Home Ownership Costs

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Home Ownership Costs

Postby steadyeddy » Fri May 03, 2013 3:55 pm

My wife and I are considering purchasing a home. Like most first time homebuyers, we have very little understanding of the real costs of home ownership both in terms of monthly cashflow and capital expenses. I am trying to budget, conservatively if not accurately, and would appreciate input on a number of questions I have.

1) We haven't settled on an exact location, but are looking at homes built in the 1920's, 1950's, and 1980's depending on the neighborhood. If the price of each home is $300k, what percentage of the purchase price should I budget for each home for annual home maintenance?

2) Are property taxes somehow arbitrary? Where can I learn how these are calculated? Using Zillow's public record property tax information (stop me here if this is my problem) I'm seeing one home with a tax basis of $300k with $3k in property taxes, and another home two blocks away with a tax basis of $200k and $4k in property taxes. Same city, county, schools, etc. This is a mystery I would like to solve.

3) What are the "unknown unknowns" I might not know enough to ask about or include in our budget?

4) Lastly, I'll throw you all a curveball. The motivation to purchase is primarily financial rather than a lifestyle decision--we don't really care if we own the space or rent it at this point in our lives. With interest rates so low, our rent payment is about a 40% premium to PITI (not total cost) on a similar townhouse. To me that seems like too much money to ignore, but am I breaking a boglehead cardinal rule by thinking about purchasing a house as merely a financial decision? More importantly, am I fooling myself for thinking that some of a 40% spread between rent and PITI might end end up in my pocket when it's all said and done?
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Re: Home Ownership Costs

Postby The Wizard » Fri May 03, 2013 4:09 pm

As time goes on, the spread between renting and buying gets bigger, since you've locked in your mortgage payment.
Owning allows you to do more with the place in terms of modifications and upgrades, but not everyone sees this as an advantage.
Can't say much about the property tax discrepancy, perhaps talk with local RE agent to get more insight on your area?
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Re: Home Ownership Costs

Postby MrMatt2532 » Fri May 03, 2013 4:28 pm

For home maintenance, I think I a good budget number is 2% of the price of the home per year. Something like 1% may be more realistic on average, but with a home you might see high expenses one year and and low expenses the next. Better to have budgeted for the high expense years.

Don't underestimate the cost of utilities. Consider electricity, gas, water, garbage, etc.

Don't rely on the mortgage calculators to come up with estimates for home insurance or property taxes. For property taxes, visit the county website. For example, if I lived in Seattle, WA: I would google "King county property taxes" and find a link that lets me search for the property taxes for any house in that county: http://www.kingcounty.gov/propertytax

Also, depending on the age/condition of your home, you may find the urge to put money towards minor/major renovation type expenses. Beware of these expenses that aren't necessary, but you might be regularly putting money towards.
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Re: Home Ownership Costs

Postby Rupert » Fri May 03, 2013 4:45 pm

1)I don't think you can estimate the cost of maintaining a home based just on its age. A well-built 1920s home may be cheaper to maintain than a poorly-built 1980s home. You need to hire a very good, independent home inspector to look at the individual home you are considering purchasing. Be there with the inspector as he/she inspects the home. Let him/her educate you about the home as he/she conducts the inspection. How old is the wiring, plumbing, HVAC, roof, water heater, etc.? How well is the house insulated? A 1920s house will, in all likelihood, be more expensive to heat and cool than a 1980s house or even a 1950s house unless it has been retrofitted with new windows and insulation. I don't budget a percentage of the purchase price for annual maintenance. I just keep a nice hefty emergency fund to cover unexpected expenses and budget for expected expenses on a project-by-project basis. It's important to know the age of your roof, HVAC unit, water heater, appliances, etc., and the life span of said items in your area. Talk to the inspector about that. The shingles on my roof have a lifetime warranty, but any good roofer around here will tell you that "lifetime" along the Gulf Coast with our heat and humidity is about 20 to 25 years. Same with outdoor HVAC units. The manufacturer might say it'll last 20 years, but units typically last 10-12 years in our climate. That's the sort of stuff you need to know so you can plan for replacing those things.

2)You can probably just call up your county revenue commission (or the equivalent entity in your location) and ask about the property tax issue. It shouldn't be arbitrary.

3)If you've never owned a house before, some "unkown unknown" costs might include: termite control (termite bond, inspection & treatment), non-termite pest control, lawn maintenance costs (include up-front cost of buying all necessary equipment and tools, e.g., mower, trimmer, rakes, shovels, clippers, etc.), homeowner's insurance, sewer system maintenance (even on city system, you must maintain your sewer line; how old is it?), security system costs (do you have/want a monitored alarm system?), exterior maintenance (does the house or its trim have to be painted? if so, how often? ask the inspector how much that typically costs in your area.).

