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Buying More House

I wanted to talk about buying more house than you might have thought about. Or another way to say it is maybe spending more money to save money. This sounds counter-intuitive. But I have this conversation with people frequently where I usually find one or two things with clients that are getting pre-approved. One is, I’ll tell somebody, ‘You’re pre-approved for a certain figure’. And they say, ‘Is that all?’ And they want more and more. And they really want to spend way beyond their budget. More than I can get them approved for. But they’re just not aligning their wants with their budgets. And then, believe it or not, there’s another problem. I’ll talk to people and I’ll say, ‘You’re approved up to a certain number.’ And they’ll say, ‘Oh, I would never spend anywhere near that much.’ And the first thing I think of is, ‘Okay, you’re just going to be coming back to me sooner than you think.’ And sometimes clients turn into this lifelong annuity of income stream for me. Which I don’t want. I don’t want people coming back to me every two, three, four years. ‘Oh, that last place wasn’t big enough.’ ‘It was the wrong community.’ ‘It was a longer commute that I wanted.’

Is buying more house than you might want smart?

When you think about it we tend to, when we buy things, certainly a house, it’s a zero-sum game, right? Spending less money, you save money. But that’s not necessarily true. For one reason, the transaction costs in buying and selling real estate are enormous. So given that, you really don’t want to do it too many times. The less frequently you can do it in life, the more you’ll save in transaction costs. Think about that on a bigger scale. If you go through life and you’re always cutting corners or going towards the cheaper end of your budget and thinking you’re saving money, this is what I did. And my very first home, which was a long time ago was a two-bedroom townhouse, one-car garage. I really wanted a three-bedroom, two-car garage because I wanted to have a roommate. And I was going to have a spare room for my mom who came to visit frequently. And I got the roommate but mom slept on the pull-out couch. I only owned that home for not even four years.

Transaction costs need to be considered

I did it again. I got a studio condo next. Why didn’t I get a one-bedroom or a one-bedroom den? Because I was cheap. And I didn’t have that place very long. So you churn so much in transaction costs. I actually went back over my lifetime and I added up, ‘How much have I saved by being cheap and spending maybe less than I really could have, maybe arguably should have. And then how much did I spend in transaction costs?’ Because arguably, in my life, if I’ve owned seven homes. I probably should have only owned four. So I add up the excess transaction costs and I compare that to the savings. Because I didn’t save money by being cheap and spending less than I really could have or should have. I ended up spending more on the transaction costs than the monthly savings. So going back to the original principle, had I spent more on these homes, maybe I would have owned less homes and in the long run would have spent less. That’s crazy to think of, right? Spend more to save more.

Buy ahead of the curve – buying more house

Another reason to consider this is what I call ‘buying ahead of the curve’. It’s just another thing where maybe you think you need a two-bedroom now, but get the three-bedroom, whether it’s a growing family or you just want more space or you want the third bedroom as a home office. Or maybe you don’t think you’ll need it, but you do need it for some point in the future. Not buying ahead of the curve means, ‘Oh gosh, now we need another place because we only got the two-bedroom to start, now we need the three-bedroom.’ Anything you can do to stay in a home longer, it just fits part of the buy-and-hold mentality. And when you think about life, look at some of the ups and downs in the stock market. Buy quality stocks or mutual funds and hold on for dear life. And if the market has a correction, at some point, it always seems to come back. Doesn’t it? That’s what history shows. Same thing with housing. Buy something you love, buy something certainly that’s in budget, but don’t go arbitrarily to the low end of your budget and cut corners and think it’s a zero-sum game. Maybe it’s okay to spend a little bit ahead of the curve and buy ahead of the curve. Because, for the reasons I’m citing, it might actually make sense in the long run.

Get a better return – buying more house

Another thing to consider as part of this principle is maybe spending a little more than you had intended, will get you a better return. Possibly you buy something that’s more expensive. Well, then it’s going to be a nicer asset, a nicer house than what you would have bought if it was cheaper. It’s the two-bedroom instead of the three. No, get the three, it’s a closer in neighborhood, it’s a better commute, it’s a better level of finish. Maybe the one that’s more expensive has got a renovated kitchen and bathrooms. Whatever it is that’s causing it to be more expensive, you will find that you may get a better percentage return. Going back to the place that I bought, that was the studio. I strictly bought it because it was just cheap. And that made me excited because it was cheap. And I was being arbitrary, it was a zero-sum decision for me.

When I sold that studio, and the market I sold it in was pretty hot, I didn’t make a whole lot of money. It’s a studio. A one-bedroom is better than a studio. A one-bedroom den better than a one-bedroom, two-bedroom better than a…you get my point. I wish I would have spent more. I think I would have gotten a better return instead of not even 2% a year, maybe I would have gotten 4% or 5% a year on a better asset because I spent more money and I had a better asset, a better house, a better property to begin with.

Stay in a home as long as possible – buying more house

And then last, another thing to consider is if you spend more, you love it more. You stay there longer, you’ve got the third bedroom instead of the two, or the second bedroom instead of the one. You’ve got parking instead of no parking, you’ve got a higher level of finish. Whatever it is that’s nicer because you spent more money. Let’s also consider this, you get the use and enjoyment of it. You’re spending more money, you get more square footage, you get more stuff, you get more utility, you get more beauty, you get a better commute. You get something for your money. You get to enjoy it while you own it, and then maybe you get a better percentage return. Maybe you live in it longer, and over your life of home ownership, you own fewer homes and you save on transaction costs.

A budget should be flexible – buying more house

So it’s just something to think about. It’s a little frustrating to me if I say to somebody, you’re qualified to an $800,000 purchase price, and they just say, ‘Oh, I would never spend that. I’m capping out at $500,000 or $550,000’. They do this because maybe that monthly payment is very similar to their current rent payment. I think it’s a big mistake. I think you’ll be back to me in a short number of years to buy something bigger, better, better commute, whatever. It’s just a consideration. It’s not something that you have to do. I just think it’s something to consider. And at the end of the day, it’s your decision. Of course, if a lender tells you you’re qualified to $800,000 and you find something that you truly love that is cheaper that is great. If it’s the commute that you want, it’s the neighborhood you want, it’s got the bedrooms and the square footage, and the park. It just has everything that you want, well, then that’s great. That’s just great. There’s nothing else to say.

Look across a range of prices

But do give some consideration to what I’ve talked about here. If you’re qualified for more, look across all those different price ranges and just really see what suits you. And think about the long-term owning lesser properties. I’m not suggesting you should be able to buy your last house first and you never move again. I think that’s difficult to do. Most of us can’t afford the house that we would love to live in for the rest of our life. Plus there’s lots of other things like job relocation, family change, relationship change, too many things. That’s a ridiculous concept, to think that you’re going to buy one house and never buy another house again. I just like the idea of considering maybe spending more to get something that you truly love, that you’re going to be able to buy and hold and love for a long time. And hopefully it turns into a great investment as well.

Conclusion – buying more house

Thanks for watching. Of course, as always, feel free to contact me with any questions on this concept and discussion or any others. Thanks very much.

To contact me to discuss your local housing market, mortgage rates, or other mortgage questions, click here to schedule a call or you can email me directly.