Is my house a good investment?

Investing in real estate is always the correct decision, right??? Afterall, the Savvy Solo is looking to minimize the amount of money thrown at the wind. We have to buy something in order to build wealth! Time-out cowboy let’s take a closer look.

At a party recently, I got into a conversation with someone about this topic. It got a bit heated, and ultimately the topic went from numbers to feelings. I can’t tell you how to feel about an investment or a large purchase, but what I can do is look at certain figures to determine the mathematical part of the equation.

Disclaimer: I live in a high cost of living area. I encourage you to utilize this post, using numbers that align with your market, to help determine if home ownership is right for you.

There’s no better place to start this process than with my current home! I’m not about to spill my address, but I will tell you that I bought in a co-op on Long Island, NY in June 2023. Co-ops are not as prevalent in other areas as they are here, but it’s easiest to think of it like buying an apartment. Similar to a condo, but we’ll cover the differences in a later post.

Before we dive in, I will say that I spent a tremendous amount of time doing research and analysis before deciding to put an offer on this place. I suggest everyone do the same, especially first-time homeowners. I was under the impression that I found an absolute gem at the time, let’s see if I was right.

My original plan was to live here 2-3 years, and then possibly start renting this place out if I wanted to get something bigger. We’ll discuss investment properties in the future, but for right now I want to focus on the place you choose to live in. This article by Sergio Ocampo states that, on average, singles move every 5 years. Let’s use this as a barometer and say that I plan to live here for 5 years. Just for the fun of it, we’ll also take a peek at the 10-year mark.

My Numbers

I’m going to use even numbers here for simplicity’s sake. There’s no sense in getting wrapped up in pennies when it comes to a 6 figure investment. Here’s are some of the numbers:

• Valued at $200K
• Mortgage is currently $151K at 5.375% (30 year fixed)
• Monthly mortgage payment: $865
• Monthly HOA fee: $1000 (includes utilities except electric)
• Home insurance: $60

On average, I’m paying roughly $2025 per month to live here. For my area this sounds pretty awesome. After checking Zillow, I was able to find out that someone is renting in my building with my exact same layout for $2000 a month. Just off those numbers, I’m totally winning!

My Actual Ownership Costs

Wait up, let’s evaluate the real costs of this place. Of course, when I moved in, I got a new couch, certain new pieces of furniture, put up a bathroom cabinet, area rugs throughout, shades, etc. Never in my life did I spend on such things in rentals in the past, but for the sake of argument, let’s say the renter did the exact same thing.

The first costs of home ownership to look at are closing costs. Take out the downpayment on the place (which was substantial but ultimately going towards the value of the home); this is the cost of inspection, lawyers, appraisal, loan application fees, underwriting fees, credit check fees, etc. As a buyer at the time, I didn’t have to worry about commissions to the real estate agents, that was on the seller (generally around 6% of purchase price). I believe the rules on this have been changing lately, so you’ll want to check this. I also got a great deal from my loan officer where they covered a big part of the closing costs. I got killed on taxes later, but it was still a win in the end.

I mentioned earlier that I’m in a co-op. In general, that means I’m not responsible for anything touching outside, which is pretty sweet (different co-ops have different rules, yours might differ). Things like window replacement, balcony touch ups, and lawn care are all covered by the HOA, awesome! However, I am responsible for everything inside my place. Things like painting, appliances, and fixtures are all on me. This is where the needs vs. wants game comes into play; but without a doubt there are a number of things I’ll need to replace within the next decade.

This fantastic article by Sarah Noel has an up-to-date list on some of these appliance costs. This article by Tom Grupa shows costs on the plumbing fixtures. I can install most of these myself, so I won’t include installation on the basic things. Also, on some of the items not listed in the articles, I went ahead and looked up the cost of what I currently have. Don’t tell my HOA that I’m planning to install these myself 😂. My current appliances and fixtures are middle of the line, lets replace them with the same.

