Taking that leap and buying your first home is a huge, exciting time in life.
After all, if you can afford it, buying a home seems smarter than forking over money to a landlord, right?
Today I’m here to share with you why, after ten years of owning our first home, we would have been better off renting.
I will preface this by saying that each situation is entirely different.
Often, buying your first home is a smart move that will absolutely pay off. I believe that whole-heartedly. Unfortunately for us, the way we went about buying, owning and paying off our first home ended up crippling us financially. In sharing this article, I’m hoping that others might avoid the mistakes that we made, and have a much better experience when buying their first home.
In 2008, each of us 22 years old, Chris and I were engaged. With our wedding date set for the end of the year, we began considering where we were going to live. Renting vs buying? I was still at home with my parents and Chris was renting at a friend’s house. We had about $6,000 in savings, and that was mostly ear-marked for wedding expenses. I was working part-time and studying, Chris was working an entry-level IT job.
Even still, we decided to explore our avenues for buying a cheap home.
We found a government scheme for people like us who were low-income and had no deposit, but wanted to buy. It was a shared-equity scheme; a government department would own 30% of the property, and we would pay the mortgage on the remaining 70%. All we needed was a $500 deposit.
This article won’t really go into shared equity arrangements. Honestly it was a pain (especially when it came time to sell the house) but not crippling or really detrimental to our situation. I just mentioned it for the background information, so you understand the position we were in when we purchased.
We looked at cheap houses, fell in love with one, made an offer, and by September 2008 we had closed on our first home.
The house was sturdy, double brick; there were no huge structural issues, it was just pretty dated. It had been built in the 70s and definitely needed a bit of work but it was more than liveable, and we loved its character and the huge backyard.
We were pretty proud of ourselves when we got those keys. Each of us just 22 years old and we were already paying off our own home. Honestly, we were pretty smug about it, thinking how far ahead we would be in life a few years down the track thanks to our smart investment.
Spoiler alert: that “smart investment” first home lost us thousands and thousands of dollars.
Ten years later, now in our early 30s, we have had to totally start over financially. For us, buying the home that we did was a huge, crippling mistake.
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4 Mistakes To Avoid When Buying Your First Home
Mistake 1: Buying a cheap old house
We didn’t realise this at the time, but we learnt a valuable lesson a few years into home ownership:
If you can only afford to buy a cheap old house, you can’t actually afford to buy a house.
Sure, you can afford the mortgage payments. But a cheap old house is costly in other ways. They generally require a ton of maintenance. And not just replace-the-leaky-shower-head-when-you-move-in kinda maintenance. We had to replace our entire hot water system within 4 months of moving in. We had to replace 40 metres of asbestos fence when one small section blew down, which involved the retaining wall being demolished and rebuilt too (that cost roughly the same as our entire kitchen renovation, FYI). Every ceiling in the house needed replacing. Cornices were cracked, aluminium door frames were wobbly. The shower started leaking into our wardrobe walls and carpet. The roof and patio kept springing leaks (I will never forget the morning that I heard splashing and came into the kitchen to find torrential rain pouring all over the top of the kitchen cabinets through a gap in the ceiling). We were constantly putting out fires.
Another factor to consider is that cheap old homes generally feature bare-minimum fittings. One light fitting per room, one powerpoint per room, etc. And if you want to start adding a light fitting here or a powerpoint there, you may need to bring all the electrics in the house up to current code.
Also, cheap old homes were not built with energy efficiency in mind. Our utilities bills were higher than those of our friends in newer homes.
Lastly, cheap old homes are usually cheap because they’re so far away from everything. Every drive (work, church, friends’ homes, etc) was a long one. We burned through fuel and we also burned through kilometres, meaning our cars were needing to be serviced more frequently than every six months – it was more like every four months.
So before buying your first home, weigh up all the work and other costs that will need to go into it and make sure you consider that against the value of the house. This article on being financially ready to buy a home sums it up really well.
