Hopefully you've read Part 1 and Part 2 over the last two days. If not, jump back and read through, this post will make more sense if you do!
We've heard two stories of first-home buyers. Now let's look at you.
Imagine you're looking at your first home. You have the same opportunities presented to you as Jamie and Shelly did. And for the sake of the exercise, let's assume that the next five years will play out they did in the story. With some minor adjustments permitted, such as if you don't like strawberries.
Which story would you choose?
Why?
Let's examine one possible motivation: Money.
Jamie made $25,000 when she sold her house. Shelley broke even. On the face of it, Jamie has come out ahead, to the tune of $5,000 per year. But underneath, it's not that simple.
I made a spreadsheet to look at it. You can download it if you want to take a look. Let me know if you find errors! Financially, it is simple, there are many elements of reality missing, but it's fun to play around. If you're a geek like I am.
Let's make up some numbers and look at where we get to. We'll assume that:
- You have $112,500 cash saved (a 25% deposit on Jamie's house, purchased for $450,000)
- Your mortgage rate is 6% and financed on a 30-year term
- If you chose to buy Shelley's house your mortgage payments are around $100 less that if you bought Jamie's house. We'll assume you have the self control to save this money.
It turns out, that the real financial difference between the two scenarios is closer to $3000 than $25,000. If we assume that each year Jamie spent one month of evenings and a weekend on renovations, this translates to an hourly rate of around $15/h.
You don't need to tweak the numbers very much to make Shelley the financial winner either. Change the purchase price of Shelley's house to $375,000, and she comes out $4,000 ahead of Jamie.
I'd assumed that Jamie's purchase would come out consistently better off. It is certainly the story I've heard touted as the "sensible step onto the property ladder".