Owning a home is one of the worst financial investments you can make, there really is no way around it. Gone are the days of double digit appreciation, hopefully forever. Although a home should be viewed only as a “place to live,” owning a home could destroy your personal finances. There are few things to remember before taking the plunge on buying home.
Expect to Lose Money
When you buy a home, you should expect to lose money. If you plan on staying in the house less than about 7 years, you should expect losing a lot of money. Although exceptions do exist in regards of appreciation, the transaction costs and opportunity costs (discussed later) destroy whatever gains you potentially might have.
Expect your Insurance and Taxes to Go Up
Personally my home’s taxes went up almost two and a half times inflation and the school levy failed (could have been a lot more). Insurance is also on the constant rise, especially with all of the insurance fraud for roofing in my area. A big storm will come through and suddenly there will be 100s or 1,000s of new roofs all from supposed storm damage, on insurance’s money. Those claims will increase your insurance rates year in and year out.
“Home Depot Tax”
Don’t forget the most overlooked tax of them all, the “Home Depot Tax.” Every improvement or repair is going to cost you, even if you do the work yourself. This expense is often under estimated by home owners. If you did a $30,000 renovation of your home and you lived there 7 years, you increased your net payment by $357 a month. You think you will get back that money when you sell it? That is very unlikely. Even the most successful renovations only net low ninety percent return, and don’t forget your realtor will get a piece of that as well, making an highly successful renovation return mid to high 80%’s, best case scenario.
If you buy a $200,000 house using a realtor (that truly is worth $200,000), you just lost around $16,000-$19,000. Similar to buying a new car, that money is gone. First, you probably paid close to $4,000 to $5,000 in closing costs to buy the home. Second, you are going to have to pay $12,000 (6%) or $14,000 (7%) to sell your home through a realtor, when the time comes to sell. You might also have to pay the buyer’s closing costs, another $4,000 to $5,000. Assuming you had your closing costs covered when you purchased the home, you still stand to lose $16,000 to $19,000 in transactions costs. Also add in another $500 to $1,000 in miscellaneous costs that will surely come out of the title insurance, realtor, appraisal, inspections, home warranties, and closing fees. This of course ignores the fact that your potential buyer may want to pay less than $200,000 or may ask for concessions for repairs or updates.
So you put down $40,000 (20%) towards your $200,000 home? If you were to get a 10% return over the 7 years of home ownership, you missed out on a $37,948 gain (approximately $28.5k after taxes). The after tax gain comes out to $338 a month, locked up in your home’s equity.
Due to the fact you just bought your home, you are now a large investor in the housing market. Things like appreciation/depreciation, interest rates, and market trends, now effect your personal finances directly. Is your house worth $200k, $220k, $180k, or $192k? Who knows! It’s an asset you have in which you will have to guess it’s value. Don’t forget that rising interest rates could destroy your home’s value. Also hopefully the neighborhood or city you own your home in doesn’t have a downfall, that could be devastating to you.
Financial Benefits of Owning a Home
You will receive a tax benefit for your home of course, but remember that your itemized deduction’s net gain should be reduced by what you would of gotten as a standard deduction. The tax gain is nice, but often exaggerated. Don’t forget the more you pay off your mortgage, the less tax benefit you receive.
Last but not least, Equity, or as I call it “Fool’s Gold.” I bet more than half of the homeowners in this nation with a mortgage, couldn’t tell you how much equity they earn month or year. Where I am located, this $200,000 house would roughly be $1250 – $1300 a month (20% down-payment: counting insurance, taxes, mortgage payment only). Out of that $1,250 to $1,300, only $211 a month would be earned in equity. The amount of equity earned would increase by about a dollar with each payment. It would come out to be $21,047 in 7 years. An amount that is shadowed by the opportunity costs and transaction costs alone.
The final point is appreciation of the home. You do gain from the fact you are leveraged on your home (you only have 20% down), but just remember that the housing market can move two directions (up and down). If you want to invest in the idea that the housing market is going to appreciate despite interest rates bound to go up, that’s your decision, but I am not as confident locking myself into a large leveraged asset with a lot of headache and red-flags.
A home is a place to live, but without the appropriate consideration, its a decision that can ruin your finances, and thus owning a home is the worst financial investment you can make.