home ownership is not all its cracked up to be anymore i lost 100 k value in my house if and whenever i get it back ill be renting til the day i die and live everyday like its the last . i think we have to rethink the formula, the more you make everything else goes up in parrallel so we're back to square one we need to redesign ideas whenever something was not working the founding fathers had inspiration to assess it and reconfigure. heres another idea why does mortgage lenders have to get back 3 times what they lend how about 2 times. We have to stop paying msrp on autos, start negotiating everything. All these experts tell you to do this and do that save save save and hence buy a house at 40 put all your income in 401k which will lose value and retire at 70 and die at 71 and be taxed like crazy again what a great life great life .
You’ve probably heard the advice over and over again about how owning a home is one of the major milestones in achieving financial independence. It is certainly true that by owning a home you can take ownership in something that has the potential to build equity and provide you with the freedom you might not otherwise have by renting, but there is more to it than that.
If you recall last week I had mentioned that I would be doing a podcast series in partnership with Charles Schwab, and the first edition talks about buying a home. I am still waiting for the public link to the podcast so I can share it with everyone, but for whatever reason it is still delayed. So, while I had hoped to share that with you today, I can at least share a lead-in personal story that illustrates some of the true costs of ownership that many people overlook or don’t prepare for.
When it Rains, It Pours
Doesn’t that always seem to be the case? It almost always happens in a way that once something goes wrong, a bunch of other things pile on all at once. Well, that has been the case for us over the past few weeks, and it is quickly becoming quite costly.
We moved in almost two years ago into our home, and after going through one rough winter, it became clear that we need a snow blower. Living in an area that receives frequent and heavy lake effect snow, it isn’t uncommon to wake up in the morning to two feet of snow. I tried to stick to elbow grease last winter and shovel, but those efforts were futile. So, we have been planning to buy a snow blower this fall and we’re just looking for a good deal. Estimated cost: $450-$750.
A few weeks ago we were getting ready to go out and buy a snow blower when something unexpected happened–our water softener broke. We have a well and live in an area with very hard water, so this is a tremendous inconvenience as well as a costly breakdown. For now we are just making due with hard water, but it is leaving rust stains in the shower, tastes awful to drink, and makes it feel impossible to get clean. The water softener itself is very old and it will cost nearly as much to try and repair it as getting a newer model. Estimated cost: $600-$2,000 parts and labor.
As if this wasn’t bad enough, another problem reared its head just a few days ago. One of the toilets is leaking at the base. It probably just needs a new wax ring, which would be fairly inexpensive, but labor intensive. Not only that, the toilet itself is quite old with rusty hardware and probably needs more than just a wax ring to bring it up to like-new operating quality. Estimated cost: $150-$300 parts and labor.
You may think that our string of bad luck would be over, but you’d be wrong. On Friday morning I woke up and it sounded like the furnace was making a noise, so I go check it out. It is an electric ignition, and the ignition module had a blinking red light. That can’t be good, so I dig out the manual to see what it means. Apparently it is a safety measure where the ignition locks itself out if it cannot ignite the burner after three attempts. No problem, so I cut power to it so that it can reset and attempt to start it back up. Again, it tries to ignite three times and locks itself out.
I spent the better half of the day on Saturday trying to get it working, but to no avail. So, today I am seeking quotes to have someone come out and check on it, and hopefully have it repaired ASAP since it is getting down to freezing at night and becoming uncomfortable by morning. A quick fix will be only a hundred or so, but any major replacement could become very costly. Estimated cost: $100-???
Think Before You Leap
While most people realize that there are maintenance costs associated with owning a home, they still tend to be an afterthought. What are the chances that a bunch of household appliances will break down at once? While that won’t happen often, it can and does happen. The real problem is not being prepared. So, while buying a home has tremendous advantages, think about the true potential costs that come along with it. Just because they may not happen very often doesn’t mean you should discount the financial impact they will have, and have some money or a plan put together to deal with the problems when they do occur.
What This Will Cost Me
This is a significant blow for us as we were really starting to make headway on debt and saving money for a bathroom remodel. Granted, the toilet can be an initial addition to that, but now the major improvements will have to wait. Even if everything comes in at the low end of the estimates, we’re going to be out a good $1,400. If the problem with the furnace is more severe or we need to spend a little more on a water softener, we’re looking at numbers well north of $3,000.
