Impact on Networth- Your First Home Purchase

[Gatsby]

I am an obsessive net worth tracker and have been so inspired by the process since entering the work force/investing career 8 years ago.
Watching my student loans slowly disappear, then vanish and investment accounts grow has been the ultimate reinforcement of my mustachian habits but I am starting to get a bit worried about how my upcoming- first home purchase might impact this momentum.
Ie- all extra costs, furnishing a first home, general home owner expenses, balancing mortgage pay off goals with investing goal etc..
Did the purchase of your first home slow you down? Speed up your FI journey? In what ways did this "life event" impact your progress?

 

[jrhampt]

In some ways, it will definitely slow your roll.  Buying a house is expensive.  You need the down payment, transaction fees, furnishings, even just curtains/blinds are expensive.  Even if you already owned another home before, you'll find that you need things specific to the new house.  It takes a while to break in a new house and get it running efficiently.  But in the long run, if you buy the right house, you can optimize it more so that you have benefits compared to renting.  You can add extra insulation, energy efficient appliances, solar panels etc. and get your utilities costs really low. You may end up feeling poorer for a while, though.

[Metalcat]

There's a lot to unpack here.

First, are you talking about net worth or value of investments? This makes a huge difference, because for someone in an exploding property value area, buying a very expensive home may shoot their NW up rapidly, but if they plan to live there in their retirement, then the increase in property value could seriously hurt them in terms of property/local taxes and cost of living in the area, which could actually delay someone's ability to FIRE.

If it's someone who plans to downsize and relocate to an LCOL area, then being heavily weighted in home equity could dramatically accelerate FIRE.

Because housing is still money being dumped into an asset, it's not as black and white as "if you spend more on housing, you will have to retire later".

Also, more expensive houses aren't necessarily larger and have more maintenance costs. Where I live, some of the most expensive real estate is 2 or 3 bedroom apartments in desirable locations. Giant, sprawling suburban properties are significantly cheaper and come with enormous maintenance costs. So again, it can be apples and oranges. Two people could be spending the exact same amount in terms of housing and transportation costs, but the one living downtown is putting more of that cost into equity while the suburbanite is losing more money because a larger proportion is on expenses like heating, snow removal, and commuting.

[Duke03]

I've been a home owner since I was 20 years old.  Probably one of the best financial decisions I ever made was buying a house when I was young.  The second best decision that I made was paying that house off within 7 years.  With all that said homes are a break even at best and most will cost you money...  Take my current house.  It's gone up in value 120k in the 6 years I've owned it, but I've also paid 36k in taxes, spent 20k on upgrades and up keep, plus made 99k in payments.  It will be paid off this year, but if I where to sell it with the Realtor fees ect I'd still technically loose money.  Granted you have to live somewhere and we love our home and I probably got way to much of my net worth tied up in it, but what can you do. 

I know this might be a bit anti mustachian, but it circles back to your post about furnishings ect.  If you buy a cheap house you can furnish it however you want.  Now the more expensive house you get the more it's going to cost to furnish.  Some people might argue this logic, but it's the truth.  You can't spend a million dollars on a home and then furnish it from big lots.  Your friends, family, coworkers, neighbors, and anyone that comes over will think you are nuts.  My current house we spent 60k on furniture.  Granted it was a lot of high end stuff but still.  You can't put a 4 top table in a dining room that is built to hold a 10 top.  It will look beyond stupid.  Don't even get me started on bar stools.  With our kitchen layout and built in bar we bought 14.  Even at $200 a bar stool that's $3,000.  See where I'm going with this.  I will say when we sold all our old furniture from our last house and what shocked me as I keep detailed records on everything is we netted about 72% of the original value selling it used.  I was thinking at best we'd get back about 30%.

[socaso]

I think it depends on the area you buy in. We bought our first home 5 years ago. I was pretty sure the neighborhood was going to go up based on the research I did and it has increased 35% in value, which we are very happy about. In my opinion we were not in great financial shape when we bought the house. The person who did our mortgage assured me we were better off than most people our age, which makes me sad for most! We are handy and did a lot of things around the house ourselves. We were also very slow to furnish the house. The living room only had 2 small chairs in it for 3 years. The guest bedroom only had the bed until I got a hand me down chair. The furniture we did buy was mostly used. I feel very good about the decision we made and we've had 5 great years in our home so it's been worth it.

