Livio Nespoli
Follow Us

Livio Nespoli

Founder & Chief Executive Officer at InterAnalyst
Mr. Nespoli has been in the investment industry as a broker, registered investment advisor, and financial publisher since 1985. He has authored over 200 financial publications, over 31,000 buy & sell trade charts, and served investors in 35 countries.
Livio Nespoli
Follow Us

Latest posts by Livio Nespoli (see all)

If you are making the comparison of renting vs. buying a home, you need to consider all the factors. If you do a quick search online, most of the resources available will only look at mortgage payments, taxes, insurance, and maybe HOA fees. However, many of them will not discuss and outline the “other costs.” These are costs such as landscaping, snow removal, home furnishings, repairs, maintenance, replacements, and renovations. These “other costs” can add up to a lot over time.

When you calculated the costs of purchasing your home, did you calculate out the costs of putting on a new roof, a new HVAC system, new water heater, new siding for your home, expenses for landscaping your property, new appliances, etc?

If you did, then congratulations, you did it right. Most people don’t include these things. Granted some of these maintenance and replacement items are not predictable, but most of them have predictable life spans.

An Example of the True Costs of Owning a Home

Let’s say you are looking to buy a single-family house. You are driving down the street and see the perfect one, and it has just been listed on the market. The listing price is $625,000. Both you and your spouse agree that it is complete and you decide to put in an offer for $625,000. What will it cost you to own this home?

Let’s start with the underlying assumptions:

  • You are planning on living in this home for 30 years
  • The purchase price is $625,000
  • Your down payment is $125,000 (assuming you are putting down 20%)
  • Your mortgage will be for $500,000
  • The interest rate of a 30 year fixed mortgage is 4%
  • Your mortgage payment will be $28,644.96 annually
  • The rate of inflation is 2%
  • Your annual maintenance costs are 1% (starting at $6,375)
  • Your real estate taxes are 1.5% (starting at $9,562.50) (this will vary on your location)

Here is a chart of what your costs would be over 30 years.

Summary of the True Cost of Owning a Home:

I will point out some interesting data from this example in case you missed it:

  • You purchased a home for $625,000 and put down $125,000 as a down payment. In 30 years your house would have appreciated at the rate of inflation to a value of $1,132,101. This is a gain of $507,101. – This looks good so far.
  • The total amount of taxes that you paid amounts to $387,932. – Wow! That is a lot of taxes.
  • The total amount of maintenance costs it would take in upkeep of your home would amount to $258,622. – All those trips to home depot really add up.
  • The total interest paid on the mortgage amounts to $359,117. We don’t include the total mortgage payment because it includes principal payments which are effectively paying yourself.
  • We don’t include factors like insurance, utilities, etc. because they would be roughly the same for both renters and owners.
  • The total costs to own a home for 30 years add up to $1,005,671. – Ouch… that much?
  • If you subtract the total value of the home from the costs of owning it, you get $126,430. – Huh?!? Isn’t that the amount you used as a down payment?

Over a period of 30 years, assuming you do no renovations and don’t have an HOA fee, living in a home you bought would net you $1,430. Yes, you read that correctly… $1,430 in gains over 30 years on your $125,000. Wow.

Actually, if you discount the value of your $1,430 due to inflation, your $1,430 in 30 years from now would only be worth $789.50 in today’s dollars.

Now let me answer the question:

Is your home a good investment???   NO

Let’s take this example one step further.

It’s All Relative.

It is clear that over the past 30 years, your $125,000 down payment didn’t grow much more than the cost of a new iPad. It is clearly a bad investment. The next question to ask yourself is if you didn’t put down 20% to buy a house, what could you do with the money?

There were a lot of options 30 years ago. CDs, treasuries, stocks, etc. were all better opportunities in hindsight, but since none of us live in the past, let’s look at today.

  • Treasury Bonds – If you put your $125,000 into a 30 year Treasury bond, you would get 2.9% in annual interest. Holding it for 30 years would net you $178,240 in interest payments.
  • Stocks – If you invested it in stocks, and the past performance is indicative of future results* (which it isn’t), the past 30 years performance of the S&P 500 was approximately 8.4%. This would turn your $125,000 into $1,405,363. A sizable difference in your net worth.

Almost any investment over 30 years would produce a better return than owning a home that you lived in. My local bank is giving 0.10% interest on savings accounts. Even that provides a higher return on my money after 30 years.

I know this information contrary to what you may have thought, but …

live in and enjoy your home, whether you rent or own. Just do not think of your home as a profitable long-term investment, it is not even close to that.

Contributor: IAGWM