A Primer on the True Cost of Real Estate Ownership

by Brant Wilson brentok3@hotmail.com

The average homeowner thinks that the full cost of home ownership is
represented by their house payment. Even more, they think they are somehow
coming out way ahead since the interest they pay is deductible. Most fail to
realize that unless they are in a high tax bracket, every dollar they pay in
interest saves them, at best, something under twenty five cents in taxes.

Paying a dollar to save twenty five cents seems like a poor investment.

If you're in the real estate business to make money over the long haul, you
need to throw out all the propaganda, half baked statistics, wishful thinking,
and bad economics to figure out what you are actually making and what things
actually cost.

Actual Costs Quantified

To arrive at the annual cost of property ownership, you should add up
everything that goes into ownership, not just the payment.

Estimated annual costs as a percentage of purchase price include:

-interest         6% - 7%
-taxes            1% - 3%  (varies depending on your locality)
-insurance      1/2% - 1%
-repairs          1% - 2%  (routine repairs and occasional remodeling)
-miscellaneous  1/2% - 1%  (drapes, landscaping, appliances, etc)
-sales costs      1%       (If you move on average every 7 years, the national average.
                            You will spend on average around 7% to sell.
                            Works out to 1% per year of ownership)

Total annual cost of ownership as a percentage of purchase price :  10%-15%

If you end up selling in a declining market, and selling for less than you
paid, obviously home ownership starts to look even worse. 

The Warped World of Home Ownership Accounting

Most people who sell a house think that the profit they make on the sale is
what they net at the sale, less what they paid for the house.

They generally fail to include the cost of remodeling, repair, and everyday
maintenance. To provide an accurate picture of the profit you make, these
amounts have to be included, but few homeowners keep accurate records for all
these items. 

When you rent, you don't pay for remodeling and repairs. To compare the cost of
owning and renting, you have to include EVERY cost associated with ownership. 

Many people who think they made a tidy profit upon sale of a house could have
actually lost a large sum of money, since they failed to take in the cost of
all expenses related to the house. 

In many ways a house is not an investment at all. If you live in a house you
receive no income from it. It doesn't increase in productivity as a business
asset could. It costs money every month rather than generating income.