Author Topic: Buy the bigger/more expensive house?  (Read 8086 times)

mjwmustache

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Buy the bigger/more expensive house?
« on: September 14, 2017, 07:57:04 PM »
I have been thinking about this for a while and would really like some advice.  All the recommendations for FIRE that I see recommend that if you do purchase a house/apt, you get one that is smaller and more modest.  But isn't there also an argument to go the other way?  (I preface all of this by saying that I'm young, have only purchased a smaller condo thus far, live in DC where property is both really expensive and also values are going up at a very high rate). 

My thinking is that if home appreciation is roughly 5%, and the average mortgage rate is 3%, why not just get a more expensive house?  I understand that more expensive likely also means additional costs in terms of higher taxes, HOA fee, (potentially) repairs, cleaning, etc. 

I'm sure I'm missing something here, but at this point I can't quite see what it is.  Is it as simple as the fact that the average rate of return in the stock market is 7%, so it would be better to get the cheaper house and put the difference in the market?

Thanks for any advice

Goldielocks

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Re: Buy the bigger/more expensive house?
« Reply #1 on: September 15, 2017, 12:02:04 AM »
The exception only applies to people using real estate as an investment, and then it would be along the lines of getting more tenants or more rent versus the mortgage, making it a better investment.

You personal home should always be thought of as an expense, it is only perhaps an investment in the week that you sell it.

Bigger usually means more expense, and more monthly cash to maintain it.
The exception I can think of is a 100 year old fixer upper home downtown, versus a newer, great condition family home a little further out.   The family home may be cheaper... and if move in ready, then maybe the cost of maintenance over 5-7 years is less.

2Birds1Stone

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Re: Buy the bigger/more expensive house?
« Reply #2 on: September 15, 2017, 05:03:22 AM »
On average homes barely keep up in value with inflation, on top of that the taxes, maintenance, and running costs usually make them a poor investment. The exception being buying a bigger house and say renting out two rooms at $750-1000 a pop. If you can do that, and get tenants to pay for a large portion of those expenses, then you might come out ahead in the bigger house.

I bigger house can also lose value, so if you buy a $1m house vs. a $500k house, and the housing market drops 20%....can you afford to be $200k underwater on the bigger one?

SeattleCPA

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Re: Buy the bigger/more expensive house?
« Reply #3 on: September 15, 2017, 07:04:55 AM »
Agree with the comments above that say you're not saving or investing or anything like that by buying a bigger house.

A bigger house jacks your costs... and in all sorts of ways. It's more expensive to heat, cool, furnish, insure, maintain, etc.

A bigger house also means that when the furnace repair guy comes out on a service call, you'll pay more. Because you've signaled you can afford it.

One tangential comment: Sometimes an expensive house is expensive because it provides proximity to high-paying jobs. I think that's something different. Not saying it's always rational to pay for that proximity. But I think it might be.

dycker1978

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Re: Buy the bigger/more expensive house?
« Reply #4 on: September 15, 2017, 10:53:43 AM »
Will the bigger more expensive house make you happier?  If you are answering yes, why?

Having more room takes more time to clean, costs more to heat, there are more things to go wrong, you will feel the need to buy more stuff to fill it up.  I will be a larger stress in your life, and I highly doubt it will make you happier.

After a certain point buying a larger house is just a "keeping up with the jones" type situation.  I would buy the smallest house that meets your needs.

hucktard

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Re: Buy the bigger/more expensive house?
« Reply #5 on: September 15, 2017, 01:09:15 PM »
It can go either way. I am a big fan of "house hacking". And I am a big fan of getting other people to buy my assets for me. If you buy a big house and then rent out a couple rooms, or the basement, your tenants can basically pay your mortgage for you and after many years you will own a huge asset. If your house appreciates a lot over those years then even better. But if your house loses value, then you lose even more money. I would not recommend buying a big house without the house hacking aspect of it. You would be better off buying a modest house for yourself and then using your extra money to buy a rental property. Use other peoples money (your tenants) to buy real estate!

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #6 on: September 15, 2017, 09:03:47 PM »
I have the same question (even after reading all the responses!).

Example:
Last week I had the opportunity to offer on a small, low maintenance house at $265k and a taller one at $165k. Taxes, utilities, roof size, etc, all very close.

