So, you’re ready to buy a house. You’ve had the dream a long time, and this year, smack in the center of your vision board, you’ve got an image you cut out of a magazine to represent moving in to your dream house.
Last year I was invited to share some insight on the realities of real estate and some of the real estate myths. Often, people find themselves buying a house without fully assessing if this is their dream, or just an American dream hand-me-down from other generations.
If you choose to buy a house, there are lots of things to consider—where that house is located, how much it costs (in terms of time away from it) to pay the mortgage, and whether, when it is time to retire, you will downsize or turn it into income producing rental property.
If this is your dream house meets reality year, please take a good look at these 5 Things Future Homeowners Need to Know:
- Owning a home, while it might be your biggest investment, might NOT be the best income producing investment in retirement or your biggest asset.
Assets are the things you own that can be sold to generate revenue when you need it. Assets hold a kind of intrinsic value until it can be converted to cash. It has a positive economic value and represents money or the potentiality of money.
That said, if you live in a house and pay your mortgage, the value of that investment asset can’t be spent until it is turned back into cash.
Depending on when you buy, please keep in mind that you have to pay your mortgage payment to keep your house. It seems obvious to state here—that you have to have income producing work or some other source of support to pay your mortgage payment.
Sometimes, you can refinance your house and borrow more money against the value of the home and use those funds to pay the mortgage, though this is a game of diminishing returns and can not be played indefinitely.
When you retire from regular earnings, if the mortgage hasn’t been paid off, you’ll have to manage the obligation of the mortgage payment with the ways you’ve saved to generate revenue. Just think it all the way through—how will you do that?
- Your house might be the perfect house to live in while you grow your family, but it may be too much house when it’s time to retire.
If you are one of the people who has paid off their house, you’ll want to consider if the house is too much house when all the kids are gone.
Will you downsize in retirement? Will you rent out rooms, or the whole house and be a landlord? Will what the house offers once it’s sold be worth more than invested money would have been in the time it took to pay for the house outright?
And, if you decide to stay in your home in retirement, do you have investments that will generate the amount owed annually as property taxes?
- While it’s true, you have to live somewhere, and home ownership seems, in so many ways, to be synonymous with The American Dream, make certain, when you’re building your life’s financial plan, that the American Dream doesn’t overshadow your own dreams.
Take into account the lifestyle you live. Do you travel often? If so, then you have to generate income to cover travel expenses and the mortgage payment.
Do you have enough saved to take care of major repairs? Like the roof? Plumbing? The Driveway when it cracks? Homeowner’s dues and special assessments (if you live in a planned community)? There are lots of expenses associated with home ownership that people don’t often think all the way through.
Saving for the down payment is one kind of consideration when buying a home. Saving for the rest of the “surprise” costs of home repairs is a whole separate account I recommend when working with my clients to automate their finances.
- Know Your Neighbors.
There’s one of the ten commandments, “Love your neighbor as yourself” but said in old English with the word Thy. And while that is the ideal point of view we’re all called to try to observe, Neighbors share property lines, fences and sometimes trees that grow on the boundary line between your property and theirs.
Sometimes, the tree that falls is clearly on their property, but there isn’t a clear agreement on who covers what costs when something goes wrong. These issues often result in litigation or strained relationships and months and months of sunk costs while the details of “who pays for what”, lost income, and expensive health issues get sorted out.
Listen to the recording to hear me tell the story of a client who owns a house she rents, and had just this situation occur. She’s still waiting for expensive repairs to get completed, and she hasn’t started the litigation phase of her relationship with her neighbor.
- Being a Landlord is Work
There’s a romantic notion that your house will be a great home for other families when your family has finished with it, and that rental property is the greatest investment of all time. The truth is simply this: renting property is a business, just like any other business, and to recognize returns, you have to run it as a business.
At a minimum, you’ll need to talk to your insurance agent and change the kind of homeowner’s policy you have to the one you’ll need when you take on the liabilities inherent in renting your property to others.
To hear our conversation about these 5 Things Homeowners Need to Know, please take a listen to this recording: (link to audio)