Should I buy an investment property?

investment propertyDO YOUR RESEARCH

 

Buying an investment property is a big decision and one that you must do your research into first before saying you want to be a landlord.

Today one of my fans Allyson shares her story of wanting to finish her education and buy an investment property to get her into the real estate market.

Since I was little, I have known that I wanted to move out into my own house. I wanted something that belonged to me that I could sell when I was ready to watch my own family move on.

When I was in high school we had a class that was supposed to prepare me for the future of living away from home.

We had to fill out a sheet with a basic budget format: monthly rent, food, utilities and expenses. I was the only person in the class that crossed out rent and labelled it mortgage.

For some people, renting is a valid option and I can respect that, but for me, renting never made sense in my head. Why would I want to give somebody else my hard-earned money for shelter when I can just buy my own?

Obviously I have a better understanding of that now, as I am currently renting a row house. But it doesn’t sit well with me. I have trouble accepting that once a month, 1/4 of my income is just gone and I will never see it again.

It occurred to me a couple of years ago that I wanted to own a rental property. Maybe a duplex so that I could have a portion of my mortgage covered while I paid significantly less to own my house.

But last week a conversation with a couple of co-workers and a good friend showed me that my dream was just in its infancy.

 

Owning an investment property

 

This is what my pipe-dream has led me to. It is my future and I am determined to make this work for me. When I explained my plan to my parents they were surprised, but as usual showed cautionary support but support none the less.

My father asked me what kind of plan I had set up and I looked at him blankly – I had none! So, I set out as I had been trained to do: make one.

Today, I share with you what I have learned. Much of this is applicable to being a first-time home buyer, but mainly in the field of buying a multi-family property. In my case, my first home will be a 4-plex or if I can find one, a 3-plex with basement suites.

Let’s start with the perspective of a landlord. In my research, I spoke with co-workers, landlords and read as much as I could about being a landlord online.

This was where I really had my “EUREKA!” moment. First and foremost a landlord must consider cash flow. This I felt was fairly obvious – money comes in from the tenants in the form of rental income and you pay your bills and it is done.

I thought about it a while longer and realized I wasn’t quite understanding cash flow in a real estate sense. The main things to consider in regards to cash flow is “does the rents being charged COMPLETELY cover the costs”? I knew that I had to have the mortgage covered, but what other rental property costs are there?

Costs associated with owning a rental property include but are not limited to:

  • Mortgage
  • Property Taxes
  • Insurance
  • Maintenance and repairs
  • Homeowner Associated Utilities
  • Vacancy

All expenses associated in owning a property should be fully subsidized by the tenants that live there, through the rental income. Now the mortgage is fairly straight forward, but I’ll go over that later anyway.

Property taxes are something that is charged every year (or two, four years or not at all depending where you live in Canada). You get a piece of paper in the mail that says you owe your municipal government X amount of money.

With all expenses, you will take the annual total and divide by 12 to see a monthly expense. This example applies to every homeowner. If your property taxes are $2500 a year then you should probably set aside roughly $210 a month to cover them when collection time comes.

Insurance is usually billed monthly, price depends on what you are insuring and often postal code related. Insuring a rental is seen has risky and can be fairly high. Be sure to shop around for a good deal that doesn’t leave anything out.

Insurance can also be mortgage insurance although having life insurance is a route you can also research. As required by law, if you do not have the required 20% down payment to purchase your home, you will need mortgage insurance. This is a cost that you can wrap into your mortgage and in the long run it doesn’t increase your payments by too much, but it does increase them none the less.

Maintenance and repairs can be calculated two different ways but provide vastly different answers. The first example is more applicable to a single family home or apartment.

At least 1-3% of the total purchase price of the home should be set aside each year for maintenance. This provides a large number for a property over $200,000. A more accurate representation for a multi-family home is 10% of the annual gross income from the property.

Utilities that are homeowner associated include garbage and recycling fees, strata (condo) fees, sewer/sanitation and any advertising costs. Unexpected expenses can include an increase in your mortgage interest rate, damage to the property and eviction costs.

 

The tenants

 

Vacancy is the last landlord associated expense and it is very important. Vacancy is calculated on average at about 5% a year. So 5% of your gross income is gone.

Maybe a tenant stopped paying their rent or moved out unexpectedly. Perhaps there was an accident and the unit needs to be renovated. Any time a unit does not have tenants residing in it is considered vacant and this must be accounted for.