When I inputted all possible costs and returns (renting room, etc), the $265k one came out ahead, because the common suggestion is to anticipate 5% growth per year.

But, like OP asked, if we're anticipating 5% growth, and everything else is equal, how are we not choosing the higher purchase price? It still seems like we "shouldn't" spend more than needed, but how do we factor growth into the spreadsheet if this idea gives this spreadsheet result?


Is the 5% (average) simply wrong?
Does the 5% assumption apply only in the very long term (like stocks), because purchase price will dip and surge?
Or is it all about the lost opportunity cost, i.e., the extra 100k invested in the house at 5% return is 100k not invested in the stock market at 6%?
Or??

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #7 on: September 15, 2017, 09:16:30 PM »
Interestingly, this article is saying something different. It's saying property does not generally increase by a percentage, but by amount.

http://www.investopedia.com/articles/mortgages-real-estate/08/housing-appreciation.asp
Quote
If the more expensive house appreciates by 10% (not including any specific improvement or capital projects), this would be equivalent to a 20% return for the other - a much more efficient use of investment capital.

So according to this, if
House #1: $200,000 increases by 10%, that's an increase of $20k
House #2: $100,000 increases not also by 10%, but by 20k, so a bigger return

It's saying the constancy is not in the percentage, but in the actual number.

Can that be true?

gggggg

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Re: Buy the bigger/more expensive house?
« Reply #8 on: September 16, 2017, 08:29:02 AM »
You might want to think about how much of your overall portfolio you want in real estate, as well. Most "average" folks that I know have most of their net worth tied up in their house. I personally didn't want to have so much of my NW in one basket (expensive house), so I have a small condo (paid off), which also keeps everyday expenses low. My condo is currently is about 45% of my NW. I'm pumping up my other asset classes now, to reduce my condo down to about 25% of NW.

waltworks

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Re: Buy the bigger/more expensive house?
« Reply #9 on: September 17, 2017, 10:05:01 AM »
Houses, historically, appreciate about (wait for it) the same as inflation.

That means, basically, they don't appreciate (with the caveat that every local area is a little different).

If you entered the housing  market in the last decade or so, this might seem totally insane to you (and there are some considerable problems/quibbles with the Schiller data it's based, especially prior to the 1940s or so) but you can easily do the thought experiment - if housing appreciates 5%/year (over inflation) house prices would relatively quickly grow to the point where nobody could afford one. Exponents are a bitch.

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elvizzle

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Re: Buy the bigger/more expensive house?
« Reply #10 on: September 20, 2017, 07:42:56 PM »
I subscribe to the idea that your primary residence should never be thought of as an investment. 

Instead of buying a bigger house, why not buy an investment property?  You can get the appreciation and also income from renting it out.

tralfamadorian

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Re: Buy the bigger/more expensive house?
« Reply #11 on: September 21, 2017, 07:35:12 AM »
Generally I do not consider leveraged speculation on a non-income producing asset to be a sound economic practice. 

RangerOne

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Re: Buy the bigger/more expensive house?
« Reply #12 on: September 21, 2017, 02:47:55 PM »
I think by modest people mean, buy a house that meets your needs. That typically means now and in the future. So if you are having kids, buying a home with room to grow in a good school district over a 2 bedroom condo makes sense, if you can afford it.

But the advice I think is meant to be taken as don't buy something you can't afford or will never need as your primary residence. The place where you live is not an investment. You will not cash in on it just because the market peaks. And you can't easily sell it if carrying costs become a burden.

Your primary residence is a liability. If you really want to invest in realistate, by an investment property after you take care of your living needs. You have for more recourse in dealing with an invesment property you don't have to live in.

But just to restate, don't by as much house as you can afford. Your criteria should be entirely focused on buying the amount of house you want to live in. For most people, if you are being frugal or optimizing, there is an ideal home size for you regardless of how much money you have. A person with this mindset generally will never buy a home that has 2 more rooms than they need or has a yard they have no interest in ever using. They optimize for lifestyle, not potential future home value.

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #13 on: September 21, 2017, 04:07:49 PM »
I'm still hoping to hear responses to the OP's question, which I think is: If all other costs are equal [as in my real-life example above], and we're told house values increase by 5% per year, why wouldn't we buy the more expensive house?

i.e., We understand inflation, that we shouldn't get a place that costs more to maintain or that we're thinking of as an investment but would not actually sell at peak, etc. And, noted that waltworks says it only increases at the same rate as inflation, and that investopedia says it doesn't increase by a percentage at all...

