For my wife and me, the dream of a house with a big, wonderful garden is deeply rooted and in fact, buying our first real estate object is an incredibly exciting goal we pursue.
But having been looking for our Dream House for two years now, it’s pretty obvious, that “finding the perfect real estate object” is not an easy project.
The hard, cold numbers show us, that it is a pretty daunting task to find a house here in central europe, suitable to our “needs” and not to overpay.
Real estate markets have gone crazy!
Just thinking of the last house we visited lately makes me shake my head:
A real estate object with five rooms – whereas one in the cellar – a small garden (400 square meters) costs over USD 1.3 Million! And just to be clear: the bulk of the houses we had a look at was even way more expensive!
How on earth could such a real estate purchase ever make a good investment!?
Real estates can be great for wealth accumulation, but as it is always with investments: you need to get good value for money.
Overpaying for a house makes it a terrible Investment
I hear and read it over and over again, buying a house is the best move one can make. People for instance praise “the stability of the long term upward price trend of real estate prices”. Houses very obviously are perceived as less risky, especially when compared to stocks and therefore are often considered as the perfect long term investment.
Basically, I am a proponent of owning real estate. I want to put my money in stocks, bonds, real estate, holding some cash etc.. But it’s not just a matter of diversification. You can live in your house or rent it, you can see and touch it, take great pleasure of a nice garden and after all, real estates are made of solid brick and stone. So a house kind of symbolises stability.
In contrast, with stocks it’s much more abstract. People can see their portolio on their bank statement or on internet banking but shares are mostly associated with daily stock price fluctuations one can see on stock tickers and charts shown on CNBC or Bloomberg. Most people seem kind of disconnected from their stock holdings.
For me as a dividend growth investor, owning stocks of a company is so much more. As a shareholder, I am owner of pieces of a business. Just think of Johnson & Johnson, Royal Dutch Shell, Coca Cola, Nestlé or Walt Disney. These wonderful companies are pumping out billions and billions in profits and distribute a fair amount of their Free Cash Flow to their shareholders. And there’s another great thing: succesfull companies tend to increase their payouts over time.
So, when you see your stock portfolio as a passive income machine, working just for you and when you look at the wonderful products and services the companies provide, you have a completely different relationship towards stocks.
Who cares about stock price fluctuations when you know, that in 5, 10, 20 years from now, chances are pretty good, that these companies will be even stronger than today and handsomely rewarding their loyal and patient Investors?
So, let’s come to the real estate prices with their “stable upward trend”.
I know a couple, having put their house for sale, more than 24 months ago, sitting and waiting until someone was prepared to pay their price tag. They bought their house some years ago for USD 2 Mio. Their mortgage is huge, litterally forcing them to work around the clock instead of having some leisure time and enjoying their nice house with the beautiful garden.
So, what happened? Why did they want to sell?
Well, it happens, that life plans don’t remain the same. They want to change some aspects in their life, they wish to ease things a bit up in order to have more time with their children. They want to take new job opportunities, have more flexibility to travel around. They also found out, that their house is too big.
So they have been waiting for two years, “to find a buyer” willing to pay at least USD 2 Mio.
Imagine there was a realtime “house price ticker”, just as the one you can see on CNBC or Bloomberg regarding stocks: How much is a house worth when you have to sell? When you really need the money and you don’t find a buyer paying you the expected price?
The couple I know was kind of “lucky”, they eventually sold their house for USD 1.8 Mio, 10 % below the purchase price they had paid some years ago. So, it’s pretty clear, that there is no “solid upward trend of home Prices”. Real estate markets as a whole may go up due to low interest rates, but with regard to an individual house, so many specific factors are playing in.
Things in life are constantly evolving and changing. For instance, people’s perception of a “great location of the house” can alter over time.
So, coming back to our couple, quite a hefty loss of USD 200’000 has been realized.
Just think of that: a 10 % loss on a real estate object is huge, as you always have to do with large numbers!
Just to put it into relation by looking at my stock portfolio, consisting of around 30 holdings, currently churning out at least USD 4’500 in cash per year. It has a market value of around USD 170’000. It took me almost ten years to build such a “passive income machine”. One single real estate loss would have wiped out more than the equivalent of my whole share portfolio.