Mistake 2: Buying in a cheap old area
The sad fact about cheap old areas is that, unless something major happens in that area to add some appeal, they stay cheap and old as a whole. Our dowdy old suburb, with its unsavoury reputation and plethora of dodgy, aged houses just like ours, was never going to jump up in value. Even in a market upswing, the prices weren’t going to increase at the same rate as other, more affluent suburbs, meaning we were always going to be a step behind.
Mistake 3: Renovating a cheap old house
Over-capitalising. That’s a word I learned about five years into home ownership. We were neck-deep in renovations by that point, and someone kindly asked us, “Are you concerned about over-capitalising?”
If you’re not familiar with the term, over-capitalising is what happens when you put more money into doing-up a house than you will ever get as a return when you sell it.
You see, we figured every renovation we completed was an investment. That every update and shiny new fitting would pay for itself and then some. And in the right house, in the right part of town, it definitely could have. Our house was really shaping up nicely. But about halfway through our renovations, we realised that the amount we had spent on renovations, when added to the amount we had paid for the house, was higher than the upper end of the market in our suburb. And our house was still pretty rough around the edges; there was no way we could even list it at those price points.
We felt we had a choice – stop renovating now, and accept the loss as it was. Or keep renovating and bring it right up to scratch so that when we did sell, it would be at the top of the market, and hopefully the overall value of the suburb would increase by that point too so that we could at least break even.
Well, we chose the latter. Little did we know, the market had peaked and was about to down swing hard.
I will say, the renovations we did over the years meant that we only (only! Ha.) lost $43,000 when we sold, rather than closer to $100,000.
Mistake 4: Only making the minimum payments on the cheap old house
Not long after purchasing our home, interest rates plummeted, which was awesome! For a while we kept our payments at the same level, so we were actually paying off more than our minimum payment.
We should have kept doing that. But when we realised we had a few thousand dollars in reserve, we started skipping payments when we had a big bill coming up. Then we started enjoying having that wiggle room, so we skipped some more. And finally we brought our fortnightly payment down to the minimum requirement, so we could have more money to play with.
If all you can afford to pay is the minimum payment, then of course you do that. But our incomes were growing and we could more than afford to keep our payments at a much higher level. Paying more each fortnight would have greatly reduced the amount of interest we paid over time. But because we were meeting the minimum requirement of our loan, we felt we were doing “good enough”.
So let’s consider how much money we spent as home owners over the course of 10 years.
Because being a home owner is more than just paying off a mortgage. Each of the items listed below cost us thousands (in some cases, tens of thousands) of dollars over the 10 year period in which we were home owners. Not one dollar spent on the items below went towards paying off our mortgage. And note that as renters, none of these costs apply to us now.
- Renovations and maintenance
- Mortgage interest
- Council and water rates
- Building insurance
Add in the fact that when we sold, we sold for $43,000 less than we originally purchased for? Ugh. I feel sick just thinking about it. What a terrible waste of money. I mean, we slogged it out for ten years at our two jobs for that!?
So why the hell did we sell our house when we were so far behind financially?
1. The market had no signs of improving
Since selling our home, the market has continued to slowly drop, with experts predicting that when the market does eventually turn around, house prices will go up, on average, 5-10% in a year. Given that our house was in a below-average suburb, we would be looking more at a 5% increase. So at that magical point in time when the market does turn around (which could be a year or two away still), the house would go up by maybe $10,000-12,000 per year. Depending on how much more the market drops before it turns around, it would take 4-5 years just for our house to return back to the value we originally bought it for, let alone for us to start seeing a profit.
And actually, a “profit” in that scenario wouldn’t be a real profit at all, when you consider the amount of mortgage interest, council rates, insurance and maintenance we would be forking out for during that time.
