It’s one of the biggest myths in America today: Hopping from house to house will increase your happiness, your stature, and your wealth. Totally not true. It sounds all well and good, but in reality, house hopping often leaves home owners more worried, more insecure, and more broke.
Okay, so before I get too far, I should probably let you know what the heck house hopping is. Apparently it’s a term I came up with myself because I can’t find hardly anything on the topic, but it’s basically the act of buying a house, living there for a couple of years as it increases in value, selling it, and then buying a more expensive, larger house with your new beefy down-payment (that you got from selling your old house).
For example, Jon and Julie have been saving up in order to buy their first house. After a few years of strict budgeting, a ton of work, and a few fights, they finally save up the down-payment. They’ve got $15,000 and take the exciting leap into home ownership with a $150,000 home purchase. They live there happily for two years and discover that the house is now worth $170,000. Since the excitement of that home had worn off a few months ago (and they had been talking about upgrading soon anyway) they decided to put the home up for sale. Sure enough, they find some interested buyers and sell the home for $165,000. Now they have $30,000 (their initial $15,000 down-payment and their $15,000 gain on the sale of the property) and start looking for the next house. Because they have a larger down-payment and have good credit, they are able to find the house of their dreams: a $300,000 executive home on a lake. They buy it immediately.
This is the epitome of house hopping. Trading up one house for another and building equity along the way, thinking that it’s making you rich because you continually have a larger and larger down-payment. All the while, actual rich people are passing you by and you just can’t figure out why! Let’s figure out why house hopping is making you poor, and why it’s DEFINITELY not making you rich!
Why House Hopping is Making You Poor
In the example above, it seems like Jon and Julie have earned $15,000 on their home sale, but have they really? Ummm, no. Not even close. Let’s take a look at their expenses during the two years of ownership:
- Closing costs – when they first bought their house, there were closing costs (fees paid to the bank to process your loan) of $2,700.
- PMI (Private Mortgage Insurance) – Since Jon and Julie only put 10% down, the bank will charge them PMI which will cost them an extra $20 a month (after 2 years, $580).
- Interest payments – In the first two years of ownership, Jon and Julie paid far more in interest than in principal. In fact, in those 2 years, they paid $10,620 in interest and only paid their mortgage down by $4,850.
- Property Taxes – Over the two years, they dropped another $3,900 in property taxes
- Home Repairs – With home ownership comes repair bills. A new furnace, carpeting, an updated kitchen – all of these cost money. According to About Money, homeowners can expect to pay 1% of their home value each year on repairs. For Jon and Julie, this means $1,500 per year, or $3,000 total.
- Realtor Fees – Most homes are sold by realtors (and I actually believe there is value in doing this – another topic for another day), which typically comes at a 6% cost to the sellers. With a sale price of $165,000, a fee of $9,900 needs to be paid. Ouch!
Okay, I just threw a TON of numbers at you. Let’s simplify:
- Closing costs: $2,700
- PMI: $580
- Interest: $10,620
- Taxes: $3,900
- Repairs: $3,000
- Realtor: $9,900
- Total Cost: $30,680
So are you making any money by house hopping? Absolutely not. Jon and Julie thought they had earned $15,000 by selling their house, but they actually lost $15,000. Not a smart move on their part. After looking at these costs, it’s pretty easy to see why house hopping is keeping people broke.
House Hopping is Keeping You From Becoming Rich
Forgive me, but I just can’t stop there. Not only is house hopping causing you to stay broke, but it is actually keeping you from becoming rich!
So yes, it’s true that there are expenses to upgrading houses every couple of years, but there are other factors at play as well. And quite honestly, I consider these factors to be more of a detriment than the costs outlined above.
Everyone has all these dreams of owning a bigger house. You know the kind, the one with 5 bedrooms and 4 full baths… the dream of a family of four…. Does that make any sense at all? To me, it certainly doesn’t, especially when you factor in the costs of the upgrade.
As we stated earlier, a family can plan to spend 1% of your home value each year in repairs and maintenance. The bigger the house, the more maintenance it needs, the greater the cost. Property taxes increase, the mortgage payment increases, and your costs increase if you ever want to sell it. Basically, by upgrading your house you are severely increasing your monthly costs. And, chances are that your income didn’t really increase that much since your last house. You just had a bigger down payment this time.
2) Selling at Wholesale, Buying at Retail
When you sell your house and pay the Realtor fees (and possibly the closing costs), when it’s all said and done you are making nowhere near the market value of your house. It’s basically like selling your home at a wholesale price.
For many of us that buy, however, we are looking for the house that is completely remodeled and move in ready. For those types of houses, you’ll always pay retail. When factoring in the costs of selling and buying from this perspective, they are through the roof (pun fully intended, ha!).
3) Hurting Your Cash Flow With Each Upgrade
When you are actively house hopping, you are typically upgrading to a nicer, larger house, which almost always means a larger mortgage payment. With moves like this, your cash at the end of each month gets smaller and smaller. And, with less cash means less chance to invest, which is clearly hurting your ability to get rich.
But Isn’t My House an Investment?
I used to think that my house was an investment. After all, as the years went by my equity increased and the value of my home typically increased as well, which therefore improved my net worth. While this is true, when factoring in all the expenses of a home, it’s pretty much like investing your money in a money market account at 0.8%…a pretty crappy return.
The rich do not consider their home to be an investment. Instead, it’s merely a nice place to stay when they’re not out working hard on the next big business deal. According to “The Millionaire Next Door”, the rich definitely aren’t fans of house hopping. In fact, they typically reside in the same house for 20 years at a time!
To further prove my point, take a look at the chart below. While the middle class put over 63% of their net worth into their house, the rich only put 9% of their worth in theirs!
If you’re interested in becoming wealthy, put your house hopping aspirations behind you. Instead, stick around in your current house, pay down your debts, and invest your extra money in the market, business ventures, and/or rental properties. These will likely give you a far better return than your house ever will!
Do you know of any house hoppers? Do you agree with my standpoint on this?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.