Finding good tenants can be hard, but it is worth passing over many prospective tenants if something does not feel right or they do not pass your tenant background screening and/or credit checks. Even the location of the property can affect who comes and checks it out and that is something to seriously consider.

Now is a good time for me to mention this. Start early! Look at the properties that interest you now so you aren’t way out of the ballpark when it comes to how much you will need to pay. Get an idea of the market for these properties and check what kind of rent you can charge.

If the property is fully rented it usually mentions the monthly income of the property somewhere in the listing or feel free to contact the agent representing the property. These are all things that the bank will be asking you.

Once you have an idea what you will need to pay, you can begin setting up your financing. It is good to get your pre-approval out-of-the-way because if there is a hiccup in securing your financing the property you are after won’t be sold out from under you.

 

The bank

 

From the Bank’s point of view.

They say that they are protecting you when they don’t want to lend you more than a certain amount because it’s all you can afford. In reality they know that if they lend over this amount, you are more likely to default which costs them time and money.

They aren’t really lying, but the banks aren’t really interested in helping you but helping themselves in the easiest, most painless way possible.

This makes the process for you as easy and painless as possible. The first thing the bank will ask you is what kind of property are you looking to buy? Remember where I said look at the market? This is where you can show them a couple of properties you were interested in.

They’ll ask you for your household income (you and your partner) and how much money you have to put down. Next they will look at the potential income of the property and if it is fully rented and put that against the monthly mortgage, but you will need to get signed agreements from the tenants stating that they plan to continue residing there (basically new leases).

  • How long have the tenants resided there?
  • Any plans to evict any of them?

Based on your answers they’ll determine an appropriate lending level and if you need mortgage insurance. They will also ask you if you have a plan in place.

  • What happens if you have a variable rate mortgage and the rate jumps from 3% to 9%?
  • Do you plan on taking advantage of any first-time home buyer grants (if available)?

When banks do calculations for rental unit financing they default to a 5% vacancy estimate and 10% of gross income for expenses. This is why I chose those ratios for my suggested calculations. They also ask if you know what the market rents for the unit are.
There are many costs to consider when purchasing a home. I have summarized the most common ones as best I can:

  • CMHC financing from 80% to 95% ranges from .5% to 3.15% of the total purchase price can be paid up front or absorbed into your mortgage.
  • Many banks have processing fees for mortgages of around $250. Some smaller brokers will not have this.
  • Survey Certificate – To ensure that no buildings cross over the property line. New surveys are around $400 or you can ask the existing homeowner for their survey from purchase. If you are putting less than 20% down this is REQUIRED by the CMHC or you will not get your funding!
  • Property Transfer Tax – Some provinces have this, others don’t. In BC it’s 1% of purchase price up to $200,000 and 2% on anything over. First time home-buyers are exempted from this

If you are buying a rental, confirm with your realtor if you can be exempted if you plan to live in one of the units.

  • Legal Fees- You will need a lawyer to check over your purchase documents to ensure that everything is worded correctly. Ranging from $900-$1200 when purchasing and up to $1700 when selling.
  • Purchase Adjustments- If you purchase your home after Property taxes are paid for the year, you will need to repay the current owner your portion of the taxes. So if you bought your home on August 1st, you would need to pay the equivalent of 11 months of property taxes to the previous owner unless they have opted for some other form other than total payment.
  • Property Inspection – Many lenders these days will not give you financing without a property inspection. Expect it to be roughly $400
  • Strata Fees- Also known as Condo Fees, they are the monthly maintenance fees. A form will need to be filled out to ensure that the previous owners do not owe any strata fees.
  • Fire Insurance – Speaks for itself I think, you pay for what you get, so it can be as high or as low as you would like it to be.
  • Interest Payments – This is a fun option. This determines when your first payment is. Usually persons set their mortgage payments to the first of the month. With how mortgages work and when you purchase your property, your first payment can either be a full payment or just the interest portion. So if you purchased your property 6 days before the 1st of the month you could choose to make a full months payment (pay it down baby!) or pay the interest portion of the payment and begin full payments on the following 1st of the month. (Takes you an additional month to pay off your mortgage in the long run.)

There are spreadsheet templates available online to help you figure out if this property will be a good buy or a bad buy for you called Real Estate Pro Forma but if you work with a realtor they can help you do this much more quickly.

All in all, if all your expenses cannot be fully subsidized by the rental income then you will not see a profit.

