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!
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…
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:
- 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.
- Inflation: The cost of materials and labor goes up over time, so the cost to build a similar house increases. If you’re in it for the long haul and have the cash, you might choose materials and techniques that are rare, labor-intensive, or hard to automate (such as stone or brick siding or a metal roof). These are likely to last longer and retain more value than those built with cheaper techniques (such as vinyl siding or asphalt roof).
- Improvements: Home improvements also drive the market average up. Unfortunately, spending on improvements is not public knowledge. So when a house doubles in value on Zillow, we don’t know how much was due to land value vs improvements. In reality, most improvements return 75% or less of their cost. The main reason to make improvements is your own comfort and enjoyment or to help your house sell faster — not because it’s a good return on investment.
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!)
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:
- 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)
- Electric heat pump: Instead of a natural gas furnace, your home can be heated and cooled with a heat exchanger (like what your fridge has, but bi-directional). While natural gas appliances can reach 90–95% efficiency, heat pumps achieve over 300% efficiency! You read that right — they’re able to create more hot / cold in your house than the energy you put in. That’s because, instead of creating new heat, they’re moving it around. Plus, by being electric instead of gas, they improve your indoor air quality and eliminate the risk of carbon monoxide poisoning. If you’re building a new house, you can save extra money by not running a natural gas line to your home at all (which saved me $5k upfront and the $15/mo active connection fee)
- Insulation: Improving your insulation can save you money and make your house more comfortable. But there are a lot of different ways you can do it. Here are some of the yes’s and no’s I found in my research:
Yes: Exterior continuous insulation. It’s more efficient than insulation inside your walls because it also insulates your studs… but it changes how you do siding, so can only be done with new construction or when replacing siding.
Yes: Double cell blinds. You have to buy blinds anyways, and windows are the least insulated part of your house. These can also help smooth out seasonal and sunny temperature swings in rooms with lots of windows.
Yes: Air sealing. A few poorly sealed holes in your house (such as around your attic, doors, windows, foundation, or plumbing vents) can lead to a significant energy loss and let insects in. It’s also inexpensive and easy to do yourself! For new construction, I also opted to upgrade my house wrap to improve the airtightness of the walls themselves.
In cold climates: Foundation slab insulation. The ground is around 55*F, which is great if you’re in a warm climate and trying to cool your house down. But if it’s cold outside and you’re trying to heat your house above 55*F, the soil is stealing your expensive warmth. This is a less common technique that’s easy to mess up the details, so make sure to find a builder / contractor that’s familiar with it.
No: Triple pane windows. They’re too expensive for their impact. All of the experts I talked to recommended getting quality double pane windows and spending the rest on the above items for a better ROI. Fun fact: They also don’t block out much more sound than double pane. If you care about soundproofing, you’ll want to look for options like Sound-Reducing or KeepSafe, which have one thicker pane of glass.
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.