It’s Money Mondays, and today I thought I’d weigh in with my experience in the “home ownership” vs. “renting” debate with my story. You see, I’ve been a homeowner with a mortgage since a few months after I turned 20 years old. I’m using “homeowner” a bit loosely here, since my first “home” was actually a condo, but I did own it. I wanted to walk you through my decision process at the time, and show you how it worked out for me.
In My Teens – Deciding To Buy, Not Rent
As I was working my way through my bachelors degree by working full time and going to school full time, I had a very strong desire to be completely independent. I had been working at a grocery store as a cashier/behind the customer service desk for several years, and had some savings. I had also gotten a payout of a few thousand dollars for burning myself at a restaurant on their gravy, which for some reason was hot enough to burn the flesh off my hand (?). Luckily they were insured, and the insurance company offered me a few thousand dollars for my trouble.
I had been looking to move out for about a year, but had already started reading books on building wealth. So I knew that the path to wealth was paved with homeownership at the base – at least, based on the books I was reading at the time. This is back in the year 2000, so the books were all based on the experience of the market back in the 80’s and 90’s.
For those that didn’t live through those times, they were also a time of ups and downs in the housing market. During the 80’s there was a time that mortgage interest rates had hit double digits! When I was shopping for a place in 1999/2000, we were coming off a down period in condo prices here in Connecticut, although I don’t think I knew that at the time. I just knew that all the books I was reading on building wealth talked about owning your home, building equity, paying off the mortgage, and living debt free. I thought that sounded pretty good, so I didn’t want to “throw my money away” by renting.
Side note – that doesn’t mean that I currently think renters are throwing their money away. Remember, I was a teenager at the time, and I hadn’t experienced a period of home price depression like in the Great Recession. All my knowledge came from books – and the books said home ownership was the way to go. Now my feelings are much more nuanced, and I know there are lots of times home ownership doesn’t make sense.
I started to seriously look around for apartments at 19, but everything I found was expensive – and I was still hesitant to throw my money away by renting. Then, as I approached 20, I decided to start looking at condos. They were affordable to me, with a monthly payment that was about the same as the apartments I was looking at (despite the 8.375% interest!). I decided to buy the second condo I looked at, which had been built in 1988. That meant it was only 12 years old, and unlikely to need major repairs or upkeep. It was a three bedroom, one and a half bath with a washer, dryer, and 1300 square feet. It came with a one car garage and a small storage space. I loved it so much I hugged the walls when I went in to look at it. Protip – that’s not a good strategy.
I had a solid (albeit small) income from that full time job, in addition to thousands of dollars in savings for the down payment. I also had a great credit score, from having gotten a credit card I used solely for gas and paid off every month. The condo was only $89k, and I think I put down 10% (hard to remember now, I’m getting old). And yes, I had that 8.375% interest rate in addition to PMI to pay. But it was mine.
And it was my soon-to-be-husbands as well. My husband and I met in high school, when I was a cashier and he worked in the meat department of the same grocery store. He had been renting an apartment with friends, but had to move back in with his parents when they decided to move on. So he helped with the mortgage payment, since he spent a ton of time at the condo. We were married a year later, and he officially moved in and paid half of all the expenses.
A few years into the mortgage, I decided to refinance because rates had dropped. The value of the condo had also gone up significantly, which meant I could get rid of that PMI at the same time. The mortgage payment dropped like a rock after the refinance, and my income had gone up slightly. So the payment was more than affordable, although I still dreaded “bill paying day”, when I would sit down with my checkbook and pay all the bills. I was so happy when automatic payments were developed, and I could stop with all the check writing. Nothing was more depressing than sitting down and watching my paycheck vanish, check by check.
Frankly, my only financial goal at the time was to break even. I figured that if I could just sell it for the same amount I bought it for, even if it never rose in price a dime, I would come out ahead of renting. I would have to pay $600-$800 a month to rent a place that was smaller than the condo, and I wouldn’t get any of that back when I moved out. Since I was definitely staying in the same location at least several years, to finish my bachelors degree, I thought this was a good idea.
Of course, I didn’t know about the upcoming Great Recession and how housing prices could go down through the floor. Teenagers don’t think about those kinds of things.
How I Made $65 Thousand In My Early 20’s
The short version is that I just lived in the condo for five years, and the housing market took off.
I honestly didn’t pay attention to the real estate market after I bought the condo, because I was too busy living my life. As I mentioned, a year after I moved in I got married. Then a few years later I had finished college, and my oldest son was born. I got my job in IT and started to earn more money. Eventually, the condo payment became a very small portion of my overall monthly income.
But the condo started to feel smaller once we had three people living there, including a baby/toddler with all his gear. The one car garage was becoming annoying, since we were using it as storage and couldn’t actually park the cars there. In the winter, this was especially frustrating, since we’d have to spend quite a bit of time cleaning the snow off our cars. And then there was the lack of outdoor space for the little guy. Our condo complex didn’t really have any outdoors to speak of, so we were stuck inside unless we wanted to drive to a park. It was time to start looking at getting a house.
When we started house shopping, it amazed me how much the market had changed in the last five years. The condo, which I had bought for $89,500 back in 2000, was now worth $154,000. Of course, houses were more expensive too. We spent months looking at dozens of houses, many of which were way overpriced and some of which were half remodeled. After months of looking, we found the house we currently live in.
This house met all our criteria at the time. At 2,200 square feet, four bedrooms, and two and a half baths, it would be large enough to both hold our current family and expand to more kids as they came along (which they have-we have three kids now). But it wasn’t a new McMansion (which I hate) and it wasn’t ridiculously big. On an acre and a half of land, there was plenty of room for a garden, and a play area for the kids. It had a two car garage, along with an unfinished basement for storage. It also had plenty of privacy, and you couldn’t see the neighbors through the trees.
