In 2020, we bought a forever home. We found a relatively good deal as panic set in during the first month of lockdown. We decided that if we are going to be cooped up for an unknown period of time, we might as well live in a more comfortable space.
The forever home is about 40% larger than our previous home. It has a nicer layout for two children and a guest. There should be no problem living in our current home until our kids become adults.
However, based on my track record of buying properties since 2003, I have my doubts we’ll be living in this home for the rest of our lives.
In a strong real estate market where you might be constantly getting outbid, buying one and done has its benefits. If you’re debating about whether you should buy a forever home or whether to upgrade to a forever home, this post is for you.
Your Forever Home Will Likely Be Temporary
The one constant in life is that it’s always changing. Just when you think you’ve got a great groove going, something tends to come up.
In 2004, I thought I had found a forever home. It was a 4-bedroom, 3.5-bathroom home across 2,300 sqft. It took all the money I had to buy it. I thought that over the next 10 years, we might start a family and grow into the home.
But our baby never came. So in 2014, we moved to a smaller home in a quiet part of San Francisco and rented out our larger home. The new house cost about 60% less than our budget based on my 30/30/3 home buying rule. It was a 3-bedroom, 2-bathroom home with an office facing the ocean.
Today, my wife and I are likely done with having kids. The biological chances of having a baby are minuscule once you hit your 40s. Further, we don’t have the same amounts of energy as we once did. However, if we are somehow blessed with a third child, we will likely have to hunt for a larger home and a car with third-row seating.
If we end up keeping our home, we may downsize once our daughter goes to college in 2038.
If you’re under 40, I say the chances of you buying your forever home is less than 25%. It’s only after you buy a home after age 50 do I think you have a greater than 50% chance of never moving again.
Your Wealth Will Change Your Desires
Part of the reason why I think there’s less than a 50% chance of buying a forever home before 50 is due to our changing desires. Ideally, all of us will spend to where our income and wealth will go. By doing so, we are able to utilize our money to live our best lives all the time.
Unfortunately, it’s very difficult to accurately forecast our future net worth. As a result, we tend to hoard our wealth for many years long after it’s more than safe to spend more. After all, corrections happen all the time. It’s generally better to be more conservative with our spending than too aggressive.
However, in 10 years, I’m certain the vast majority of us will be much wealthier. If you currently own a home with a mortgage, the cost of ownership will feel so little in 10 years thanks to inflation as well. Therefore, even if you think you own your forever home now, your desires will likely change a decade from now.
Your Property Declines As A Percentage Of Net Worth
When I first bought my 2-bedroom vacation property, the total purchase price made up around 35% of my net worth. At age 30, I naively thought this property would satisfy my desires for the rest of my life. At the time, I also thought my income and net worth would continue to rapidly grow. Too bad the financial crisis happened soon after.
However, after more than 14 years of ownership, the purchase price now makes up less than 3% of our net worth. Yet, we still vacation there. The reality is, I would prefer if we owned a place that was twice as big given our household is twice as big. If so, we could stay at a vacation property closer to the size of our primary residence rather than 60% smaller. One of the goals of going on vacation is to live it up, not down.
I’m pretty certain that in 10 years I’m going to long for an even nicer home. The reason is not because our current home isn’t good enough. The reason is there’s a decent chance my net worth will double in 10 years assuming a 7.2% annual growth rate.
Despite being relatively frugal, it’s a little hard to imagine not wanting to inflate our lifestyles a little further. Money should be spent on a better life, otherwise, there is no point working so hard after you have enough to survive.
I’ve already dreamt about living in a beachfront home. That dream may only grow stronger over time.
Best Way To Buy A Forever Home
With the default assumption your forever home will likely be temporary, let me propose the best way to buy your forever home in a financially responsible way.
Some buyers use the excuse of buying a forever home to pay more than they should. They tell themselves and others that because they plan to live in the home for decades, stretching to overpay is fine. The situation is akin to someone justifying buying a fancier car because he plans to own it for 200,000+ miles. But the reality is, this seldom ever happens.
