Home Ownership Cost Us $60,000 in a Great Housing Market

We recently sold our house and moved as part of our early retirement plan. The place we moved from was considered one of the hotter housing markets in the country (Dallas-Fort Worth) and we sold our home for nearly $50,000 more than we purchased it for after owning it for only 43 months.  That sounds like a victory, but when we finalized the numbers  we *lost* nearly $60,000  compared to renting over that same time period.  The property was a three bedroom house located “in-town” purchased for $630,000 and contracted for sale at $679,000.    Below is our total cost of ownership:

The house we sold

Total Costs:

Calculation Details:

Property Tax:  We moved to a major city in Texas and chose to live near the office.  We either would pay in housing expense or pay in commuting cost, so we chose housing costs.  We initially rented for $2,800/mo before buying this house.  In Texas there is no income tax and the system disproportionately taxes homeowners and renters in the four major metropolitan areas.   I am including the full cost of property taxes in this analysis because it is compared against rent in the same state.  Landlords pay an even higher property tax rate (no homestead exemption on rental properties) and pass those costs on to the tenants through higher rent.  There are also other states without an income tax such as Tennessee and Florida that don’t come with these oppressive property tax levels.  Texas also carries an 8.25% sales tax and tolls are everywhere if you want to move around the city.  

Interest:  We received a 2.875% 7/1 ARM on a $504,000 mortgage which kept our interest expense low.  Most borrowers would opt for a 15 or 30 year fixed at a slightly higher rate than we got on the 7/1 ARM.   Since we were pursuing financial independence, we were comfortable taking the savings up front on the interest rate knowing we could handle a worse case scenario.  We were confident we would have the funds in seven years to handle any interest rate reset.   The particular loan could only go up by 2% at the first rate reset after seven years.  

Selling Costs:  This includes paying the real estate agent commissions and customary seller paid closing cost, which meant the title insurance policy and one half of the escrow agent’s fees.  Our market had very little flexibility in the 6% commission rate.

Opportunity Cost:  We sold $126,000 of index funds to generate the down payment for the house.   The market carried a better than average return from the point or purchase to the point of sale coming out to an annualized return of  ~ 13.6% per year over our ownership period.  Unfortunately we sold shares for the down payment during a near bear market in late 2015.

Rent:  We did not adjust for any rent increases as the house we rented re-rented for the same amount and the tenants are still in the property.  Additionally there were other houses in the neighborhood that rented for a similar amount.  Any rent increases would have been minor and chipped into this number.   (but rent is “throwing money away”, right?)

What we did “right” on the purchase

The internet is full of advice on how to do the “right” things when buying a home.   Here were a list of things I thought we did right.

1) Minimal closing costs at purchase.  This analysis includes minimal closing costs or inspection costs on the purchase side.  My employer paid these as part of a relocation benefit for moving.   

2) Good timing on interest rates.   We did a 7/1 ARM and locked in a 2.875% interest rate on the loan. I’ll often encourage people to consider a 5-10 year ARM now if the interest rate is better than a 30 year loan. Today’s adjustable rate mortgages have caps on how high the rate can go and it takes years past the lock period under a worse-case scenario to break even.  More interest is paid earlier in the loan when the balance is highest.  A 30-year mortgage would had added over $18,000 to our interest expense over time.

3) Bought in a “good” area. We rented in an area that was close to work and “in-town” and decided we wanted to own in that same area. The houses we were looking at sold for a small percentage over their underlying lot value and provided great downside protection on price unless there was a complete implosion in values.  The price could only fall a little before a builder would buy the property for lot value. The short commute was also wonderful for my physical and mental health.

4) Bought a quality house:  This was our fourth house and Mrs. Shirts has become quite handy.  We looked at house after house and finally found a well maintained 1955 house that was renovated and expanded in 2006.  It was not without its quirks, but our repair costs were less than $10,000 over the 3.5 years we owned it.  That included a $3,500 deductible payment for hail damage to our roof that was outside of our control.  There were a couple of items on the inspection that people could pick at, but the house had withstood issues for sixty plus years and it was unlikely these inspection items were mandatory.

So How Did We Lose Money?

1) Real Estate Agent Fees and Closing Costs: Our house sold for $679,000 and we used a full service real estate agent. There was no flexibility on the 3% buyers agent fee in our market and we likely made a mistake with going with a full-cost agent.  (The market we sold in is actually ground zero for an anti-trust lawsuit)  In the process we were constantly pressured to pay “just a little” in closing costs because they were “normal seller expenses”.  Commissions paid totaled $40,740 plus another $4,766 in closing costs.

2) Property Taxes. The taxes on the house increased by 23% during the course of owning the home after a significant successful appeal in our last year. On an annualized basis this accounted to a 4.6% increase per tax year while the house only appreciated 2.2% per year. The state and municipal pension crisis is real in this country and our tax burden represented this.  The painful reminder about property taxes that rise faster than values is they cost the homeowner twice, once in the annual cash outlay and secondly by holding down the sale price.   Most shoppers are getting a mortgage and total monthly payments matter.  

