Buy a Home, Save Money!
The first thing that most people think when buying a home is, "How much is it going to cost?" What many people fail to ask is, "How much am I going to save?" I know it might seem contradictory at first, but you can actually save quite a bit of money by buying a home.
No, I'm not talking about buying a home in a depressed market therefore saving what someone might have paid in a high market. I'm talking about saving money, lots of it, in the long term!
First let's see how a typical person thinks about saving money, I call this Disciplined Saving. A family earning $100,000 per year might be able to save $1,000 per month. After paying for housing (rent - approximately $2,000 per month), taxes, groceries, etc saving $1,000 per month on a $100,000 annual income will not be easy. Let's assume that someone were able to do this. To keep it simple, we will not adjust for inflation; include interest on savings and taxes paid on that interest.
At this rate, a family will save $12,000 in 1 year, $120,000 in 10 years and $360,000 in 30 years. Not bad huh? Yes, it does seem pretty good to me too. A disciplined person/family can do this and be able to save a substantial amount of money over a long period of time. If this is you, congratulations, you will do well. Unfortunately, with the cost of living continually rising, this feat is nearly impossible for many people.
If you're like most people who have difficulty saving money in this manner, then buying a home may be the alternative way to accomplish the same goal.
Now let's see how buying a house can help you achieve the same goal, I call this Forced Saving. For simplicity we'll use the same income levels and leave out inflation, interest paid and tax write-offs.
The same family earning $100,000 per year buys a home. The price of the home will have to be in the range where monthly expenses (mortgage and taxes) do not exceed $3,000 per month. Based on today's interest rate (5%), this family should be able to buy a $350,000 house. Monthly payments on this house at 5% interest rate are $1,500 (with 20% down payment). Add in real estate taxes, utilities and repairs and monthly expenses should fall well below the $3,000 per month limit.
So far, the most difficult challenge we have is to come up with the down payment ($70,000). The down payment will have to be saved using the Disciplined Saving method unless you acquired it in some other way (bonus, lottery or willed by a rich uncle). It's also possible to buy with a lower down payment, especially first time home buyers and take advantage of current $8,000 tax credits.
Ok, you buy the house, now what? All you have to do is just keep making your monthly mortgage payments, taxes and other upkeep of your home and the savings will happen on its own. Monthly housing expense will be a little higher than it was when you were renting which will leave less disposable income. The housing cost will serve as Forced Saving.
Here's why it works; on average real estate doubles every 10 years. While in the Disciplined Saving method you will see your savings grow, in the Forced Saving method it may not be so evident for a while. Let's be conservative and assume that your home's value will double its original value every 10 years. After 10 years, your home will be worth $700,000. In 20 years your home will be worth $1,050,000 and in 30 years, it will be worth $1,400,000.
Wow! That's $1,400,000! If you take away the original cost ($350,000), this leaves you with $1,050,000 in savings over the same 30 year period. That's approximately 3 times more savings than if you had put aside $1,000 per month (which we identified as being very difficult).
You're probably thinking, No Way! This is not possible! Don't you see what's happened with real estate? The real estate market cannot possibly continue to rise in this manner!
Yes, I know that the real estate market tanked in the past couple of years and what was gained seems to be lost again. While this may be somewhat true, it's not entirely true. Most people have short term memory and I'm talking about long term (30 years).
Looking back in the past 5 years, the price of most homes is lower today that it was 5 years ago. But looking back 10 years, the price of most homes is much higher today (2010) than it was in 2000. Going back even further, home prices in 2010 are significantly higher than they were in 1990 and even more so since 1980.
Don't believe me? Ask someone who bought their house in 1980; ask them what they paid for it. You will find that they paid $100,000 or less for a house that is easily valued at $400,000 or more today. That's 4 times greater!
You're also thinking that it's a lot easier for a $100,000 house to go up to $400,000 but it's not possible for a $350,000 to go up to $1,400,000. Really? Well go find a $1,400,000 dollar home and find out what it cost back in 1980. I'd be willing to bet that it was right around $350,000.
Do you want to use the Disciplined Saving method and put away $1,000 per month and in 30 years have $360,000 (plus compounded interest) in savings?
Or do you want to use the Forced Saving method to buy a home and in the same 30 years have $1,050,000 in savings?
It's your choice.
|Peter Z. Nikic
||Licensed Real Estate Broker
& Investor (NY)