Either it's not true (as investopedia asserts) that houses generally increase at a rate of 5% per year or buying a more expensive place that has the same maintenance costs is wise.

Are we, like investopedia, saying it's not true?

libertarian4321

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Re: Buy the bigger/more expensive house?
« Reply #14 on: September 21, 2017, 04:32:12 PM »
TAXES TAXES TAXES!

Double the price of a house, and the tax will likely more than double.  This is especially brutal in a state that has high property taxes.  You don't really own your house, the government does.  They just let you live there as long as you pay their rent.

Plus, all the other stuff.  Heating, cooling, maintenance, furnishing, lawn care, insurance.  It becomes something of a money pit.

We live in our house.  We don't consider it an investment.  I don't even count it in my net worth calculations.

I've lived here 21 years.  If I had to do it over again, I'd buy a SMALLER house, not a larger one.

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #15 on: September 21, 2017, 04:49:44 PM »
But if all ongoing costs are equal, lib? In my real life example from last week, footprint, taxes, etc, were almost the same, just the price was way higher on one.

waltworks

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Re: Buy the bigger/more expensive house?
« Reply #16 on: September 21, 2017, 07:39:52 PM »
If house prices increase at 5%/year, you can buy the most expensive house you can find, and then just refi it periodically for spending money, and be retired forever. No need for that pesky 4% rule for investments, your house makes you FI immediately!

5% (over inflation) is ludicrous. Houses haven't, even in the rosiest of scenarios approached that over the long term, except in isolated areas (stay out of Malibu, Lebowski!) And they've plummeted (Detroit/anywhere in the rust belt from 1960 to today, anyone?) in at least as many places.

So the answer to the OP is that the question is silly, because the assumptions built into it are untrue.

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joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #17 on: September 21, 2017, 08:23:53 PM »
No one I've read said 5% over inflation. Just 5%, period.

Your opening line was joking, of course, but that's pretty much what common culture is saying, and why OP and I had the question.

It's okay to ask legitimate questions on the forum, to sort through common cultural presentations to get down to facts and sound strategies.

waltworks

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Re: Buy the bigger/more expensive house?
« Reply #18 on: September 21, 2017, 09:00:28 PM »
15 seconds of googling will find you the Schiller paper/data. Houses, historically, aren't investments - just like basically anything else that can be made cheaply. Land, if it's in the right place (or it's useful for agriculture/mining/forestry) can be a good investment - but it's darn hard to figure out where that land is going to be over the long term. There's an awful lot of amazing MA farmland that has reforested since 200 years ago that you can basically have for free.

So if you buy an expensive house, you're buying a depreciating asset (the structure) and a load of overhead (taxes, landscaping, maintenance, etc). You might get lucky and have the property gain value - if you are under about 35, this is probably what you expect, always, because you weren't a grownup until the bottom of an enormous housing crash, and things have gone up constantly since then. So go read the archives of Calculate Risk and see what people were saying in 2005 or 2006 - "houses always go up". They were wrong then, and they're wrong now if they think 5% is a reasonable appreciation number to expect going forward.

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joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #19 on: September 21, 2017, 09:13:11 PM »
So, I think your answer is: The common cultural presentation of [any]% annual increase, on average within one person's lifetime, is incorrect.

I think that's really the kind of info we were looking for.

Goldielocks

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Re: Buy the bigger/more expensive house?
« Reply #20 on: September 21, 2017, 10:48:24 PM »
I'm still hoping to hear responses to the OP's question, which I think is: If all other costs are equal [as in my real-life example above], and we're told house values increase by 5% per year, why wouldn't we buy the more expensive house?

i.e., We understand inflation, that we shouldn't get a place that costs more to maintain or that we're thinking of as an investment but would not actually sell at peak, etc. And, noted that waltworks says it only increases at the same rate as inflation, and that investopedia says it doesn't increase by a percentage at all...

Either it's not true (as investopedia asserts) that houses generally increase at a rate of 5% per year or buying a more expensive place that has the same maintenance costs is wise.

Are we, like investopedia, saying it's not true?

