus cash that we put into a home (down payment, aggressive extra mortgage payments, renovations, maintenance, etc) would have made twice as much (over $168,000 using our numbers)!

But here’s the thing…

As I said last year, we wouldn’t have invested our 20% down payment had we not bought a house. We weren’t all-in on investing yet, so that’s purely hypothetical.

But here are a few undeniable truths (in our situation):

1. Your primary residence is probably not a great investment. In our case, a 2.1% yearly return is barely keeping pace with inflation (exceptions: renting out extra rooms or otherwise monetizing your property). And this was one of America’s hottest real estate markets.
2. Renting can generate a better return if excess funds are invested.
3. Without investing, in our case, renting is an inferior option to home ownership from a financial standpoint.

Would We Buy a Home Again?

Yes, I believe we will.

We’ve parked the proceeds of our home sale into a series of high-yield savings accounts, reserving the majority in cash and only investing a small portion.

Our goal is to continue our road trip, seeking the right place to resettle. We already have some favorites, so now is the time to really sell us on your town. I greatly appreciate those who have already reached out or otherwise graciously showed us around.

We will use the stored wad to make an all-cash offer. As much as people whine and moan about the cost of living in their town, well, all the places we are considering are still cheaper than Denver. For now. So it goes.

(As an aside, this is why I strongly believe that the true power of geoarbitrage is not to be used as a tool to getting to financial independence sooner, but instead as a way of entering financial independence. Build wealth in a high cost-of-living location, and then move to some place cheaper.)

Sweeten the Deal on Home Ownership

We love being homeowners. We’ve known all along that while home ownership is generally not a money-losing proposition, it’s hardly a great investment. We fully recognize that real estate can be a great wealth-building tool, but the house you live in is not a particularly efficient investment.

That said, we all have to live someplace. If I did it again, I’d strongly consider a property with rental options. Perhaps that’s an extra bedroom, a basement with Airbnb potential, or a mother-in-law suite. Those are quick ways to turn a marginal investment into a wealth-building machine. Having someone else pay for your living expenses is a huge deal!

Here is a great resource for real estate investing.

Summary

After seven years of home ownership, the numbers don’t lie:

• We made over $83,000 of profit as home owners over a seven-year period. Unfortunately, that’s only a 2.1% yearly return, even in a red-hot real estate market.
• We aggressively paid down our mortgage in seven years. While the feeling of being debt-free was outstanding, we probably hurt our overall returns. However, entering a period of low- to no income without a mortgage is a smart choice. With the pandemic, we didn’t know where the world (or we) were headed.
• Had we continued renting and invested the surplus cash over the same seven-year period, we would have more than doubled our money, hypothetically making over $168,000!
• Renting makes better economic sense (in our case) only if investing surplus cash not otherwise tied up in the expense of home ownership. Otherwise, it’s just a fat cost of life.
• For all the intangible reasons, we love being home owners. We will resettle in a new town and use the proceeds of our Denver home for an all-cash offer someplace else.
• The economics of home ownership can be greatly improved through “house hacking”: adding rental options to decrease or eliminate living expenses.

So, does this crush your dreams of being a home owner? Are you really mad at me and want to tell me I’m wrong? Are you feeling fine but have some things you’d like to discuss? Do you like these words and want to give me a digital high five? All of these feelings and emotions are welcome and encouraged in the comments below.

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