[RWD]

We lived in our first home for 7 years and sold it for about a $40k loss (we bought in 2008). Ended up being significantly more expensive than renting. This choice probably delayed retirement by nearly a year.

[tweezers]

For us, it was timing and location.  We live in a desirable, HCOL area.  I bought at fixer-upper before I was married at the height of the housing bubble (December 2005) where we lived after I got married, and my husband and I bought another fixer at the bottom of the market in 2008.  We rented that initial house because it was underwater when we bought our second, and ultimately came out even or a little ahead (sold it for ~$35K over mortgaged value in 2013).  Our current house has been a win though.  It's more than doubled in value in the 11 years we've lived there (including the money we put in to get it to what we wanted), and it's everything we want for our family (yard, walk to everything, schools, close to my work).  It has been a significant contributor to our net worth, and with our recent refi to a 30-year mortgage at 2.5%, it costs considerably less than renting even with taxes and insurance.     

[pdxvandal]

For me, it's been fairly significant, especially as I've never been a high earner. Bought my first house at age 26 in 2001 for $125k, moved to a larger city and rented it for 2 years before selling in 2007 for $215k, just months prior to the real estate crash.

In the new city, had also bought a small house in 2005 for $225k (with a $5k down payment, when lending standards were very loose), lived in that for 11 years, rented it for 2 years and sold for $475k. But yes, it's not cheap to buy and sell houses as well as upgrade and maintain. I had a sewer issue last month that set me back $2k ... surprise! But if you buy, commit to owning it for at least 8-10 years, even if you rent it out for part of the time. Good luck.

[legalstache]

We bought our first house in 2019. I'm not really sure if it will speed up or slow down our FI journey. It may speed it up, because houses in our neighborhood have increased in value by ~150k since we bought, and with refinancing our monthly payment is now lower than our rent was in our previous HCOL.

At the same time, we've certainly spent more on our house (repairs, landscaping, etc.) than we would have renting. And our down payment obviously would have gained significant value if we'd invested it instead.

For me, buying a house was partly a financial decision but moreso a life decision. We were pregnant and the rental market here is pretty tenuous. Owning has worked out great in many ways for us. I'd say make sure you're comfortable with what you already have invested and more important, that you'll be able to to continue to invest at a level you're comfortable with once you factor in the added costs of owning.

[seemsright]

We bought our house back in '02 before the housing bubble and we did it without a Real Estate Agent. I worked out just fine for us. Our house has more than doubled in value.

Owning a home (we own outright) is stupid expensive. You do not get much say in if they raise property taxes. Insurance goes up every year. And it is a crap ton of work. You get to fix the problem when the kitchen rains, when the furnace dies in the middle of a freeze. When all of the glass in the house fails at the same time getting door and window people to call you back and give quotes then schedule for the work is just a huge PITA. And trying to find contractors now in our area is impossible due to them working on rebuilding all of the houses that burned during massive wild fires.

It is one problem after problem. It is work. I find it important that we have a house for our DD to grow up in. When she goes out on her own in about 10ish years the for sale sign goes up. I hate owning a house and all of the problems that come with it. The only good thing is I can paint the wall any color I want or put holes where ever I want.

[Saving in Austin]

We bought a house exactly 10 years ago and the Zestimate says it doubled in value as of one month ago. If we had invested in the market our networth would be higher today, but then we might have been living in a crappy basement apartment this whole time. For me, there is no comparison. Owning a house is expensive but we love it. It's wonderful if you can afford it and it's a decent investment but I wouldn't say that it is the best investment.

[YummyRaisins]

Too early for me to tell what impact our home purchase will have. Right now it seems to be going well relative to renting a similarly sized home in our area. And with two you kids, I would be pulling my hair out if we were stuck in our old apartment during the pandemic.

We bought in August 2019 and refi'd this past fall to a much lower rate. The new assessment increased 5% with no improvements made.

We did have had to buy some living room furniture as our Ikea apartment furniture wasn't cutting it.

The house is in good shape, however there will be some big ticket items needing attention in the next couple years (e.g., new roof, replacing clapboard siding or repainting, replacing central AC unit). We'd also like to make some upgrades that would require significant money that likely wouldn't be recovered in home value (remodeling master bed/bath and living room).

Overall all I'm glad I did it. It wasn't really a financial decision so much as it was a quality of life decision.

