Over invested in my property?
Once a month I write an article for New Zealand Home Loans and the last one I wrote was really close to my heart because it was about a conversation that is STILL on repeat at my house. So, today I’m republishing that article because I keep referring back to the numbers in it myself and talking it through with Jonny. I thought you might be interested too.
And that conversation revolves around selling our house and buying or building a cheaper one. The reason for doing this would be to free up cash that I could invest that would then generate an income. It was on Feb 12 2017, just over a year ago, that I released a blog post talking about just this very thing: Downsize the digs. But all this time later, I’m still tapping away at my computer in the very same house. We are still here folks, still mulling over the question!
And then I read with interest the article that Emily Doran wrote about actually downsizing her house: Downsizing – a year down the track and I have to say a BIG UPS to Emily for thinking it through and then ACTUALLY DOING IT, that is a very bold move. The biggest issue with her move seemed to be lack of storage but that is probably all of the packing boxes getting in the way? For my own podcast I spoke with Ronnie who also downsized: How Come I'm Not Rich. This was a huge decision for her to make but things have worked out well for her too. For me I like to consult widely so it has been really helpful to learn from the experiences of others.
Both Emily and Ronnie have achieved something that I am still deeply mulling over. I am constantly debating the question of “should we sell our perfectly suitable house that we really enjoy living in?” I have asked this question out loud now, just to cement the idea in my mind and my ten year old is horrified at the thought of moving to another place - but that is because she is a creature of habit with an innate fear of the unknown. Generally when she gets to the ‘unknown’ she loves the idea! My husband is also pretty quick to point out his thoughts on it being a bad idea, but finding the problem with some of my concepts is just an innate ability that he also has! But I have persevered with my thinking out loud and I will tell you why.
We live in a great neighbourhood in a great house which is close to schools, parks, the shops and places to run with my dog. If I can’t walk out the door and be there in ten minutes, I can drive out the door and be there in ten minutes. But living in a small town, without named suburbs as such, you can pretty much do that from any point in the town; our location is not unique. So although our place is great, there are equally as many great places all over town. SO, we need not feel tied to this particular spot forever.
The nuts and bolts of it is that I believe we have too much cash tied up in our house, which is apparently worth about $650,000 but who knows really, until we try to sell it? It is our biggest asset and an illiquid one at that. In my mind we have about $250,000 too much invested in the house. I want to release some equity from the place and the only way that I can comfortably see a way to do this is to sell it lock stock and barrel and buy something cheaper. If cheaper is smaller, like Emily and Ronnie have done, well I think that would be perfect as well.
The biggest problem with my plan is finding another house and sorting the timeline to make things happen. In a previous blog post I have written for NZHL I talked about how emotion gets in the way when you buy, well I can also tell you that it also gets in the way when you are contemplating selling. What happens say if we put our place on the market, it sells quickly and then we can’t find a place to move to? Everything is selling really fast at the moment and WHAT IF we keep missing out on a place and end up HOMELESS? This is the scenario that is playing out in the mind of my family every time I mention moving. I suggested that we could de-camp to the local campground but that idea was shot down in flames pretty quick, camping has never been our thing!
A few weekends ago the first real opportunity presented itself when a friend let me know about a house coming on the market of a friend of theirs. If we were interested we had first dibs on taking a look and it would be a private sale. So I went and had a look and the comparisons with the home I am sitting in right now are stark.
New vs Older
Warm vs Colder
Built for us vs 1980’s design
Private vs waving to the neighbour over coffee in the morning
But if I put emotions aside it was a perfectly tidy, a perfectly good house on a perfectly good street and was still perfectly located for everything we like to do. It was just older and DIFFERENT to what we have now and in fact the dog walking/me running opportunities were even better than where we are now as I drive past this very house when I head to the hills for a run! And I asked myself, “could we live in this house and resist the urge to spend $100,000 modernising it”, because we probably could not just stop at a feature wall but would instead rip the place to bits and build it up again? Or could we stick to the math, just live in the place as it is and invest that $250,000 which would create an income for us for the next 50 years?
Here is a rough back of the envelope calculation of what investing that $250,000 could look like if I invested it for just FIVE years:
If I chuck that $250,000 into a term deposit at 4.3% it could earn me $59,000 (before tax)
If I chuck that $250,000 into a NZ Top 50 index fund at 13.7% (which is the returns they have generated in the last five years) it could earn me a staggering $224,000 (with distributions reinvested, before tax).
Uuum, now that is extremely interesting math don’t you think?
Divided by 5 years that would have been $44,800 for each year (before tax). On paper this looks like a no brainer to me, I’ll come back and finish this blog post in a minute, I’m just taking a quick break to nail up the For Sale sign and type my resignation letter (except the reality is that I wouldn’t resign as I love my job)!
Now, obviously with the share market past returns don’t predict future returns and I could invest the lot and we then enter a sustained rubbish period, but what is also true is that in the history of the share market, over time it has always gone up. And I’m around for 50 more years so I could stay my course! Looking at these numbers, I’m sold on the idea, but still the whanau are less so!
What about capital gains on my house that I sit into today, is the house making money anyway? Well yes the price of my house has been rising but it does not match the gains we could have received had we invested as above AND we have spent a fair amount of time and money tinkering on our house making sure it stays in tip top condition, and that costs money.
And another thought to add to the mix is IF we still had a $250,000 mortgage to pay on our $650,000 house and knew we could buy a house down the road for $400,000 and be DEBT FREE and never pay interest again, would we do it? Without a doubt my answer would be YES!
What if we just stay put? The house we now own has certainly gone up in value over the five years we have owned it, but at no time can I withdraw a dividend and use that money to go on holiday, at no point could we pull an income off it and reduce the hours we work. And at no point could I sell off a square metre of it and invest it where I can access it at any time. We have investments outside of the house that are growing each month, year on year and adding a big chunk of change to them would certainly boost their performance and the returns could really add value to our lives. I’m currently 44 but my conundrum is the same as many who are heading into retirement and have ALL of their money tied up in their house, what are they going to do for cash once they stop working? I’m just contemplating my move 21 years ahead of time, but it makes more sense to me to do it now, invest the cash I free up and enjoy the income that my investments create so I can enjoy each day without being restricted by cash flow.
So, as of writing this, I remain in limbo. Perfectly comfortable in the house we built and really enjoy but equally perfectly uncomfortable with having a lot of our eggs in one giant housing basket. I am wondering what my tipping point is, where I can put emotion aside, concentrate on the EXTREMELY exciting math above and actually put this downsizing plan into action instead of just giving it lip service like I currently am. Once again, I will keep you posted but in the meantime I would love to hear your take on this. Comment below or flick me an email. Oh, and if you want to buy my house let me know!