"All other costs being the same, for the more expensive home.."


How does that happen?   great inner city location on a small, rebuilt home, versus sprawling home outside of city.   Large sprawling home has lots of maintenance and upkeep, but lower taxes...?

So, it may be possible..

5% appreciation per year -- that is an AVERAGE based on recent history...  but not a guarantee.  If someone guaranteed me a 5% savings bond, for the next 5-10 years, I would probably take it.     

In retrospect, I say just get the personal home that suits your needs the best, for the price, not because of future gains, because future gains are not guaranteed.

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #21 on: September 21, 2017, 11:26:00 PM »
How does that happen?   great inner city location on a small, rebuilt home, versus sprawling home outside of city.   Large sprawling home has lots of maintenance and upkeep, but lower taxes...?

So, it may be possible..

Yes, definitely possible. I just saw it :)
Think past sprawl; not everything at significantly higher cost is bigger. (In this case, the cheaper one was almost 50% larger.)

5% appreciation per year -- that is an AVERAGE based on recent history...  but not a guarantee.  If someone guaranteed me a 5% savings bond, for the next 5-10 years, I would probably take it.     

Yes, average over a long period, but not guaranteed. Like stocks. We don't invest in stocks on guarantees either.

Goldielocks

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Re: Buy the bigger/more expensive house?
« Reply #22 on: September 21, 2017, 11:46:29 PM »
How does that happen?   great inner city location on a small, rebuilt home, versus sprawling home outside of city.   Large sprawling home has lots of maintenance and upkeep, but lower taxes...?

So, it may be possible..

Yes, definitely possible. I just saw it :)
Think past sprawl; not everything at significantly higher cost is bigger. (In this case, the cheaper one was almost 50% larger.)

5% appreciation per year -- that is an AVERAGE based on recent history...  but not a guarantee.  If someone guaranteed me a 5% savings bond, for the next 5-10 years, I would probably take it.     

Yes, average over a long period, but not guaranteed. Like stocks. We don't invest in stocks on guarantees either.
Well, housing is a leveraged investment for most of us, and I would not leverage for stocks with uncertain returns, for one thing.. so why get the more expensive one solely based on potential for future returns?   Also, the house is a large portion of my investments, another reason not to leverage a more expensive home solely for the potential returns...   But most of all, what it comes down to is the decision to buy the home that best works for you, given the carrying costs and lifestyle.

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #23 on: September 21, 2017, 11:57:37 PM »
Well, housing is a leveraged investment for most of us, and I would not leverage for stocks with uncertain returns, for one thing.. so why get the more expensive one solely based on potential for future returns?   Also, the house is a large portion of my investments, another reason not to leverage a more expensive home solely for the potential returns...   But most of all, what it comes down to is the decision to buy the home that best works for you, given the carrying costs and lifestyle.

Those are sort of different house-buying-decision matters.

Let's try it this way.
I think OP's question really boils down to:
[Completely forget that it's a dwelling at all. This will remove red herrings.]
If I have $200k available to invest, and Stock X is expected to increase 5% average per year, over the long term, why would I put 100k into it vs 200k?

I believe the relevant answer is only: Because it's not diversified enough. If for some reason the first $100k must go into one "basket", you're safer in every which way spreading the second $100k over many different investments.

Goldielocks

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Re: Buy the bigger/more expensive house?
« Reply #24 on: September 22, 2017, 12:02:25 AM »
Well, housing is a leveraged investment for most of us, and I would not leverage for stocks with uncertain returns, for one thing.. so why get the more expensive one solely based on potential for future returns?   Also, the house is a large portion of my investments, another reason not to leverage a more expensive home solely for the potential returns...   But most of all, what it comes down to is the decision to buy the home that best works for you, given the carrying costs and lifestyle.

Those are sort of different house-buying-decision matters.

Let's try it this way.
I think OP's question really boils down to:
[Completely forget that it's a dwelling at all. This will remove red herrings.]
If I have $200k available to invest, and Stock X is expected to increase 5% average per year, over the long term, why would I put 100k into it vs 200k?

I believe the relevant answer is only: Because it's not diversified enough. If for some reason the first $100k must go into one "basket", you're safer in every which way spreading the second $100k over many different investments.

And you multiply your risk when you leverage. / take a loan out to purchase.   