I wouldn’t trade owning our home for anything, but issues like this can bring added stress and put a substantial dent in your wallet. I remember the years of apartment living where I’d wake up in the morning on a snowy day and find the whole parking lot and sidewalk was cleared and salted. When our hot water heater went out, a quick call to the landlord and they had it replaced in less than 24-hours. When the dishwasher and air conditioner broke, again they sent someone right out to repair it.
It can be easy to become complacent when you have had the luxury of not having to purchase and install expensive appliances when they break down. This serves as a good reminder on how important it is to prepare for these unexpected and unwanted problems.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.
gotta love all these forums, but realistically who really lives like this i make 85k per year before taxes but after taxes is withdrawn i get my paycheck i have roughly lit above 1000 per week so $4000 per month times 25% = $1000 left for mortgage so where can i find a mortgage with taxes for $1000 per month in ny when the property taxes is $12000 per year. anywhere house is 1k per month guarantee i'm not gonna make 85k per year so hence to own something you have to get a spouse to help provide income then kids come along now one has to stay home poof and the dilema goes on as fuel, old home repairs and of course schools need newer stuff and politicians expenses and yada yada rise heres a start to my solution eliminate property taxes completely cut government spending on aid overseas and part of our already paid income taxes gets returned. and make transportation by public transportation free and im sure we could add more.
Generally it's a better to own than to rent. In some places rent is much much cheaper than owning. Biggest problem is for first time home buyers is to get in the market is a huge stretch. Very very few people have a 20-25% down payment on a house.
I've seen long discussions elsewhere about the merits or renting vs buying and generally regardless of numbers most people want to own. (myself included)
What puts me off of owning (at least in Canada US and UK) is property taxes upkeep etc. Generally in Europe property taxes are very very low.
Great comments, everyone. Just an update on the furnace, we were fortunate enough to end up only paying about $200 to fix it. The igniter cracked and wasn't sparking.
In addition to unexpected expenses, you have to keep in mind lost time spent on upkeep. I probably spend around 10 hours a week, improving, maintaining, and fixing little things around the house. I'm happy to own, but time = money.
Long term capital appreciation is all about planting as many seeds as you can, of which a house is one. Bonds, stocks, cash, your career are others. spread your money out, some will grow better than the rest but just like a garden you can't always know which area will bear the best fruit. hedge your bets and everything will work out.
oh, just don't go too crazy on the house. I see to many fellow GenXers in silicon valley buying way to big of a house. We bought smaller than we could have afforded, have still seen good appreciation and live with mortgage that wasn't all that much more than our rent (yes, all the rest of the stuff adds up but then again 50% of my rent didn't go back to me).
best chapter of whether to rent or buy is chapter one in "home buying for dummies"... read it and do the excercise on TCO about 30 pages in.
I think homes end up not being a good thing for a lot of people since they buy one before it makes financial sense to do so... Barely anyone buys a home with a 20% down payment anymore, and most people spending the maximum amount of money their lender will let them...leaving them little to no cash to take care of the things that just happen when you own a home.
@Bill - I disagree with your assessment regarding square footage. To rent the house I live in would cost me about $1300 a month. My house payments are $1050 (including taxes and insurance). If I had to buy the house again at the current value, it would wind up about $1250 a month. It's more expensive to rent in my area than it is to buy. And the rents are still going up.
On a square foot basis, it's always cheaper to rent than own.
As for investing, residential real estate has had a long-term return of only 1-2% above inflation, not much of a return compared to financial assets.
People own homes because they want the freedom to do things they can't do with a rental.
But understand owning a home is not inexpensive - typically you'll spend 1% of the home's value annually just on maintenance.
I am three months away from making the last mortgage payment. Thinking how I can save the money to increase my emergency fund. The furnace died, the plumbing started to leak, like wise the roof. To the tune of over $20,000. Which I don't have in savings and will need to borrow. Taxes have increased every year, insurance for the house has doubled in price since I bought the house 18 years ago.
