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6 Hidden Costs Of Home Ownership That Can Change Your Mind Of Buying
It is one of those things that you do not need to comprehend until the situation arises. The headaches which the numbers and digits can give you is a paradox by itself. Because when you finally think that you have it all figured out, you are usually back to square one a few hours later.
Whether you are downsizing, buying your first house, or planning for retirement, the economics that result in your rent versus buy dilemma is a mathematical problem that most people prefer not to have. The gut feeling we are trying to fight off all the time is the conventional wisdom that buying is always better than renting. The simple reason is that you will own a property when you buy. And you are just helping others own property when you rent. Well, times have changed. Things are no longer as simple as a one-liner. There can be many reasons why renting is better as well.
Owning your own home does not really equate to living in it for free. And rentals are not always more costly than mortgage installments. Even when loan repayments are lower, there are many more quantifiable and continuing costs that a home owner has to bear. So whether one makes more financial sense compared to another is really a question only the beholder can answer. This is because different personal circumstances can make either choices more logical. There is no universally correct answer.
If we are to put rent versus buy side by side, we may also not be able to see for sure what is a cost effective choice. Because things only get more blurry and complicated when we try to factor in things like tax implications and maintenance costs. Even mortgage payments can fluctuate when they are structured to adjustable rates. If only Einstein solved this equation with relativity.
As you can see, as a tenant, the cost can be quite clearly defined as the rent. It is fixed to the amount stated in the lease contract and does not change at all until a greedy landlord decides to suck in more cash when the lease expires. It is the costs of home ownership that has a mysterious feature that even the most experienced investor will find hard to pin down. What are the hidden costs of owning a home?
The bulk make-up of transaction costs are those associated with selling and closing. Now you might ask why you have to factor in selling expenses when you are the buyer. It cannot be the case that you have to pay the expenses of the owner selling you his house, isn’t it? That is correct. But eventually you could be selling it yourself in the future. You will then know what is the weird cause of the owner’s nose bleed when he sold you his house. You need to pay for commissions, home staging, and maybe even for quick fixes by the handyman.
When you are just looking around for a place to buy you will also find that the only professional trying to make a buck from you is your agent. But when closing is imminent, you will suddenly find yourself being swarmed by people attempting to get a cut from the money being brokered. These include lawyers, appraisers, bankers, realtors, insurers, etc. Even a friend who first introduced you to a listing might come and ask for a referral fee. You could jolly well end up with a closing cost of up to 6% of the purchase price.
Even though not all banks will make it mandatory for home buyers to buy insurance in order to grant a mortgage, you might still want to take it up. This is especially when you know that your other half does not have the financial strength to service the loan alone. Can you imagine if you have somehow lost your income and the bank comes to foreclose your house for continuous defaults while your spouse looks on haplessly? For many people, that is as scary as Freddy on Elm Street. The annual premium for an average house will not likely to exceed $1,000. This is also dependant on the types of coverage you are signing up for. This does not look like much when you consider that the house is worth $200,000. But add that up over the years and you will find it a substantial amount. And you did not even make a one cent claim on it.
The most awkward part of owning your own home is that every expense comes out of your own pocket. A hairline crack is not a problem that you can just leave to the landlord. You need to spend money and take action immediately before it gets worst. On the one hand, you don’t want to drive up your household expenses. On the other hand, the unsightly defect is hitting a nerve. Either you get it fixed or get someone to do so. Or you live with it for the rest of your life. The choice is obvious. Because you own the house, you are committed to it, and you cannot stand another day where you wife nags you about it.
Plumbing leaks, replacing the rood, paint touch-ups, etc, can all be required at one point or another. There is really no way you can run away from them when the occupant is you. And you are the owner. The biggest pain in the neck is when you suffer the irony of years of low costs, but suddenly a big ticket item like a foundation problem props up. This can turn all your years of frugal living into a huge joke.
Property tax can vary from state to state and surely from country to country. And when you are a someone making your home in a foreign land, you could be exposed to the type of taxes and stamp duties that can make a grown man cry. Check out on your costs beforehand. And when you are making these checks, do find out if there are any tax benefits as well.
The concept that investing in a house protects you from inflation has been over-marketed. In fact, many people who have an eye on this actually buy a house in fear of losing their money’s value rather than to profit from appreciation. Yes there is a tendency for property prices to keep up with inflation. But if you believe in this notion, it also means that all your maintenance costs and transactions costs will rise as well. Meaning your are not really staying a step ahead of anything especially when you have spent exuberant amounts of money on remodeling and repairs.
It is very easy to come to a conclusion that renting is akin to paying for someone else’s mortgage. Something that you replicate yourself. Rentals can add up to big numbers as the months pile up. And these expenses are avoided by home owners. For many, this is reason enough to buy instead of rent.
But this is not the whole picture. Because when you tie up your home equity in a house, you are forgoing the returns you can make from them if they were used for other investment properties. So if you bought a $500,000 with an 80% loan-to-value, you will have put $100,000 into it’s equity just to get started. This is the same money that you could have had the vision to put into Bitcoins and made a 100% return within a couple of months. It is money that you have chosen not to make just because you choose to purchase a home instead of going into other investments.
Also don’t forget that the monthly payments you make towards you mortgage are not fully go into the home’s equity. Because a huge portion are made up of interest payments. This interest is a cost of home ownership just like any item. Even if you set your equity free by refinancing, you are still paying an interest on all that cash. Most people do not take a closer look at their mortgage amortization tables. If you seek out the accumulated interest that you will pay over the years, you will be astounded at what you are paying and will pay in the eventual future.
Not all about numbers
Even there are huge costs associated with owning your own home, the decision to buy or rent is not always a logical one based on numbers. There is an irrefutable emotional aspect to it as well. And it is with this emotional aspect where most people make their decisions.
When you are the owner, you can customize the place however you like to your liking. You don’t have to worry about what to do after a lease expires. And the best thing is that you can live with a sense of stability. Renters can have great control over their own expenses as they are not compelled to pay for repairs and maintenance. They don’t need to be tied down to one place as well. Whenever there is an urge to relocate, they can do so on little notice and hop from city to city.
As a final word, a home is more than just a house. You cannot make these buying decisions purely based on number you gathered.