Related post to this discussion (last post)  https://forum.mrmoneymustache.com/journals/playing-with-fire-is-getting-burned/200/?topicseen

An awful thing is, this wasn't even the extent of the borrowing they were offered. They were offered an IO mortgage to buy a bigger place (a whole extra floor, I think two extra bedrooms and one extra bathroom), but OH and I convinced them that they didn't need the spare rooms. They had been told that they should buy it because house prices only go up, so the more house you buy the more money you make. Thank fuck for that.
« Last Edit: September 22, 2017, 12:12:47 AM by Goldielocks »

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #25 on: September 22, 2017, 12:17:18 AM »
Quote
They had been told that they should buy it because house prices only go up, so the more house you buy the more money you make.

Yeah, like that! Even removing the factor of borrowing (i.e., assuming it's all in cash)...

We have this common cultural presentation [average increase over long term] that's being pitched to people as though fact, which skews spreadsheet results.

letired

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Re: Buy the bigger/more expensive house?
« Reply #26 on: September 22, 2017, 12:36:02 AM »
Someone should feel free to correct me on this analysis, but it seems to me a significant factor here is the ratio of risk to reward, which has been alluded to in the discussion of diversification. But I also think that the risk-reward ratio on housing is skewed such that it's very difficult to come out ahead for the amount of risk involved.

I invest in equities via index funds because while there is no guarantee on returns, there is a historical precedent for the increase in value to exceed inflation, often by quite a bit, though the probability of large fluctuations is high, meaning it is a higher-risk investment. I do not leverage my investment in equities, which removes one kind of risk. I can also easily convert my equities to cash, which removes another kind of risk. And it's a wide swath of equities, which reduces another kind of risk. Even so, equity investments are on the high risk-high reward end of the spectrum.

In contrast, the historical precedent for the increase in value of housing is for it to keep pace with inflation but no more (low reward), and it is often a leveraged purchase (higher risk). Fluctuations in housing value are generally lower (???? 2008 US housing crash aside??) than with equities (lower risk). In total, I see housing (someplace you are going to live, not real estate investments) as medium risk (leveraged, highly local market, single 'investment' ie no ability to diversify)-medium to low reward (only keeping up with inflation, highly local market).

To move housing from medium to low reward to medium/high reward requires things that have already been mentioned: rental income commensurate with the purchase price/investment or a super-heated housing market. And in the case of the super-heated housing market, it also requires selling the house at some point and finding someplace else to live, either locally or leaving the area, which I would think adds to risk side of the equation and I think is part of why we say housing is not a(n good) investment.

Obviously there are factors that can flip some of these, like if part of the plan is to make a killing on the house in the shortish term and then do some geographic arbitrage and move to a lower cost of living/lower cost of housing area after the sale.

For me, the skew in risk and reward in housing means it's not a great place to park a lot of money that I need to live off of. See also: efficient frontier in modern portfolio theory, etc.

tralfamadorian

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Re: Buy the bigger/more expensive house?
« Reply #27 on: September 22, 2017, 08:09:19 AM »
I'm still hoping to hear responses to the OP's question, which I think is: If all other costs are equal [as in my real-life example above], and we're told house values increase by 5% per year, why wouldn't we buy the more expensive house?

I feel like I did answer the question directly, though possibly it was too macro.

Quote
Generally I do not consider leveraged speculation on a non-income producing asset to be a sound economic practice.

Buying a property hoping relying on appreciation is the definition of real estate speculation.  It's like stock picking.  Then using a mortgage is akin to buying on margin.  Would you ever argue that buying stocks on margin is a better idea that buying index funds not on margin? 

Now if someone wants to invest more money in real estate than a reasonable home costs, then it is much more prudent to invest in rental real estate.  Instead of one upside 1) appreciation, there are now four, 1) appreciation, 2) diversification, 3) rental income, 4) strong tax benefits (in the US at least). 

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #28 on: September 22, 2017, 09:20:49 AM »
I feel like I did answer the question directly, though possibly it was too macro.

Most answers assumed extra variables (mortgage vs cash), that "more expensive" and "larger" are one and the same, etc. It took a long time for the underlying question to be distilled. i.e. What concern remains when we remove the red herrings of: extra expenses on the house with higher purchase price, mortgage, etc?

