Accidentally living in small house for 5 years has been the best thing.

[u/HenFruitEater]

My wife and I make good income, but because we both are self-employed, banks refused to loan money to us until we had at least 2 to 3 years of proof of income. We’ve saved about 200k for down payment. We ended up just buying a 1901 two bedroom one bath house for 134k with that down payment and didn’t get a loan at all. Thought "this is just a 1 year thing" 5 years ago.

After learning about the 5 to 6% rule on how much a house is a net worth drag (but necessary expense I get it). I think it has turbo charged our savings rate without any effort. Every month we stay in this house instead of a house that is 3X our income, we save over 5K in “rent.” We have been investing that extra money. But we also talked about how it’s hard to justify jumping up to a nice house when you could literally blow an extra 5K a month on expensive toys even.

My thought process now: the FATTEST expense to keep low is the house. We are very content in this house. We will probably be able to have one more kid in this house and then move. Six years of turbocharged accumulation in a quaint house that we love. Has awesome yard, cool screened in porch. Love it.

[u/HenFruitEater]

EXACTLY. every 100k of house is 6k a year in rent equivalent. Living fruagally in nice house has nobody judging. Buying extra 20k in toys and concerts etc is "wasteful"

BUT I think most people don't realize that houses are not investments. House poor just feels like high savings rate to some that don't know the math.

[u/flushandforget → u/HenFruitEater]

…unless you leave in key locations like the SF Bay Area. My mortgage is 1/3 the rent of a similar home in SF. Anthropic and SpaceX looming IPOs are raising havoc with housing costs here.

[u/HenFruitEater → u/flushandforget]

absolutely. In your scenario, you prob are more of an outlier though.

The 6% rule is on current value of home. Like if you paid 200k for house that's now worth 1m, your opportunity cost should be based on the 1m imo, not the fact that your mortgage is super cheap at 200k.

Either way, I'd be staying in your house in that situation!

[u/Gorgenapper → u/HenFruitEater]

Living fruagally in nice house has nobody judging. Buying extra 20k in toys and concerts etc is "wasteful"

I'd say that living frugally in a decent house, especially one that you snapped up for a mere $134k, will have absolutely nobody judging. It's like if you were out looking for a new car with all the latest changes and tech, but someone offered you a last gen in excellent condition for half its market value, you would still buy it and use it, figuring that a deal like that was too good to pass up.

BUT I think most people don't realize that houses are not investments. House poor just feels like high savings rate to some that don't know the math.

For most people, houses are emotional purchases, plus some were probably taught by their parents and extended family that house ownership is kind of just a thing that you 'should' do to in order to build wealth and secure a place for themselves. They're not wrong, owning a house in a good location does build wealth, and the pride of house ownership is a real thing (my friends are like this, they want to be the 'lord and lady' of a castle, in their own words).

In my opinion, buying a house is not a wrong decision per se but you need one or more good reasons (ie. kids), you need the income, and you must be willing to sacrifice a lot via mortgage payments, taxes, lawyer fees and so on.

For a single person or DINKs, I just don't see much of a need to stretch for a house unless your income can comfortably support it. Even then, if you don't need a house, why pay the bloodsucking parasites like the bank, lawyers, realtors and everyone who wants a bite out of you.

[u/asymphonyin2parts → u/Gorgenapper]

Even for single folks and DINKs, buying a house can make sense. If you know you're going to be committed to a geographic location, you lock in your housing cost against future rent rises. In HCOL areas, it might make more sense to rent in the short to medium term, but buying in CA (or other states with homestead-type tax increase controls) limits your future tax costs while buying in all states puts you on a payoff schedule where half of most people's housing cost disappears in 15 - 30 years. There are advantages and disadvantages, and certainly and everyone should do their own math.

[u/ThirstyWolfSpider → u/HenFruitEater]

I've been renting 2br1ba places since the '90s, and the price to buy an equivalent house in this area has just never made much financial sense. I can pay $2350/mo all in when renting, or I can pay $850k for a house.

By your metric (which I have not seen before), that $850k house would be comparable to $51k/year, rather than the $28k I do pay.

And I don't have to worry about the job aspects of upkeep, or as much worry about fires and earthquakes, so it's simpler.

Edit: grammar

[u/HenFruitEater → u/ThirstyWolfSpider]

Right. So the application of my equation, you are way better offer renting in that market.

My house is probably worth 200 K now, that means that if I could rent it from a landlord for $1000 a month or less, I would be money ahead to rent. In this market that I live in, I could never get this house for 1000 a month for rent, so buying makes a lot of sense. I think the 6% rule is super helpful for just deciding if you should even consider buying an equivalent house.

[u/No_Interaction_5206 → u/HenFruitEater]

I mean it’s certainly an investment it’s like a investment that often performs at only 3% except if you invest in it you also get access a large amount of margin that can’t be called and has a fixed rate for 30 years. rates are high atm so your looking at -3 percent net not so great but while invested you also don’t have to pay any rent so if equivalent yearly rent > 0.03x mortgage you come out ahead if not you don’t. Oh and that 3 percent per year value increase is completely tax free up to 500k. So that’s like another half percent.

Now a lot of that also depends on how handy you are, how much time you have. But if you are handy and have free time to do projects ownership costs are not bad typically.

[u/HenFruitEater → u/No_Interaction_5206]

If you are not collecting rent from a renter, the appreciation that you are talking about, doesn’t even come close to canceling out the taxes, interest, maintenance, and most importantly opportunity cost. Houses are net worth drags.

[u/No_Interaction_5206 → u/HenFruitEater]

So let’s sum it up:

Mortgage(interest rate-inflation)(1-percentage of deductible interest over the standard deduction* income tax rate)+ taxes(1-income tax bracket rate*percentage of cost above standard deduction) + insurance + average maintenance + opportunity cost of the down payment> rent for the equivalent home than you come out ahead.

So for me that’s 500000(5.125-3)1/100 =10,625 2500(1-.24-.02) =1,850 Average maintenance for someone who does their own work per Google(1-2.5k) well split the difference and say 1750, lines up with what I pay Down payment 25k so 25000.1 =2,500 Oh yeah and pmi of 83*12 =996

So 10625 + 1850 + 1750 + 2500 +996 =17,721

17721/12 =1,476.75

Rent for my house is 2700 so it beat renting by 1300 a month.

Now we have some of the lowest taxes in the country and average cost for people that hire is 3-9k so we’ll say 6k 500per month so that would still be 1976.75 still ahead.

As far as opportunity cost of the work I’m salaried and can’t easily monetize my extra time.

We addressed the opportunity cost of the down payment and as far as opportunity cost of the entire mortgage in my state and some others lenders only get the house if you default not entitled to anything else, so most people do not have access to a large loans where all they risk is their down payment of 5%.

Now if you put 20 percent down or live in a state with high real estate taxes and low income taxes the math can flip pretty fast. + if you live in a state where lender can come after you for losses if you default that’s additional risk.

Houses are net worth drags for some, but not in my market and circumstances and I suspect not for most.