Einstein is often credited for the observation that people underestimate the power of compound interest.1 While this may be true, there is a second, inverse version of the same statement: people also underestimate the impact of maintenance costs.
Firstly, let’s address the key point: yes, maintenance is good. Fixing your house a little bit every year will save you a huge amount of money compared to letting your house disintegrate to splinters every twenty years. Keeping things maintained is important. Trust me, I know—I wrote a whole thesis on this topic.2 However, even better than maintaining things is minimizing the total maintenance cost by reducing the quantity of stuff that requires maintenance in the first place. That’s because maintenance costs can become a death spiral.
Let’s look at an example at how maintenance cost, specifically maintenance of a floor space you don’t actually need, make your life a misery.
You’re buying a house. You could comfortably live in a 100 m² house, but due to social pressures, you decide to buy a 150 m² house instead. Thanks to the economy of scale, it might even seem like a good deal—you won’t pay 1.5 times the price of the smaller house, maybe just 1.3 times. But that’s only until you factor in that this is not a one-time payment: you’ll be paying maintenance on the extra 50 m² for as long as you own the place. And by maintenance I do not mean only cleaning the gutters and fixing the roof once in a while, I mean all of the recurring cost that is linked to the house ownership. There’s also higher utility bills for the extra space, higher property taxes, the cost of furnishing it and inevitably fill it with stuff you don’t need to justify having the extra room.
But it gets much worse if you don’t have the cash to pay for the house upfront.3 Depending on your down payment, your mortgage will grow disproportionately compared to the floor space gained. Let’s say you can pay half the cost of the smaller house upfront. That could already be a sizable mortgage and a big future commitment. However, if the bigger house costs 30% more, you’ll need to borrow 60% more (see the example calculation below), because you still have the same amount of savings to begin with. This dramatically increases the total interest paid to the bank—not only are you borrowing more, but you’ll also have less disposable income for your monthly mortgage payments, since the bigger house will cost you more in yearly maintenance, utilities, and taxes. Here’s a potential (and somewhat speculative) illustration in the table below, using random but consistent figures.
| 100 m² house | 150 m² house | ||
|---|---|---|---|
| Purchase cost | €1,000,000 | €1,300,000 | 1.3x factor thanks to the economy of scale |
| Furnishing cost | €100,000 | €140,000 | 1.4x factor as the economy of scale applies to a lesser degree |
| Total cost of purchase | €1,100,000 | €1,440,000 | Purchase cost + furnishing cost |
| Money in the bank | €500,000 | €500,000 | Same amount in your bank account |
| Mortgage size | €600,000 | €940,000 | Total cost of purchase minus money in the bank |
| Yearly income after taxes | €100,000 | €100,000 | Salary is not related to property size |
| Yearly property maintenance and utility costs | €10,000 | €14,000 | 1.4x factor due to small help from the economy of scale |
| Other yearly expenses unrelated to property size | €30,000 | €30,000 | Not related to property size |
| Money available to pay the mortgage (per year) | €60,000 | €56,000 | Less money available per year due to higher ownership costs |
| Years to pay mortgage (5% interest rate assumed) | 14 | 31 | Same interest rate in both cases |
| Total interest paid (5% interest rate assumed) | €235,502 | €911,176 | Impact of a much longer repayment period |
So, what’s the impact? You’ll have a much larger mortgage and slightly less money for monthly payments. The result? Seventeen extra years of payments and more than quadrupling the interest paid to the bank. If you buy the house at 35 (after saving for the down payment), you’ll be mortgage-free at 49 with the smaller house—or 66 with the bigger one. In other words, you can either retire in middle age or work until your death—for an extra 50 m² of floor space.
