It's about what it gets you--not what it costs you

Every now and then I'll hear one of two complaints:

1. A homeowner looking at their monthly house payment as they realize how much they are paying in taxes, interest, home owner's insurance, PMI, and/or HOA fees.

2. A prospective home buyer weighing the benefits of homeownership against renting, taken aback by paying taxes, home owner's insurance, interest, PMI, HOA, etc.
   

And my answer to both of them is that investing is not about what it costs you. Investing is about what it gets you.

Here's the breakdown:

I'm going to make up a property, client, and scenario right now. Let's call our buyer Jasmine. Jasmine currently pays $1600 in rent on her apartment and her rent increases 4% at every renewal. In 3 months, her rent will increase so $1664. In one more year, her rent will be $1730 and in one more year, her rent will be $1799. So in 4 years, Jasmine will have spent $81,516 in rent. Das a lot.

OKAYSO what if Jasmine had been a homeowner for those 4 years?

Let's say she puts 10% down, gets a conventional loan on a $250,000 single family home. (A single family home is just a "regular" home--not a condo or townhome, probably in a neighborhood, just regular..) Her interest rate is 3.15% (Her credit is pretty good, but she is only putting 10% down so she sees a slight bump here.) Her taxes are $5500 annually (which is $458/mo), her HOA is $360 annually (so $30/mo.) And, because Jasmine didn't have the cash to put down 20%, she has to pay PMI and it comes to $169/mo. Jasmine's insurance agent quoted her an $80/mo policy too. Her monthly payment comes to $1,704. Take a look at the image to the right >>>

Jasmine could own a home for the same as her average rent over those 4 years. AND THERE'S NO 4% INCREASE EVERY DAMN YEAR. It's true that Jasmine's taxes could increase over time, but she can always fight that and prevent it from happening--though that's really neither here nor there because our purpose is to get to the end.

I HOPE YOU'RE STILL WITH ME BECAUSE I'M ABOUT TO GET TO THE POINT:

Now, I'm going to show you what Jasmine will spend in carrying costs over the next 4 years: taxes, hoa, insurance, PMI, and interest. It's gonna look scary. Please stay with me :)

Taxes $21,984

HOA $1,440

Insurance $3,840

PMI $8,112

Interest $27,729

Total non-principal expenses $63,105.

And after the 4 years, Jasmine's loan balance is $205,351. So she's paid $20k into her equity. And, now she's ready to sell this house and begin a new chapter. The house has appreciated 4% each year. So with no improvement or renovations, Jasmine's house is now valued at $292,000. She sells it for $290,000. After paying off her mortgage, she walks away with a check for $84,649. Even if you subtract the $63,105 from her take-away, she still profited $21,544.

That's the difference between renting and owning. That is what building equity means. That is why real estate is often referred to as a "forced savings account." Had Jasmine been renting for these 4 years, she'd have spent almost the same in rent as her equity came out to.

So yeah, it cost over $60k in expenses, and it got her $80k.

Any questions?