One of the most important financial decisions that I ever made was buying a home. It’s not often in life that you make 6-figure (or more) purchases, so obviously decisions like these should not come lightly. Oftentimes, I hear new reports or see statistics that millennials aren’t buying into the white picket fence lifestyle ideal that previous generations associated with “making it” or the American Dream. Our generation is more often associated with a spare bedroom in the basement of our parents’ house than it is with houses of our own. And who can blame millennials for being anti-mortgage when we grew up during the “Great Recession” which was sparked, in large part, by irresponsible lending, especially in the mortgage arena?
For most of my adult life, I’ve had to hear my parents groan about being underwater on their mortgage. It took my parents years to be able to downsize after they became empty nesters when my brother and I went off to school because my father did not want to take a loss on the house. Thankfully, they were able to sell for a profit a year or so ago, but with this sort of drama playing out in front of my eyes (and the eyes of many within my generation) it should come as to surprise to anyone that millennials are somewhat skeptical of going into massive debt for a mortgage.
But all of this cynicism aside, not only was buying a home one of the most important financial decisions that I’ve ever made, it was one of the best as well. In my experience, owning property and a house feels a lot more like home than any rental that I ever lived in. The ownership aspect of the proposition plays a large role in that mentally.
Sure, owning, rather than renting, comes with a lot more stress as well. When my hot water heater broke last year, I had to pay $1000 bucks for a new one; when you rent, your landlord will typically take care of things like that. I have to worry about all sorts of upkeep so that the value of our property doesn’t erode. I pay a lot more attention to my neighbors and my relationship with them because we’re all in in for the long-term (or at least, much longer term than a 12-month lease).
This stress is worth it though. The freedom that comes along with ownership feels great. There’s a sense of security that it won’t be taken away from me (I once had a landlord sell a house I was renting, forcing my wife and I to leave sooner than we expected). The hopes and dreams that I have for my family’s future as I look around the fields, the forest, and the spare room, picturing gardens, and tree forts, and kids, are worth it. But do you know what else makes home ownership great? Knowing about all of the money I’m saving.
For years, during college and right after, I paid the landlord who owned the house/apartment I was living in rent. This meant that once a month, a significant chunk of change disappeared from my bank account…or at least, it felt that way.
After awhile, I got sick and tired of paying rent, knowing that if I had a mortgage, I would be essentially paying myself every month as I built up equity in what should be an appreciating asset over time rather than handing that money to someone else (and building their equity in return). This led to a lot of research about property values in my area and the local real estate market dynamics. After awhile I zeroed in on the part of town that I wanted to live in and decided to take the plunge, becoming a home owner instead of a renter.
Low interest rates played a major role in that decision. After we paid off all of our student loans, I wasn’t very interested in adding debt to my family’s balance sheet. We have a couple of car payments, but the principle of the loans isn’t very large and interest rates on the cars are less than 2%. A house in another situation entirely. Going hundreds of thousands of dollars into debt was scary. However, looking at rates less than 4%, I felt rather confident that my assets in the market would outpace my mortgage interest over the long-term, meaning that leveraging that debt made sense relative to draining our savings/investment accounts (something that I wasn’t interested in doing because it would totally disrupt all of my long-term plans regarding financial freedom via dividend income).
My Realtor informed my wife and I that in our local area, the breakeven with regard to cost effectiveness when owning versus renting was about 3 years. Your mileage will vary with regard to this timetable depending on where you live, how much typical costs are associated with rents, the interest rate that you receive on your loan, and how much cash you put on the down payment. We planned on staying at our current location long-term, so this three-year timetable sounded great to us.
By buying our home we’re saving hundreds of dollars per month relative to rents on comparable options. Even with the costs associated with maintenance and upkeep, we still come out significantly ahead of where we would have been renting on a yearly basis. That 3-year breakeven time period above is the time it takes you to make up for all of the added costs of buying a home (closing costs, attorney’s fees, Realtor fees, etc).
As previously mentioned, the research that I did on our local area, the population growth, industry, schools, etc, also leads me to believe that the value of our property will continue to appreciate moving forward. This is obviously speculative, but just looking at the Zestimate on Zillow (I didn’t feel like getting onto the MLS and doing a comprehensive market analysis, the value of our home has gone up ~14% since we purchased it only a few years back.
As many of you know, this is a website based around passive income and financial freedom. Well, paying off a mortgage goes a long way towards financial freedom. But what’s more, our home generates anywhere from $500-$1500 during most months of the year due to a combination of rental income from our basement and AirBnB guests staying in a spare room.
I guess this money isn’t completely passive, but it’s pretty close. There are a couple of costs and some work involved in the rentals; I have to clean the house before guests arrive (and continue to pay for the utilities like I would regardless because my wife and I live here with our dogs). There were a few extra fees meeting local ordinances with regard to short-term renters, but all in all, AirBnB has been a really positive experience for us.
We’ve met a lot of great people and even made friends who’ve turned into repeat guests. After hosting hundreds of strangers in our home, there have only been two incidences that were negative and neither of them were all that bad (I’d say they would qualify as inconveniences more than anything).
Something else that millennials are associated with is the side hustle. AirBnB is the best side hustle that I know. Our home not only provides us with comfort and shelter, but it makes these friendships possible. These friendships go a long way towards paying our bills, which frees up money for savings (investment).
So, in saying all of this, I hope that readers here who’ve totally disregarded the possibility of home ownership might reconsider. Obviously everyone’s financial situations are different, as is every local real estate market, so all I can do is speak for myself, but as I said in the intro, buying a home was/has been a great financial decision for me and my family.
When I have my portfolio manager hat on I view my home as an alternative asset within the broader view of my investment portfolio, but it’s obviously much more than that. Leveraging debt is always a risk, but at the end of the day, not only do I receive a respectable ROI on my home due to rental income, but it also saves me a meaningful amount of money relative to renting.