Quote
Buying a property hoping relying on appreciation is the definition of real estate speculation.

Yes.

So I think what we got to is that a spreadsheet should exclude appreciation, even at inflation, even at 5%.

1. What common culture presents (5%) is, according to various perspectives, incorrect. (Some say this is not the long-term average at all. Some say an area increases by an amount (e.g., $10k) vs by percentage. Etc.)
 
2. Applying the idea of a percentage increase skews a purchase-consideration spreadsheet, as well as a rent-or-buy one.

3. Even if paying in all cash, putting more eggs into one basket (house) leaves one too undiversified. If that property has an uninsured disaster, or housing values in the area of both homes drops, the owner is screwed for more vs less. We want to spread our cash (or borrowings) across more asset classes, geography, etc, not fewer.

4. In a real estate spreadsheet, it is reasonable to factor in some rental income -that's more likely to manifest at least in a given rental market (though also speculative for long term)- but not any amount of appreciation, because there is no real average increase.
« Last Edit: September 22, 2017, 10:30:43 AM by jooniFLORisploo »

elvizzle

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Re: Buy the bigger/more expensive house?
« Reply #29 on: September 22, 2017, 11:07:27 AM »
If you think your primary home is an investment, what's the end game?  How would you realize any gains that the home has? 

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #30 on: September 22, 2017, 11:11:51 AM »
If you think your primary home is an investment, what's the end game?  How would you realize any gains that the home has?

Some of us are not location-dependent and are, simultaneously, very willing to sell and move when the price reaches a given point. That's how I did it, and how I would do it again.

waltworks

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Re: Buy the bigger/more expensive house?
« Reply #31 on: September 22, 2017, 12:12:16 PM »
My advice, if you really are curious about this stuff, is to go pick up one of the RE investing books mentioned in the sticky at the top of the forum. Then you'll have at least a basic understanding of how RE investing works (and doesn't) and can ask more informed questions of the investors here.

My own last rental closes next month, I've pulled all my chips off the table. I'll let you interpret that however you want.

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joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #32 on: September 22, 2017, 12:19:42 PM »
My advice, if you really are curious about this stuff, is to go pick up one of the RE investing books mentioned in the sticky at the top of the forum. Then you'll have at least a basic understanding of how RE investing works (and doesn't) and can ask more informed questions of the investors here.

I don't know about the OP, but I've found conversations on this forum infinitely more helpful than books. It was a conversation on investment basics that turned things around for me. It got to the key pieces I wasn't able to garner through any of the books. Some people learn best via conversation. That's okay, and really, it's exactly what the forum is for :)

It's not really for us to direct people to not ask certain questions, to "go ask your grandma" or to "go read a book then come back with more informed questions." Pete made us a forum so we can explore through conversation, too.

GuitarStv

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Re: Buy the bigger/more expensive house?
« Reply #33 on: September 22, 2017, 12:31:15 PM »
If you're not planning to die in the house you purchase, it's probably worth thinking about resale value when buying.  When my wife and I were looking for a home we certainly didn't need 2.5 bath and three bedroom rooms . . . but we're almost certainly not going to live here for the rest of our lives.  It's much easier to sell a home with three bedrooms than one with one or two.  It's easier to sell a house with multiple bathrooms too.

Dicey

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Re: Buy the bigger/more expensive house?
« Reply #34 on: September 25, 2017, 04:48:25 AM »
Okay, I'll swing on this pitch. I did it. My adorable condo was an 880 sf 2+1 with a one-car extended garage in a prime location. I legitimately worked from home, so BR 2 was a tax deductible home office, as was a portion of the garage. Paid $120k on a short sale, sold 4 years later for $245k.

I sold because I ran out of sample/supply storage area and needed a larger garage. The best thing I could find was a 1700 sf, 4 +2.5 townhouse with a slightly oversized 2-car garage in an adjacent, less expensive town for $390k. I didn't need 4 bedrooms or 1700 sf, but I needed an office and the garage. I bought it and rented out two bedrooms to one tenant for $1k/month. By having a roommate, my OOP was about the same. In addition, I only put 20% ($78k) down and invested the rest of my tax-free proceeds in index funds. I sold it eleven years later for $600k, just as the market was heating up. No taxes on that gain, either.

