You might have heard from many different sources around you that rent is money thrown out the window and if you can pay the same amount of money (or even more) as a mortgage, you’re much better off. Well, based on what we saw in the previous chapters of this series, we need several factors in our favor in order to prove this statement, and even in those cases we might need many years to enjoy the real financial benefit of home ownership. One of the factors that people tend to forget about are all the costs that you need to pay as a homeowner but not as a tenant.
Such costs can be very various depending on where you live. Typically property and related taxes are one of the important elements that can vary country by country. But one thing is for sure: no matter where you live, you will have maintenance expenses. When you rent and the roof is leaking, the boiler is broken, you need a plummer, you just pick up the phone, call your landlord and he’s gonna fix it for you. Once you become a home owner, these costs will be paid right from your pocket.
How much will you spend on maintenance is hard to tell. Many people say that depending on the size, condition, location etc. of your house you can expect on average anywhere between 1% to 3% of the property value per year.
How much does this 1-3% impact or buy or rent calculation? If you read the first chapter, you remember that we calculated for the sample property that after 6.5 years buying the house becomes more beneficial than renting it. What if we think like many people out there and forget about the home ownership costs and we go for a property where our monthly mortgage payments would equal the rental fee of the first year?
Some might say that buying still worth it, as part of your mortgage will go against the principal, furthermore the rent will surely get increased by the inflation. Let’s say what our chart says, which we also used in the previous chapters! I will consider here home ownership costs as being 1%, which is really the minimum.
Shocking, right? If you invest the amount of money that is kept in your pocket by renting (which is basically the home ownership costs), buying doesn’t seem to be that good idea anymore. Conclusion? If you decide to buy, make sure your monthly mortgage payments are less than the rental fee for a similar property would be.
But let’s go back to the original example, where the price to rent ratio of 18 combined with a 2.4% interest rate, 2% inflation and a slightly over 1% ownership cost has resulted in the benefit of home ownership over 6.5 years. What would happen if we change the home ownership costs to 1.5% and 2%?
As you can see it makes a lot of difference. Calculating with 2% home ownership costs (which includes everything, not just maintenance fees) you need to wait nearly 18 years in order to be able to see that financially you made a better decision with buying.
What we saw from this chapter is that home ownership costs should not be neglected at all when buying a property. In fact, besides of the price to rent ratio, this seems to be the other important factor that determines how beneficial it is financially to buy a house. All other factors only fine tune the end result. It really worth sitting down and list all known expenses (e.g. taxes) and estimate the unknown ones. A research of couple of hours or days might save you from a bad financial decision, or contrary: reassure you that you are making the right one.
Are you a home owner? Where and in what type of property you live in? Based on that what is the rough percentage of your home ownership costs vs the value of your property? Please share it in the comment field (e.g. Netherlands, town house, 1.3%). It might be interesting to see the differences per country/state.
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