3) Opportunity Cost: We sold $130,000 in investments in late November 2015 to make the responsible 20% down-payment plus a few initial purchase items. The cumulative total return for the S&P 500 including dividends between November 2015 and June 2019 was just over 48%. Our opportunity cost on the lump sum came out to $57,000. We also paid down around $1,000/mo in principal and earnings on those additional investments are estimated at another $6,300.   

Lessons Learned:

Most of  your gain/loss will be dictated by the market first and hold period second.  We lost money on house number two and three, then optimistically call this house “break-even” outside of the opportunity cost.  With the benefit of hindsight, my job moves were great for income but terribly timed for the housing market after the first move.   We missed on jumps in housing prices by one year on house #2 and house #3.    We then rented for nearly a year and by the time we re-entered the purchase market in late 2015, the area we bought in had already seen most of its gains.  Prices generally come back first in the most desirable areas then move out into the suburbs.   Our decision to move out of the suburbs and back into the city was not well-timed with the country’s housing recovery. 

Gains above/beyond the market are either luck or working like its a full time job.  I’ve spent a lot of time trying to figure out “why not us” on the last three house purchases when I know a ton of people who are making good money on houses.   The reality is we didn’t do the full-time work of a live-in flipper or a foreclosure hunter to make money on the front end.   We also moved too much for my job and that timing caused us to miss two upswings.

Look at the implied rental value.   How much can you rent the house out per month compared to the price you pay?    You probably aren’t going to meet the 1% rule on your home, but how close can you get?   The first house I bought could have rented for about 0.75% of its purchase price per month and we made decent money on the home (and would have held it as a rental if we couldn’t).  The third house which we only lost a little of money on with a short hold period rented for around 0.6% of its purchase price in a college town.   We would have also held that if not for my employer taking on the cost of the real estate agent’s commissions.  The two big money losers had rent ratios lower than 0.50%.   It should be no surprise these houses also had the most square feet.  

Transaction costs are painful in real estate.   When a large sum of money is changing hands, there’s a line of people holding their hand out trying to skim some of that money.   Spreading the transaction costs over a longer hold period could have potentially improved our numbers compared to renting.  Spreading the transaction cost over more years helps the math and potentially gives inflation an opportunity to creep and and help with some additional price gains to offset these costs.

Agent Fees.   Go ahead and put a For Sale By Owner sign or a “make me move” offer on Zillow before signing a listing agreement.   You’re going to have to deal with a swarm of vulture real estate agents trying to get a listing, but you might find a buyer.   Our biggest mistake in the process was not pushing harder on our agent fees.  We falsely believed we would get more attention from a full-service agent than a discount agent in our market.  The discount agents also still required 3% to be paid to the selling agent, which is absurd.   The fact these fees are based on selling price doesn’t make any sense.   Agents will happily put the same (minimal) amount of work into a house that sells for $300,000 yet charge me over twice that price to list/sell house in the $600s. 

Our selling agent did minimal work and the house brought in five offers in the first thirty days of listing.   We paid over $40,000 in commissions and every dollar over about a third of that amount was the equivalent of embezzlement after I signed a listing agreement.   The core of the problem was our agent was competent but older and not motivated after the good sales pitch to get the agreement.  The buyer’s agent lacked competency and we missed three closing dates to get closed.  We took this as best we could since we’re adults and for signing that listing agreement, but it pissed us off every step of the way.   

We actually got so frustrated in the process and felt our agent fumbled with three different buyers that we demanded the house be pulled from the market.  (apparently that hits some list and we were bombarded with calls from vulture agents trying to get a new agreement) We were going to wait out our listing agreement then fire the agent.   One of the previous offers ended up coming back after we lost someone in due diligence and we went through with selling the house and eating the 6%.   

But were there advantages to owning the home?

We switched to being renters again and drive by nice new home developments every day.  We like our rental house, but don’t love it like a home we could choose to modify.  This has me thinking about ownership, but also questioning what was the value of home ownership versus being a renter for the rest of our life.  So what did we value in owning a home?

Control. Our last two houses were not in HOAs and we had near-full control of the property outside of city ordinances. We could change anything we didn’t like and didn’t have to ask anyone permission to do anything to the house. We also would never be forced to move or have some change to the property declined.   

House projects:  These could fall into both a pro and a con.  The amount of time not spent on house projects has been really nice, but we might actually miss doing some of these projects in the future.   We got into our new rental house and immediately wanted to change out the dishwasher and noticed a few other things we would have done differently.

So What Happens Next?

We are going to happily enjoy our time as renters for the next year while figuring out if this is our final location.   After that, we may venture into some casual home searching.  We aren’t under any pressure to find a place and am slowly realizing the the selling costs and the process were both equally frustrating for us.   If we pay attention to the rental potential, then we have an second option if we decide to move.  Financial independence for us is about living life on our terms and within our control.   A secondary option as a rental would make us more comfortable venturing into home ownership in the future.