At some point in my life, I’ve dreamed about living in a gigantic mansion on some exotic location where the ocean breeze lightly blows against some beautiful Egyptian cotton curtains. I will bet that most of us have that dream at some point – and perhaps some of us are already creating a path to get there someway, somehow.
Well, maybe not all of us have those dreams; but still, we often strive to live a little better. Let’s start with that small 2 bedroom condo. Oh wait, we need more space. We need 3 bedroom townhouse. But I really want a yard. This kitchen is too small. Where’s my man cave? Our kids need a room. Pretty soon, we are trading up from that tiny apartment to a gigantic house, or from living in a neighborhood where you are a bit scared to walk at night to that neighborhood with the really good schools.
It is the American dream, isn’t it?
But sometimes you have to consider the costs of trading up your residence. I know two couples who live in Orange County, California who, after living maybe a couple of years, are already looking to trade up to a new home that cost nearly double of what their previous residence was worth (i.e., $350,000 to $800,000 range). Sure – it is in a much better neighborhood. Sure – sometimes you need that extra office and nursery… but consider the costs! Even at 4%, your monthly payment would have gone from (let’s just say you put 20% down each time and this is a 30-year fixed loan) $1337 to $3055! That is a lot of change no matter what you do.
Well, what about building that net worth?
Surely, you can build equity faster every month with the bigger house, but that is because you are putting that much more money into it. You are tying up cash into a house that you have to live in. Whether the housing market goes up or down, you are tied to living in that residence. It is also an extremely illiquid investment. While you think you can sell a house quickly today, that wasn’t the case back in 2008. Your entire net worth has become dependent on what the next person is willing to pay for your home. It is an extremely volatile and risky investment if you tie up most of your wealth into the house.
The market is going up, I can sell it to buy a better house!
Can you? If you only own that one house, is it worth it for you to sell that home to buy another one? In a rising market, all houses go up in value. If you are trying to buy a similar or better house, wouldn’t it cost you more money even though you sold your house for more money? What difference would it make?
And another thing, every time you trade up a house, you are paying a lot of expenses. I have flipped properties before, and I know selling costs can sometimes range from 8 to 10% of the actual selling price. It is a huge transaction cost. Those real estate agents are waiting for those big bucks, bucks that you don’t have to spend if you decide not to sell your property and go buy another one. Imagine selling a $350,000 and having to spend $30,000 for transaction fees. That’s the price of a car!
All I am saying is that it may not necessarily be wise to trade up for a bigger place until you are truly financially ready. Sometimes living in that two bedroom condo will give you an opportunity to save a lot of your wealth for other investments. Or maybe you can live small and trade up really big further down the line, instead of constantly switching.
I’ve heard that the average time Americans live in a residence is 7 years. Maybe the next time you switch up you should wait 15 to 20 years. It is a long wait. You may not like your old home so much, but hey – the rewards for saving now can benefit you greatly in the future.
What do you think? Leave your comments below!
Photo: Trey RatcliffWhy "Trading Up" Your House Might Just Be Killing Your Financial Future by Leon Yang