4)Every time someone asks a home-buying question on here I always say this: I bought a house when I was 26 against my father's advice. I wish I hadn't.
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Re: Home Ownership Costs

Postby DiscoBunny1979 » Fri May 03, 2013 4:50 pm

steadyeddy wrote:1) We haven't settled on an exact location, but are looking at homes built in the 1920's, 1950's, and 1980's depending on the neighborhood. If the price of each home is $300k, what percentage of the purchase price should I budget for each home for annual home maintenance?


In my opinion, you can't do it that way. Location is important. Different areas might charge different rates for labor or materials. An older home built in the 1920s might require "restoration" matching original trim work or might require updating old plumbing with copper. There is no way to know what to budget unless there is knowledge of exactly what to compare to.

steadyeddy wrote:2) Are property taxes somehow arbitrary? Where can I learn how these are calculated? Using Zillow's public record property tax information (stop me here if this is my problem) I'm seeing one home with a tax basis of $300k with $3k in property taxes, and another home two blocks away with a tax basis of $200k and $4k in property taxes. Same city, county, schools, etc. This is a mystery I would like to solve.


Property taxes are determined by location and the laws governing those locations. For instance, in California, property taxes are fixed due to Proposition 13 at 1% of Purchase price for the first year only. Then, each year thereafter can increase 1-2% compounding each year. For instance you buy a house for $300K, the property tax would be $3,000. The next year It could be 3,060. The next year it could be $3,120. The next year $3,240. But it doesn't end there. In California, there can be Bond issues. Each County or City can ask the voting population to approve Bond issues to pay for water service, park service, or any other public issue. There is no limit to Bond issues that can be approved by the voters. Some cities even will put your yearly Garbage Collection Bill on your taxes if you fail to pay it. Therefore, in California, 1% is where one would start. You'd have to know what the bond issues are for the area you want to live - again Location.

steadyeddy wrote:3) What are the "unknown unknowns" I might not know enough to ask about or include in our budget?


Does your 'Location" of house have a Septic System? Folks inspecting Septic Tanks only need to see if the water is running from the house to the septic tank (and maybe leach lines). Any Septic inspection can not determine if a tree in your front yard is soaking up the water and therefore testing your leach lines might not turn up anything negative until you cut down that tree.

Does your "Location" of house have Natural Gas or Gas Tank? Would you want to run a natural gas line to the house if there isn't one that might cost a few thousand dollars?

How strong is the Signal from the Telephone company? Some signals in rural areas are weak and therefore DSL can not work even though they may claim through commercials on TV that DSL is available in your area. You might be stuck with Cable service.

What type of neighbors might you have? Fences might not be allowed in certain areas, others allow fences. Fences can be important especially if neighbors have dogs, or you want dogs, or want more security. Fencing is not cheap. Some areas allow for chain link fencing - especially in rural areas whereas chain link allows for the wind to pass through the fence without worry of having it fall over even if posts are secured in concrete. Other areas require block wall or wrought iron or other expensive materials. Wood fences are nice, but all the wood fencing I've installed (i'm partial to redwood) requires a nice stain - not painted - because wood needs to breath. Therefore, using a good quality stain usually costs about $250 each time I stain all of the fence! So fencing can be be an unknown budget item.

Drainage. If looking for a house during a time when it doesn't rain might mean you can't determine potential problems with rain water. Know the topography of the land you're interested in. Houses in different eras might have used different techniques in building foundations OR the location of the house might be problematic if not positioned to have the water run away from the house.

steadyeddy wrote:4) Lastly, I'll throw you all a curveball. The motivation to purchase is primarily financial rather than a lifestyle decision--we don't really care if we own the space or rent it at this point in our lives. With interest rates so low, our rent payment is about a 40% premium to PITI (not total cost) on a similar townhouse. To me that seems like too much money to ignore, but am I breaking a boglehead cardinal rule by thinking about purchasing a house as merely a financial decision? More importantly, am I fooling myself for thinking that some of a 40% spread between rent and PITI might end end up in my pocket when it's all said and done?


Do not buy a house because of interest rates. You should buy a house because you want or need to be a home owner. What kind of hobbies do you have that would motivate you to continue to be home owner? Do you enjoy gardening? Do you have animals that need a yard? Do you work on cars and need a garage for your tools and car parts? Does the spouse have a crafting hobby, sewing hobby, that requires an additional room for space? These are reasons to buy a house - not because it potentially could save a few dollars. It might not.
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Re: Home Ownership Costs

Postby CyberBob » Fri May 03, 2013 4:56 pm

steadyeddy wrote:The motivation to purchase is primarily financial rather than a lifestyle decision--

That makes me think of Larry Swedroe's CBS Moneywatch article History says home real estate is a bad investment.

Bob
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Re: Home Ownership Costs

Postby stan1 » Fri May 03, 2013 5:11 pm

1) Location really does matter. Houses in well kept neighborhoods with good schools, parks, short commutes, and easy access to shopping/dining do in fact cost more because these features are desirable to people. Some things you have little control over, such as if the nice neighbors move out and the people who buy their house park a 30 foot RV in the driveway and don't take care of the yard.