[Tester]

Selling stock for the downpayment meant we lost 100k of potential net worth as the stock jumped 30% after we sold
Bought in June 2020.
Zillow estimator says the house value increased by 45k so in theory we only lost 55k for now.
Payment is just a little bigger than the rent we were paying, but having a yard helped with the lockdown and the kids.
We had some quite costly things to replace, but now we should be fine for 5-10 years.

The most important part for me is that the moment we closed on the house and moved we felt really well and some of the stress disappeared.

I learned that having a yard is not as fun as I thought it would be and that I don't have the time l/willpower to do a lot of improvements/gardening, but I still like having a house/yard.
Will see how much this will impact our long term net worth.

Just for comparison: not buying the house would have meant our net worth would have been around 580k and liquid.
Having the house means we are at 470k networth and the equity in the house it not really liquid, liquid assets are around 290k. In these time 580k liquid assets would have been safer but as I said moving in the house made me feel "at peace" so there is that.

As I also changed jobs with a 25% pay increase I hope to get over 500k net worth asap with more liquidity to take care of that part too.


EDIT: just remembered, this is not the first house. Built another house but left the country right before finishing it. That one impacted the net worth a lot as we used quite some shares to build it.
Those shares would be worth 2.8 million USD now...

[Kayad]

Selling stock for the downpayment meant we lost 100k of potential net worth as the stock jumped 30% after we sold
Bought in June 2020.
Zillow estimator says the house value increased by 45k so in theory we only lost 55k for now.

. . . .

EDIT: just remembered, this is not the first house. Built another house but left the country right before finishing it. That one impacted the net worth a lot as we used quite some shares to build it.
Those shares would be worth 2.8 million USD now...

This way of thinking about it can drive you crazy.  Fair to note that the opportunity cost to rolling your $ into down payment is stock market investment, which historically return 7% annually, and leave it at that.  Sometimes the market goes up, sometimes down, sometimes you make good stock picks (if you play that game), sometimes bad.  That all has nothing to do with choosing to own a home.

Buying homes has been very good for our net worth.  We’ve had the luck to buy in a strongly appreciating market.  Our first home is now a solid rental.  Seems like if one doesn’t overreach, and stays for long enough, it’s a net positive decision in most markets (eventually, your mortgage will be lower than rent just by virtue of inflation).  I’ll say it seems there are always some big initial unexpected expenses that suck (hvac at house 1, water heater catastrophe at house 2, etc.), on top of the big initial expected expenses that also suck.

[ctuser1]

Our housing cost went up from ~$1800-$2000 per month (rent + utilities for small 2bed apartment) to about $3200-$3800 per month (cost of carrying mortgage + opportunity cost of principal + amortized cost of replacing stuff that need replacing every couple of decades or so).

The spread is so wide because the actual numbers come out different depending upon the assumptions you make.

The $1500-$2000 impact to our budget was immediately visible, however. e.g. In 2018, I was suddenly scrambling to figure out where to get $11k for Roth contributions for that year. We weren't extravagantly spendthrift compared to other people we knew, but had a lot of anti-mustachian consumer-sucka' behavior nevertheless (e.g. a $1200 grocery spending + over $1500 in eating out per month).

We were sorta forced to look into things because of this sudden "mini-shock" to our finances, and will probably come out ahead in the long run because of it.

[Greystache]

In the short term, it will probably have a negative impact on your journey towards fire. However, owning a home should be a long term investment decision. We bought our current house in 1994 for $200K. It is now worth $750K.  I might have been able to invest that money in a way that would have generated greater wealth. But it is not simply capital gains.  Now that my house is paid off, my monthly housing expense is around $600 a month. It would cost $3000 a month to rent. So I am saving about $2400 month in housing costs. What other low risk investment is going to kick off that much monthly income? Also, it's a lifestyle decision. I am much happier living in a house I own rather than rent. I don't know how you put a price on happiness, I just know it was worth it for me.

[FLBiker]

We bought our first house in 2010, and sold it this past July, and that basically pushed us up the final bump to FI.  We bought for $143K, didn't do anything too major (probably ~$20K in maintenance and upgrades, half of which was a new roof) and sold it for $245K.  Early on, we made extra payments, but I stopped doing that at a certain point because the interest rate was reasonable.  On our new house (which cost ~$200K) we just put 20% down and will not pay extra -- we got a 5 year mortgage (means something different here in Canada - it's amortized to 25 years) at 2.125% (if memory serves).

All that being said, I don't personally factor my house into my net worth - in other words, I ignore the value, the equity and the mortgage.  The only implication it has is the mortgage / maintenance expense as it impacts our FIRE target number.

