Yesterday in this column, we destroyed the dream of every one of you with their heart set on buying a house.
After watching a story about rental rates these days, I wandered into the mathematical abyss and crunched the actual numbers on what it costs to own a house. Or more accurately, what it costs to buy one, over time from a bank. It owns the house until the mortgage is paid.
The numbers don’t lie, if you count every expense—from the mortgage to insurance, taxes, maintenance and improvements, a $235,000 home, which is the median price for one in Omaha and you put 10% down, considering 4% inflation, you’ll spend $628,000 on that place over the next 15 years.
Sounds more like the American nightmare.
But over those 15 years, won’t the home appreciate? Sure, by on average, 3% a year. These last two years where home values were up double digits, will not last. But 3% compounded each year is reasonable. That means after 15 years, the place should sell for about $366,000. Minus the mortgage, even after real estate sales commission, that’s a tidy sum. And proceeds from home sales, at least for now, are not taxed.
But compared to what you’ll have to sink into the place? Not even close.
So, what about renting? Is it that bad?
What if you were able to rent that place instead of buy? The owner charges you about 1% of the purchase price per month, about $2350. You like him, he likes you. You sign a one-year lease. You and the family fall in love. The neighborhood is great, schools are close. Next year, the rent goes up 5%. Not unreasonable. His costs are up, the taxes, insurance went up. Now you’re at $2460 per month. The same thing happens in years three, four, five…..
After a while, the difference between your rent payment and what we figured yesterday you’d be spending to own the place isn’t that much.
But the renter’s grim reaper is always lurking behind every last month of the lease.
One day, you get THE call. The landlord is selling. You have to be out in 90 days. Now, you’ve just fallen face-first into the 5th ring of Hell. That’s the biggest stop sign to renting a house, long term. You’re in a safe harbor from that in an apartment or a condo but what if the Gen Y’er who moved in next door likes to Rock the Verve at 2:00 am or worse, he and the girlfriend prefer verbal expression during intimacy?
We’ve all been there.
This just sucks. What to do?
For decades, owning your own house was a great investment. Prices were low, interest rates were low. Taxes were low and you didn’t need to be a Buffett to afford a coat of paint. Stay in it forever, pay off the mortgage and there is your retirement nest egg.
Today, homeownership has become prohibitively expensive, and wages haven’t kept up.
The fictional $235,000 starter home we talked about yesterday was probably $75,000 a generation ago. Putting 10% down (which you could do for free until they invented Private Mortgage Insurance) meant you owed $67,500. At 10% interest plus 1.5% principle each month, the payment was a reasonable $646. That 235,000 house even at 4.5% interest plus PMI is $1,235 per month. And everything from taxes to home improvement and maintenance is double to triple as much.
If you’re still not sure, Real Estate investors shared some tips. Since rental rates are zooming, homeownership, if you have the down payment, is still the way to go. But you have to shop price which means a fixer-upper. They are the best investment today because you control what and when improvements are made rather than paying the seller back for his. Fixer-uppers get taxed less. Pick neighborhoods on the rise. In Omaha, that’s midtown, Dundee, Blackstone, North Omaha and the near south. There are good buys there. Might need some vision but some of them are very affordable.
Stay updated on community development—where are great projects planned or underway? You want to be in the nice areas to come.
One other biggie. Don’t buy it or rent it for the money. Do it for love. Afterall, you come home to it every night. -30-