If you’ve read the most recent net worth update, you might have noticed I dropped a bomb at the end of the introduction.
The Money Wizard bought a house? Aka the guy who was so adamantly against home ownership for the first 26 years of his life? That guy bought a house??
Next you’ll tell me he’s financing a luxury SUV. Or that Warren Buffett abandoned buy and hold to become a day trader, or that Donald Trump ditched his reality TV shows to run for presidency. Hey wait a minute…
But alas, the rumors are true… sort of.
Warming up to the idea of a house
My roots in anti-homeownership began in Denver.
Wait, that’s not true.
As I write this, I’m realizing the seeds of my home ownership opinions were planted long before Denver, back in my early years as a kid living in Texas. A day dreaming teenager living in The Lone Star State. Please don’t look up my high school yearbook photos…
Texans are proud people. One particular axiom the Texans are especially proud about – Everything’s Bigger in Texas. It’s true for everything from their highway overpasses to their state fair corn dogs, and especially, their houses.
Even as a kid, this always struck me as odd. The rows of McMansions, always complete with 4 bedrooms too many and inhabited by working professionals living paycheck to paycheck on 6 figure salaries, just seemed like a huge waste of money to me.
Texas has a lot of land, which means cheap real estate. Instead of taking advantage of this, Texans just engaged in a sort of silent competition to see who could build the biggest house on the biggest plot of land. I wanted no part of it.
Shortly after graduation, I moved to Denver. For the first time in my life, I was faced with the rent vs. buy decision.
While Denver-ians/ites/however you say it had a much more balanced approach to housing, they also lived in a beautiful mountain playground. So while their houses appeared much more reasonable, the price of real estate meant their houses were still crazy expensive.
I ran the numbers and realized I could save a ton money by passing on this “rite of passage.” So I did. It was the launching point to a lifestyle of saving and a huge net worth. I regret nothing.
Then, two years ago, I moved to Minnesota’s Twin Cities.
Maybe it’s the just the mid-west humility, but people here take an even more reasonable approach to housing. And the pounding winters keep the prices down. Hey, even this report just ranked Minneapolis as one of the 10 best places for millennials to live.
My rent vs. buy calculation wasn’t so clear cut anymore. I found myself justifying my decision to rent with intangibles, like flexibility and simplicity, rather than cold hard cash. For an analytical guy obsessed with optimizing his money, this just didn’t sit right.
I started softening my stance on houses. You could see this in my writing; I even wrote a post about the benefits of home ownership! Although, not without a huge rant against houses taking up the whole first half of the article. Whoops.
The Money Wizard Goes House Shopping
So I ran the rent vs. buy numbers again, using my article about the hidden costs of home ownership as my guide. I included:
- Mortgage (principle + interest at a 4% interest rate)
- Insurance (about $1,000 per year)
- Taxes (1.5% of the home’s value per year)
- Maintenance (1-2% of the home’s value per year)
And realized something pretty encouraging. We could buy a house for around $175,000, and our monthly out of pocket expenses would be almost identical to our current rent payments.
In other words, $107 less per month than our current monthly rent ($1,300). And with that, the girlfriend and I started looking at not just houseboats, but houses too!
As a sort of cheap quasi-date night, we soon found ourselves viewing house after house over a period of about a year and a half. We still weren’t completely sold on the commitment, but we figured it’d be good market homework in case we ever wanted to pull the trigger.
We set up the game plan. A diligent saver in her own right, Lady Money Wizard had enough built up to cover a 20% down payment on a $175,000 house. Meanwhile, I still had dreams of diversifying the portfolio with a rental property or two. Our worry was whether lenders would loan me a couple hundred thousand dollars for investment purposes, if I already had a big home mortgage in my name.
The solution? Lady Money Wizard would take out the loan in her name and cover the downpayment. After closing, she’d be the “landlord” while we split all ongoing home costs (mortgage, taxes, maintenance, etc.) 50/50, just like we currently split rent and utilities.
Oooo, just wait until those Yahoo finance readers get a hold of that one! But hey, teamwork makes the dream work!
As a higher wage earner, I could continue saving like a maniac and eventually purchase an investment property or two in my name. When we do get married and our finances merge, we’ll hopefully have a sort of mini real estate empire around the Twin Cities.
Boom, power couple. Take that, Kim and Kanye.
