How to lose money on your own house
Posted February 23, 2013on:
Recently, a client called to tell me that he had finally got the big boulder off his back, and it was such a relief for him.
The “big boulder” he referred to was his big house, with a swimming pool and a tennis court. The house had been costing him $100k a year in property taxes and upkeep, more than 50% of my client’s retirement income. No wonder he called it a big boulder on his back.
He bought the house 25 years ago for $2.2mm, and he just sold it for $2.1mm. After all the costs associated with selling the house, he took home $2mm and change.
I did a back of the envelop calculation: he lost $200k in home value, and he spent $2.5mm in property taxes and upkeep. He is set back $2.7mm, and that is before taking into account the time value of money and lost opportunity cost.
If he had invested the $2.2mm in the S&P 500 25 years ago, do you know how much his portfolio would be worth? He would have over $11mm in his portfolio and he would have received all the dividend income along the way as well.
Now I don’t mean you should stop buying a comfortable roof for your family. What I am suggesting is that you should avoid these mistakes that many home buyers make:
- Buying a glamorous house to show off.
- Buying a bigger house than your friends to impress them.
- Buying at the top of the market since everybody else is buying.
- Ignoring the cost of property taxes and upkeep.
Some of the biggest financial holes I have seen are caused by people buying the wrong house at the wrong time.
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