Home Finance for beginners

Estimating the Costs of Owning a Home

Maintenance and Landscaping

For some people, not having to shovel snow or mow the lawn make an apartment a bargain at almost any price. But while these activities may be physically intensive, they pale in comparison to the potential for maintenance that owning your home can bring about. Consider what happens in a home you own versus an apartment during the following scenarios:

A kid throws something through the window, and you can't find his parents. At any rate, the window is broken. In the case of a place you own, you're responsible for either repairing the window, replacing the window or attempting to heat or cool the outside while birds and insects find their way into your home. In an apartment, you make a phone call and the window gets fixed when your landlord feels like it.

Your heating system breaks down when the temperature outside is cold enough to turn anything liquid into ice. If you own your home, you can choose to ignore this problem and be found frozen to death surrounded by burst pipes, or you can call a heating technician and pay whatever he or she chooses to charge. If you live in a home you rent, you can make a phone call and have the problem fixed for no cost to you.

Maintenance and landscaping expenses are very tricky to evaluate and will depend on the condition and age of your home. Most homeowners do not keep track and do not consider large home improvement projects as expenses. Instead, they think of them as "investments." (In fact, they are terrible investments. For nearly all home improvements you make, most of the cost of the improvement will be lost, and only a small fraction will increase the resale value of your home.)

One of very few resources is homewyse.com, a website that provides estimates for the cost of home improvement projects.

Property Taxes

Homeowners have some control over the cost of property taxes. While you do have to pay your property taxes, you also have the ability to haggle them to some extent through the hearing process. Most taxation authorities offer a hearing process if you feel that your property has been assessed unfairly, and often there are homestead and other deductions that you can take in order to further reduce your property taxes. While you may not always get the value you want, you can work to be taxed fairly as a homeowner.

Renters do not pay property taxes directly. Many people assume that landlords must be making money and that rent covers a landlord's property taxes and other costs. This is often a false assumption, because many businesses, including property rental businesses, operate at a loss and go bust. As a renter, you only have to negotiate your lease if you are not under rent control and your contract is up for renewal. You will not have to contest property taxes or haggle with contractors. Any tax hikes will not be felt by you while you are under contract, and only indirectly if you are negotiating a new lease.

Modernization

As a homeowner, the types of changes you make to your home are completely up to you. As long as the law allows it, you can do pretty much anything you want with your home. From installing the latest technologies to falling back on a wood-fired stove, you have many options.

However, your personal preferences go out the window when you look to sell your home. Buyers typically want homes that are not customized, have modern fixtures or have modern style options. Your personal customizations will either have to be destroyed or you will have to wait a long time to find a buyer with the same preferences as you. This is why many homeowners spend tens of thousands of dollars updating their homes before putting them up for sale.

Your home will not be new forever, and the more time that passes, the more outdated it becomes. As more time passes, new technologies replaced old technologies. Building codes become more stringent over time. New styles replace old styles. If you own a home, you will have to pay for this modernization, either to contractors or as a discount to new buyers when you sell your home. These expenses are the homeowner's burden.

As a tenant in a rental, you have to assume that what you see is what you get.

Your landlord may not make updates during your lease, so you should expect your home to stay as-is for the most part. The wonderful thing about renting is that you do not have to modernize your apartment when you leave since that's your landlord's problem. You can move from one apartment to the next to find more modern living accommodations. However, while you stay in the same apartment, you are at the mercy of how modern your landlord chooses to keep the property.

Location Costs

The location of your home will impact your transportation expenses, your exposure to crime and cost of living inputs. Each of these costs can be very high.

Different areas have different standards of living. In cheaper locations, you will save money on groceries, sundries and services. In other areas, you will spend more for identical goods and services. Ultimately, two different places can cost dramatically different amounts for arbitrary reasons. These considerations will impact which city or which side of town you decide to move to more than what block or what neighborhood you decide to move to.

Before you move to a new rental or buy a new home, you should search the Internet for a crime map of the area. These maps will show where recent crimes occurred and show the kind of criminal activity that was reported. Living in a higher crime area could expose you to theft and personal injury. These are traumatic and expensive events. In general, avoid high crime areas, especially areas with a high rate of violent crime.

Location will dramatically impact your transportation costs. The farther away you live from your workplace, the more gas you will have to buy for your car and the more deterioration you car will experience. Worse yet, commuting takes time and can cause considerable heartache. More distance traveled can lead to more accidents and injuries, too.

Let's consider the extra cost of a house being one mile further from work. Assuming that you commute to work five days per week and 50 weeks per year, that's 250 workdays. Each workday, you travel to and from work. So, your roundtrip distance would be 250 doubled, making your commute 500 miles per year. If your car gets 25 miles to the gallon, that's 20 gallons of gas. Assuming $4 per gallon, that's $80 per year. Your insurance and maintenance will go up, too.