Here’s a list of the one-time costs:

• Closing Costs: $5,000
• Fridge: $1,500
• Range: $1,000
• Dishwasher: $1,000
• Kitchen Sink: $500
• Kitchen Sink Faucet: $200
• OTR Microwave: $300
• Toilet: $300
• Bathroom Vanity Sink & Faucet: $1,000
• Shower Valve/Trim: $300
• 2 Wall Unit ACs: $1,200

Notice the things I didn’t put on that list. I’m pretty sure my tub will stand the test of time, and I’m really hoping I don’t run into any electrical issues in the near future. I’m also not planning to do anything that involves replacing drywall, tile, floors, lighting fixtures, or paint. You might want to consider these things if looking at a real fixer upper.

The list above is what I expect to replace over the course of 10 years, not all at once. Chances are high the costs of these items will go up over time, but let’s stick with these numbers for now. To be fair, we said the barometer was 5 years, so we’ll cut the cost of appliances and fixtures in half. $7,300 / 2 = $3,650. We’ll add this to the closing costs and spread it out over 5 years to determine our monthly costs.

Actual monthly cost for me: $2,170

Actual monthly cost for renter: $2,000

Still looking pretty good for me! Part of my monthly costs are going towards equity, right?

Me Versus Renter

The first thing you’ll hear about buying a home is that it’s important to save up 20% before buying so that you can avoid PMI. We’ll get into home buying practices in another post, but the important thing to know here is that I put down $40k in order to buy this place. Let’s say that the renter had $40k that they invested into something basic, like the S&P 500, on move in day and we both moved in at the same time. Also, the renter will take that extra $170 per month and throw it at their investment.

According to this article by Bill Lyons, home appreciation for houses in America appreciated by 4% last year. Many of the personal finance pros I listen to say that 4% is a good rule of thumb in general when looking at appreciation of single-family homes. I really don’t feel confident my co-op will experience such returns, but let’s be bold and say that it will appreciate by 3%. Chances are it will be less than this, co-ops don’t appreciate in the way single family homes do.

Let’s jump back to our renter. This graph and breakdown by Slickcharts show that the S&P 500 had returns the last couple years north of 20%! Over the last decade, it actually has an average of 12.86! Let’s say our renter is fully invested in the S&P 500, but we’ll be conservative here and say the renter gets 10% returns. Again, many of the personal finance pros I listen to say that 10% returns are a pretty safe rule of thumb when looking at the S&P 500.

For these next calculations, I’ll be using an investment calculator from calculator.net.

For my co-op, let’s first look at the amortization schedule.

So, after 5 years of paying the mortgage, I will have a balance of $147,690. Also, we are adding 3% to the value of my co-op for this time period, so now the future value of my place is roughly $230,000.

This puts me at a grand total of $82,310

Like we mentioned earlier, the renter took $40k and invested it at 10% returns and adding $170 per month. Using the calculator, it would look like this:

The renter, after 5 years, is at a grand total of $77,435

I guess I won? Kind of a tight race.

After 10 years (using 3%) my place might be worth $268k. We’ll take out the additional $3,650 for fixtures and appliances I’ll need to replace over the next decade.

Using these same formulas:

Me: $132,756

Renter: $137,726

Now I’m losing? What’s going on here?

A Few Takeaways

While I have compounding interest working against me with the mortgage, the renter has compounding interest working for them. Sure, the 3% raise in house value every year is helping me; but that 5.375% interest rate is actively working against my investment. It’s also worth mentioning that this is a really good mortgage interest rate for the time we are in.

Honestly the difference here is negligible. I’m actually pretty stoked the numbers were as close as they were, turns out I didn’t make a terrible investment!

“Well that’s great for you, I’m a Savvy Solo with kids. I need to buy a real house with a yard!”

Alright, settle down big daddy, let’s run the numbers.

Single Family Home

Let’s jump back to Zillow and see what we find.

Here we go! I got a 4 bed 3 bath house with a backyard in a really nice neighborhood on Long Island, NY. You are going to love this place, it’s amazing!

Looks like the rental asking price is $4,200 per month, or the Zestimate price of the property is roughly $900,000. To me (for whatever that’s worth), that Zestimate feels a little low compared to the homes being sold around it, but let’s run with $900k.