When we rent don't we pay for all costs of ownership, plus a profit for the owner? 30 years later all we own is our rent receipts. Too, in most cases doesn't our rent go up, at least, on a yearly basis ? An apartment I lived in when I was 30 was $65.00 a month, now, that same apartment is over $500.00 a month and when I was there it took a stick of dynamite to get the landlord to do anything. Maybe your landlord is the "best in the world", and does whatever is necessary, quickly, but I would say, "YOU are paying for it"! --- john
I am a mortgage lender and have been for over 9 years. I see people "financially naked" when we make an application for a home loan.
My observation is that most people have no clue about finances other than making payments on homes, cars and consumer revolving accounts. That is sad.
Wealth, as defined by Robert Kyiosaki, is not having to go to work to pay the bills unless you want to. Getting out of the Rat Race means having alternate sources of income so you don't need to work, unless you want to, to pay your cost to live. (Personally, I love to work and add value to those around me).
If you can own a home with the idea of one day paying it off, then you can arrive at a point where, with wise personal spending, you can live an enjoyable life and have a pile of money in investments.
If you rent your abode, then it is like making a mortgage payment that is "interest only", never paying down the balance, and not getting any tax advantage either. Your rent payment is paying for taxes, insurance and maintenence but due to economies of scale, the cost of maintenence is lower per person. But the insurance and taxes remain the same per unit of value of the property.
I make home loans for a living. I believe a home loan is needed only because most people don't have financial resources to pay cash. Pay the mortgage off as soon as possible or pay it down as quickly as possible to save on the amount of interest you pay.
If you were one of the rare people who kept a home for 30 years, then you will pay for the home 3 times over. Why would you pay $600,000 for a $200,000 home - even with inflated dollars that is you giving twice your time/energy for the home.
To pay $1 in interest for the purpose of saving 15 to 38 cents in taxes doesn't seem to me to be a good deal either. Pay the average 25 cents to the taxes and keep the other 75 cents you were giving to the bank. Instead of paying interst to the bank, invest in the bank and let them pay you interest.
Is this 'practical'? It certainly takes some 'doing'.
People in other countries live with family members while saving money for a home and many own their homes with no debt. Rarely do they worry about money or debt obligations.
I refinanced my sister's home to a 15 year note at a low rate. She is making extra payments to pay it off in 7 years and while she is doing this, she has no car payment, lives close to work and rides a scooter, and invests money each month.
She is a single mom and works as a nursing assistant at a hospital. She also believes in working to her fullest at work, extra hours and making lots of friends.
I encourage people to own homes but ditch the mortgage as soon as you can.
When you have no to low cash outflow, you need less in flow and are not at the mercy of the job market, economic ups and downs and you don't need to hoard money out of fear of old age poverty.
I was once laid off from the high tech job I had; I had no mortgage or car payments at the time. I was quite relaxed about the whole layoff affair. The guy being walked out the back door next to me had 5 cars and an expensive mortgage. The guards had to help him stand as they walked him out as he was in such shock and fear - at the age of 55.
The (wo)man without money is at the mercy of the world.
Two rules for happiness (from a Chinese engineer I once knew):
1. Always be happy with what you have
2. Always have enough
Be happy and be at nobody's mercy.
I think your estimate on buying a snow blower is way low. I too live in a lake effect snow area and can tell you from long experience buy the biggest baddest most powerful beast of a snowblower that you can find. Make that with electronic ignition and one of those thingies that protects you from the wind and the blowing snow. You will never regret it I promise. Or just do like I do after I got to hating the snow in my face twice a day and hire it out.
have you considered getting a home warranty? when i owned a home i would pay $50 to have the stove, plumbing, etc fixed. there was an annual cost as well, around $400, but considering i was in a home over 40 years old that hadn't been very well maintained, i think it worked out very well for me. plus, when we sold it, we included the warranty in the sale, which was really attractive to the buyers.
"When you’re renting and you spend $100 on getting the heater fixed, that’s lost money."
Um, actually when you rent, you pay nothing to get the heater fixed. That is the whole point of this article.
So actually, your example puts the renter ahead. If the renter invests the $100 that he didn't have to spend on a heater and gets the stock market's historic average of ~10%, the renter will have a lot more money than the heater is worth later on down the road.
you're right - in some senses your home isn't an asset in the sense that it's something you spend money ON rather than something that produces income.
