Charting Your Real Estate Roadmap
By Pat Kilner
Here’s a shocking truth: The way that most homeowners approach real estate in the DMV will wind up causing them to lose on average two million dollars over the course of their lifetime. Their approach not only leads to financial instability but surprisingly correlates in the long term to family instability as well.
What’s even more sad about what’s happening to homeowners is that it doesn’t have to be this way. When people adopt a different approach to real estate they hold onto their money and ensure their family’s security in the long run.
In the 1950’s the great majority of the post-war generation returned home, bought a house, raised their family, and oftentimes remained in the same residence for the next 50 years. But their children – the Baby Boomers, who had access to more wealth than any generation before them – began a trend of moving from home to home and upgrading houses far more often than their parents. The Boomers’ approach to home ownership only accelerated when you consider the approach their children’s generation (sometimes referred to as Generation X) took. Today the modern family residing in the DMV buys and sells a home every 7 to 8 years – and if recent data is any indication, this pace is accelerating. In the third quarter of this year, the national average tenure of a seller in their home was 6 years and 4 months prior to selling. And because of the transient nature of government, DC area sellers typically stay in their homes for significantly fewer years than the rest of the nation.
From one point of view all this selling and buying represents the American Dream. After all, isn’t it a good thing to have the financial freedom to move from one home to the next with greater ease than ever? But when you look closer at all this activity from a clear-eyed financial perspective you soon discover that there is a measurable cost in treating the asset of real estate in a way that our grandparent’s generations never even imagined. And if you’re surprised to hear someone who makes money on real estate transactions question the wisdom of more of them, then read on.
The Cost of Moving
Let’s begin with a simple look at a fictional family in the DC area who moves every seven years. The Smiths find themselves like a lot of other homeowners in the area with the opportunity or need to frequently move. Each time they sell their house they are faced with a set of not insubstantial costs associated with the move:
Transactional Costs: These include commissions, taxes, title fees, and of course preparing their home for sale. Even if only light work is needed to ready the Smith’s home for the housing market, they still face approximately $40,000 in various expenses when selling a $600,000 home.
Equity Loss (Opportunity Cost): This is the loss incurred by holding onto a home for 7 years instead of (say) an additional 10 years. At an average increase in value of just 2.5% annually for a $600,000 home, the loss to the Smith family is enormous – $198,000.
In fact, between the Smiths buying their first home at age 25 and selling a third home at age 46, upgrading their home each time they sell and buy, the Smiths lose over $960,000. And that’s not all: because banks want to recoup their money back quickly, everyone who gets a home loan pays more in interest at the beginning of their bank note. When you factor in the huge additional costs the Smiths will pay in mortgage interest during the early years of owning each of their homes and the meager equity they will have accrued during that time, you can safely add another $200,000 to the Smith’s costs.
When the numbers are presented this way, the automatic response is to wonder why people buy a home at all. Wouldn’t it be better to simply rent? On the one hand, if the Smiths had rented homes during this same timeframe, they would have spent slightly less in rent and moving costs. So compared to the way the Smiths buy and sell their homes, it would appear that buying is not always the right move. But what if the Smiths bought homes differently? It turns out that buying with a deeper understanding of how to make your investment in a house work for you turns the tables on these losses.
Family Wealth and Family Flourishing
While the picture sketched above of the Smiths is a good starting point for grasping the costs associated with buying and selling houses, if we only see the home we live in through the lens of a spreadsheet, we can easily miss the even bigger picture – one that takes a generational approach.
For most of human history, wealth has been transferred through property. And no form of property (no asset class) has delivered more wealth, security and sense of belonging to the next generation like real estate. Due to its scarcity, land – and the homes we build on it – has always been something worth sacrificing for. Property in the form of land and houses gave people purpose – to tend it, care for it, and most importantly to pass it on. Those who had it and kept it controlled their destiny compared to those who lost it or lacked it altogether.
This was a vision that animated generations of people for literally thousands of years until quite recently. What then changed from then to now – and what is our new approach costing us?
At Kilner & Kirk we wanted to find out, so in the winter of 2020 we began interviewing families at every stage of life who have worked with us over the past two decades to discover the true depth and breadth of these costs. These families were from every socio-economic and demographic background and own homes in every area of DC, Maryland and Northern Virginia.
We discovered something remarkable. Families with a generational approach to real estate reaped hundreds of thousands and oftentimes millions of dollars of value from the way they approached real estate. But most families found themselves in a similar boat as the Smiths. By their mid-40’s, their decisions had cost them over a million dollars – and they didn’t even know it. More and more families like the Smiths have little left to pass on to their children as a result of the kinds of decisions they made, making the ownership of real estate more of a burden than an asset.
Our interviews also revealed three major factors that make a generational approach toward real estate challenging for the modern family. These factors are uniquely acute for this generation of homeowners and cause pressures on today’s families that have never been experienced by previous generations. It’s as if we are playing on an entirely different field. If that’s the case, then understanding these factors and deploying the right strategies and tactics to counter them is key to winning this new game.
