It’s no secret that I’m not a huge fan of homeownership. I’ve detailed this before, and I’ll detail it again. But that doesn’t mean I believe homeownership, in itself, is wrong or bad. In fact, you could say my frustration is more with the blind importance, status, and reverence which American culture confers upon homeownership, and how this often leads people to make really terrible six-figure decisions. But what if you really want to own a house and aren’t just a cultural robot parroting what your wealthy parents say? Well, there are good ways to go about being a homeowner and there are bad ways. So let’s talk about those.
First of all, I want to address that even as far back as high school, I was often preached the same old story: statistics show that children are happier when their parents own a house. This is part of the propaganda around buying a house, and it’s not necessarily wrong. Of course, I also want to inform people that children are happier and have greater self-esteem when their father owns over 100 head of cattle. And that’s not wrong either, I’m not just not talking about American culture. My point of course is that saying “children are happier when…” is a slippery slope. Yeah, if you belong to a family that has achieved all of the cultural values they grew up with, you might feel good about yourself because you get to feel like “good stock” (pun intended!) and can look down on the peasantry who haven’t achieved immortality, but there’s no objective truth to this, and since every culture has good and bad values, that’s not a guarantee you are a good person. So before you rush out and buy a house for little junior, remember this, because children will often follow the values of their parents, and if you raise your kid to be a dick because you grew up “in a house”, you’re one of the people I get pissed off with. So cheers.
THAT being said, what are some keys to buying a house and buying it right?
- Understand that just because the mortgage is usually cheaper than rent does not mean the HOUSE is cheaper, too. The failure to realize this comes from the failure to understand the true cost of things. Especially if you are somebody who wants to see teachers’ salaries increased, realize that you will be paying that increase through property tax. Also, the amount you will typically need to budget for maintenance and repairs is often handily assumed to be 1% of the value of the house per year. So if you own the average $400,000 house in Denver, that is $4,000 per year. Some years may be less, some years more. But if you can’t swing $4,000 per year, you probably shouldn’t be buying a $400,000 property. So if you are going to buy a house, make sure you can swing 1% of the value each year. Expect it. Plan for it.
- Learn how your house works. It’s absurd to make a six-figure decision without learning what you are getting into. Just how there is no shortage of PhDs who do not understand the basics of how their car works and spend theirs days in fear of it, otherwise intelligent people often do not understand how basics things in their house work. Mind you, I don’t know a ton about how houses work, but that’s because I don’t have one and don’t plan to have one for a long time. But I have occasionally been interested, and even had a book one time about building your own house, which was really cool. The most expensive thing you will ever buy is not something you should be ignorant about. Go learn about houses.
- Don’t put all your eggs in one basket. Meaning, don’t be someone who saves up $20,000 for a down payment, makes the down payment, then has $0. You should always have money in reserve. What happens if you buy a house, then get laid off? You’re going to be in hot water really, really fast. The danger with a house is that you can’t just move back in with your parents. And although you probably don’t want to in the first place, it’s pretty nice if you can and need to. Once you sign all that mortgage paperwork, you are on the hook until that house is paid. Have money in reserve. Don’t be stupid.
- Fix the damn place up. I saw this in a blog one time. The author was complaining that everybody waits until they are selling their house to fix it up, hoping this will allow them to sell at a higher price. His point was: if you just fixed it up in the first place, you could have enjoyed how nice it was. Instead, you waited around for 5 years with half-finished this and that, then fixed it up just so you could sell it. For the same price, you could have just had a nicer place. Assuming you have the money, what’s the point of having a house if it isn’t nice? Right?
- Don’t buy more house than you need. Buying as much house as you could was an old recommendation pre-Recession. The idea was that by taking out a larger mortgage, you were “leveraging” that money, such that as the house increased in value, this would lead to a greater net increase. So if you took out a $200,000 mortgage, and the house went up 10%, that was $20,000. But if you took out a $300,000 mortgage, and it went up 10%, that was $30,000. “You want more money, don’t you?!” This is completely and utterly stupid. You may get lucky, but you may not. Shit-tons of people found this out the hard way. Don’t be one of them. If I told you to take out a $300,000 loan and invest it in stocks, you’d probably think I was crazy, and you’d be right. But when you buy a house hoping to make a quick buck, you’re also playing with fire, and as soon as there’s a downturn, you could be facing bankruptcy. Playing games with debt is super dangerous. Besides, $10,000 really isn’t that much. You’re better off just not buying that stupid luxury car and saving yourself $40,000 instead.
