In this post, I am going to share my story of owning a one-bedroom apartment in Stamford, CT, a 45-minute train ride from NYC.
What looked like a sure investment five years ago, turned out to be a financial mistake. I am also going to show you how much more I would have made, had I invested elsewhere (spoiler – $39,500 more!).
My bachelor pad
I bought my 1br, 1 bath, 760sqft apartment in Stamford, Connecticut in June 2016. Financial details:
- Price: $262,000
- Down payment: 10%
- Mortgage: 3.6%, 30y fixed
- Monthly payment, including HOA dues (which already increased 10% in that period), taxes and PMI: roughly $1858 per month.
Back then, I had a stable income and good credit. And 30-year fixed rates were at all-time lows. I decided to put down only 10%. I am still a big proponent of responsible borrowing – if you have good income and job stability and can finance a large purchase at historically low interest rate then you should go for it and invest your own money in something with higher long term potential. Of course, the downside is the PMI you would have to pay. Here is a summary of my expenses since then excluding the upfront costs and improvement costs.
What has happened since I bought?
A few weeks ago, feeling optimistic, I decided to ask for a reappraisal to remove my PMI. I paid $500 for this “pleasure”, just to discover that my apartment now costs only $245,000 (6.5% less than what I paid for it). Now that’s disappointing! Especially after making multiple improvements:
- Removed carpets and installed expensive wood floor.
- Replaced the old drapes with energy efficient honey comb blinds.
- Purchased a new water heater (the apartment doesn’t have gas).
- The HOA installed a new, fancy elevator a month after I moved in.
- The HOA redid the paving of the whole complex.
Why did I lose money?
How did I make improvements and lost money in an apparently rising market?! I am not an expert on appraising apartments and honestly the price does not make financial sense to me but that’s the thing about real estate markets – the lack of liquidity (availability of instant buying and selling and low transaction costs) leads to distortions in market prices.
It is worth mentioning that my apartment got flooded three months after I moved in because an apartment above leaked water from the kitchen. It was frustrating and took a long time to inspect for mold and replacing the flooring and walls. I also recently moved to a new place because of unforeseen reasons and had to find tenants and deal with that. I was lucky and they are the nicest people, however, renting still requires work to find the right tenants and then maintain the place and make sure everything is in good shape. All I am trying to convey here is that investing in real estate takes time and work.
The HOA story
By the way, I am quite happy with my HOA – they did an excellent job renovating the building. My monthly dues increased by $30 (roughly 10%). I think it is a well run HOA, and I trust them. But that goes to show you that even the best-run HOAs can increase monthly dues and you, as an owner, should be prepared for that! By the way you can now inspect your HOA online!
Okay – now what could/should I have done?
I could have put my money in a cheap index-tracking ETF. That includes my down payment ($26,000) , transaction costs (roughly $7,000) and costs for improvement ($5,500). The S&P500 index has been up 66% since that time.
If my apartment’s real price is truly $245,000, I have lost $17,000 on my investment. Had I invested in the stock market, and accounting for all expense differences between buying and renting, I would have made $21,500. That’s a difference of $39,500!!
Hindsight is always 20-20. Over the last 4-5 years, the stock market has performed much better than my home investment. The point I am making is that- real estate is not always the best place to invest your money. Thirty percent of Americans have 100% of their savings invested in their homes. Conventional wisdom is that buying a home is an excellent financial decision. This is not always true. Just like the stock market, real estate has its risks and is not a sure thing. Know the risks and diversify your investments.
Here is a visual representation of the two alternatives accounting for all my renovation costs and HOA increases:
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