Steven here from munny.club, a weekly newsletter where I share a different perspective on personal finance concepts. If this doesn't interest you or you don't find it valuable, you can unsubscribe at the bottom of this email. If you have feedback, just shoot me a reply!
Today we are getting a bit technical about owning real estate and the hidden costs of your great deal, I'm talking about opportunity costs.
When making a decision to buy, most people compare how much rent they currently pay to what a mortgage would cost them for a similar property. Maybe you're paying $2,000 a month right now, but if you bought the property your mortgage payments would only be $1,000 a month. So you buy the property and start paying $1,000 less per month immediately.
To illustrate where I'm going a bit more we're going to apply some time. Five years later, your house is wildly valuable. In fact, it's doubled in value! You are still paying your regular mortgage payments of $1,000 instead of the now $4,000 in rent. Talk about savings.
But, wait a second. Without even realizing it, you are effectively paying $4,000 in rent. You are foregoing the additional $3,000 you could be making by renting out your exact same property by living in it instead. Weird, huh?
And this doesn't just apply to renting. If you paid $500,000 for your house in the past and it's now worth a million, you are effectively paying that $1,000,000 to continue to own it. You could instead sell it for that price and move into another $500,000 home instead. Is that house really worth a million dollars to you?
This is a very narrow way of looking at housing, as dollars only, but an important one. When people get such a great deal, they become blinded to the true costs of it. This is common in behavioural finance and an example of sporting tickets if often used. If you wouldn't pay $500 for concert tickets but had them gifted to you instead, would you go? They are still valued at $500 if you sold them, so by choosing to go you are foregoing that money and "paying it" yourself. Wild.
My examples have ignored any costs associated with selling or a transaction, as well as taxes, emotional benefits, or other, but it's a very important factor to consider when what you're sitting on appreciates in value. This logic & process is also what happens in standard equity investing. When a share passes its intrinsic value, you sell it.
What are you still secretly paying for?
Thanks for reading.