[ctuser1]

I'd beg to disagree with parts of your post. Please clarify if I did not get the full picture and hence responded incorrectly.

In the short term, it will probably have a negative impact on your journey towards fire. However, owning a home should be a long term investment decision. We bought our current house in 1994 for $200K. It is now worth $750K. 

How much would it have been worth if you had kept renting, and put the differential in home-ownership cost into SP500?

For reference, my cost to rent an apartment (much smaller, 750sq ft) was about $1800, but house (much bigger) costs $3300-$3800 to carry when you consider all costs. If I had rented a similar sized house and did not have to worry about fixing stuff or taxes, it would cost about $2500/month.

I might have been able to invest that money in a way that would have generated greater wealth. But it is not simply capital gains.  Now that my house is paid off, my monthly housing expense is around $600 a month. It would cost $3000 a month to rent. So I am saving about $2400 month in housing costs. What other low risk investment is going to kick off that much monthly income?

Are you sure you are accounting for the opportunity cost on the $750k principal seating on the house?

Also, it's a lifestyle decision. I am much happier living in a house I own rather than rent. I don't know how you put a price on happiness, I just know it was worth it for me.

This is the crux of the matter. I know I am spending more after purchasing a house. But, it still brought non-financial benefits because of which, in hindsight, it still made sense for us to purchase. I was very skeptical about home ownership before the purchase, because my analysis-paralysis brain was telling me, based on my spreadsheets, that it was going to be money sink financially. DW pretty much dragged me kicking and screaming and forced me to buy a house. In the end, it has proven to be a good decision for non-financial reasons that has indirectly led us to eventually become more mustachian and hence - in the end - financially benefitted us too.

[Tester]

Selling stock for the downpayment meant we lost 100k of potential net worth as the stock jumped 30% after we sold
Bought in June 2020.
Zillow estimator says the house value increased by 45k so in theory we only lost 55k for now.

. . . .

EDIT: just remembered, this is not the first house. Built another house but left the country right before finishing it. That one impacted the net worth a lot as we used quite some shares to build it.
Those shares would be worth 2.8 million USD now...

This way of thinking about it can drive you crazy.  Fair to note that the opportunity cost to rolling your $ into down payment is stock market investment, which historically return 7% annually, and leave it at that.  Sometimes the market goes up, sometimes down, sometimes you make good stock picks (if you play that game), sometimes bad.  That all has nothing to do with choosing to own a home.

Buying homes has been very good for our net worth.  We’ve had the luck to buy in a strongly appreciating market.  Our first home is now a solid rental.  Seems like if one doesn’t overreach, and stays for long enough, it’s a net positive decision in most markets (eventually, your mortgage will be lower than rent just by virtue of inflation).  I’ll say it seems there are always some big initial unexpected expenses that suck (hvac at house 1, water heater catastrophe at house 2, etc.), on top of the big initial expected expenses that also suck.

I agree and we are not dwelling in that. The stock could have tanked to zero...
I still posted it for a different perspective.

[MudPuppy]

For me, somewhat positive effect. It’s cheaper for me to own than rent in my area. My net worth stalled for the time around the initial purchase just because of the fees, things to buy, etc, but oh well. We don’t plan to move after FIRE, so the equity is neither here nor there. It will be nice to not have a rent/mortgage payment eventually though, and that will reduce the amount needed for FIRE.

[ericrugiero]

I'd beg to disagree with parts of your post. Please clarify if I did not get the full picture and hence responded incorrectly.

In the short term, it will probably have a negative impact on your journey towards fire. However, owning a home should be a long term investment decision. We bought our current house in 1994 for $200K. It is now worth $750K. 

How much would it have been worth if you had kept renting, and put the differential in home-ownership cost into SP500?

For reference, my cost to rent an apartment (much smaller, 750sq ft) was about $1800, but house (much bigger) costs $3300-$3800 to carry when you consider all costs. If I had rented a similar sized house and did not have to worry about fixing stuff or taxes, it would cost about $2500/month.

I might have been able to invest that money in a way that would have generated greater wealth. But it is not simply capital gains.  Now that my house is paid off, my monthly housing expense is around $600 a month. It would cost $3000 a month to rent. So I am saving about $2400 month in housing costs. What other low risk investment is going to kick off that much monthly income?

Are you sure you are accounting for the opportunity cost on the $750k principal seating on the house?

