A large part of my modest success as an investor can be attributed to my frugal life style. I try to eliminate all unnecessary costs without reducing my quality of life. By eliminating some expenses that many would say are necessary I am able to save a larger part of each pay check each month and are able to spend money on things that other would consider luxuries even though I am living more frugally than most other people. The illusion of what you need can cost you a lot of money and deprive you of things you really want. I would recommend that you go over all your expenses with an open mind and see how many things you can find that doesn’t bring joy or comfort to your life. Things you only got because it is expected of you or because it is things you used to like. By eliminating these things, no matter the size, you free up money to use for other things.
With this in mind I have recently started looking over my living situation. I am trying to figure out if it would be better for me to buy a house and move out of the apartment I am currently renting or if I am better of renting.
Borrowing money or selling stock
The first thing I looked at is whether it would be better to get a mortgage or to sell stock to be able to buy a house. I would be able to buy a house without a mortgage but if I were to do that I would need to sell a large part of my main portfolio.
It didn’t take long to discover that it is much better to get a mortgage than it is to sell my stock. The return I get from my stock is a lot higher than the interest rate on a mortgage and I would therefore lose a lot of money if I chose to sell my stock to buy the house.
I have a decent credit score and would be able to get a loan at about 3% interest. My portfolio is currently owning an average dividend yield of 4%. This means that the stock will earn more than the cost of the mortgage and this does not take rising stock prices into account. Just the dividends themselves.
It therefor seems clear that the best option for me in the current market conditions is to take a mortgage.
The yearly cost to buy a house will be about 3%. My yearly payment will be larger than that but I do not consider the down payments a cost. They are an investment.
Monthly cost of buying a house vs renting
The main reason to buy your own house is that it is supposed to be cheaper then renting. Rent is often referred to as a tax on the poor that transfers money to the rich who own the properties. But is this really the case. Is it cheaper to own a house then it is to rent.
I currently pay $1200 a month for my 2 bedroom apartment in a central location. The apartment building have a community pool and a gym in the basement. It also offer laundry facilities. A similar house in my area would cost about $260 000. The interest rate on a 260 000 mortgage would be $650 a month, $7800 a year. $650 is lower then the $1200 I presently pay. But there are a lot of cost associated with owning a house.
$550 a month adds up to $6600 a year. Is this enough to pay for renovations, property tax, garbage fees etc. I am not sure. Hiring handymen for the renovations can be very expensive. Any larger renovation such as redoing a bathroom, a kitchen, or replacing the roof or windows will cost a lot more than that.
I can personally not see any large financial benefits from buying rather than renting and this is despite the fact that I am not counting the down payment of the loan as a monthly expense. If I take that into consideration then it is likely that I would end up paying more if I bought a house.
Increasing value of the property
A common reason stated to why it is better to own then rent is that the property will go up in value and make for a good investment. There is no doubt that this has been largely true during the last 30 years but there is nothing that guarantees that this will be the case in the future. Property prices in my area are very high at the moment. This is true even when put into relation with the average earnings in the area. It seems very likely that properties wont be able to continue to appreciate in value as they have in the past because if they do then no one will be able to afford to buy them. I am not saying that it is impossible that they will keep going up in value but it is far from certain that so will be the case. I feel a lot more certain that stocks will continue to appreciate in value than I do with residential real estate.
A better option?
A better option might be to buy a fixer upper and then renovate it to a good standard. This is a good option if you are able to do a lot of work yourself. This doesn’t really describe me but I might be able to learn. It might also be possible to to find a property that is a good deal even after I paid professionals to renovate it. The profits will however be nowhere as good as if I would be able to do the work myself.
I can not see any economic benefits that would make me buy a house rather then keep renting. Doing so might allow me to save a small amount of money but this would likely be spent on renovations over the years. I think it is better to keep renting and investing money in stock. Increasing interest rates might bring the house prices down and make it a more attractive proposition to buy a house. But right now it does not seem to be worth the hassle to save a limited amount of money each year.
With this said. It might be worth buying a house for other reasons such as being able to change the house in any way I want to suit my needs and to get a garden. But if I decide to buy a house it will be due to other reasons, not due to the economic benefits of doing so.