Today’s question comes from Mike. He asks:
“Thanks for the guidance you provide in emails, and on your website. I have enjoyed learning with you. So my single biggest question about money is this: Is a home purchase, in my specific case, really a bad idea?
We purchased our home 6 months ago for $348,000. We used my VA loan which got us 3.25%, 30 year fixed with no money down, no points, no origination fees, no PMI, etc. (I qualify for a very unique military loan with lots of perks). It’s way more than what I wanted to spend, but we’re now only a mile and a half from my work — the time savings that I have given back to my family is HUGE!
Our payments are $1,726 a month and I make about $93k a year. Our home is perfectly situated in a major growth area of Colorado. Although I realize it’s not a guarantee, real estate values in this specific zip code are estimated to climb in the range of 6-9% in the next year to 18 months due to many logistical reasons. As for renting, you can barely rent a 3 bedroom house in this area for $2000 a month. So, I know that many financial experts are down on home ownership these days. However, every time I look at our numbers, I just cannot see how buying this home was a bad idea vs. paying high rent prices and ending up with nothing in a very expensive Colorado housing market.
For a complete financial picture, I’m 34 years old, married, with 3 kids. We started investing four years ago and have about $65k in retirement accounts. Also, we are saving about 25% of my income each month. We have no credit card debt, student loan debt, or car loan debt. Our only debt is the mortgage. I definitely feel like I am late to the game and need to make up for lost time, but at the same time, I am also pleased with our progress in a short amount of time.
Hopefully that wasn’t too much to throw out as a question, but I am looking forward to hearing your thoughts!”
Owning a house is only a bad idea if you buy a house, live in it, and think it’s the best investment. A house isn’t an investment, it’s a place to live.
I’m going to tell you I’ll get emails about what I just said because whenever I say a house isn’t an investment I get emails about it. Like the one I got this weekend:
“after reading the article about you, I have come to the conclusion that you are not very smart at all.
in fact , I believe that you are an idiot.
the problem you faced is your own.
you know nothing about investing.
your too young to realize any profit.
your main problem was retiring at a young age.
wake up and smell the coffee.
your an idiot. PERIOD”
When I was starting out this email would annoy me. It would outweigh getting 100 reader success stories. It took me a long time to realize this isn’t about me at all — it’s about them.
Think about that. Only someone who’s unhappy with their life spends their valuable time criticizing other people. Or, if what you believe has been challenged.
The people who are successful in life want to have their beliefs challenged. They don’t just sit around saying, “You’re wrong, and here’s all the reasons why.”
No, they’re trying to change the way they look at things, because when you change the way you look at things the things you look at change. And that’s how you learn and grow.
So, I’m going to show you a different way to look at housing.
I’ve said this before and I’ll say it again. Yale economist Robert Shiller found that from 1890 to 2012 the inflation-adjusted return on residential real estate was 0.17%.
That means if you bought a $5,000 house in 1890 it would be worth $6,150 in 2012.
Over the same time period the stock market returned an inflation-adjusted 6.27%. And that means if you invested $5,000 it would be worth $8 million.
This is why I’ve never included my house in my investments. I don’t even think of it as being part of my “net worth” like everyone else. Why? I see it as a place to live.
Now, the next thing people tell me is that no one buys a house with cash so my example isn’t a fair comparison. That’s a valid point, so here’s another way to look at it.
A 20% down payment for a $250,000 house is $50,000. Using historical returns, 30 years from now the house will be worth an inflation-adjusted $263,000.
The $50,000 down payment is worth $53,000.
The same $50,000 invested would have grown to an inflation-adjusted $310,000. A difference of $257,000.
That’s the opportunity cost of using money for one thing rather than another.
Most people will say they’re sick of throwing money away on rent, and if they owned they’d at least be building equity, and eventually have a paid-off house. This is true.
But now you get to throw money away on property taxes and homeowner association fees and fixing things that break and remodeling and so on.
I don’t think your house is a bad idea. Why not? You spent the time thinking it through. Most people spend more time picking out a restaurant than they do making huge financial decisions like buying a house.
No down payment means no lost opportunity cost, it’s cheap money at 3.25%, and it’s walking distance to work which improves your home life. So, enjoy your house.
I’ve always said if you want to buy a house buy a house. Just don’t buy a house, live in it, and think it’s the best investment. Buy a house and live in it because it’s a place you want to live.