It also looked ugly – lacking curb appeal was why it was still on the market at the time. In 2005 the market was red hot, with houses selling very quickly at outrageous prices. There was peeling paint, three different kinds of wood siding, and ugly carpet/wallpaper. The driveway was cracked and the front walkway looked terrible. We were looking at houses in November, so all the trees had no leaves and everything looked dead.
We could see beyond the ugliness and saw that the house was a great one. The owner was a “handyman” (notice the quotes here) that had partially remodeled the house, so parts of it were updated. We knew that the remaining cosmetic things that the house needed could be done over several years-there was nothing urgent that needed to be repaired or replaced. So we put in an offer, which was accepted.
Then we put the condo on the market, and it sold the first day it was on the market for the full asking price. Wow. Red hot market is right.
Moving on Fire! (Not FIRE)
We closed on both sales in January of 2006. We had a fun incident where the moving truck we had rented caught on fire – that was a good time – but luckily it was empty at the time. It was one of those U-Haul type deals, which we were using to ferry our stuff from the storage unit we had put everything in(free for the first month, and we only used it for a few days!) into the house. Luckily we got the fire department to put out the fire, got a new rental, and finished the move.
So there we were, in 2006 when I was 25 years old, with a brand new (to us-it had been built in 1968) house. We still live in this same house now, eleven plus years later. It’s needed plenty of work during that time, and there’s still a lot of remodeling we want to do. We’ve used the “slow and steady wins the race” methodology of updating the home, making incremental changes over time to improve the house. Of course, if something breaks, we need to fix it, but most of the updates we want to make are cosmetic. The condo sale enabled us to put 20% down on this house, so we never had to pay PMI (private mortgage insurance).
My oldest son was telling me just the other day how happy he is that we live in this house. It has a lovely screened in porch that overlooks the woods in our backyard. There’s a playscape for little ones, which the two year old now enjoys, where you can play and slide down a slide. We have a beautiful weeping cherry tree, plenty of storage, and a garage for the cars. There’s enough space to be comfortable, but not so much space that we don’t see each other. In fact, we hang out as a family in the living room pretty constantly.
Financially, was this a good decision? Not at this point in time, no. I assume some time in the future there will be another housing boom, at which time the value will go up. It went down during the housing crash, of course, but it’s slowly risen back up since that time. In my net worth statements I just keep the value at what I bought it for eleven years ago. I just checked Zillow this morning, and it says that the house is worth about $15k more than I payed for it. But since I don’t plan to sell – possibly ever – it really doesn’t matter to me what the house is worth.
The mortgage I currently have outstanding on the house, which is a 15 year now (with only eleven years left to go), is a little over 50% of the value of the house. So I actually own about 45% of the house right now, and I’m on track to get it completely paid off before I’m 40. This is without moving to a smaller house, or selling investments – it’s just the power of a goal combined with a fifteen year mortgage.
Was This A Good Idea? Can You Do It Too?
Good questions. This obviously worked out very well for me. Buying the condo instead of renting gave me a down payment on a wonderful house that my family can live in forever. But was this really a smart idea?
Like a good lawyer, I will advise you – IT DEPENDS.
I’m will happily confess that this situation was entirely the result of luck, not skill, in the real estate market. When I was buying it just happened to be coming off a down market in condos. We also then happened to enter the biggest run up in housing prices ever, resulting in a housing bubble that burst AFTER I sold.
My brother tried to follow in my footsteps by buying a condo, which he lived in for about the same amount of time I lived in mine. He then sold it to buy a house (bigger, fancier, and more expensive than mine) just a few years ago. And he lost money on that condo, selling it for less than he bought it for.
What about the person that bought my condo from me eleven years ago? I looked it up on Zillow just today. Remember, the condo was only 12 year old when I bought it in 2000. Now in 2017 it would be approaching 30 years old.
- $101,000 – 1996 purchase price (this is the person I bought the condo from)
- $89,900 – 2000 purchase price (when I bought the condo)
- $154,000 – 2006 purchase price (when I sold the condo)
- $125,000 – Current value according to Zillow
So the person I sold the condo to is sitting, eleven years later, with a condo worth about $30k less than they paid for it. That’s around a 20% loss. The price looks to have crashed in 2011 and stayed down there for the last six years. In fact, there’s a forclosure in the same complex right now that looks to be selling for $102k.
Then there’s the cost involved in this house. Once you take into account all the improvements and repairs we’ve made in the last eleven years, we’ve made nothing. Since I’m not planning on selling, and since we’ve paid off so much of the mortgage, it really doesn’t matter to me. But financially, it’s not been the best decision.
What if I had rented all these years, though? Then I would have no home equity, instead of over $150k in equity. If I wanted to sell and downsize, I could buy a smaller home – or my old condo – for cash today. My current payment is around the same as it would cost to rent a similar house, and once the home is paid for, all I need to pay is taxes every month. The cost of the taxes is less than renting an efficiency apartment where I live.
It makes no sense to make your first home purchase on the upswing of a bubble. You need to look at past prices to see if you’re getting a deal-or getting hosed. Buying only makes sense if you’re going to stay in an area long enough where you can wait out a downswing in home prices. It’s not the automatic path to wealth, as people used to think. But it can work out in your favor if you play the game for the long run, and buy smart.
What’s your home buying – or renting – story? Do you think I made a smart decision, or just got lucky? My vote – I think I got lucky. I could easily have bought at the peak and not a valley. Let me know in the comments!
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