Twenty years ago this October we bought a house. At the time I made a spreadsheet to weigh the financial costs and benefits. I went back to look at that spreadsheet and compare my guesses to how things really turned out.
In 1998 we were renting a 3 bedroom, 1250 sq ft apartment. Rent was $790 and we were paying $90 for utilities and insurance. Mortgage rates were near historic lows at 6.75% and we found a model home that we liked that was 1600 sq ft and $156000.
I made quite a few guesses about the future in the spreadsheet. The most important were the growth rates of real-estate, rent, and the stock market. I assumed that rent and real-estate would grow at 4% a year and the stock market would go up 8% a year.
I also found out how much our insurance, property tax, HOA and utilities would be in the house and assumed that those would grow at 3% a year.
| Category | Value in 1998 | Assumed Growth rate | Projected for 2018 | Actual 2018 | Actual rate |
|---|---|---|---|---|---|
| Rent | $790/mo | 4% | $1731 | $1500 | 3.25% |
| Utilities, Taxes and Insurance | $343/mo | 3% | $751 | $502 | 1.9% |
| S&P 500 | 1000 | 8% | 4661 | 2720 | 5.1% |
| Home Value | $155600 | 4% | $360000 | $379000* | 4.2%* |
* Includes more home improvements than we planned in 1998
During these 20 years, we have refinanced twice: to 5.6%, then to 4.75%. We finished the basement, put in A/C and hardwood floors.
The prediction in 1998 was that we would need to stay in the house 7 years to make up the initial costs. If I go back and put in some actual growth rates, it changes the payoff time to 6 years.
To compare what we actually did to a universe where we stayed in the apartment, I’ll go through our ownership history year by year comparing what we would have paid at the apartment to what we did pay at the house. I’ll include home improvements, repairs and the tax savings from the mortgage interest deduction. (Improvement and repairs include things like refrigerators and sprinklers that stay with the house, but don’t include things like beds that we would have needed to buy at the apartment.) Each year, I’ll take the extra cost of owning the house and put it into the S&P 500. At the end, I’ll compare the value of the investment to what we could sell the house for. (The basement doesn’t show up in the “Additions and repairs” column because we added it to the mortgage.)
| Year | Apartment rent and utilities | Mortgage, tax, utilities, insurance, HOA, interest deduction | Additions and repairs | Home cost over apartment | Value in 2018 |
|---|---|---|---|---|---|
| 1998 | $ 10,530 | $ 13,787 | $ 12,784 | $17,003 | $47,924 |
| 1999 | $ 10,859 | $ 14,166 | $ 80 | $4,368 | $8,323 |
| 2000 | $ 11,199 | $ 13,125 | $ 325 | $3,251 | $6,612 |
| 2001 | $ 11,549 | $ 13,240 | $ – | $2,710 | $6,460 |
| 2002 | $ 11,910 | $ 14,557 | $ 800 | $4,485 | $13,617 |
| 2003 | $ 12,283 | $ 12,747 | $ – | $1,522 | $3,653 |
| 2004 | $ 12,668 | $ 12,864 | $ – | $1,274 | $2,932 |
| 2005 | $ 13,065 | $ 12,991 | $ 1170 | $1,026 | $4,666 |
| 2006 | $ 13,475 | $ 13,118 | $ 2,790 | $3,554 | $6,781 |
| 2007 | $ 13,897 | $ 13,240 | $ 409 | $894 | $1,762 |
| 2008 | $ 14,333 | $ 12,974 | $ 7,777 | $6,855 | $23,788 |
| 2009 | $ 14,783 | $ 15,515 | $ 9,983 | $11,131 | $28,720 |
| 2010 | $ 15,248 | $ 17,112 | $ 254 | $3,328 | $7,048 |
| 2011 | $ 15,727 | $ 17,212 | $ 660 | $3,378 | $7,054 |
| 2012 | $ 16,221 | $ 17,313 | $ 200 | $2,548 | $4,679 |
| 2013 | $ 16,731 | $ 17,417 | $ 1,575 | $2,541 | $5,281 |
| 2014 | $ 17,258 | $ 17,522 | $ 4,634 | $6,203 | $8,311 |
| 2015 | $ 17,801 | $ 17,629 | $ 3,865 | $4,508 | $7,114 |
| 2016 | $ 18,362 | $ 17,739 | $ 400 | $1,133 | $1,353 |
| 2017 | $ 18,940 | $ 17,850 | $ – | $292 | $284 |
| 2018 | $ 19,537 | $ 17,964 | $ 1,677 | $1,512 | $1,512 |
The total value of the invested savings would be $198,000. The house would probably sell for $375,000. Taking out sale-prep costs, realtor fees and the current value of our mortgage ($60800); we would net about $284000. So we are $86,000 ahead because of the house.
Of course this comparison doesn’t take into account the differences in lifestyle and standard of living between the house and apartment. The house is larger, has a garage, and a yard. If instead, I compared buying the house to renting the same house, owning has a bigger advantage:
| Year | Home rent and utilities | Mortgage, tax, utilities, insurance, HOA, interest deduction | Additions and repairs | Ownership cost over rent | Value in 2018 |
|---|---|---|---|---|---|
| 1998 | $13,032 | $14,187 | $12,384 | $13,540 | $38,161 |
| 1999 | $13,569 | $14,246 | $- | $678 | $1,291 |
| 2000 | $14,106 | $13,450 | $- | $(656) | $(1,335) |
| 2001 | $14,644 | $13,240 | $- | $(1,404) | $(3,347) |
| 2002 | $15,183 | $14,557 | $800 | $174 | $528 |
| 2003 | $15,723 | $12,747 | $- | $(2,976) | $(7,143) |
| 2004 | $16,263 | $12,864 | $- | $(3,399) | $(7,820) |
| 2005 | $16,804 | $14,161 | $- | $(2,642) | $(5,613) |
| 2006 | $17,345 | $15,408 | $500 | $(1,437) | $(2,742) |
| 2007 | $18,394 | $13,649 | $- | $(4,745) | $(9,348) |
| 2008 | $17,401 | $14,001 | $6,750 | $3,350 | $10,509 |
| 2009 | $15,088 | $16,478 | $9,000 | $10,390 | $25,115 |
| 2010 | $15,639 | $17,366 | $- | $1,727 | $3,657 |
| 2011 | $14,870 | $17,872 | $- | $3,002 | $6,270 |
| 2012 | $16,451 | $17,513 | $- | $1,063 | $1,951 |
| 2013 | $19,061 | $17,642 | $1,350 | $(69) | $(103) |
| 2014 | $20,790 | $22,156 | $- | $1,366 | $1,830 |
| 2015 | $24,209 | $19,395 | $2,100 | $(2,714) | $(3,843) |
| 2016 | $26,308 | $18,139 | $- | $(8,169) | $(9,756) |
| 2017 | $28,407 | $17,850 | $- | $(10,556) | $(10,280) |
| 2018 | $29,846 | $19,641 | $- | $(10,205) | $(10,205) |
The total value of the invested savings is now just $17,750. So we are $266,000 ahead by owning instead of renting.