However, I urge you to really think about the value that you're getting when you do these repairs (something my dad told me when I was thinking about buying my first home). When you're renting and you spend $100 on getting the heater fixed, that's lost money. It's gone. You're going to have to chase down the landlord to get your money back.
When you're the homeowner and you spend $100 on getting the heater fixed, sure you can't get the money back, but what you DO have is a shiny new fixed heater that works, and it's YOUR heater. You're one heater's worth closer to financial independence because you won't have to get it fixed tomorrow.
Agree with INHABIT AUSTIN. "Home" does not always mean "house." In a condominium building, all the issues you mention, except for the toilet, would be association expenses. Yes, you still pay for those as a condo owner, but (1) the expenses are lower since they are shared by all owners, and (2) you pay a set amount in dues each month so maintenance is easy to budget for. Just be careful not to buy into a building that has insufficient reserves in case anything big comes up requiring a special assessment.
I always said that it really depends on what you want out of life as to whether you own a home or not. Being married with kids, the home has many advantages (in my mind) over renting, but it also comes with the need for a lot of elbow grease. One thing not mentioned, is that rents continue to climb, usually more than your property taxes and mortgage. Within five or six years of purchasing both my townhouse and then later on my single family home, the rent for two bedroom apartments (a minimum, and cramped size, for a family of five) in my area actually equaled my mortgage and escrow payments. At the same time for a three bedroom townhome rental, they exceeded my mortgage by more than enough to cover the extra I was putting away to take care of home maintenance. Granted, I was able to buy newer homes in each case which has definately helped with the lack of repair, but you still have to plan.
On the flip side, my single brother has significanlty lower expectations for his living space, and I could never approach what he can find living in a single efficiency appartment. I would never expect him to purchase house other than as a potential investment. As with most financial advise, you really need to look at how it applies for your situation.
Also, I plan on downsizing once the kids are out, since I don't think we'll need anything that large again, and as already posted, a condo sounds like it might be just the thing.
Excellent job in highlighting the true cost of home ownership. Having an emergency/maintenance fund in place is a great idea, especially if you're seeking the older home in a mature neighborhood.
I know a handful of people that have opted to purchase a condo rather than worrying about having to shovel snow and do a lot of home maintenance themselves. Could be the best of both worlds...depending on the condo association.
This is a valid post.. I wanted to buy my own place so bad for a while until I really thought it through. I don't want to:
1. get a mortgage
2. pay taxes
3. pay expensive HOA fees (my area)
4. expensive insurance (i'm close to the gulf of mexico)
5. and pay when things break
After all of those expenses, I decided it's just not worth it unless it's purely for an investment, in which a renter or a business pays the mortgage and everything.
I totally agree -- that home ownership is wonderful, but not necessarily a good investment.
People look at their equity and think, hey, what a great investment! But they forget about the interest on their mortgage, property taxes, insurance, repairs, maintenance, some improvements, and all the other costs that do not add to the equity of a home.
If you add it all up, for many people their home is not a good investment (especially with historic home appreciation at 4-5% per year), compared to other investments.
Elizabeth (financial planner)
Thanks for the tip, Nick. Actually that and a dirty sensor are two things I saw online as common problems. Unfortunately though, there is a big warning label on the furnace and in the manual that says the combustion compartment is pressurized, and if you access it you have to replace all of the gaskets.
I considered trying to track down the replacement gaskets and give it a go, but I'd rather not end up blowing my house up when I do something wrong :D
But someone is coming tomorrow to check on it, so if they can't seem to find a problem I'll mention it.
We had a similar problem with our furnace for most of last winter---it would not reliably ignite the gas. Sometimes it took two or three tries, or it would give up if it couldn't get it after four tries. We suspected the igniter was faulty, but that wouldn't explain why it lit sometimes.
Several furnace repairmen later, we finally got one who discovered and fixed the problem in minutes: clogged burners. The problem was that not enough gas was getting through to the igniter for it to ignite. Once the repairmen removed and carefully cleaned each burner, we haven't had a problem since.
It's still best to have someone come out and check the furnace, but be sure to raise this possibility with them since not every furnace repair outfit seems to know about it.