We think we’ve hit on the right game plan to ensure our clients take a generational approach toward real estate, equipping them differently for the different game they are in. We call it your Personal Real Estate Blueprint, and it centers on mitigating three key factors that are currently preventing families from literally building millions of dollars in wealth.
Factor 1: Faulty Retirement Planning
Most modern financial planning begins by asking in what year you want to retire. This admittedly arbitrary date then guides all of the assumptions about your savings in the short term. Those savings are plugged into a calculation that uses mutual funds or other financial vehicles to determine their future value. While the exercise is not bad in itself (after all, we won’t be able to gainfully work forever), it leaves out two important ideas:
The wealth we want to pass on (not just live on)
The value of our real estate at the end of our lives
When these are incorporated into your thinking about retirement, the nature of the retirement game changes dramatically. Thinking of your home in terms of an asset that factors into your retirement should change the way you think about buying and selling houses. For example, if you could project that the home you are about to purchase would grow at twice the annual average of other similarly priced homes available, would you be willing to compete for it differently? Or how would your offer change if you could predict a relatively weak growth of the asset?
It turns out that it’s not rocket science to estimate the value of your real estate in 10, 30, or even 50 years. The data is available just as it is with bonds or stocks. But when we omit real estate valuation and only focus on investments in capital markets when thinking about retirement, our concept of wealth is reduced to that which will allow us to survive until death instead of the far broader picture of generational wealth. As part of our process, we help clients project the growth of their real estate investment whether they’ve owned it for years or are still considering making it their own.
Factor 2: The Amazon Effect
I recently bought a car online, but unlike prior vehicle purchases from whatever the dealer had available on the lot, I was able to compare every car on the market, then bought the best priced one I could find – 1600 miles away in Texas. And they delivered it for free! Thanks to Amazon, Ebay, and every other store that has an online e-commerce capability, we don’t even need to leave our homes to buy a car, buy stock in a blue-chip company, or purchase our next tailored jacket. Nearly every good and even many services have become easily substituted commodities and with the rise of apps like Zillow that bring every listed home to our phones, the purchase of a home has also become commoditized. One click allows you to see the virtual tour. Another gets you a showing. Another allows you to sign the offer from your couch. Online marketplaces have made buying so frictionless that it’s not surprising to see how our habits of impulse buying and short-term thinking can impact even the most critical of purchases.
Apps like Zillow are built by design to prompt only basic questions that can be easily measured and answered – the number of bedrooms, bathrooms and location – but a generational approach to purchasing real estate adds a layer of discernment by asking questions such as:
Is my home a retreat from life’s whirlwind?
Is my home ideal for my children to reach their fullest potential?
Can I see myself retiring in this home?
Does my home allow for the family culture I want to build?
Answering questions like these stretches our perspective. No longer is the purchase of a house simply a transaction. Rather, a home becomes a vehicle through which a family can achieve their deepest desires – not just a roof over their heads but a place where they flourish. At Kilner & Kirk, we’ve developed an easy if eye-opening process that helps you recalibrate thinking of your home as a generational investment for you and your family.
Factor 3: Heightened Expectations and Unreliable Advice
The psychologist Rene Girard observed that the things we want are fueled by seeing what others have. It’s just how human beings are wired. When it comes to our homes, the desire to keep up with the proverbial Joneses affects us all. The difference is that today social media makes us more keenly aware than ever of our friend’s unblemished remodeled kitchens, entertaining Meca backyards and wrap-around porches. This easily creates an environment wherein we can become deeply dissatisfied with the more-than-sufficient property we currently call home.
When it comes to a decision as impactful as buying the right home or selling your current home, the cost of not having the right advisors can be enormous. After all, we’ve all had the experience of being fairly confident in a purchase only to be talked out of it by someone we trusted who either explicitly or implicitly helped to adjust our perspective. An algorithm cannot prevent us from making a disastrous decision because the algorithm is probably how we wound up thinking that item X was the right purchase in the first place. In fact, using its own algorithm to assess values, Zillow lost hundreds of millions of dollars and completely shut down its own instant buyer program in November – proof that everyone would benefit from having an experienced set of eyes to help them when it comes to buying something as important as a home.
As part of our process, we help clients assess the team of trusted fiduciaries they have around them to make the best decisions possible. From estate planning to financial insights and accounting expertise, the right board of advisors can help you adjust your plans or craft entirely new ones that have truly generational implications.
A Personal Real Estate Blueprint
What if every individual or family who bought or sold a home could assess the impact of these three factors on their own approach to real estate? What if those insights allowed them to create a strategy to counteract the factors?
Over the past year, we’ve worked with our own board of advisors to create a completely complimentary process for our clients that does just that. Every client who has ever or will ever work with us now has the opportunity to:
Assess how you are positioned to maximize real estate for wealth building in addition to three other critical areas.
Receive a holistic financial plan which goes beyond just retirement planning and which includes real estate holdings.
Craft a year-by-year strategic plan designed to guide their decisions or the decisions of their estate
Where’s the catch? Wouldn’t it be easier for us to just sell you a home every 8 years, send you gifts and marketing and ask nicely for you to refer us?
Probably.
But we believe that a business that plans to be around for generations requires a different level of care for clients. We wouldn’t have it any other way.
