Sunday, February 10, 2019

How Much Does It Cost To Live In A Paid-For House?

How much does it cost to live in a house?

In my last posting, I mused that it costs me about $1000 a month to live in the house I live in.   But quantifying this is a little hard to do, even though I have been tracking expenses on Quickbooks for the last decade.  With a click of a mouse, I can generate a report that tells me to the penny what my housing expenses are.

But what are they?   For example, to get on our island, you have to pay a $6 toll, or pay $45 a year for a parking pass (I think it is $50 now).   Does that count as a living expense here?  After all, if I didn't live here, I wouldn't be paying it, right?

Or what about personal property taxes?   In some jurisdictions they would actually tax your sofa (I kid you not, back in the day, they did this in Virginia).   So if I moved to a no-personal-property-tax State, this would not be an expense I would be paying.  Here in Georgia, we only have (or had) personal property tax on cars - is that an automobile expense or a cost of living here?   Hard to tell.

The main categories are easy to figure out - property taxes, insurance, electric, water, sewer, trash - all broken out in monthly checks or credit card charges and logged neatly.   We also have our lot lease ($250 a year - not much!) and fire fee (nearly double that) which clearly are a cost of living here.

But what about "maintenance"?  This is where it gets tricky to determine and tricky to log.   I go to Lowes to buy a bunch of junk - half of it I don't need.   Paint to paint the bathroom.  Is that a housing expense or just a waste of money?  What about the plants for the front yard?   Or house plants?  Or furniture?   It gets a little tricky.   What about cleaning supplies and vacuum cleaner bags?  Arguably these are things I would buy in any event.

It is not an exact science, unless you can determine hard-and-fast rules for these things and itemize each receipt in Quickbooks, item by item, which would take forever to do.

There are other things that seem pretty straightforward - the pest control people (necessary in the South) and the HVAC contract.   And we have a guy mow the lawn when we are not home.   Those seem like legitimate expenses.  And I have included "maintenance" expenses from Lowes and Home Depot, except for "projects" which I have broken out separately.

Averaging the last six years' worth of expenses, I come up with $10,891.67 a year for housing expenses - an attractive $907.64 a month in costs.   But this is only because we have no mortgage and that raises some other thorny accounting issues.

Opportunity Cost arguments, as I noted before, are often specious when applied to consumer spending.  The real estate agent and the car dealer makes these arguments when trying to sell you more house or get you to lease a car - reasons alone why they should be suspect.  After all, when was the last time a real estate agent or a car dealer lied to you?   Oh, right, all the time.

The argument goes that you could "invest" that money and make lots of bucks in the stock market - in excess of what you were paying in interest on a mortgage or car loan.   However, this is a classic case of comparing apples to oranges.   Interest not paid is the safest "investment" you can make - safer than gold, bitcoin, stocks, and even government-backed bonds.   You can lose every penny you invest in stocks.  But a dollar in interest not paid is a guaranteed sure-thing.

So let's toss the "opportunity cost" arguments for the time being at least.  By not having a mortgage, I am saving over ten thousand dollars in annual interest payments, assuming I would be borrowing $400,000 at 4% interest, and the loan is fairly young.   I would have to consistently beat 4% in the stock market to make more money than this - it can be done, of course, just not consistently or reliably.

You can't compare investments with different rates of return and different risk factors.  It is apples and oranges.  If this comparison was indeed valid, then the most "sensible" investment would be ultra-high-yield absolute junk bonds or hugely speculative stock investments.   They might yield returns well into the double-digits - or lose every damn penny you have.   But if you take the "logic" of "opportunity cost" arguments to its ridiculous extreme, that's where it gets you.

And as we learned in 2008, leveraging yourself into debt to invest (which is what you are doing - borrowing money to invest) can go horribly wrong and leave you destitute and literally homeless.  Debt sucks.

But getting back to monthly home costs, as I note before, a house is just an expensive machine with a lot of parts that break about every 15 years.   Every so often, you have to pony up thousands of dollars to repair or rebuild things - something Condo owners don't understand, which results in them freaking out when a special assessment is due.   Roofs may only last 15 years, and ditto for air conditioners, hot water heaters, and home appliances.   Driveways crack and fall apart and need to be resurfaced or replaced.   Kitchens and Baths can become woefully outdated and need remodeling.  Plumbing and sewer lines can age and require replacement.  Electrical wiring can even age and electrical boxes can become outdated as well.

All of these things are expensive.   And these are just things you need to do to keep the house from falling down.  We're not even talking about add-ons you might want to plow money into - a swimming pool, a new addition, a screen room, a sun porch, a deck, a garage, a garden - and so on.  A house can be as much of a money pit as you want to make of it.  Oh, and ask me how I know this - Mr. Swimming Pool!   Oh, well, we had fun with it, at least.