But, you may ask, won’t the larger house be more valuable in the long run? Financially speaking, won’t it be worth working those extra years? Let’s examine that. Suppose your property appreciates at 5% annually, regardless of size. After 31 years, this will add 354% to your house’s purchase price. The 1 million house will be worth 4.5 million, and the 1.3 million house will be worth 5.9 million. The extra 1.4 million in market value is more than double the extra interest paid. So, what’s the issue? Maintenance, utility, and tax costs, which you’ve been paying all along. Check the following table:
| 100 m² house | 150 m² house | ||
|---|---|---|---|
| Annual property value appreciation | 5% | 5% | |
| Compounded appreciation after 31 years | 354% | 354% | |
| Property value after 31 years | €4,538,039 | €5,899,451 | Purchase price + 5% yearly appreciation |
| Total amount paid for property and maintenance | €1,645,502 | €2,785,176 | Including interest paid to the bank |
| Property value appreciation | €3,538,039 | €4,599,451 | Value increase over purchase price |
| Net profit after 31 years | €1,892,537 | €1,814,275 |
Behold, not only have you spent an extra 17 years working to pay the mortgage, but you also lost money in the process. Your net profit (house appreciation minus maintenance costs and interest) is actually lower with the larger house.
With that established, let’s explore the other direction. What if you downsize further and buy a smaller place, perhaps closer to where your family works and goes to school? Let’s say you opt for a 75 m² apartment in the city instead of the 100 m² house outside of town, assuming it costs the same as the 100 m² house. Now, your savings come from lower yearly maintenance and reduced commuting costs. Let’s make some assumptions and compare all three options side by side:
| 100 m² house | 150 m² house | 75 m² apartment | |
|---|---|---|---|
| Purchase cost | €1,000,000 | €1,300,000 | €1,000,000 |
| Furnishing cost | €100,000 | €140,000 | €85,000 |
| Total cost of purchase | €1,100,000 | €1,440,000 | €1,085,000 |
| Money in the bank | €500,000 | €500,000 | €500,000 |
| Mortgage size | €600,000 | €940,000 | €585,000 |
| Yearly income after taxes | €100,000 | €100,000 | €100,000 |
| Yearly property maintenance and utility costs | €10,000 | €14,000 | €8,500 |
| Other yearly expenses unrelated to property size | €30,000 | €30,000 | €25,000 |
| Money available to pay the mortgage | €60,000 | €56,000 | €66,500 |
| Years to pay mortgage (5% interest rate assumed) | 14 | 31 | 12 |
| Total interest paid (5% interest rate assumed) | €235,502 | €911,176 | €194,128 |
| Property value after 31 years | €4,538,039 | €5,899,451 | €4,538,039 |
| Total amount paid for the property and maintenance | €1,645,502 | €2,785,176 | €1,534,128 |
| Property value appreciation | €3,538,039 | €4,599,451 | €3,538,039 |
| Net profit after 31 years | €1,892,537 | €1,814,275 | €2,003,911 |
As expected, the smaller apartment offers the best investment overall, as the mortgage is paid off earlier, reducing interest. The lower maintenance and utility costs also help. Additionally, time saved from commuting can be spent in far more pleasant ways.
At first glance, this example may seem unrelated to maintenance, but the reverse is true. The difference between these scenarios is largely driven by maintenance costs. The €300k extra price for the bigger house is only a small part of the overall expense; the recurring payments snowball over time. These payments will quite literally cost you a significant portion of your life for what, in my opinion, is a rather meager payoff.
We’ll explore less egregious examples another time.
Footnotes
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As is customary with Einstein quotes, this one is almost certainly fake. But who cares? I think he wouldn’t mind. ↩
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Specifically, it was about the impact of preventive maintenance on the availability and total operational cost of machinery in production. However, the same logic applies to anything subject to entropy (so, literally everything). A good example of this is visible in the auto industry, where car manufacturers have been extending the intervals for oil changes and regular maintenance to make the total cost of ownership for corporate fleets appear lower. Of course, this often results in engines running on dirty oil for extended periods, leaving the next owner with a car ready for a major repair. ↩
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Even if you pay in cash, you could argue the extra money could be invested elsewhere for better returns. But the point is the same: if you use all your money to buy a bigger house and then spend years building up savings for retirement, it’s just as silly as taking on a larger mortgage. ↩