Now, it’s a little different if you’re buying a larger house for kids. The question is…how many kids are you going have? Forgot how many you WANT to have, how many are you GOING to have? And most people don’t actually know, because most people can’t predict the future. It’s nice to have an extra room to have space to grow, but I’m also not an advocate of spending an extra $70,000 (average) for one additional room if your only plan is to use that as a guest bedroom. These rarely, if ever, see action, and I recently discussed the cost of this. Anyway, I have some friends who went out and bought a 5 bedroom house because the wife had always wanted a bunch of kids. I’m not a big fan of that personally, but there’s nothing wrong with it. From one perspective, if you never move you save a lot of money on realtors and closing costs. On the other hand, you get to pay out your butt for heating and cooling dead space while you slowly build up the troops, and there’s a very human tendency to fill empty space, so be prepared to spend money filling those rooms up. But it does raise an interesting trade off: avoiding the frequency of moving, in order to save money, and avoiding dead space, which always has a cost, even if you aren’t paying attention to it. I don’t have a good recommendation here, but you’re going to want to weight this cautiously. - Understand that owning a paid-off house is not the same as financial independence. Having your house completely paid off is a huge accomplishment, and I’m happy when people reach that. But even Dave Ramsey has stories of older, retired couples who paid their houses off but didn’t have enough money to eat. This is why it’s still important to invest in things like your 401k. Just because a house is paid off doesn’t mean you don’t still owe property taxes. It doesn’t mean you won’t still have to mow the lawn or pay somebody to mow it for you. It doesn’t mean you won’t still have to pay utilities.
Let’s just say your property taxes are $2,400 per year. One way to account for this is to use the 4% rule of investment withdrawals to see how much you would need to have invested in order to pay this free and clear. $2,400 is 4% of $60,000. So if you (properly) invest $60,000, this should allow you to withdraw the $2,400 you need each year. Also, if you aren’t familiar with the 4% rule, it’s worth learning and really understanding, because there are some important caveats.
Another danger related to this is when you try, very rightly, to pay your mortgage off sooner than later. The risk here is that if you aren’t saving an emergency fund, all the money you put into the house could still be lost if you face difficult circumstances or go long enough without a job. I was first mesmerized, fascinated by the stories I read of people paying off their houses in their 30s. That was when I first got excited about money and personal finance. Some crazy assholes do it, and I have mad respect for those people. But these days, as laudatory as that is, it can be very risky. And if you aren’t putting money in your 401k or 403b, you may be missing out free money from an employer match. You will also be missing out on the compounding ability of time. So while having a paid off house is great, you need to consider the risk you face just having a mortgage in the first place. One of your top priorities is to be able to continue paying that mortgage. - Lastly, if I were to buy a house, here’s what I would do. I would learn all about the process. I would hire a highly reputable inspector, and then I would higher another. I would research more about house construction, and would finds leads for every major system. If the hot water heater was old, I would just pay to have it replaced upfront (I did this with my car batter when I bought my car. The battery was seven years old! I wasn’t interested in not having it start one day, so I said screw it and just replaced it the day after I bought the car). I would have a plan. I also would have no less than $10,000 set aside specifically for the house. I’d have a year of expenses set aside in my emergency fund. Also, the house would not be too large, but would have at least two bedrooms. I would also make small improvements to save on heating and cooling.
But uh…that’s just me. And that’s as far as my brain goes because I still have no intention of buying a house anytime soon.
So just…don’t buy a house because your old man thinks that’s the only way toward wealth. Trying to leverage houses is a gamble, and yeah, some people do become wealthy that way, but it’s dangerous and risky, and unless you’re really willing to put in the effort, you are far more likely to get burned. But of course that doesn’t mean buying a house is bad, you just have to keep the bigger picture in mind. Don’t be a jerk and look down on your renting friends because culture tells you that you can. Rent is not throwing money away because life costs no matter how you slice it. You pay for a place to live, you get a place to live. That’s not throwing money away. Houses with structural issues do a way better job at that.
In fact, side note. I was watching another urban exploring video where a group of people went to a giant abandoned mansion in Texas. Why was it abandoned? It made sense when the explorers went into the very large finished basement. Black mold, all along the walls, up to about four feet. What happened? I’m guessing a flood. And I’m guessing that the basement was so large and the cost to repair so great that this more or less “totaled” the house, and made it cheaper to abandon. Mega ouch. That was probably a multi-million dollar property.
Keep a level head, do your research. Consider all the costs, not just the sticker price. Don’t be a dick. Hopefully, things will work out for you and the house will be a blessing for many years to come.
(I have a rant for investment properties, but that’s for another day)