Houses: Fun, Profit, My Experiences and Bad Tax Advice

“You won’t Iose the house. Everybody has three mortgages nowadays.” – Ghostbusters

My second house.  My worst moment there?  Discovering that I had termites and the only way to treat them involved an exterminator doing a painful extraction of $2000 from my wallet.

I’ve been a homeowner since I was in graduate school, with the exception of about an eight week period from when we moved from Alaska to Houston where we stayed in corporate housing until we could close on a house – oh, and it took 8 weeks for our household stuff to make it through the Panama Canal, so closing on a house too quickly would have been useless unless we slept in the pool, and then we would have been wrinkly raisin people – and everyone hates them.

That being said, I’d prefer not to live in an apartment in a big city – it felt too much like being a tiny rat in a cage next to ten thousand other rats in tiny rat cages.  Houses in the ‘burbs are much closer to the wide open country where I was raised – 15 miles from the nearest town of 1000 people.  To get to a town with 5000 people?  That was a 45 minute drive.  So the ‘burbs in Houston were like a crawling over three miles of sandpaper to get a beer on a 110˚F day.  I mean, I’m gonna do it, but I’m not gonna like it.

I’ve continually made the choice to buy homes.  Houston was the first place that we considered trying to rent – but the rent was too high, compared to what we would get.  Even though we always considered Houston a place that we would only be staying for a two years or so, we ended up buying.  As it is we ended up staying in Houston for thirty one months and twenty-nine days and got out as soon as we possibly could and did okay, but only because I was kinda sneaky.

So, should you rent or buy?

The positives of home ownership are:

• Appreciation – Historically, housing prices have gone up over time. Even if it’s just keeping up with inflation, this is known as appreciation.  I know you normally feel appreciation that someone as wonderful as me lives and shares his wisdom with you, but when used with a house, it’s not an emotion, it’s a word that means the house is worth more than it was when you bought it.  Again, most of the time house prices increase over time.  But home prices aren’t uniform – in San Francisco you can’t buy a cardboard box next to a fish gutting factory for less than $23,000,000.  Where I live?  You can buy a house that a human could live in for $15,000 (not kidding).  Not a great house, but one you could live in.
• Forced Savings – Unless you’re on some sort of “interest only” loan that they sell to LSD-using hippies who mistake bran muffins for money, every month that you send a check to the bank (or use that sorcery, electronic bill payment) part of your payment is interest, and part of it repays the borrowed amount, until the loan is eventually paid for. This is a savings plan that you have no real choice on, so you can’t drop all that money on PEZ®, pantyhose, and elephant rides.
• Tax Deduction – If you pay interest, at least right now you can deduct it off of your taxes. I am NOT a tax adviser, so don’t go waving a copy of this blog post in the IRS agent’s face if you get audited.  But be sure to poke him in the chest with your index finger while loudly saying, “My taxes pay your salary.”  They love that.
• Emotional – You want a house. I understand.  I also want a volcanic island lair and supervillain-type cars.  But no one understands me.  Maybe someone will understand your narcissistic desire for a . . . house.
• Opportunity to be the Evil Neighbor Nobody Likes – That’s us. Not that we’re unfriendly, but we’re loud.  We yell.  Pugsley mows the lawn . . . interestingly some times – I’ve never seen a lawn that looks like a topographic map, but he figured out how to do it.  And the house could use a paint job.  And we have little dogs that will yap at you if you drive up to our house.  Yeah, we are “those” neighbors.
• Asset to Borrow Against – Yeah. You can always borrow against the place if it’s worth more than you owe.  I did that once.  It worked out okay – divorces are expensive, and home appreciation paid for one.  I’d avoid this unless you want to pay off an ex-wife, it’s risky as can be.
• Perception of Being Tied to a Place – People generally treat homeowners better, especially in places where respectable people own homes. So, there’s that.
• Can Customize at Will – If you want to knock out a wall? Do it.  New deck?  Add it on.  Cow-launching trebuchet?  If the backyard is big enough, sure.  Unless you live in New York or California, in which case you can’t mow your lawn unless it’s above 2.4” and it must be kept below 2.55”.    I just read (seriously) about a guy who cut down several trees that were damaged by Hurricane Sandy.  Damaged trees that were on his own property (in New York).  And the city fined him $20,000.  For cutting down broken, damaged tress.  On his own property.     Count me out.
• No Renting Rules – Smoke all you want, have pets, draw on the walls. Cut a pentagram into your wood floor if you want.  It’s yours.

Yes, I owned a three bedroom log cabin in Alaska.  I miss it every day.  Simple days.  And no termites.

But where there are positives, there are negatives, too:

