Buying A Home Is (Mostly) Not An Investment

Brunching with friends over the weekend, the conversation gradually turned to local real estate, as it is wont to do among the late-twenties, early-thirties urban professional crowd. The hosts were heading out to a series of open houses, looking at everything from fixer uppers to new construction. “You’re so lucky you bought a few years ago,” they told me and the other home-owning couple of the group, “Buying a home is just so unaffordable now.”

I live in a bonkers market. For those uninitiated to the current whims of coastal, big city home purchasing, here’s a taste of what’s going on out here: Single family homes in my area start at $1MM and go up from there (unless you’re okay with a teardown or fire damaged property, which you can probably buy for a cool $700k). For any property, especially at the “starter home” bracket, you’ll end up in a bidding war with at least five other dual high-income couples, usually one or both partners in tech. Homes last one weekend, two at most on the MLS unless there’s something seriously wrong with the property. Cash buyers routinely put in offers hundreds of thousands of dollars over asking price without inspection contingencies.

Because demand outstrips supply, since we bought our home in 2015, we’ve seen a consistent 5-6% YoY increase in our home’s value. From purchase until now, our home value has jumped just under $200k in three years. You would think, given that kind of increase, that I’d think home ownership is a wonderful investment, right?

Methodology

I decided to crunch the numbers. What if all the money I have dumped into my home over the years had gone into the S&P 500 instead? Is my home equity more than what I’d’ve had in cold, hard, liquid cash?

In my analysis I took into account all housing expenses including: rent, mortgage, property taxes, insurance, repairs, and the federal and state income tax implications of home ownership. I did not include the impact of my solar panels— i.e. none of the cost, income, change in utility costs, or increase in value to the home– since I think of that more or less as its own self-contained thing with its own payback period. I assumed in my calculations a 3% yearly rent increases under the rental scenario. I discounted my home value by 5% to account for transaction costs upon sale; I also discounted the rental scenario profit numbers by 10% to account for LTCG.

Results

I’m not going to share all my numbers, but here’s how Renter YAPFB and Owner YAPFB do in the relevant time frame at a high level:

In 2015, Owner YAPFB spends a tidy six figure sum for a down payment, delayed maintenance, and repairs on her brand new (to her) condo. The value of her home shoots up after she does mid-five-figure remodel: replacing the roof, new plumbing and electrical, flooring, foundation work. However, most of that equity is eaten up by the transaction costs of buying a home and the four months she spends paying both rent and a mortgage while construction was happening. Cumulative net benefit of buying a home: -$5,777.62.

In 2016, Owner YAPFB thinks her spree of wallet-emptying home maintenance is over when her eight-year-old furnace breaks down in the middle of winter. While she could go with a cheap replacement, she decides to install a heat pump so she can have central air conditioning in the summer. This eats up a lot of her equity gain from increasing home values. Cumulative net benefit of buying a home: $493.24

In 2017, things have mostly stabilized on the home owning front. Owner YAPFB actually spends a little less than Renter YAPFB on housing costs for the year. However, because the stock market is also going gangbusters, the increase in Owner YAPFB’s home value with leverage barely matches Renter YAPFB’s profits from the market. Cumulative net benefit of buying a home: $3,728.56.

So far in 2018, both Owner and Renter YAPFB have been sitting on their laurels, while the stock market has been jutting in fits and starts, the local real estate market continues apace, though who knows how far it can go? Cumulative net benefit of buying a home: $41,266.57.

Conclusion

Even in a very hot market, it’s only really clear that buying has been better financially about three years into ownership. Yes, I’d be ahead ~$40k if I sold now, that’s a far cry from the $200k top line number I started with.

Now, assuming I’m done front-loading my repairs for a while, home ownership should cost a little less than renting by a couple thousand dollars a year. In addition, I’m at the point where I should be able to “pocket” the increase in home values rather than siphon it off into yet more repairs. So assuming (1) home values continue to increase, (2) the leveraged increase in home values outpaces stock market growth, and (3) nothing catastrophic happens in terms of maintenance, my home may turn out to be financially a “better” decision than non-ownership.

But given the unsure nature of the financial situation, I cannot say the money is the main source of value I derive from home ownership. For me, the big things are more qualitative than quantitative: stability in knowing where I will live, lack of worry about being priced out of my home due to rent increases, being more integrated with my local community (homeowners have a very outsized voice in local politics), and being able to customize my home to my aesthetic and comfort preferences (paint on the walls! central A/C!). All these qualitative benefits come with their own costs (liquidity, various worries about climate change on an ocean-adjacent city), but for now I feel they are mostly worth it.

Have you calculated the rent versus buy financials on your home? Why do you (or don’t you) value home ownership?

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Solar Panel Finances: One Year In

About a year ago, we got solar panels installed on the roof of our condo. In that time, our panels have generated around 6.58 MWh of power (/work?). Enough to power our home, eliminating our electric bills and then some.

