The Real Cost of Property Ownership

Home ownership is sometimes viewed by the laymen as a single expense, namely the purchase price of the home. However, a thorough examination of the situation reveals that home ownership entails a number of costs. When budgeting, it is easy to overlook certain expenses. As a result, in this article, we've created a checklist of some of the costs that typically arise in such instances. Among the investments are the following:

Purchase Cost

This is the most visible expense involved with real estate investing. As a result, if we buy a $100,000 home, we believe we have only invested that amount. When people ask us, "How much did you pay for it?" we tell them the aforesaid sum. However, as we will see later in this essay, the layman's perception that $100,000 is the total cost of the property is frequently wrong.

First and foremost, there are transaction fees associated with the acquisition. Brokerage fees, processing fees paid to the bank to handle the mortgage loan, and legal fees collected by the government to register the property in the name of the new buyer are all part of the transaction costs. First-time buyers usually underestimate these costs. However, they can swiftly rise to anything between 3% and 5% of the property value. As a result, even if the property's list price is $100,000, the buyer will pay at least $105,000!

Paid Interest

The majority of properties acquired today are purchased with borrowed funds. Mortgages are the new normal! People buying homes with no money down are almost unheard of nowadays. However, if there is a mortgage, there are mortgage payments, which contain an interest component.

The amortisation schedule of any mortgage is designed so that the banks collect all of the interest first, followed by the principal due. For example, if your monthly payment is $1000, $900 will go toward interest in the first several months! In fact, throughout the first five years of a mortgage loan's servicing, the borrowers just service the interest payments! During this time, only a little portion of the principal is reduced. As a result, if these expenses are capitalised, or added to the value of the property, the value of $100,000 increases significantly.

Theoretical Interest

Aside from the interest paid, which is an out-of-pocket expense for the buyers, notional interest is also involved in real estate investing. Most real estate investments necessitate a down payment from the buyer. This down payment is around 10% to 15% of the property value. As a result, for a $100,000, a person must make an initial payment of $15000. Making this payment now has an opportunity cost. If this money had not been used to make the down payment, it would have been earning interest in a bank or another investment. However, once utilised for a down payment, it earns no interest!

As a result, the amount of notional interest lost should be added to the property valuation, i.e. the $100,000 that the buyer first thought was their whole investment in the property.

Insurance

Most mortgage lenders require the buyer to carry property insurance. This is due to the possibility of property destruction in the event of natural disasters such as earthquakes and hurricanes. As a result, the borrower will simply cease paying payments on the property. As a result, lenders rely on insurance to protect their interests.

Aside from insurance that covers the value of the house, many homeowners choose to insure their home contents as well. This is due to the fact that they spend a large amount of money on interior design and want to ensure that their investment is protected in the event of an unanticipated circumstance. This also raises the expense of home ownership.

Taxes on real estate

When we buy real estate, we agree to make annual payments to the government in perpetuity! These payments are known as property taxes, and practically every government in the world imposes them. Once again, these taxes considerably increase the cost of home ownership. It is also important to note that these charges are frequently modified in value throughout time. As a result, these prices often rise at the same rate as inflation. As a result, while planning for the purchase of a home, the costs involved must be considered.

Maintenance

Properties all across the world increasingly include amenities. In gated communities, swimming pools and jogging routes are common. The idea is to provide people with a way of life, not merely a place to live. However, these luxuries necessitate a significant amount of upkeep. Gated communities necessitate a large number of staff and equipment to keep the area safe and tidy. As a result, these fees are billed to homebuyers on a monthly basis. This, too, raises the cost of investing in real estate. These costs can sneak up on an uninformed customer, so they must be avoided at all costs.

Utilities and furnishings

There are minor expenditures associated with transferring utilities to one's name as well as furnishing the residence. These expenses also contribute to the overall cost of home ownership.

As a result, home ownership has become a perplexing maze of multiple costs. Understanding and budgeting for these hidden expenses requires extreme caution, as omitting these expenses might substantially deplete your budget in the future.

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