The Numbers

In calculating this, we’ll use a lot of the same formulas we used on my place. Also, it looks like heat is included in the rental, but none of the other utilities. This article, written by Stacy Sager, states that the average cost to heat a home back in 2022 was $1,200 for the winter season. It might be more now, but let’s run with it. The rest of the utilities are a wash, both the renter and owner are going to pay the same.

I doubt this house would be up for rent if anything in the house wasn’t working correctly at the moment. It’s safe to say the owner would be able to move in and not worry about any immediate major expenses. However, over the course of 5-10 years, there are definitely expenses the owner has to worry about that the renter does not. Just like we did above, lets break down some of these.

Actual Owner Costs

Since it’s move in ready, let’s make a few assumptions to the benefit of the homeowner. Let’s say they don’t plan on doing any additions to the house, or anything that involves moving drywall or tile. The roof, siding, windows, doors, existing plumbing, electric, boiler, and interior paint are all going to work perfectly for 10 years (unlikely, but let a man dream 😂). Also, we’ll say that two of the three bathrooms don’t need to be touched during this time frame.

For the owner costs, we’ll reference the above price points:

• Closing Costs: $30,000
• Fridge: $1,500
• Range: $1,000
• Dishwasher: $1,000
• Kitchen Sink: $500
• Kitchen Sink Faucet: $200
• OTR Microwave: $300
• Toilet: $300
• Bathroom Vanity Sink & Faucet: $1,000
• Shower Valve/Trim: $300
• HVAC replacement (ductwork still in great shape): $8,000
• Water Heater: $3000

The above onetime costs expected to hit over a decade total $47,100, or $23,550 for 5 years. We’ll also have to add in the monthly costs for the owner that the renter doesn’t worry about. Property taxes are roughly $17,000 annually (or $1400 per month), lawn care $100, and homeowners insurance at $70.

Now, we’ll assume that the homeowner did the right thing, and saved up 20% before buying (in this case $180,000) so they don’t have to pay PMI. According to Investopedia, the mortgage rate for 30-Year fixed as of 9/27/24 is 6.18%. This would put the mortgage at roughly $4,400 per month.

Actual monthly cost for owner: $6,360

Actual monthly cost for renter: $4,200

OOOOOF! Homeowner not off to a great start, let’s dig in further.

Owner Versus Renter

Alright so in this case, the renter is investing $2,160 each month to catch up to the owner. This is a hefty sum, along with the $180K to start so let’s say they mix in RIETs, bonds, a total stock market fund, along with the S&P 500 in order to ensure a safe average return of 7% (3 entire points lower than what we used above). On the other side, we’ll give the homeowner the full 4% appreciation on their single-family house.

LET’S GO!

So, after 5 years the owner got the mortgage balance down to $671,465. Let’s go ahead and add the 4% to the home making it worth $1,094,985. Hooray, millionaire status! Not quite…

This puts the owner at a grand total of $423,520

For the renter, we are starting off with $180k and adding $2,160 per month, expecting a rate of return at 7%.

The renter, after 5 years, has a total of $406,242. Had we used 10% returns, the renter would have surpassed the homeowner already, but let’s stick with 7%.

After 10 years, with 4% appreciation, this house is worth $1,333,000. Let us not forget about the remaining $23,550 the owner is going to pay for fixing things.

And the winner is:

Owner: $704,041

Renter: $723.558

My Takeaway

It kind of amazes me how negligible these numbers are again. I mean, yes $20k is a lot of money, but in the grand scheme of playing with a million bucks over 10 years, I figured there would be a larger disparity. I really thought the renter would run away with this one.

Maybe, just maybe, renting isn’t the worst thing in the world? 👀

In fact, the longer the renter rents, at least in these scenarios, the richer they get. Not to mention, the renter’s wealth is mainly liquid, the homeowner’s is not. Good luck selling a chunk of your house to go on vacation! To top it all off, the renter can move at the end of every lease, and doesn’t have many pesky responsibilities around the house.