Our home is up in the cold, dark, often rainy Northeast. The roof with our panels are non-optimally placed, they face somewhat south (to our benefit), but also mostly eastward. Even so, we’ll likely recoup our investment in the panels in about nine years of its purchase. And then for another eleven years we’ll benefit from the free energy to come.

I don’t often write posts like this with lots of external tutorials, advice and how-to’s. But I’m a big fan of our solar panels and know that the idea of investing so much in a new technology for your home can be a big daunting process. So I’ve outlined below what our financials have looked like with solar: the cost, the benefits, and some tips on how you could get started as well.

Cost

Our solar array consists of 23 270 kW Canadian Solar panels (which, despite the name, are manufactured in China). These panels are attached to micro-inverters, which allow more individualized panel monitoring and energy input, and are lined with snow guards that prevent roof-valanches from burying our neighbor without warning in the winter. Our installation comes with a 10 year warranty and the panels themselves are guaranteed for 20 years.

Our solar array design

The sticker cost of our solar array was $20,004.20. However, we got $6001.26 back in the form of federal tax credits and additional $1000 back due to incentives from our state. So on net we only paid $13,002.94 for the panels and installation.

Because of the cost of the panels, we’ve increased our homeowner’s insurance to the tune of $60/year. In addition, we paid $275 to our real estate attorney to amend our condo agreement. That way, it was clear and on the record that 1) our neighbor approved the build and 2) our unit alone owns the panels.

• Upfront cost: $13,277.94
• Ongoing cost: $60/year

SRECs and Net Metering

As we generate electricity, we are issued SRECs which can be sold to public utilities to meet their state-mandated portfolio quotas for renewable-sourced energy. Note that these SRECs are independent from the buying and selling of the energy itself. We get 1 SREC for each 1.2 MWh of energy we produce. That averages out to about 20.925 cents/kWh of energy our array generates. The value of our SRECs will decline over time by 5% per year and we will cease to generate SRECs by the 10th anniversary of our system’s installation.

In addition, we live in a net metering state. That means that our meter backslides and we get paid for excess solar energy generated by our array and fed back into the grid during the day. We are paid around 18.462 cents/kWh of energy we pump back into the grid. Last year we used only 3615 kWh for our own electricity use, a little more than half of what we generated.

These net metering credits do not get sent to us in the form of cash, but instead just credits on our electricity bill. This isn’t super useful to us since, well, our electricity bill is always $0 (we’re using solar, remember). But, there is a way around this. By filling out a little bit of paperwork, we can instead have our energy credits applied to someone else’s bill instead of our own. In this way, we sell our energy credits at a 20% discount to a couple of our friends. It’s a win-win: they get a discount on their electricity bills and we get to off-load otherwise-useless credits.

• First year SREC income: $1376.87 (estimated, not yet paid out)
• First year savings on energy bill: $607.40
• First year energy credit reselling income: $437.92
• Total first year gross: $2422.18
• Total first year net (post-tax, after insurance): $1,683.97

Projected Revenue and IRR

Given our current projections for revenue, our panels should break even in about nine years:

Over the period of twenty years, we’re looking at a 13% IRR for the solar installation based on gross revenue and 7% IRR based on net post-taxes. That is to say, not bad for a home improvement project. The return would have been much better had we financed the whole thing like Gen Y Finance Guy did with his solar installation.

What To Do If You Want To Install Solar

• Make your home energy efficient. Before investing the big bucks in solar panel, first start by optimizing how you use energy in your home already. We’ve found that easy, cheap solutions like LED light bulbs and insulation pay for themselves within a year. Look to the “energy efficiency pyramid” for guidance on where to start.
• Determine whether your roof is a good candidate for solar. Online services such as Google’s Project Sunroof will help estimate how many hours of light your roof gets and which portions of your roof are most optimal for solar panels. Project Sunroof also gives a breakdown of the expected cost and payback period for panels on your roof, which I’ve found to be close to my real numbers at least a year in. They even factored in federal tax credits, state tax credits, and SRECs into the calculation.

Solar estimate for our home by Project Sunroof.

• Get comparison quotes for solar installers in your area. I personally like Energy Sage (not a sponsored link) as a means for generating quotes and comparing prices on costs for local solar installers.
• Determine financing options in your area. For example, our state subsidizes banks that lend money for residential solar arrays. That means, had we financed our panels, we could’ve paid nothing up front and gotten rates as low as 1% interest (no, that’s not a typo). So even if you don’t have the money up front for a five-figure solar installation, you might be able to get a ten-year loan, perhaps never spending more than your current energy bill to do so.
• Consider community solar projects or alternative utility providers if solar doesn’t work for your home. If you’re a renter or if your roof isn’t well-positioned for solar, but you are interested in bringing renewable energy to your home, try participating in a community solar project in your area. Or consider connecting your utility account to an alternative energy provider such as Arcadia Power. By telling your public utility that you want renewables for your home, you can help signal the growing public support for solar and wind investment in your area.

Have you considered installing solar panels? What sort of “green” additions have you made to your home?