I think the best way to buy a forever home is to buy the nicest home you can afford up to 5X your household income. The common multiple used to be 3X. However, with interest rates so low, stretching to 5X now provides a similar level of affordability compared to when interest rates were 2-3X higher.
Make no mistake about it. Buying a home up to 5X your household income is aggressive. You don’t have to buy your forever home either. But if you want to, we are talking about the highest household income multiple possible that is still financially responsible. After all, it’s reasonable to assume our net worths will generally go up over time.
After you’ve purchased your forever home, you should aim to live in it for longer than the median homeownership duration of 8-9 years. Therefore, aim to live in your forever home for at least 10 years.
Why Own A Forever Home For At Least 10 Years?
10 years is a good enough time to:
- Enjoy your forever home and get the most out of your initial down payment. The first three years will be filled with excitement. The next five years will be getting really comfortable with your home and the neighborhood. The next two or more years may be about entrenching yourself in your community.
- Accumulate a significant amount of additional capital. Perhaps after paying 5X your household income, you are left with a small financial buffer. You want to rebuild your cash hoard to gain back some financial peace of mind. After 10 years, you’ve now got a big financial buffer to afford a new forever home if you want one.
- Ride out downturns just in case you buy your forever home at the top of the market. Although a downturn shouldn’t hurt you if you planned to live in your new house forever, a downturn may still negatively affect your mental health. But after 10 years, chances are high your forever home’s price has likely recovered or even increased in value.
After 10 years of ownership, only then can you properly make the decision as to whether your home is truly the one. If it is, congratulations! Having to find a new home and move can be a real PITA. But if you create enough wealth during this time period, you might as well keep living your best life.
Plans For Our Home
Given we purchased our forever home in 2020, we will ideally try and live in it until 2030 before making a decision. The biggest drawback of owning the home for so long is that it may affect our ability to relocate to Hawaii.
However, if we are able to build enough wealth, we might be able to buy a new forever home in Honolulu before 2030 and rent out our current home. And if we build an enormous amount of wealth, we can do what foreign money launderers do in Canada and just keep their homes empty. Just kidding. That would be too wasteful.
My favorite way to buy real estate is to buy a great property, live in it for several years, and rent it out. In a normal lifespan, going through this process three times to build wealth and passive income is feasible. When you buy property you enjoy living in, chances are high the person renting it will enjoy it too. Same for a potential future buyer.
Selling a property creates economic loss through commissions, transfer taxes, and preparation costs. Therefore, owning a home for as long as possible is recommended. And if you get really wealthy, there’s no reason why you can’t buy and own multiple forever homes to live in throughout the year.
Eventually, these forever homes can be passed down to your children. Let’s hope they can take full advantage of the stepped-up basis when the time comes. As your children build their own wealth, they can eventually buy their own forever homes as well.
Permanently Lower Home Inventory
Check out this latest existing home inventory for sale chart. I don’t think we’ll ever return to the historical average of 2.35M homes for sale.
As I look to the future, it seems likely more households will permanently buy and keep more than one property. Owning real estate has become a normalized way to build a retirement income portfolio.
Further, as more people keep their forever homes for longer, the average duration of homeownership will increase. As a result, there may be a permanent decline in inventory. And lower inventory leads to higher prices.
Sure, there’s a chance inventory ticks up in the future as some retirees look to downsize. But with the potential for a capital gains tax hike, the rational financial move is to just keep the asset and borrow from it if necessary.
If you find your forever home, chances are high that other people will have found it as well. The key is to not overpay. But if you do, know that when you turn around and sell in the future, chances are high new buyers will overpay as well.
Related post: Why The Housing Market Won’t Crash Any Time Soon
Readers, do you live in your forever home? Have you left your forever home and moved to an even nicer home? What do you think is the minimum amount of time and the maximum amount you should spend on a forever home?
Enjoy Your Forever Home For Now, It Will Likely Change is written by Financial Samurai for www.financialsamurai.com