This worked because 1) I had a roommate and 2) some of my costs were tax deductible and 3) I never had to sell in a down market.

I never, ever assumed ANY appreciation. Historically, it is not guaranteed. I own another home in a different part of the state. I bought it new in 2003 and it has not even kept up with inflation. Go figure.

Dicey

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Re: Buy the bigger/more expensive house?
« Reply #35 on: September 25, 2017, 05:10:38 AM »
You might want to think about how much of your overall portfolio you want in real estate, as well. Most "average" folks that I know have most of their net worth tied up in their house. I personally didn't want to have so much of my NW in one basket (expensive house), so I have a small condo (paid off), which also keeps everyday expenses low. My condo is currently is about 45% of my NW. I'm pumping up my other asset classes now, to reduce my condo down to about 25% of NW.
dcamnc, I trust that you made the best decision for your own tolerances when you apparently* chose to accelerate to  pay off the mortgage at the expense of other investments. This is a good example of why carrying a moderate, fixed-rate mortgage while investing in other asset classes simultaneously can provide better long-term results.

One could also make the case that a more efficient way to achieve a better balance quickly might be to take out a new, low interest, fixed-rate mortgage on your condo and invest the money in other asset classes such as low cost ETFs, a la jlcollinsnh.

This is not a personal criticism, dcamnc, just an example of why it can be better not to accelerate mortgage payoff at the expense of other investments. I get that it seems totally counter-intuitive. I thought that the first person who explained this concept to me was completely off their rocker. It took me a long time to figure out they were actually quite badass.

*Based on the information given.

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #36 on: September 25, 2017, 08:33:31 AM »
Okay, I'll swing on this pitch. I did it. My adorable condo was [two huge increases]. [...]

I never, ever assumed ANY appreciation. Historically, it is not guaranteed. I own another home in a different part of the state. I bought it new in 2003 and it has not even kept up with inflation. Go figure.

Dicey, on the thread's topic, are you saying: Houses appreciate (or not) by varying factors, not by percentage across houses?

i.e. You agree with the consensus in this thread.

dcamnc, I trust that you made the best decision for your own tolerances when you apparently* chose to accelerate to  pay off the mortgage at the expense of other investments. This is a good example of why carrying a moderate, fixed-rate mortgage while investing in other asset classes simultaneously can provide better long-term results.

One could also make the case that a more efficient way to achieve a better balance quickly might be to take out a new, low interest, fixed-rate mortgage on your condo and invest the money in other asset classes such as low cost ETFs, a la jlcollinsnh.

Hopefully we can keep that conversation to its dedicated thread, rather than shift this one.

Per this thread's topic, though, I would add that the risk dcamnc mentioned on the more expensive place remains. Having the smallest DP, and the difference in index funds, doesn't change the risk if: the house faces an uninsured disaster; the house's value drops and we're underwater on the mortgage for the rest of our lives. So, the strategy you mention [detailed elsewhere on the forum] doesn't mitigate these risks in the more expensive house, and encourages the less expensive one. (It's also not so applicable in, for example, Canada, where we can generally lock in a rate for much shorter periods than folks in the US can.)

Goldielocks

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Re: Buy the bigger/more expensive house?
« Reply #37 on: September 25, 2017, 02:40:42 PM »
This post is my insight on why some homes don't increase "as expected", or with the larger market increase.  Why an average increase is never a "sure" or "very likely" thing to rely on...

Often, a new development of "equal but new" homes is being built nearby.  This can depress the resale value of your home for 5+ years until all the "new" properties are sold.   The only resales that happen are for homes that look great, and have many added features - maybe a better view, closer to the rec. centre, or upgrades like closet organizers and updated appliances.   At which point, these homes sell for the same price as the new homes, but never for more.

The new development can be very unexpected.



Dicey

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Re: Buy the bigger/more expensive house?
« Reply #38 on: September 25, 2017, 05:22:54 PM »
Okay, I'll swing on this pitch. I did it. My adorable condo was [two huge increases]. [...]

I never, ever assumed ANY appreciation. Historically, it is not guaranteed. I own another home in a different part of the state. I bought it new in 2003 and it has not even kept up with inflation. Go figure.

Dicey, on the thread's topic, are you saying: Houses appreciate (or not) by varying factors, not by percentage across houses?