Last year, we did a garage makeover - epoxy speckle paint on the floor, replacing the outdated and leaking plumbing, new washer and dryer, new sheetrock, lighting, wall treatments, cabinets - even a new garage door seal.  It didn't sound like much, but I logged every purchase and every expense and it came to over $8000.   Just to remodel a garage.  And that's not counting the two grand I threw at it a few years before by installing a split system air conditioner and insulating the garage door.

I do have a nice garage now - the envy of the neighborhood!   Well, not exactly, but a nice place to do laundry and work on cars or projects.  It is something we enjoy and something that had to be done (leaking plumbing and peeling paint were non-starters).   Maybe we could have done it for a few thousand less - but not for free.

This year, it is a new electrical panel.  Our Pacific-Electric panel is well-known to start house fires - what's not to like?   Eventually it would have to be replaced, just to sell the house.  A local electrician can replace it for about $1000, which is pretty reasonable.  I could do it for a little less, but not much less!

We had two trees taken down this year - at $1000 a tree.   Oh boy, does that add up!  The driveway is cracked and will have to be replaced.  The appliances, the roof, the hot water heater, the HVAC system- all about 13 years old and destined for replacement within the next few years.

I can see where these sort of expenses could easily equal half the "annual cost" of owning home (sans mortgage) if spread out over time.  In other words, I should budget another $5000 a year for these sorts of long-term repairs, or about $500 a month or so.  Owning a home isn't cheap.

Of course, you can let a house fall down around you and not spend a dime.   Eventually, you sell it for a pittance and someone comes in and tears it all apart and starts over with new everything. The problem with that approach is twofold:  First, you are living in a festering shithole, and that's not exactly fun.  Second, you end up losing a lot of equity in your home.   For example, a house recently sold here on the island for $250,000 as it needed a complete overhaul.  It is now on the market for $450,000 after being remodeled.   If the previous owner had kept the place up and up-to-date, they might have realized two hundred grand more when they sold it.

It is like the "logic" of never changing your oil.   And yes, I know people who have done this - even to brand-new cars.  They save all that money on oil changes, right?  But they end up driving an oil-burner and putting a quart in every time they fill up (so they don't necessarily save on oil changes, they just buy them one quart at a time).  And in about 50-70K miles, tops, the engine gives out and the car is worth little more than scrap - a car that could have gone 150K miles without effort.

Of course, there are junker cars that cost only $100 and maybe aren't worth even an oil change.  Similarly, there are houses in places like Gary, Indiana or Flint, Michigan, which aren't worth fixing, and as a result, they aren't fixed and quickly turn into ghetto homes, until they become inhabitable and condemned.  And at that point, the city tries to sell them for back taxes - with no takers.  Gary, Indiana is trying to sell homes for a dollar with no takers.   Location trumps condition, and when location and condition are both bad, you can't give real estate away.

Please tell this to the people at Lowes and Home Depot!

I guess that is why it sort of irks me when people talk about housing as a "right" and not as physical thing that requires maintenance and expenses.   You can talk all day about how you have a "right" to a house, but even if someone gave you the house outright (hello Oprah?) there are still significant expenses that need to be paid in order to just live there - well over $1000 a month, I would estimate, even for the cheapest of homes.  But of course, many people don't realize these expenses exist, as their roof isn't leaking yet and the refrigerator hasn't broken down yet.

I wonder, in these situations such as Habitat for Humanity how it works out for the buyers of those homes?   Do they understand that their remodeled or new home will require a lot of expensive repairs  in 10-15 years?  Or that even neglecting simple maintenance, such as cleaning gutters, can result in expensive repairs down the road?  Do they understand that as owners they are responsible for these things? (Can they even afford the homes in the first place?)

I say this as I sold a house to a renter once, and he called me two years later asking me to make repairs to the house.  When I refused, he said, "I don't see what the problem is, my landlord used to make repairs all the time!"   I explained to him I was not his landlord and he did not have a landlord.  He was the landlord.

"I put in a new HVAC system, new wiring, new carpet, new roof, new driveway, and new windows," I told him, "now it's your turn!"  Apparently he thought a house was a thing that never needed repairs, maintenance or replacements.  I tried to explain to him about cleaning the gutters regularly, but apparently that never took with him - with predictable results.

He got very agitated and I offered to buy the house back from him at the same price.  The house was worth $100,000 more now than it was when I sold it to him, of course.   He should have sold the place and gone back to renting.   Some people are not cut out to own homes.  Some people are not cut out to even own cars.  Or be parents.  Or even feed themselves.   But, sadly, that doesn't stop them!

Maybe I should just wait for Ms. Alexandra Casio-Sportwatch to become President, and then get on the wait-list for an apartment in some brutalist soviet-style housing block.  There's always that option!