2. The house still needed a lot of work
Our buyer immediately made plans for a massive roof and gutter restoration. There was a fence at the back of the property that I could see was going to need replacing in the next few years. The huge backyard that I fell in love with when we bought had no reticulation, no lawn, and was just completely overgrown with wild nasturtiums and weeds.
All the blood, sweat, tears and dollars we had put into renovations over that time had all been focused on the inside of the house. We hadn’t even touched the outside in that period. We couldn’t afford it and we didn’t have the time. Plus, we hadn’t done much in the bathroom, other than a bath tub repair and some plumbing and grout work. Even after ten years of renovating, the house still needed a lot of work. With a toddler and a baby on the way, we didn’t have that capacity any more. It was time to focus on our growing family, not on our money pit of a house!
3. We had outgrown the home
Sure, families outgrow homes all the time and make it work until they can afford to move. But if we had waited for the house to improve in value enough to sell it, we were going to be in it for the long haul. Years and years of being crammed into that space honestly just didn’t appeal, especially when weighed up with all the other factors.
4. It would not have been a viable investment property
A LOT of people asked us why we were selling our home rather than renting it out.
“Have someone else pay your mortgage until the market improves,” we would hear over and over. And we considered it. But we realised pretty quickly it wasn’t a practical option for us, as:
- The house needed a lot of work outside in order to be a viable rental property.
- The house wasn’t renovated in a tenant-friendly, low-maintenance fashion.
- With the drop in house prices, the rental market took a hit and rentals were (and still are) dirt cheap in our area – we wouldn’t have even covered our mortgage payments.
- The rental market is pretty flooded with properties at the moment – it was a huge possibility that our home would sit un-tenanted for months or longer
- We would still have been liable for the same building insurance, maintenance, rates and mortgage interest we had been paying (in other words, pouring even more dollars into that pit.)
In the end, the decision to sell came down to this nugget of advice: when you find yourself in a hole, the first step for getting out of it is to stop digging.
Since selling our cheap old house and moving into a rental, our lives have improved drastically.
We are able to save money that we won’t need to put back into the house – for the first time in our marriage. Our weekends are ours, and not for renovating or fixing things up. When something breaks, it’s not our problem – our landlord takes care of it. We’re living in a nicer area. We just went on our first family holiday because Chris’s leave could actually be spent on down-time, rather than overseeing renovations. When the weather is wet and stormy, we don’t have to worry about the roof caving in, because if it does, someone else’s insurance is paying for it. Oh, and our rent payments are less than we were paying on our mortgage.
We know we have a long haul ahead in saving for our forever home, and it was a bitter pill to swallow when we realised how much time and money we wasted as home owners. But we are less burdened and happier with our lives than we were in that home. For us, the question of renting vs buying is a no-brainer for this season… renting all the way!
I still believe that the right house can be a GREAT investment.
However, I no longer believe that every house is a great investment. If we had done our research and waited until we could afford to have options, rather than scrambling to get into the first home we could afford, we would be in a much better position today. Yep, even if we had spent five years renting first.
So while I’m definitely not trying to convince you NOT to buy your first home, I am hoping you’ll go into it a little less blindly than I did.
If you’re planning on buying your first home, I hope this article has delivered some new information that will help you make a great choice. The smartest thing you can do before making the decision to buy is to become as informed as possible.
Alternatively, if you’re considering building, check out these articles that Kat shared when she demolished and re-built her home:
In March 2018 we read The Barefoot Investor by Scott Pape for the first time and it changed the way we thought about our money. Reading his book helped us realise what a terrible investment our home was, and ultimately drove us to the decision to sell.
If you’re flailing financially and need a fool-proof guide to getting started, this is it. We thought we had a good grip on our finances, but the system laid out in the book was not only more beneficial for us than our budget at the time, but also much more simple to stick to. We recommend this book to everybody we talk to about finances, so it would be remiss of me not to mention it in this post! Although many of the financial institutions recommended are for Australians only, the basic principles in the book can be applied no matter what country you live in. Buy it here now.