Yes, indeedy!

i.e. You agree with the consensus in this thread.

dcamnc, I trust that you made the best decision for your own tolerances when you apparently* chose to accelerate to  pay off the mortgage at the expense of other investments. This is a good example of why carrying a moderate, fixed-rate mortgage while investing in other asset classes simultaneously can provide better long-term results.

One could also make the case that a more efficient way to achieve a better balance quickly might be to take out a new, low interest, fixed-rate mortgage on your condo and invest the money in other asset classes such as low cost ETFs, a la jlcollinsnh.
Hopefully we can keep that conversation to its dedicated thread, rather than shift this one.

Jooni, I promise I'll stop talking about it when it becomes a well understood option. Until then, I will preach with the zeal of a Revivalist until people understand their choices and the ramifications of said choices. My remarks were directly relevant to the comment quoted. I speak this truth for the benefit of all. Once you understand, you are completely free to do as you wish, but the thinking itself is somewhat counterintuitive and not well understood. Perhaps less so in Canada, but in the US, with low, fixed, tax deductible mortgage rates, it's worth taking the time to study the math before you "kill the mortgage" at the expense of other investment options, including saving enough to get the full company match, if you're eligible for one.
XO, Dicey
.

Per this thread's topic, though, I would add that the risk dcamnc mentioned on the more expensive place remains. Having the smallest DP, and the difference in index funds, doesn't change the risk if: the house faces an uninsured disaster; the house's value drops and we're underwater on the mortgage for the rest of our lives. So, the strategy you mention [detailed elsewhere on the forum] doesn't mitigate these risks in the more expensive house, and encourages the less expensive one. (It's also not so applicable in, for example, Canada, where we can generally lock in a rate for much shorter periods than folks in the US can.)

joonifloofeefloo

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Re: Buy the bigger/more expensive house?
« Reply #39 on: September 25, 2017, 05:27:47 PM »
Jooni, I promise I'll stop talking about it when it becomes a well understood option. Until then, I will preach with the zeal of a Revivalist until people understand their choices and the ramifications of said choices.

I understand it -it having been duly bashed into my head on the boards- but this thread has had a hard enough time focusing on the original question. As passionate as you are about spreading the "keep the mortgage" love, I'm equally so about finally letting some of us have the OP's question answered. It's a great one, and addresses another common real estate myth, so highly valuable in its own right.

acepedro45

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Re: Buy the bigger/more expensive house?
« Reply #40 on: September 26, 2017, 05:54:06 AM »
Quote
I'm equally so about finally letting some of us have the OP's question answered.

I'll bite.

I hear this 3% cost of money, 5% price appreciation argument quoted all the time as conventional wisdom, too. The argument goes: Since you are a long term investor willing to ride out ebbs and flows in the market, you have an arbitrage opportunity between the cheap cost of the financing (3%) and the expected appreciation of the house (5%), especially when the financing is tax deductible. Logically, you should maximize the dollar amount of that arbitrage by buying the absolutely most expensive house you can and borrowing the most amount of money you can.

In my opinion, that argument is a bogus one cooked up to serve the self-interests of the mortgage-industrial complex. It leads to bigger mortgages, bigger commissions, bigger everything in an industry where compensation is derived as a percentage of transaction value.

The 3/5 argument makes two hugely wrong assumptions.

First, that houses will appreciate much faster than the cost of money. I'll even concede that with all the tax advantages layered into the US mortgage system, it's possible to borrow for cheaper than the inflation rate. But it couldn't possibly be a 2% spread (5-3). Someone earlier pointed out that if housing inflation keeps wildly outpacing the cost of money, in just a few short decades nobody will ever be able to afford a house!

Second and more damning flaw in the 3/5 argument: paying the mortgage is by no means the only cost of owning a house. Adding taxes, insurance, maintenance and utilities can easily add 2-3% (of home value) to the direct costs of your mortgage. All of the sudden that arbitrage opportunity doesn't look so great any more.

In the end, in exchange for all the money you spend on your house, you only get the sale price when you sell it, plus a place to live in the meantime. Some more entrepreneurial folks may also collect some rent. But don't let the any mortgage salesperson mislead you by tempting you with an Excel sheet showing your house price growing at 5% while you pay just 3% to borrow. If you hear the phrase "You'd be crazy not to!" it's your cue to run.