The Investment Scientist

How to lose money on your own house

Posted on: February 23, 2013

house for sale

House for sale

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:

  1. Buying a glamorous house to show off.
  2. Buying a bigger house than your friends to impress them.
  3. Buying at the top of the market since everybody else is buying.
  4. 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.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

3 Responses to "How to lose money on your own house"

Interesting. I wouldn’t be surprised if his kids are saddled with college debt. The difference of even $100,000 in home price can go a long way towards paying for the kids’ college. Buying “…to show off” costs more than people realize.

how could the house value go down in DC? It could be the case if your client bought it in Detroit.

He bought it in Westbury NY, about an hour drive from NYC.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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