The finances of building a home (pt 2)

I’m building a house for Makers in Pittsburgh, PA. In case you missed it, here’s Part 1: Why Build a House.

Next, we’ll talk about finances for the land, the house, and home ownership.

The exact numbers depend on what, where and when you’re building… but here’s a rough guide for those brave enough to try!

Don’t worry, I’ve done all of the heavy lifting

The Land

If you’re building new, you need an empty plot of land. These can be difficult to find in a city. But, when you do find them (outside of NYC or SF), they’re pretty reasonably priced. My 5,000 sqft plot cost about 50k, less than 10% of the total project cost. Since there were no plots actively for sale in my area, I used Google Maps’ satellite view to find empty plots, the Allegheny County Real Estate website to look up owners, and then sent them hand-written letters. This had a 40% response rate, not bad!

When buying land, make sure to inspect the plants and soil and get the seller to pay for as many costs as you can. In my case, I ran into issues with both the large tree in the back area (which was hollow and cost ~2k to remove)… and the soil itself (which was full of debris from the previous house’s demolition, increasing excavation costs by ~4k).

Once you’ve purchased it, land is a good investment. Land on its own has minimal maintenance (the occasional mow or trim) and cost (property taxes are quite low on empty land). And, since there’s only so much of it, it tends to go up in value. No so for the building…

The Building

Unlike land, it’s a bad idea to sit on an empty structure. Structures only decline with age and have lots of ongoing costs — maintenance, energy and taxes.

People hear that real estate goes up (according to RedFin, 8%/year) and think that the houses themselves are becoming more valuable. Not so — what’s really happening is:

  1. Land: The land beneath the structure is increasing in value as the population in cities (and thus demand for land) rises. Although, as commercial real estate collapses (a trend that eCommerce started 20 years ago), this could slow down as commercial properties are repurposed for housing.

By understanding the forces at play, you can make smarter investments in your future home.

One of the smart investments you can make is things that return direct financial value — such as energy efficiency improvements or solar panels. More on that below!

Rent vs Own

One of the things I researched when starting was whether it even makes sense to own a home. While home ownership is part of the “American dream”, many American dreams (such as having a pool and truck/SUV) are HUGE money sinks.

What I found is that, while owning a home isn’t nearly as bad as owning an SUV, it’s also a worse investment than the stock market if you move in less than 5 years.

Why is that?

Fees. When you own a home, there are all sorts of fees that you don’t have to pay as a renter and don’t build equity in your home: property taxes, transfer taxes, real estate agent, maintenance, property insurance, mortgage insurance, you name it. As a rule of thumb, expect to pay ~the 30yr mortgage rate in empty costs & fees. Yikes!

Fees aside, owning a home is risky. Nobody can predict the future — markets aren’t guaranteed to go up, especially individual neighborhoods. And with climate change, areas that people once found desirable (e.g. California, Florida) are becoming undesirable due to increasing floods, fires, droughts, hurricanes, etc (although people are generally still migrating to cities). Plus, studies have found that home ownership makes you more likely to be unemployed due to reduced mobility.

Why, then, would you ever want to own a home?

As far as I can tell, the main reason to own or build a home is if you really want something that’s not available on the rental market and you have cash to burn. Or, if you’re really confident you’ll stay in an area for a while, even if it’s at the cost of career growth (a tradeoff you might already be making if you have kids).

In my case, I wanted a house designed for a group of makers (which doesn’t exist on the local market, or at least hasn’t come up for rent/sale in the past 3 years). Plus, by sharing it, I’m able to lower my financial costs and risks. And, since I work in technology, I can work remotely without sacrificing my career. (Thanks COVID!)

MakerHouse Costs

The moment you’ve all been waiting for… here’s the financial model for MakerHouse. Feel free to make a copy and plug in your own numbers:

You can see on the far right that I estimated two scenarios, a lower and upper case. The lower case assumes that local real estate only goes up around 1% after inflation (which I think is realistic if you aren’t making improvements that inflate the property value), and the upper case assumes 3% after inflation (e.g. around 5–7% pre-inflation, which is close to RedFin’s estimate). With all of this factored in, you can see that the home won’t break even for 5–6 years. Definitely a long-term investment!

This model broke one of my initial expectations — that a 30 year mortgage is “better” because it’s loaning you more money at a below-stock-market interest rate. But, once I plugged all of the numbers in, I found that going for a 15 year mortgage instead of a 30 year mortgage resulted in a faster break-even. Since mortgage rates are far below market returns, I had expected it to be better to get the largest and slowest mortgage possible, and invest the money. What I hadn’t accounted for is the faster equity growth. In a 30 year mortgage, you spend the first 10 years just paying interest — but in a 15 year mortgage, you practically own your home by year 10! The main downside of the 15 year mortgage is that the higher monthly payments are more cash intensive, so if you’re buying a home on the upper end of your monthly budget, you may not be able to afford the 15 year payments.

What Improvements Are Good Investments?

As I alluded to, most home improvements lose money — but here are three opportunities I found that make your home nicer AND are good investments:

  1. Solar panels: Perhaps the most well-known economic + ecological upgrade. Solar is easy to do on new construction and existing houses, and have become dramatically cheaper in the past few years. So much so that even in a cloudy northern climate like Pittsburgh, panels can pay for themselves in less than 10 years (and last 30+ years). I ended up going with Tesla since their recent price drops made them the most affordable option in the area. If you use my referral link, we’ll both get $100 off. (Note: I recently started working at Tesla Solar, but made the decision to go with Tesla panels before interviewing with them — in fact, getting Tesla panels contributed to me working with them)

In Conclusion

Building a house has been a fantastic learning experience and creative outlet, even if it’s not the best financial investment. In fact, my experience in construction and energy efficiency earned me bonus points in my interview with Tesla.

In the next post, I’ll be talking about the mental health of building a house — like and follow this post to be notified when it’s published. Learn more about the house at mkr.house.

Technology, Entrepreneurship and Design to make the planet a better place. Pittsburgh, PA.

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