image courtesy of lovethispic.com
image courtesy of lovethispic.com
We recently faced the dilemma of whether to purchase another home so that my parents can live in one of them and we another. We COULD afford a 2nd home mortgage/expenses, but I suspected it was NOT a numerically sound choice.
Since John places a high premium on quality of life, living space, privacy, and our daughter having pool in the backyard, I decided to crunch some numbers to see how much these “desires and wants” will cost us: if we were to purchase a second home NOW instead of putting the same amount money in post tax and pre-tax retirement savings (mainly in stocks.)

time is more valuable than moeny
Time value of $ combined with opportunity costs, consider both.
The following table compares 3 scenarios:
  1. The first row represents the seller’s current terms after backing down from initially asking 365k, 6% interest rate on owner carry back loan.
  2. The 2nd row represents my best and final offer, purchasing @ 285k for 285k value.
  3. The 3rd row represents purchasing @ 285k for 325k value.

 

terms/ value cash into  2nd home for 24 mos 24 month expenses + 40k down payment equity gained in 24 months net gain in 24 months if buying net gain in 24 months if invested in stocks @ 8% return instead difference
between investing in stocks over buying 2nd home
price 340k, 40k down, 4.5% -60051.6 -100051.6 $49,901.82 -50149.78 16648.58624 66798.36624
price & value 285k, 40k down, 3% -48360.48 -88360.48 50385 -37975.48 14703.18387 52678.66387
325k value, bought @ 285k, 40k down, 3% -48360.48 -88360.48 90,385.81 2025.33 14703.18387 12677.85387

3rd row is BEST case scenario
285k purchase price (with presumed 325k value)
40k down
3% interest
2 year refi
as is condition
AND if indeed our first home is rented out for 12k/mo for 24 mos= 28.8k
we can possibly come out ahead buying vs. investing this money.
But if we don’t count rental income at all from our first home, yet still pay for utilities/housing expenses of 1st home, and 2nd home is worth exactly what we bought it for (285k for 285k value), we will be missing 53k if we buy this home instead of invest in stocks (long term.)

Where to put my $
This is the impact of putting $100 Today into various priorities (it’s worth 2k in a matched 401k in 30 years; worth 1k in Roth IRA, worth $720 if paid fed student loans, worth $370 if paid lower interest rate refinanced student loans, $0 if purchased clothes.) Without running the # on this specific scenario, I know that buying this house would get me a return somewhere between paying down fed vs. buying clothes after adjustment for maintenance costs/ property taxes/insurance, etc. & inflation. Not to mention the potential headache of being a landlord.

This does not EVEN account for additional factors:
  1. Maxing out ROTH space NOW is much cheaper than when my income quadruples or quintuples in 5 years.
  2. Time value of money and compounding interest. 8-10% long term growth in stock vs. 1-2% appreciation in houses.
  3. Major repairs or even small maintenance costs associated with a 3000 sq foot home plus a lap swimming pool.
  4. Last but not least, the seller is convinced that their home is worth 345k when my realtor estimated no more than 325-330k. The highest price I’m willing to pay is 285k.

 

The numbers are simply too convincing for me to want to purchase another home, or at least THIS particular home.


 

  • Have you ever been faced the dilemma of purchase and indulge vs. save and invest?
  • Which did you choose, how did you justify your choice?
  • Did you have any smart ways of getting more growth out of real estate other than stumbling on an amazing deal (ie. purchasing WELL below the value of the home)?
  • Any success story to share when you came out ahead buying homes rather than investing?

 

Comment below!

Numbers speak louder than desires…
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