• Debt – Very few people can walk into a place and buy it with cash. So, people (generally) borrow money to buy a house.  Essentially, when you borrow money you’ve sold part of your soul to that person – you have to go to work to earn the money to pay the money you borrowed, PLUS interest.  Debt sucks.  So very much.  I have no debt I can’t write a check for, so, any debt I have is because it’s a choice.
• High Payment – Debt can lead to a pretty high payment. One phrase that has fallen out of fashion (somewhat) is “house poor.”  That essentially means that you owe so much money on your house that you can’t afford to eat a Chick-Fil-A® because it’s too expensive.    House payments can eat up all of your income.  The guidelines for a loan used to be that the house payment could be no more than 28% of your income and all of your debt should be less than 40% of your income.  I think you should be striving for TOTAL debt to be less than 20% of your income for any sort of comfort.  Some folks prefer the zero debt level.  I can understand and agree – work for that if you can.  Here’s a post where I work out my past experiences on that (Homes: Affordability versus Income).
• Tied to a Location and Place – So, if I hadn’t convinced my employer to take a $100,000 hit for me, it would have been hard to move from Houston. I would have been stuck in a place precisely when the economy was poor there.  One study from back around the turn of the century actually showed a correlation between home ownership and poverty in some locations – people couldn’t afford to move because they owed money on their house.  If this were for a grade or if I was being paid I’d look it up to give you the source.  You can if you want.  You have DuckDuckGoogle®, too.
• Risk on Sale – This is sort of like the above – how long will the sale take, and how much money will you get? Who knows?  In aggregate, people talk about days on the market, average selling price.  But if nobody wants to by your house because it’s just icky and you carved a pentagram in the hardwood floor in the living room, well, you’re out of luck.
• Commission on Sale – Unless you’re a realtor or want to pretend to be one, you’re going to pay someone 6% of the sales price when you sell your house. And if you sell it yourself?  People will want to negotiate that 6% out of you, since they know you don’t have to pay a realtor.  People are awful, right?  Oh, heck, I forgot, I’m a people, too.
• Upkeep Costs – Replacing a roof, fixing gutters, mowing lawns, trimming hedges, painting, cutting down the dead tree on my property that overhangs the neighbor’s deck. What is this, a list of things my neighbors would like me to do?  Well, yes.  But also, a list of things that also you have to pay for over time.  And the costs add up – general upkeep on a house costs thousands of dollars a year.
• Utility Costs – If you rent, some of these are (generally) covered. If you own a home, you have to pay them all.
• Insurance Costs – If you owe money (which is the default condition) on the house, your mortgage company will generally insist that you pay for insurance so that their asset (your house) maintains value and they don’t lose money. The bright side?  You get to pay for it.  I meant the bright side for the mortgage company, not you.
• Upkeep Time – Somebody’s gotta mow. And it’ll probably be you, until you get a teenager.  Then they’ll want money . . .
• Large Percentage of Money Invested – You might have $4,000 and some dryer lint in your 401K, but you’ve invested $20,000 on the down payment of a house. That’s a big investment.  Will it pan out?
• Liability – Somebody slip and fall on the sidewalk in front of your house? Yeah, they’re gonna sue you.  I hope you have insurance . . .
• Homeowners’ Associations – HOAs are run by bitter, retired old cranks with nothing better to do than complain about how people keep their yard, and send nasty, threatening letters with real legal consequences behind them. Don’t forget, Homeowners’ Associations have downsides, too.

The Boy and Pugsley in our Houston house.  I think this was taken at the coldest day in December, since it was never below 145˚F when we were there.

Economics:

I’ve bought five houses and sold four, so how’s that working out for me?

The net gain (based just on sales price) is up about $100,000.  Not bad, right?  Well, like anything, there’s more to that story . . .

In Houston, I almost certainly would have lost about $60,000 plus had to pay my mortgage, insurance and utilities for 18 months while the house sat on the market had I not negotiated one little clause with my employer before accepting a job with them – if they moved me from Houston, they would pay me what I had in the house.  I didn’t want any gain, I just wanted out.  They agreed.  Why not?  This was before the housing bubble collapsed.  Home prices always go up, right?  So, of my $100,000 of profit, I’d actually probably be around a net of zero dollars had I not negotiated for that . . . “one last small item.”

Oh, and my current house?  If I sold it today, it would probably go for $40,000 less than I originally paid for it.  Yeah.

But those aren’t the whole economic picture.  I’ve actually had to pay interest on borrowed money for these houses.  I did some sloppy math, and I’ve paid about $140,000 in interest.  Sure, it’s deductible, so I’ll only take a $90,000 hit for interest payments.

But there’s also been upkeep and improvements.  I’d estimate (and I think this is low) that I’ve probably spent $125,000 on maintenance and improvements.

So, net (and I’ll keep my sly job negotiation gain and NOT account for a loss on a property I haven’t sold) I was up $100,000 – $90,000 interest – $125,000 upkeep/improvements.  This says that I’ve paid roughly $135,000 to live in my houses.  Keep in mind that number could be closer to $235,000 except for that one shrewd move I made.

What’s the alternative?  I picked a ballpark rent, and multiplied, and the total was $460,000 for the time period in question.  So, for me, owning homes has saved me $325,000 versus the alternative of renting.

But your mileage may vary based on the following criteria:

• Debt Load – As mentioned, if you’re paying too much money in debt – you fry your family future. Avoid debt as much as possible.
• Area – Is the area poised for growth? Good schools?  Industry/commerce moving in?  Or is it a dead zone with a declining population like Flint, Michigan?
• Commute Time – Every minute commuting is a minute you’ll have to spend EVERY DAY that you go to work. Those minutes?  They’re your life.
• Duration – How long are you going to be there? Six months?    Five years?  Buying becomes an option . . . .
• Single Vs. Dual Income – Let’s pretend you now have only one income – your spouse isn’t working. If you can’t afford the house with one income, you can’t afford the house.
• Cost of Rent vs. Cost of Ownership – In the town where I live in Midwestia, I mentioned you could buy a livable house for $15,000. Why would you rent?  Dunno, but people do.
• Consequence of Default – Varies by state. I’m NOT a lawyer, and I’ve never defaulted.  So, what’s the consequence if you can’t pay?  Do you have to declare bankruptcy, or can you just mail the keys in to the mortgage company.  You might want to know this where you live.

Buying a home is a complicated decision.  It’s worked out well for me (so far) but it could have been different.  Think about it, especially before you buy that unique fixer-upper in central Manhattan.  Is it really worth $41,000,000 to own a single room apartment that was once rejected as a site for a Sex and the City™ episode?