I’ll be doing a housing expense post in order to keep track of how much my primary residence is costing me. My hypothesis is that we place too much emphasis on the sale price and don’t adequately take into account the carrying costs which more than offset any potential gains.
Below you’ll see that the 9% apparent appreciation that I had in the value of the property is only 2% after adjusting it for various realistic factors.
- I bought the house 2 years ago, December 2015, for $140,000.
- It’s a studio condominium and has about 360 sqft of space with a washer/dryer.
- The HOA dues started at $163/month and now are at $172/month.
- I have property insurance which costs me $199/year.
- Water is paid for by the HOA so I only pay for electricity which is in the $30 range per month.
- My cable internet was $49 up until recently and now it’s nearly $70/month.
- Property taxes went up by nearly 10% to $2,100
Housing Expenses From Memory
It’s good practice for me to see how good I am at mental budgeting – well, I already know I suck.
I guessed that I spent $4,700 on my condo in 2017. But that’s not correct – off by 30%. Fortunately, I YNAB and so I can look back and see that I had the following expenses I forgot to account for:
- HOA special assessment
- small repairs
In total, I spent exactly $6,338. So my spending from memory was off by 30%.
Income From My Property
I also had a little income from the condo.
I rented it out for a month on AirBnb and after fees I took home around $900. It would have been $1,800 but I split it with my co-host who did all the legwork.
It’s important to take into consideration the rent income potential because it’s not always the sale value that matters.
Appreciation in 2017
My property appreciated by $15,000 in 2017. It started out at around $170,000 and should now be worth somewhere around $185,000.
Even though the condo went up in value on paper, I still would have to take into account how much I spent – $6,300 – and I would have to factor in inflation.
You keep hearing that there has been no inflation but everything around me is going up in cost – so, I don’t care what I’m told and follow what I see. I would say 3% is a very conservative inflation rate for 2017.
If we had a 3% inflation then my $170,000 condo would be worth $5,100 less the following year – that’s how inflation works.
Actual Appreciation 2017
The condo went up by $15,000 which would seem that I had nearly 9% of appreciation. Wow, how awesome! I’m such a baller.
But in fact it only went up by $3,600 or 2%. Still, not bad – 2% is a halfway decent return on any investment because it’s a real return (aka actual return).
I subtracted that $11,400 for inflation and my actual spending on the property for 2017.
The state certainly thinks that my property appreciated 9% because they bumped up my annual property taxes by 10% for 2017.
I’m keeping track of this number for myself because I’m not exactly sure what to do with it yet.
Rent for my unit would have been somewhere around $1,080/mo beginning of 2017 and it’s now closer to $1,200/mo. I rarely see rent go down even when the economy takes a hit – maybe this is more valuable than the sale value of my condo. We shall see.
Sell it, Keep it, Rent it?
I didn’t buy this condo because it was my dream condo but because it made financial sense.
The going rate for condos of this size at the time was closer to $180,000 and I got it for $140,000 so this was a great deal. As they say, you lock in the most value at the time of purchase of a home.
Though this condo has some characteristics of an investment, I am living in it and therefore it’s more of a liability as you can see from the spending. True, I’m saving money on rent – maybe it’s a wash.
With any investment or pseudo-investment, I like to assess whether it’s something worth keeping, selling, renting, or getting rid of.
Carrying Cost (=$400/mo)
At the very least, I need to pay for property taxes, property insurance, maintenance, and HOA dues in order to carry this property from year to year.
If I do most of the labor myself then I can keep maintenance down. I can also write off some of the property taxes on my income taxes.
I’m looking at around $400/month which should cover my carrying costs.
Opportunity Cost (=$800/mo)
The opportunity cost is the money that I have tied up in this condo. That money would be earning me some returns potentially if invested in my index fund portfolio.
I have $140k in the condo and if it performed the way my other investments performed the past 2 years then my initial investment would be worth around $171,000 by now.
For every year I leave the money in the condo, I would lose out on the potential returns (or sometimes losses) from that money being invested in the market.
At around 7%, my $140k investment would earn me around $800/month. That’s what I have to factor for when deciding if holding onto the condo makes sense. But I also have to consider the alternative costs such as paying rent.
Alternative Costs (rent=$1,200/mo)
If I didn’t have this condo then I would have to pay rent which would set me back around $1,200 for something comparable. I could maybe find a place as cheap as $1,000 in Portland but it wouldn’t be easy.
From an economic standpoint, you’re supposed to compare apples to apples and therefore calculate your alternative costs based on paying rent for a similar condo.
But that’s bullshit.
I can go live wherever I want, I am not tied down to Portland in any way. I can move to Bhutan or Barcelona and enjoy much lower rent – this might be as low as $500/month and up to $800/month.
If my goal is to grow my wealth then I would be better off moving to a city/country with lower rent, selling the condo and invest my money instead.
But my goal isn’t to grow my wealth further. I have enough invested in the securities market that I should be more than well taken care of by the time I reach an age when I can’t earn any more money.
The convenience of having this condo is well worth it. And if I need to offset the costs for any reason then I can rent it out for a couple of months on AirBnb.