Buying Home vs Renting (Part 4)
Hidden Costs
Hidden Costs
Hidden Costs — Virtually no one talks about.
This is the extra stuff you have to pay for that you don’t realize you have to pay for until you have to pay for it. For example:
A lawnmower to cut the grass and gas
A snow blower to clean snow and gas
A leaf blower to clean up leaves in the fall
Or hiring someone to do all of that
Or the issues you’ll have, since all homes have them:
Leaky kitchen faucet
Your clothes dryer dies
The water heater stops working
The furnace doesn’t heat your home
Or half your home has no electricity
The leaky faucet and only half the home having electricity happened to us within 2 months of us buying our home. It happens!
Yesterday, as I was working in my home office I noticed a pool of water on the floor. My office is in my basement which is finished. For those of you that are not aware, a finished basement has walls, flooring and doors dividing up the space. For those of you that have never seen a basement because lets say you were born and raised in Florida, a basement is a space, under your home built inside/under the dirt. And here in the north east, some water tends to find its way in. Sometimes very little, other times a lot.
So back to the leak, it was coming from underneath the upstairs shower. Inspection from a local plumbing company, puts the cost to fix at $2,200.
Takeaway: As an owner, that cost is on you. As a renter, that cost is on your landlord. All the hidden costs of owning a home fall on you. But as a renter, you can rest easy knowing that all you have to do is pay your rent on time, don’t be a loud tenant and keep your space clean. I want everyone to own a home if that is part of your financial goal. I know a few people who rent and love it. And they have lots of money. I also know people with money who buy. Do what’s best for you. Not what social media or the banks feed us. And remember, it’s the real estate agents job to tell you to buy! Be careful to take their advice.
As a rule of thumb, factor in 1% of the purchase price of your home towards these “hidden costs,” each month. So if you buy a home for $300,000, at 1% that is $3,000 you should have available for maintenance, repairs and hidden costs. This should be in your budget. Some months you will use them and others you won’t. But at least you have a general rule to not be caught by surprise. Knowing your numbers is the single most important thing before you buy a home. Otherwise, you’ll be known as house poor [see yesterday’s blog to find the meaning of house poor].
Now, I mentioned that you should plan to have 1% of the purchase price of your house available each month in case you need it. This is a separate rule of thumb to follow compared to your total monthly payment for your home to be at 25% [ see yesterday’s blog to see how a mortgage is made up]. Using both rule of thumbs is a great way to determine when you are ready to buy a home. I cannot finish without emphasizing the importance of budgeting the right way each month and have as little debt as possible when buying a home. I strongly believe in having an emergency fund saved before you buy too!
Bonus
Carry little debt before you purchase a home
Have an emergency fund that covers 6–12 months of your monthly expenses
Have 20% of the price of the home saved for a down payment. This avoids Private Mortgage Insurance (PMI. Not required. Only if you put less than 20% down, the bank will make you get this added insurance, incase you stop paying them. This is protection for the bank, not for you. This can add an extra $50–150 for every $100,000 you borrow. If you borrow $300,000 from the bank, your payment will include $150–450 extra for PMI)
Make sure you factor in each month in your budget, 1% of the price of the home for maintenance, repairs and hidden costs of owning a home.
Dan Roman is a Husband, Father, and writer that releases a daily blog. A quick read on money, marriage, parenting, self-improvement, development and his thoughts. Dan is also Founder/Creator of Roman Solutions, a Personal Finance Firm that currently provides coaching and education.
To connect with Dan visit: linktr.ee/bydanroman
Or by email : financialdifference@danromansolutions.com