The opportunity cost of the $750K isn't applicable in a buy vs rent comparison because the purchase price was $200K.  The opportunity cost should be the difference between what Greystache spent on the house over the years vs what they could have paid in rent. 

You could make an argument for the opportunity costs of selling (@ $750K) vs renting but that $750K would never have been an option unless they had bought to start with. 

[ericrugiero]

Our first and 2nd home purchases have been pretty good for our net worth because the cost of owning has been less than the cost of renting a similar home.  (we live in a LCOL area with few nice homes for rent)  Also, both homes have appreciated some over the years.  It seems like this is a little unusual because in most areas renting comes out ahead if you actually invest the difference.  Many people spend everything they make so having some forced savings in the house is the only net worth improvement they make outside of their 401K.  But, if you are happy renting and will actually invest the difference, it's frequently better to rent. 

With the benefit of 20/20 hindsight, it would have been better to buy a home, keep a 30 year mortgage on the home and invest the difference rather than paying it off (like we did).  That said, until I started reading about MMM I was less serious about savings so some of the money we spent to off the mortgage would almost certainly have been wasted.  Paying off the mortgage is clearly the better choice than spending the money without a plan. 

Buying has been a good lifestyle choice because we can do whatever we want to the home and are never forced to move.  It's more of a lifestyle choice in our area because any savings are minimal.  We can make that choice because I make more in a year than our home cost.  If a decent house cost $500K+ around here we would likely make a different choice. 

[ctuser1]

I'd beg to disagree with parts of your post. Please clarify if I did not get the full picture and hence responded incorrectly.

In the short term, it will probably have a negative impact on your journey towards fire. However, owning a home should be a long term investment decision. We bought our current house in 1994 for $200K. It is now worth $750K. 

How much would it have been worth if you had kept renting, and put the differential in home-ownership cost into SP500?

For reference, my cost to rent an apartment (much smaller, 750sq ft) was about $1800, but house (much bigger) costs $3300-$3800 to carry when you consider all costs. If I had rented a similar sized house and did not have to worry about fixing stuff or taxes, it would cost about $2500/month.

I might have been able to invest that money in a way that would have generated greater wealth. But it is not simply capital gains.  Now that my house is paid off, my monthly housing expense is around $600 a month. It would cost $3000 a month to rent. So I am saving about $2400 month in housing costs. What other low risk investment is going to kick off that much monthly income?

Are you sure you are accounting for the opportunity cost on the $750k principal seating on the house?

The opportunity cost of the $750K isn't applicable in a buy vs rent comparison because the purchase price was $200K.  The opportunity cost should be the difference between what Greystache spent on the house over the years vs what they could have paid in rent. 

You could make an argument for the opportunity costs of selling (@ $750K) vs renting but that $750K would never have been an option unless they had bought to start with.

Assuming the house was not purchased in 1994, and the difference in carrying cost is invested in SP500, how much would that be worth today?

I purchased my house for $258k (I like to think way below market value, due to some unique circumstances not relevant for this thread). For me, the difference in carrying cost of this house vs. the apartment I used to rent is approximately $1500. If I considered the same (bigger) house, it would be $1000/mo.

I put $1000/mo in this calculator for the period from 1994 Jan to 2021 Jan, "https://dqydj.com/sp-500-periodic-reinvestment-calculator-dividends/", and it spit out the Final Value of portfolio to be "$1,308,702.68".

Assuming that the post I referenced had a similar equation, the opportunity cost we should consider would likely be something higher than $750k, isn't it? But I was trying to be conservative in my back of the envelope calculation.

In general, assuming that the markets are efficient (which, many a times they are not), imputing the opportunity cost as a *real* cost based on the present value of an investment is what is standard in any P&L calculation I have ever seen.

[norajean]

You would have to totally luck on out timing with a purchase into a rapidly appreciating market (and sell out at the right time) in order for it to not slow your progress.  In almost all cases, you will see
1) your big fat down payment sits there doing nothing until you sell one day.  It could have a long term negative return or more likely match inflation.  Even if your property appreciates, it will struggle to overcome item 2 below.
2) a vast increase in spending for furniture, maintenance, insurance, property taxes, maybe HOA, and just about everything you can imagine.
3) large transaction costs (realtor fees) when it comes time to sell, which also eat up any appreciation you might have.
4) a huge loss of liquidity on your part and a lack of flexibility to take risks with job, move elsewhere, etc.
5) increase in personal liability risk since you may have strangers or tradesmen visiting who could hurt themselves