The House “We” Bought
About a year and a half into our search, we found something that finally checked all our boxes:
- 1,200 square feet: small enough that heating/cooling and ongoing maintenance costs won’t send us to the poor house.
- A location close to both our jobs, so we don’t blow ridiculous time/money on soul crushing commutes.
- Near downtown, because we’re millennials yo!
- Not located in a warzone, because I don’t want to dodge bullets while getting the mail.
- A two car garage. I’ve parked outside when it’s snowing and 30 below. Never again.
- Some sort of fence-able backyard for The Money Pup.
- The old historic charm that Lady Money Wizard loves, and I think is pretty neat too, I guess.
- A dedicated office with a door, so I can close out the world and keep delivering the goods to you awesome readers!
We found all this in a quaint, early 1900s 3 bed/2 bath home, packed with that classic Twin Cities character, and located near an up and coming neighborhood. The old age may be a turnoff for some, but hey, at least I can avoid paying for the ridiculous walk-in closets and explosion of square footage that ruined houses in the past 60 years.
Even still, there was just one small problem: the house was $225,000.
A full $50,000 over budget!
We filed it away under “that’s too bad” and went on with our lives.
Two weeks later, the price dropped a couple thousand dollars. We filed it away under “interesting.”
Two weeks after that, the price dropped to $200,000. Now this is entering the “so you’re telling me there’s a chance…” category.
Using a skill I crafted from years of Craigslist negotiations, I went for my signature move: THE LOWBALL.
Ignoring our realtor, who’s compensation structure guarantees he’s only out to close a deal and not to actually get us a good price, we threw out an offer of $175,000. In a market where homes were regularly selling above asking price.
“You better be afraid of insulting the seller,” said our realtor and everyone else we told about the deal.
The seller wasn’t insulted, and they countered at $187,500. We went back and forth before they sent a “final offer” of $185,000. We countered with a final offer of $180,000.
AND THEY ACCEPTED.
Oh lawd what have I done…
How This Will Impact My Finances
Using my handy dandy spreadsheet adapted from my post about analyzing rental property, the finances shake out like so:
We put 20% down on a $180,000 purchase price. And by we, I mean she covered the entire $36,000 down payment. Did I luck out with my match or what??
We went with a 30-year term at a fixed 3.75% interest rate, which leaves:
- A monthly mortgage payment of $667.
- Home owner’s insurance premium of $90 a month.
- Property taxes of $230 a month.
- Utilities of about $200 per month, based on historic records for the property.
- A maintenance allowance of $300 per month, or about 2% of the home’s value per year. Most guidelines say maintenance runs about 1% of the home’s value per year, but since the house is literally 100 years old, we’re budgeting for double that.
Total monthly expenses: $1,487.
We currently pay $1,300 in apartment rent and another $100 in monthly utilities. So all in, this should be a $87 increase in monthly payments.
All things considered, not bad!
Since part of that $1,487 covers principle reduction/equity building, and we should also have some of those legendary tax breaks that home owners have been trying to convince me of for years, we should actually come out ahead!
Fending Off The Money Pit
Obviously, the big wild card will be those maintenance expenses.
To help with that guessing game, we hired an inspector for a non-refundable $800. (Did I mention EVERYTHING related to buying a house is expensive?)
The inspection went pretty well, and I exhaled for the first time in days. They say the foundation and basement are solid, but we may be looking at some front-loaded maintenance costs.
According to the inspectors, the furnace needs servicing, the kitchen faucet needs replacing, the dryer needs repair, we’ll need to install gutters, the water heater is nearing the end of its life cycle, and the $6,000 roof probably only has 3-5 years left. Whew…
A little intimidating, but back of the envelope estimates say that for the most part, this should be covered by our budgeted $3,500+ of yearly maintenance. That said, I’d be lying if I didn’t admit I’m silently sweating bullets.
And maybe even more importantly, we’ll have to avoid using the house as an excuse to spend money. There may be a light kitchen remodel in our future (am I really saying that? I don’t even know who I am anymore!!) because oddly, there’s no dishwasher as it stands. We’ll have to approach that with a level head.
And like always, I’ll avoid the temptation to fill every nook and cranny with clutter. Or as its more politically correct friends like to label it, knick-knacks. Even still, it will be interesting to see how much the unavoidable new necessities add up (lawn mower, garden hoses, random furniture, etc.)
Like everything on this site, I’ll be meticulously tracking it all and sharing everything with you all along the way.
Welcome aboard the newest ride!