Estimates for these costs were found to be between $20 and $40 per year. An extra $100 or $120 per year might seem small, but this is for just one mile! If you were choosing between two houses, one that is five miles from work and one that is one mile from work, your cost would be the four-mile difference multiplied by the $100 to $120 cost of a mile. That's $400 to $480 every year. Worse yet, fuel prices could go up. Also, if you are a contractor or hourly employee, your lost time should be computed as well.

Miscellaneous Costs

There are all kinds of small but noticeable costs that go along with being either a renter or a homeowner. While many people think that owning their home outright would mean that they will no longer have any bills, this is not the case at all. There will always be expenses regardless off where you live. A few of the miscellaneous expenses you will have to pay as a homeowner but that you may be able to escape as a renter include:

Homeowners insurance. While renters can always choose to insure their possessions, their liability for damage is minimal if something devastates the property they're living in. A homeowner has no choice but to either secure or demolish the home in the event of a serious issue, and even hauling away the debris is an expense. Nearly every mortgage requires homeowners insurance, so it's hard to escape.

Some renters pass some of their utilities, like water and garbage pick up, to the landlord. By contrast, a homeowner will never escape paying for all of their utilities. This can be separated into gas, water, sewer, electric and any additional services like phone, Internet and cable. If there is a cost, the homeowner bears it.

Is Jim making his landlord rich?

Jim is 27 years old, lives in Los Angeles and works as a salesman managing two other salesmen in a dealership his uncle runs. While he eats lunch one day, Jim and his uncle have a discussion.

Jim brings up that his landlord has raised his rent to $1,400 a month, and that rent is just money he's throwing away. "You're not throwing it away," his uncle replies. "You're trading it for a service, renting a nice apartment in a good part of town."

Jim nods at the logic of his uncle's statement but adds, "I just feel like all I'm doing is making my landlord rich for pretty much nothing. I'd bet if I got into owning real estate I'd get rich the easy way, too."

Jim's uncle takes a moment to ponder this and comes back with, "There are prices to pay no matter what you do."

"Like the mortgage," Jim responds. "I'm paying my landlord's mortgage with my rent and then some."

Jim's uncle responds, "If you ever decide to own your own home, you'll understand that there are more costs: interest, taxes and insurance."

Swallowing a bite, Jim shrugs, "I'll make back just about everything eventually by not having to pay

rent."

As the conversation continues, Jim's uncle suggests he do some research and come to some logical financial conclusions about owning versus renting in his area.

After doing some research, Jim came up with the following estimates: Rent for Jim's Condo: $1,400 per month, or $16,800 per year
Price of similar condos for sale: $200,000
Property taxes: 1.5% (including water, garbage and ordinances) Homeowners insurance: $750 per year

Condo homeowners association fees: $3,000 per year
Internal repairs: $500 per year
Mortgage rate: 4% (after closing costs, mortgage insurance and tax deductions) Another day, Jim brought these numbers to his uncle during lunch.

Jim's uncle added another cost of home ownership: modernization. He said that if you own the property you would spend about $500 per year keeping it up to code and updating its style.

Jim then estimated the expenses that the landlord was paying for Jim's condo as: Property taxes: $3,000 per year (1.5% x $200,000)
Mortgage interest: $8,000 per year (4% x $200,000)
Homeowners insurance: $750 per year

Homeowners association fees: $3,000 per year
Internal repairs: $500 per year
Modernization: $500 per year
Uncle Jim's total came out to $16,250. Jim couldn't believe that his landlord was barely breaking even.

"But, isn't there a way to get out of homeowners association dues," Jim asked.

"Not really," his uncle replied. "Somebody has to hire contractors to keep up the exterior, and that's not cheap. Plus, homeowner associations can pretty much charge what they want."

Jim was shocked at this, stammering out, "So, I wouldn't even save money by owning most years?"

"In a nutshell," his uncle nods. "Your rent is locked in place and you can negotiate it when you renew your lease. Plus, there are plenty of other places around if your landlord tries to get greedy. Ultimately, you're getting a fair deal."

Jim considered this for a moment and asked, "So, how do people make millions in real estate, then?"

"Probably not by buying their own condos!" his uncle joked. He added, "We assumed that there was no real ownership involved, which can be a good investment in the long run. In real life, you'd likely have to put down around 20%, or $40,000. On top of that, you'd pay extra into each payment to pay down that balance a little each month."

"This is more complicated than I thought," Jim replied, rubbing his temples. 

Estimating the Costs of Owning a Home584Estimating the Costs of Owning a Home