2) In many areas property taxes are based off the purchase price. So someone who paid $30K for a house in 1970 might be paying a lot less than someone who paid $200K in 2012 for an identical house across the street. The website for your county's assessor should explain how it works where you are looking.

3) Condition of houses varies. Look for things like new foundations, modern electrical outlets, updated plumbing, heating/cooling, windows/doors, roofs. Watch for potential problems like water damage, mold, odors, drainage. A 1980s house is 30 years old and very well may need as much or more of these upgrades if it hasn't been well maintained. Be careful of houses that have a lot of cosmetic changes (such as new kitchens and bathrooms) that have not had underlying structure updated. If the electrical or plumbing needs updating you can waste a lot of money tearing out outer layers to get to the inside. In particular, be very cautious about houses that have been "flipped" with only cosmetic changes. It is easy to spend $5-10K (and up) per year on maintenance if you want to keep the house looking good. If you don't care about upkeep you can spend a lot less.

4) Keep in mind transaction costs. Then there other expenses like furnishings and upgrades to make the house how you like it. If you don't care about this you may be happy as renters in the same neighborhoods.
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Re: Home Ownership Costs

Postby kmok » Fri May 03, 2013 5:42 pm

The Wizard wrote:As time goes on, the spread between renting and buying gets bigger, since you've locked in your mortgage payment.

It seems like you implied that buying is better on a long run. That is not necessay true if you consider opportunty cost.
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Re: Home Ownership Costs

Postby Allan12 » Fri May 03, 2013 5:53 pm

I recently purchased my first house.

So many great posts in this thread!

I've found the biggest expense to come from our pride in owning a house, and the constant need to improve it,

For example, if we are going to spend $200 on Maintenance many times we will take a step back and go for the superior item, or a modern style, thus costing more.

Not sure if you will understand what I am getting at, it's been hard to describe, and extremely tough to budget for.

-A
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Re: Home Ownership Costs

Postby Padlin » Fri May 03, 2013 8:15 pm

FWIW, we spent 5% of the homes value on home related expenses last year, not including any mortgage.

Taxes, Utilities, Home Owners, and normal maintenance. Our tax rates are $14 per thousand.
Regards | Bob
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Re: Home Ownership Costs

Postby livesoft » Fri May 03, 2013 8:31 pm

Let's contrast two different homeowners that live next door to each other, Family A and Family B:

A mows and edges their own yard. B pays for a yard crew.
A plants flowers and trims the bushes themselves. B hires a landscape architect to do this for them.
A fertilizes themselves. B pays for the yard crew to do this.
A maintains their pool themselves. B pays for a pool crew.
A fixes things like thermocouples for water heaters. B pays for a top-notch repairperson to do this.
A paints the house inside and out every 5 to 10 years. B pays a contractor to paint.
A cleans the carpets themselves. B hires a carpet cleaner.
A uses re-usable filters in the HVAC system. B buys new filters every month.
A knows how to replace the toilet parts. B hires plumber for any minor toilet leak.
A puts out rat poison in the attic for $4. B hires a pest control company.
A maintains thermostat at 68 deg in winter and 78 deg in summer. B uses 75 in winter and 70 in summer.

And so on.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Home Ownership Costs

Postby stan1 » Fri May 03, 2013 8:57 pm

livesoft wrote:Let's contrast two different homeowners that live next door to each other, Family A and Family B:

A mows and edges their own yard. B pays for a yard crew. C knocks the weeds down when they are over 2 feet high.
A plants flowers and trims the bushes themselves. B hires a landscape architect to do this for them. C calls the weeds flowers.
A fertilizes themselves. B pays for the yard crew to do this. C Let's the neighborhood dogs fertilize the weeds.
A maintains their pool themselves. B pays for a pool crew. C has greenish water in the pool
A fixes things like thermocouples for water heaters. B pays for a top-notch repairperson to do this. C buys the cheapest water heater at home depot and leaves the box on the doorstep for months.
A paints the house inside and out every 5 to 10 years. B pays a contractor to paint. C never repaints (inside or outside)
A cleans the carpets themselves. B hires a carpet cleaner. C never cleans (or replaces) the carpet
A uses re-usable filters in the HVAC system. B buys new filters every month. C what's a filter?
A knows how to replace the toilet parts. B hires plumber for any minor toilet leak. C house has more than one toilet
A puts out rat poison in the attic for $4. B hires a pest control company. C the rats won't even come near the house
A maintains thermostat at 68 deg in winter and 78 deg in summer. B uses 75 in winter and 70 in summer. C goes to friends house when it is too hot or too cold

And so on.


If C is your style -- renting might be a better choice.
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Re: Home Ownership Costs

Postby stan1 » Fri May 03, 2013 9:13 pm

Allan12 wrote:,

For example, if we are going to spend $200 on Maintenance many times we will take a step back and go for the superior item, or a modern style, thus costing more.

-A


Just wait until you see how nice those $15K French Doors are ..... very hard to say "no".
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