Buying A Bigger House… Is It Worth It?
I enjoy working in Real Estate, especially the home renovation process. I, therefore, tend to read a number of different articles about Real Estate trends. Recently I came across an article on “The Real Cost of Buying a Bigger House” By SETH WILLIAMS. In this article, Seth did a good job of quoting the costs of buying a bigger house and challenged the reader to answer for themselves if it was worth it.
My interest is renovating the property and then selling it. I see first-hand how the cost of renovations when buying a bigger house is directly proportional to the size of the property. Common sense tells you that renovating two bathrooms is more expensive than renovating one bathroom and that 1000 square feet of flooring is more expensive than 500 square feet to flooring. But I also know that a 3 bedroom, 2 bathroom house is the more popular than a 3 bedroom one bathroom house. Hence the 3 bedroom, 2 bathroom house will sell better and for a higher price than a 3 bedroom one bathroom house. In my experience, it is definitely worth it to add the second bathroom if possible when doing a renovation.
The different phases of life happen to all of us in one form or another. I mean you grow up and become a single adult, move into a rented apartment. Then eventually meet Mr/Miss right and become a couple. In many cases, decide to raise a family and start buying a bigger house. Pretty soon you out grow that house as the kids get older so you buy a bigger house. Then eventually the kids move out and now you have a bigger house that you really don’t need anymore. Then you start to downsize etc. This process happens to all generations. It also is the process that keeps the Real Estate market going.
Each phase of life has people deciding if buying a bigger house is worth the extra cost. When you get to the downsizing phase you have to decide is the reduced cost worth it for the reduced space. The hard part is, you can put a dollar value on the cost of the space but you can’t on the value of the space in terms of family value. In the end, deciding to increase the size of your home or decrease the size of your home becomes a very emotional decision. As an investor, I have to constantly remind myself that the potential seller/buyer is making this emotional decision, not just a dollar decision.
The cost for the increase in the size of a house according to the article by Seth Williams mentioned above is listed below.
AVERAGE ONE-TIME COSTS WHEN BUYING A NEW HOUSE
- Purchase price of an average new house: $84/sq ft
- Closing costs: 3.5% of the home price
- Costs to fully furnish a new home: 20% of the home price
AVERAGE ANNUAL COSTS OF HOME OWNERSHIP
- Energy costs: $1.03/sq ft
- Maintenance: 1% of the home price
- Property taxes: 1.3% of the home price
OVER A 30 YEAR MORTGAGE, EACH ADDITIONAL 500 SQUARE FEET OF SPACE WILL COST YOU AN EXTRA…
- $42,000 in initial purchase costs
- $1,470 in closing costs
- $8,400 in furnishing
- $24,148 in mortgage interest
- $16,506 in property taxes
- $15, 450 in energy costs
- $12,600 in maintenance
HOW MUCH THAT BIGGER HOME WILL REALLY COST YOU OVER 30 YEARS ASSUMING YOU HAVE A 30-YEAR MORTGAGE AT 4%
- A 1000 sq ft house will cost you an extra $241,148
- A 1500 sq ft house will cost you an extra $361,722
- A 2000 sq ft house will cost you an extra $482,297
- A 2500 sq ft house will cost you an extra $602,871
To the above cost, I would also add the cost to renovate the property to be able to sell it to the next buyer. After 30 years, the property can still be in good shape due to good maintenance practices but it will be out of style.
In summary, a 2500 sq ft house will cost you $361,723 ($602,871- $241,148) more to own than a $1000 sq ft house. This is roughly $12,000 a year. Each of us has to make our own decision if $12,000 a year is worth it for an extra 1500 sq ft of living space. My experience is that most of the people in the Midwest make the decision that a 3 bedroom, 2 bathroom home between 1800 – 2200 sq ft is the right tradeoff of dollars vs family value. However, this is a personal decision that only you can decide for yourself.