The True Cost of Homeownership

My Millennial money tips this month focus on freezing your eggs, tax-advantaged investments, and the true cost of homeownership

Ultimately, the true cost of homeownership is trivial, right?

*Editor’s Note: I originally published this article in my Millennial finance newsletter, which you also can get twice each month (for free) by adding your name here*

---

Details about the costs are secondary to such a unique opportunity to grow your wealth, no? A home is an investment, we regularly hear.

But these same claims often miss or leave out a few important caveats.

Honest Math is a small Kansas company that created a free online retirement simulator for do-it-yourself investors. As part of the educational content they share, Honest Math recently posted a graphic on Twitter about the true cost of homeownership. The information was in response to the following Twitter boast:

“Our real estate agent is selling their home for $580,000.

They paid $355,000 for it back in 2018.

They will pay 0% capital gains tax on that $225,000 gain.

Because… real estate.”

Honest Math pointed out that the post may have omitted a significant portion of the actual profit calculation.

Honest Math on the True Cost of Homeownership

The real estate agent’s math suggests that your homeownership profit equals your sales price minus the purchase price. What about everything that happens in between those two events, though?

Honest Math instead inserted these additional costs into the equation:

“Closing costs, commissions, taxes, interest, utilities, maintenance, repairs, improvements, furnishings, insurance, HOA fees, Petey chewed through the fence to eat Dale’s tulips, call Dale, buy tulips, the Cooks’ lawn is so green, buy fertilizer, run sprinklers, water bill doubles, where’s Petey, have you seen Petey…”

Their joke highlights the trouble with calculating a return on your down payment dollars. An almost countless number of personal events — with financial implications — occur during the years you spend in a house.

Is the True Cost of Homeownership Not Investing More?

We often forget that one alternative to building home equity can be investment growth. So allow me to turn to Katie Gatti Tassin for a truncated example of what this might look like. (You can find the full version here if you’re interested in more details.) Here’s Katie:

“Let’s say you buy a $250,000 home, which means your 20% down payment would set you back $50,000. In Dallas, a $200,000 mortgage (plus property taxes and insurance) would cost $1,381/mo.”

“…The mortgage described above ($200,000 on a 30-year fixed, 3% rate) actually ends up costing $303,554.90 over the life of the mortgage. That means if you were to fully pay off this $250,000 home, in the end, the loan ($200,000) and down payment ($50,000) actually equal $350,000.

Even if the taxes and insurance never went up on the property, if you were to pay that same $530/mo. in taxes and insurance over this hypothetical 30-year period (in order to pay off the house), that tacks on another (are you ready for this?) approx. $190,000.

So the true cost of this $250,000 home over 30 years is $547,160.”

---

What if you invested that $50,000 down payment instead?

By comparison, Katie says, “Let’s say your rent is $1,381.

…Even if you never added another dime, a 7% rate of return (which is a safer assumption than a real estate market boom) would produce $380,000 of cold, hard (invested) cash, with which you can do whatever you want (up to and including buying a house outright).

[So you] spend about $497,160 over 30 years on rent, but have $380,000 in an investment account. …And if you rent for, say, just $1,000 per month (instead of $1,381) and invest the $381 difference, now you end up with $826,174 in your investment account and have only spent $360,000 on rent.”

Another one of my favorite personal finance writers, Ben Carlson, concludes, “Add it all up and I don’t think there is a single person in America who can confidently state what the return is on their home.”

The homeownership profit calculation can seem straightforward. But the true cost doesn’t fit so neatly in a 140-character post.

---

The Millennial Finance Newsletter: Feb. 7, 2024

For your days ahead: 3 perspectives, 2 articles, and 1 idea from me.

​Three Perspectives

1 / A fun tool for finding a city & house that fit your budget.

2 / Freezing your eggs can have hidden financial implications.

3 / The true cost of home ownership, in graphic form. (editor’s note: see the post discussed above!)

​Two Articles

1 / How much can you contribute to tax-advantaged accounts in 2024? Here’s a cheat sheet.

2 / You may be eligible to get a 401(k) match from your employer for making student loan payments.

​One Idea From Me

Since I founded my firm in 2017, I’ve met several financial advisors around Washington, D.C. who do great, unheralded work for a wide variety of clients. So each January, I like to highlight them and their companies. If you’re interested in working with a financial advisor or know someone who is, you may want to start with these fine folks:

1 / You can read the full list & my perspective on finding a financial advisor in The 10 Best Financial Advisors in Washington, DC (2024 Update)

---

Your Questions About the True Cost of Homeownership

I hope these articles help! Please feel free to send me an e-mail at kevin@illumintfc.com with any follow-up questions. You also can subscribe to my newsletter here to learn more about how you can turn your money into memories with your family. I typically send the newsletter twice each month.

---

Recommended Money Reads for Millennials

If you liked this article, you may also want to check out:

• Can a Simple Investing Strategy Work?
• Turning Your 529 Plan into a Roth IRA

---

About Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennials like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to free personal finance tips written specifically for Millennial parents. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your kids. And then when you’re ready, please send me your thoughts & questions!