Buying a house is falling out of fashion in the Financial Independence and Early Retirement community. Not “Green Polyester Leisure Suit” out of fashion, more “Cherry Cabinets and Ornamental Backsplash” out of fashion.
The oft-cited, and extensively researched, post on the matter is the awesome and amazing JCollinsNH’s “Rent v. Owning Your Home, opportunity cost and running some numbers.” If you haven’t read it, you should. Go ahead, I’ll wait.
I weighed in with my own “Should I rent or buy a house” post the other day, cribbed from the research and soul searching Mrs. Frugalwoods and I did during our house hunt in 2012.
Now back to the issue at hand. If Mrs. FW and I are so darn frugal, why do we own one of these wealth destroying monsters?
Location, Location, Location!
Location Bonus #1: Our house is 0.5 miles from MIT and 1 mile from Harvard University. No matter what happens in education and the economy, I feel confident these two institutions will continue driving the local economy. In particular, the biotechnology sector is booming here and several thousand high-paying jobs are moving into the neighborhood over the next few years.
Location Bonus #2: We’re less than a mile from the subway (called the “T” ’round these parts). My office is just a few miles away so I’m able to bike to work. And it’s in a neighborhood we love.
Location Bonus #3: Our immediate neighborhood is experiencing a rapid turnover from working class to young professional renter class. When we bought in 2012, our house was on the edge of the “nice” area. Now the “nice” area has expanded to encompass us.
Location Bonus #4: We were able to buy a single family home. No condo, apartment, or co-op for us. This means no homeowners’ association (HOA) fees or shared walls! Most importantly, there are no restrictions on renting it out in the future–many HOAs prohibit or restrict owners from renting their units.
We bought our house with the intention of turning it into a rental in the future
This is key. From the moment we closed on our house, we could rent it out for more than PITI (Principal, Interest, Taxes and Insurance).
The substantial undergraduate and graduate student population in the area creates a robust rental market. Our house is ideally situated for renting and the four bedrooms allow for excellent rental income opportunities with our target market of students.
And while the fact that the house doesn’t have a yard is sometimes a bummer for us, it also means we won’t need to pay a landscaper to take care of it once we’ve rented it out.
We Got A Smokin’ Deal
It was early 2012. The housing market was starting to show signs of life but hadn’t roared back yet. If you had good credit (we did), mortgage rates were extremely cheap. We ended up with a 30-year fixed rate conventional mortgage at 3.8%. I fully expect to brag to my grandkids about how cheap that money was!
The house showed poorly and hadn’t been updated. It was painted odd interior colors, there were heavy dark drapes, and hideous floral rugs covered the wood floors. Tons of family photos crowded the walls making a small house seem even smaller. But decorating tastes aside, the previous owners lived in the house for over 20 years and took great care of the important stuff. The house has a solid foundation, new windows, new roof, and the mechanicals are in good condition.
We knew we could put sweat equity into cosmetic features and have a great looking house. Since we were familiar with the area and had lived nearby for several years, we knew the neighborhood was prime for rejuvenation. In the 2 years we’ve been here, there’s been incredible revitalization.
We ended up paying ~$460,000 for the house, which turned out to be the lowest price-per-square-foot of any habitable property sold in the area that entire year. We also lucked out in buying just before the market got insanely competitive. We didn’t have a bidding war, and we had standard contingencies on the sale.
Facts Not Feelings
There’s an entire industry dedicated to convincing us that buying a house is an emotional–possibly spiritual–decision that should be made with teary eyes and visions of unparalleled domestic bliss. If you’re going into a house hunt with this outlook, please cease and desist ASAP! TV shows that herald cloying realtors urging clients to “go with their heart” and “stretch their budget” to get their “dream home” are not helping matters. While, yeah, it’s good to like the house you’re buying, it’s more important to view it for it is: an investment. Buying a home because it “feels right” is not a useful metric.
We bought through the unemotional lens of looking for a future rental investment. After living in the house for two years, we feel confident the decision to buy was right for us. We love living in the house and working on projects, but we also love the idea of moving on in a few years and renting it out. The rental market has continued its upward trajectory since we purchased and the numbers are even more favorable now.
But if you’re not looking for a future rental investment and you just need somewhere to live? Buying might not be a good idea for you.