Using Your Home as an Investment

Doing the Math.

Dear Homeowner,
Have you ever considered your home to be an investment? If you are living in the Lowcountry and enjoying this hot real estate market, I’m sure you have at some point or other. If not, please allow me to convince you that you should be. If you will follow along with my explanation, I’m sure you’ll see that in life, prices go up and down and in real estate they do as well. Some of you may well remember what happened to the housing market in 2007. I pray we never have to reach those kinds of lows again however, they make a great point of reference for our analysis. Bear with me while I make a few obvious points because we will refer back to them momentarily.
I’m going to assume that you own a home now which is valued between $300K and $400K. I will also assume for this explanation, that you are able to finance a new house if you decided to proceed with my theory. Now then, your home is worth $350K and you have a minimum of $50K in equity in it right now let’s pretend you purchased it for $330K. These are the parameters of our discussion.
We will call this scenario #1. You have a home which is now worth more than you originally paid for it. Let’s say the value increased by $20K over the past 10 years. This is a conservative number but go with it. Now, you’ve also been paying it down little by little and you’ve paid down the principle by $30K. You have $50K in equity right now correct? Let’s pretend that you plan to keep this house for 20 years. In this example, if you keep this house, you will be lucky to have another $30K in equity the next 10 years. Please remember that you will at some point need to replace the carpet, roof and or HVAC unit(s). You may have dampness (fungi) or termites and any other imaginable thing that I’ve seen happening in the Lowcountry in my time as an agent. So, for the purpose of this example, let’s say you will have to put about $20K into your house just to maintain it in good repair.
Here are some of the costs to maintain the home. Roof $12K-15K, HVAC $4K-10K, Carpet $4K-6K… and the list goes on, hot water heater, appliances etc. How do I know? Because I’m living in a 10-year-old house. These things are cropping up and I’m having to replace them one by one.
So far, if you keep the house in scenario #1 we are assuming that you’ll have an additional $30K in your investment after another 10 years passes. You might argue that the value of the home will increase over time as well and I hear you but, you have to subtract the up keep and we haven’t even considered upgrades yet. In today’s market, to get top dollar for your home, you need stainless steel appliances, granite or marble counter tops and hardwood floors to compete with the newer homes which are available. Perhaps you have these things already. Outstanding! But, for those of you who don’t, these are the items which will make or break your house fetching top dollar.
So, let’s end this example by saying that over 20 years you stand to have $80K in equity barring any unforeseen market crashes. ($50K from the 1st 10 years + $30K from the 2nd 10 years)
Now let’s discuss scenario #2, if you own the same home and currently have $50K in equity but, instead of keeping it, you decide to sell it and move into a newer house, here is what your scenario might look like. Again, barring any major market crashes.
You sell your house and it costs 6% for the agent’s transaction fee as well as another $5K in negotiations. For argument’s sake let’s assume the commission to be $21K and to that we add the $5K in lost negotiations for a total loss of $26K. You would still have about $24K in your pocket after the sale, right? You take this money which will likely be more than $24K but I’m being ultra conservative here and you buy a new house. This new house is loaded with all of the things we just mentioned. Hardwood floors, stainless steel appliances and the like. Now we live in the beautiful, brand new house for the next 10 years just like in the last example only this time, you gain, minimally, another $50K plus you have the $24K you used as a down payment. Stay with me on this because you’re going to catch my drift really quickly. You might think you lost money in this example. I mean if you kept the old house you’re sitting on $80K and in the new house you have $74K after 20 years but, what you did not account for is that over the next 10 years, Charleston is projected to grow exponentially. There are tons of new neighborhoods and apartments cropping up everywhere you turn. Who is moving in you might ask? Well there are Northerners, foreigners, retirees, military, Volvo plant workers and Boeing plant workers as well as the usual riff raff who just can’t stay away from this gorgeous city. Those who have vacationed here and those who’s family members live here and they want to be closer to them etc. but, I digress.
Here is what the end result looks like.
In scenario #1, I keep the same house for 20 years and don’t change a thing. Wear and tear alone will cost me over $20K in this scenario. Now, I try to sell it and I’m up against the newest most ultra-modern styles and technologies but, my house is 20 years out dated because we never allocated any money to keep it up to “selling standard”, only money for repairs.
In scenario #2, I buy a new house and after 10 years I have a reasonably decent, well equipped house to sell again and reap the benefits of over and over. Not to mention that you get to live in the newer house and not sink a bunch of money into replacing aged roofs, HVAC units or carpets etc.
How much do you think it costs to bring a house up to selling standard after 20 years? Let’s just say conservatively $15K-20K. That’s right, it’s at least that amount. Have you been in a 20-year-old home that has not been updated recently? That was hmm… 1998. It looks like you just stepped into an episode of Beverly Hills 90210. Not Kidding. Which makes a very good point because when that program aired, they lived in a prominent neighborhood in Beverly Hills, CA. That means they had all of the best components in their house at that time. I’m just saying…do you remember that $80K you thought you owned in scenario #1 at the end of 20 years? Now subtract $15K- 20K for upgrades, 6% for transaction fees and a bare minimum of $5K in lost negotiations. My friends, it’s sad but true. After this 20-year-old home finds a potential buyer and they have an inspection done, you stand to lose a whole lot more than that. It’s rare if ever that an inspection comes back without hiccups. That means, either you pay to fix what they find is broken and/or damaged, or you re-negotiate down to the price it would cost to fix those items. Trust me on this, it gets really ugly really fast. So, let’s conservatively subtract another $5K-7K for inspection report findings to be fixed.
If at the end of 20 years both parties were to sell their homes, this is how it would look respectively. Scenario #1 the owners would end up with a maximum of $34K and a Return on Investment of approximately 10% while the owners in Scenario #2 would end up with $48K and a ROI of about 14.5% in the same amount of time.
Ladies and Gentlemen, I rest my case. It pays to treat your house as an investment. No matter how you slice it, 20 years happens faster than we’d like to admit. Consider what I’ve put forth and if I can help you find a newer, better, more upgraded, fabulous home in the Lowcountry, please don’t hesitate to call me.
Stacie Smith