Around the water cooler we have always had the heated discussion about home ownership. One side believes that your home is an investment, while the other side does not. I used to believe the house my wife and I bought was an investment. As a matter of fact, many will tell you that it is a great tax haven or write off. All these statements are technically true depending on the way you define investment and how you look at taxes.
The point of this blog is to put into perspective some of the planning you should accomplish before you shop for a new home. For many of us, this is going to be our biggest outlay of cash. Accordingly, this should be where you devote the most time in preparation.
Location is the one of the main priorities to research when investing in Real Estate as an income producing option. I believe the same is true with home ownership as well. Purchasing a property in a town with a strong school system as well as solid town financials will benefit you in the long run when it comes to property value. Future projects in the town will also have a positive and negative effect on your property value. It may not benefit your current home value if they are planning on building a Walmart next door five years down the road. Conversely, if you own a multi-family home, this may benefit you tremendously.
Don’t underestimate the true expenses of a home. When my wife and I started out, we didn’t take a lot of expenses into account. Fortunately for us we didn’t purchase a home based on what our banker told us we could afford either. We reversed engineered our mortgage to determine the maximum amount we were willing to spend. This will require you to have a budget so that you know exactly how much money you have available to cover the cost of your home each month. Unfortunately, I haven’t found an easy way to do this, but to get you started, the best thing to do is visit some of the free calculators on sites such as Zillow.com. This will allow you to have plenty of monthly income to cover the expenses you may never even think of, such as landscaping costs or even unexpected costs like that new hot water heater. I would also suggest you look at the differences of heating your house if you live in areas like the Northeast. This could be a very large expense and will help you determine the type of house you are looking for.
Above all, you need to formulate a good game plan for purchasing your house. Don’t feel like you have come across a once-in-a-lifetime deal when looking at houses and try to keep your emotions out of the decision making process. Smart buying involves knowing the numbers. Although your emotions are certainly going to play a part, buying a house no matter what because the kitchen is priceless will often lead to financial issues in the future if you haven’t properly assessed the rest of the house. If you have been hunting for a house for over a year, it will be tempting to bite at the next “best” thing. This almost always leads to trouble and when you are settling into your new home, you may find a feature of the house you completely overlooked that you just can’t live with. Ultimately, this may lead you to greater expenses to take care of the problem. Patience is your number one ally when you are searching for a home. Ultimately, you probably aren’t going to find a house that has everything you want, so prioritize what’s important to you and your significant other. With each property, list pros and cons and match them to your list of priorities you want in your home and you will most likely make the right decision.
Things to Consider:
- Taxes
- Insurance
- School system
- Neighborhood as well as neighbors
- Landscaping costs
- Winter costs, if applicable
- Utilities, Gas vs Oil vs electricity
- Future upgrades
The first two on this list are typically overlooked when calculating your monthly payment. This is often the case because you won’t know the specific numbers until you analyze a specific property. You can use Zillow.com or some of the other sites like it to get an estimate. The taxes are in the ball park, but to be safe, add at least $100 to that number per month as a precaution.
Due Diligence:
This is a term many real estate investors use during the course of purchasing an investment property. This is also the time as the potential buyer of a property that you will have certain inspections done. This is a great time to do the necessary number crunching to ensure you aren’t taxing your budget. If the numbers don’t add up based on your due diligence, you may be able to re-negotiate the terms.
A Word of Caution:
If your sole reason for purchasing a home is for an investment, you may want to do more research. Unless you are planning to rent out the property, buying a home to live in may not be a wise investment. There are many pros and cons with home ownership, but many times we feel the pros of your own property outweigh all the cons. If this is your position, you may still want to do some serious research before purchasing your property. Even if everything goes correctly for you, if you truly track the numbers, they won’t add up. To put this into perspective, my wife and I plan on selling our home to move south in two years. If everything stays as is, we can most likely sell our house for twice what we paid for it. On the surface, this seems like a great investment, but the initial cost of your home is just the beginning. Anyone that has a mortgage can look at the note and see how much interest they will pay over the life of that note. Even if you have a 15 year note, the interest on that note will put you over the total you can expect to receive after the sale. The point is that although home ownership can help you with cash when you go to sell it, the real numbers reflect a whole different story. In essence it’s the same as spending $10 to save $1. That isn’t a very good investment.
On the other side, home ownership has many qualities to each owner. If you are purchasing property because you don’t want to rent and want the joy (and pain) of owning your own home, be patient and don’t rush into it. All your planning and diligence will pay off in the long run. Just don’t get trapped by analysis paralysis. This often happens to investors and can happen to new home owners. The point to remember is that you want to stack the deck in your favor, but you will still lose a hand every now and again. Home ownership can be a wonderful experience, but without a plan it can be a financially disastrous mess.
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