As we get closer to moving into our new home (and selling our existing one) I decided to look back on the financial return of our home purchase. I wish I hadn’t. On first glance, I think my house was a lousy investment.
We haven’t put our house on the market yet, but we will soon and I expect it to sell for somewhere between $500,000 and $549,000 (the range of outcomes has widened, especially to the downside, as the housing market slows down).
If it sells for $524,000, we’ll make $100,000 over the $424,000 that we initially paid for the house back in 2011. That sounds okay, but it represents just a 1.94% compound annual growth rate. Oof.
But it gets even worse from there.
Phantom Costs of Home Ownership
The year after we bought our home we spent $7,500 on landscaping the front and back yard, and putting up a fence. The following year, we spent $32,500 to renovate the unfinished basement.
That already puts us at $464,000 and I haven’t included phantom (unrecoverable) costs such as property taxes, insurance, and maintenance.
Thankfully, the brand new house didn’t cost much in terms of ongoing maintenance over the last 11 years. I’m going to be generously low and put this at $1,000 per year for a total of $11,000.
We paid an average of $4,000 per year in property taxes ($44,000 total), and an average of $1,600 per year for insurance ($17,600). That’s another $61,600 in total unrecoverable costs that we paid as homeowners.
We made mortgage payments, on average, of $1,600 per month. Over 11 years that adds up to roughly $211,200. I’d estimate $50,000 of that went to interest costs and $161,200 towards the principal.
Finally, there’s also the opportunity cost of capital – the $88,000 down payment we put towards the house purchase back in 2011.
What If We Rented and Invested the Difference?
If we had invested that amount in a globally diversified portfolio of stocks and earned 8% per year (not unrealistic, considering the S&P 500 gained 14.4% from 2011 to 2021) that $88,000 would turn into roughly $190,000. Call it a $100,000 opportunity cost.
Let’s say we rented a house for the last 11 years, paying the equivalent of our total mortgage payment each month in rent. We invested our initial $88,000 lump sum, plus another $550 per month that we saved from not having to pay property taxes, insurance, and maintenance. We’d end up with about $295,000 by the end of 2021.
Also, don’t forget the extra $40,000 we spent on renovations and landscaping. Let’s say we just kept that in cash under our mattress. We’d have $335,000 in savings and investments today had we rented and invested / saved the difference.
Instead, we put that $88,000 towards a house. We put an additional $40,000 into the house to finish the basement and landscape the yards. And, we paid another $72,600 in phantom or unrecoverable costs over the past 11 years, plus another $50,000 in interest costs.
Not So Fast
To counter that, the majority of our mortgage payments went towards paying down the loan principal and so we have that $161,200, plus our initial downpayment of $88,000, built up in home equity. We can’t forget about that so-called forced savings.
Finally, we should include another expense – $20,000 in realtor fees after the sale of our house.
By my count, if we sell the house for $524,000, pay the realtor fees of $20,000, and pay off the remaining mortgage of $170,000, we’ll end up with about $334,000.
In the rent-and-invest-the-difference scenario, we’d end up with about $335,000.
Related: Is Renting Throwing Money Away?
In other words, in both the buying and renting scenarios our starting position was $88,000 in 2011, plus another $40,000 of capital invested between 2012 and 2013. Our ending position in 2022 will be around $335,000 either way.
I’d say it’s pretty clear the difference is negligible between the two outcomes, and most likely leans towards buying for some of the intangible benefits of home ownership.
Home ownership has been a clear winner for many Canadians over the past decade or longer, particularly for those living in BC and Ontario. For some, it has been like winning the real estate lottery.
But for homeowners living in Alberta, Saskatchewan, or in Atlantic Canada, the math isn’t always as favourable. Home prices can stagnate for many years, and phantom costs eat into your returns over time.
Was my house a lousy investment? After a closer look at the numbers it hasn’t been that bad.
More importantly, I don’t actually consider my primary residence to be an investment. It’s a lifestyle decision, more than anything.
We didn’t win the real estate lottery, but we spent 11 years living in a house we loved and we’re leaving it richer in both wealth and memories. That’s good enough for me.