Now, there are about to be a metric ton of complaints flooding in about this, so let’s address a few of them:

• “Rent goes up every year!”: Eh, not every year. I’ve been renting my whole life up until a year ago. Rent always went up on me when property taxes and utilities went up. I’m not saying this doesn’t hurt the renter more, but the homeowner is feeling the pain too. I’m sure my HOA fee will go up right around the same time as the renter in my building has to pay higher rent.
• “You expect a renter to invest like that every month?”: Yes, I expect the renter to be just as adult as any other adult. The Savvy Solo is generally investing the same amount each month, and pushing themselves to invest more. I only set those $ amounts to even up the investments.
• “You forgot about tax benefits for ownership!”: I didn’t forget, I didn’t add them into this equation to keep it simpler. I also didn’t ping the homeowner the 6% real estate agent commission fees, or other closing costs they’ll have to pay when selling the house.
• “Those numbers are way off my local area.”: I’m glad you noticed that! I encourage everyone to use this as a template to measure your own situation.
• “Why did you stop at 10 years?”: Chances are you are going to move in this timeframe; either to a bigger home in a close neighborhood or due to relocation. Even if you are living in the same house for longer than that, chances are you’ll refinance in that time period.
• “I bought my house in 2019 and I’m sitting pretty 😁”: I’m so happy for you! I honestly mean that, I’m not being facetious (maybe just a little). Wild swings in the real estate market are going to happen occasionally. Home buyers in 2007 were on the opposite side of that fence. Don’t let recent events impact the decision to buy, for or against.

If you can’t already tell, I’m a maniac. When I was on the home hunt, I spent months digging and doing research on finding the exact right place to live; I factored in everything. Location had to be prime for work as well as the places I frequent. The price had to be at the lower end of what my market was offering, and I wasn’t looking at anything that didn’t have a balcony! In fact, my “must have/like to have/can’t have” list got quite extensive. The real estate agent I had was a nice guy, but the only thing he did was get me in to view the places I already knew I wanted to see.

My personal experience closing on the co-op was a nightmare. I had already felt burnt out by the time the offer was accepted, little did I know the real journey was just starting. I proceeded to go through 4 months of hell between “offer accepted” and “congrats on your new home!” This process really took it out of me, the 5POH was really struggling at all angles. It didn’t matter, I had the homeownership bug, and I wasn’t going to stop at any cost, or any logical reason 🤪.

The time it took to close was definitely not due to normal circumstance, but the process of buying a house takes a toll on everyone. This is likely the biggest financial decision of your life, so it shouldn’t be easy. I only mention this because you need to be mentally, emotionally, and (most of all) financially prepared to dive in.

Why are you buying a house? Because it’s a good investment? Clearly not a good enough answer. Give me the real reason you want to buy property. Renters have the freedom to choose where they want to live every single year, is that something you want to give up? If the fridge goes out, or if there’s a leak in the roof, all the renter has to do is make a phone call. Are you ready to take on that stress? Make a list of pros and cons, personal to you, on home ownership.

I hope this gives renters a little peace of mind, and also the motivation to start investing more. The only reason renters are winning, albeit by a slight margin, is because they are investing the difference in monthly costs. The fact that you don’t have a forced savings account does not give you permission to start buying things you can’t afford.

Still think I’m off my rocker? One of my personal heroes, JL Collins, tends to agree with me. So does Kevin Mercadante on the Money Under 30 site (please check this website out youngens), same with Garit Boothe on MSN.

At the end of the day, the question of homeownership is a personal question. Are your finances in line? You plan to live there for the next 5-8 years, at least? You are pretty handy around the house, and don’t need to “call a guy” for every little thing? You still have the burning desire to buy a house after reading and understanding the numbers above? Go for it.

I hope readers don’t think I’m completely averse to homeownership. I love my place; I’m not leaving anytime soon. I just want this to open your eyes, and figure out if this is really one of your core values. The “American Dream” of homeownership created a nightmare for the millions of people who jumped into it before they were ready. Make sure this is your dream, not someone else’s, and plan accordingly.

Stay classy solos! ✌️