My lessons learned when it comes to real estate investing
There are a couple of aspects, I will certainly consider:
- Real estate prices don’t always go up. In fact, it is possible, that a loss has to be realised. As the invested amount is always a larger one, even a smaller percentage loss of say 10 % can have great financial implications.
- Life plans can change, so financial flexibility is key. I will certainly avoid taking a large mortgage, making me stuck and forcing me to work in order to pay down debt.
- Always have an exit strategy. Focus on the quality of the house and good location making the resale process likely to be successful.
- The price is hugely important, a margin of safety is paramount.
So, taking these lessons learned, let’s turn to a key question:
How much are we prepared to pay for a house?
As said, buying a nice house with a big garden costs well over USD 1 Mio in central Europe, especially in Switzerland. I could not see one single offer below that price tag. In fact, it seems that a house price of USD 1.5 seems pretty “normal”.
Interest levels are low, real estate markets are in a sweet spot. And resale values are commonly perceived pretty intact.
Considering ourselves as Mustachians seeking Financial Independence as a medium term goal, we want to make sure, that we will not over-pay and generally never make any investments and take-on costs to the substantial detriment of our finances.
So, what amount would we be willing to pay for a house?
It turns out, that for us, USD 500’000 represents a “price maximum”.
It would allow us to make the real estate investment and taking on almost no debt.
We consider everything elsewhere the amount of USD 500’000 as just not worth the financial risk(s) and moreover it would not justify the oportunity costs.
There is always a trade-off when it comes to buying a house.
For instance, given our cost structure, USD 500’000 represents more than ten times of our costs of living of our family of four! And using some greographic arbitrage, we could for travel Europe or the world for more than 12 years. Just think of that.
Or we could put that amount of USD 500’000 to work for us, substantially increasing our stock portfolio and invest it in great businesses such as Johnson & Johnson, PepsiCo, Coca Cola, Nestlé, Diageo and Henkel. More than USD 15’000 in additional dividends each year and seeing it grow would be a great thing!
Moreover, chances are good, that one day, I want to follow creative activities earning little or no money. That’s no problem at all having USD 500’000 at hand (or even better: invested in rock solid companies).
Or I could work part-time just to cover the basic costs and enjoy more time with my family.
There is shere indefinite list of options.
So, again, USD 500’000 is the absolute maximum amount, we would be willing to pay for a house.
Valuing what we have
My wife and I, having grown up in apartments and lived in flats ever since, both have a strong attraction towards houses. In my case, it reminds me my childhood, when I visited my grandparents living on the countryside.
But don’t get me wrong: We have always been happy in our apartment and enjoyed the flexibility of renting. We live in a very nice 100 square meter apartment, it is very practical and near to our offices. Our flat is in an older building but in a very good condition and the rent compares very favourably toward other apartments of the same location and size. The rent we pay makes less than 10 % of our net income, so it’s pretty favourable.
We don’t think we are throwing away money because we rent. Our apartment is providing us shelter, a great location and flexibility. When I need something to be repaired, I just pick up my mobile and call my landlord who fixes everything, it has always been free of charge. So renting is very comfortable.
Could a house improve the Quality of our lives (even further)?
This is the basic question.
And the answer is NO, PROBABLY NOT. There’s no need for buying a house. At least not at the moment. And certainly not an expensive one.
And to be clear: I don’t think that we will able to find a nice house with a big garden for our price range of about USD 500’000.
But maybe there is an alternative approach.
Maybe a Tiny House could be right for us?
Searching for our Dream House for two years, we have seen plenty of real estate objects. And it turned out, that at least, we kind of found our Dream Garden. And what about the house? Well, there is a Garden House.
What if we transformed that Garden House into a kind of Tiny House?
It could be a lot of fun! Carpentry is cool, it would be a kind of family project for the next year.
The acquisition price for the whole real estate seems quite reasonable.
It would leave us a lot of flexibility, the garden is lovely and who knows, maybe in ten years, time will be right to build a larger house.
My wife and I are pretty excited by the idea. Of course, we’ll do our research and I’m looking forward to keep you updated about our “mini project”.
What about you, fellow reader? Have you ever considered the idea of buying or building a Tiny House? Are you looking for your Dream House too?
Share your thoughts and experiences below.