Seeing as profit is the whole point of owning a rental if it doesn’t work, pass it over and wait for the next golden opportunity. And as with all properties, the larger your down payment, the less of the property you need to mortgage, the more your cash can flow!

Do you own an investment property?

What did you learn about it after that you wished you’d known before you purchased?

Post contribution: Allyson is a long-time fan of Canadian Budget Binder who lives in the Sunny Okanagan in beautiful British Columbia. She works for a crown corporation and is saving up to go back to school full-time and finish debt free.

Money-quote

 

Are You New To Canadian Budget Binder?

Related articles

Photo credit: freedigitalphotos.net/digidreamgrafix

Why I’m not buying your house for sale

house for saleBUY MY HOUSE……

 

There are reasons why I won’t buy your house for sale unless it was up for sale at a fantastically low price and here’s why.
 
Since spending months looking at open houses only a few years ago before we bought our current home my wife complained that I was too picky.

I’m pretty sure her views have changed now over the years of learning more about the home buying process.

I blogged the other day about how to avoid home buying mistakes the first time but this post goes a bit deeper into what we saw and what we were looking for in our first home.

I swear she thought we would never buy a house at one point and the real estate agent was probably getting a little annoyed too.

I can’t even remember the amount of houses we visited but it was quite a few although the reality is I didn’t want to buy a house just because it looked pretty.

If you have a house for sale and are wondering why your house hasn’t sold yet you might want to look at some of the obvious.

 

Wrong MLS information

 

These houses we looked at didn’t include all the ones we’d previously dismissed earlier just because of the marketing information provided by the real estate listing agent led us to believe it wasn’t even worth looking at.

The same goes if you plan to sell your house privately, make sure you list it properly and ask for advice on selling a house or risk losing potential buyers.

To be honest our current home was listed with no parking when in fact we can park 4 cars in our driveway.

One of the main reasons we went to look at this house is because my wife questioned the parking because she knew the area where the home was located.

Sure enough the real estate agent didn’t properly market the house and potentially sent buyers away listing no parking with street parking only.

The other problem was the homeowner obviously didn’t read the MLS Listing online to realize the error to alert their real estate agent.

I guess we learned if it sounds odd don’t be shy to ask a question to your real estate agent or do a quick drive by and check yourself.

 

Buying your house for sale

 

I don’t think we are much different from other house hunters but I didn’t exclusively listen to my real estate agent because ultimately the final decision was up to the both of us.

If you ever go to an open house you will hear every selling agent say how perfect the house is and exclude the problems.

Not every agent is like that but let’s be honest, real estate salary for an agent is just as important as your own. How many people do you know market their products with defects unless they are mandated by law?

If you buy an apple and don’t like it you can’t bring it back after you’ve taken a bite. Make sure you have a solid relationship with your own real estate agent built on trust and friendship.

We visited houses new and old, two storey and bungalows because we really didn’t have a particular style that we were leaning towards.

 

Poor renovations

 

It wasn’t the decorating style that turned me off of a particular house for sale but a combination of stupidity, over the top pricing and poor execution of renovations.

As a handy guy I can look past the painting and decorating in nearly every open house for sale we visited. Although they say presentation can be the winning key to selling a property, presentation alone will not convince me that it’s a great house to buy.

General condition was a key factor for me because if a homeowner didn’t love the house that they poured their hard-earned money into because being a homeowner is not cut and dry. You don’t just buy it and forget it.

Did someone take care of the house they called home, or did they just let it go?

If I’m going to buy your house for sale I want to see evidence that your home was maintained or installed correctly.

When you upgraded the carpeted floors to hardwood I want to see seamless joints and edges to the baseboard. The fact of the matter was, we saw some of the most poorly executed hardwood flooring installations ever.

Having looked at massive gaps at the edges or between planks which either left you dumbfounded about how they thought that was a nice job or how on earth they expect potential buyers to not notice.

In one house for sale that we visited with our agent the homeowner had even cut out an entire wall and yet forgot to drywall the newly created edges. What they did do was they had painted the exposed wood studs just to jazz up the place.

Strangely enough, that wasn’t the biggest concern I had in that particular house for sale it was the fact that if they didn’t have the knowledge or skills to finish up the renovation job they started did they support the cut-out correctly? Probably not.

 

Bedrooms

 

Bedroom size was an important factor for me in every house for sale that we looked at. Having previously lived in a very small house in the UK, I didn’t want to recreate the same issues I’d experienced before.

Although I did say if I had to live in a micro-apartment or small house I could but if I don’t have to by choice I’d rather not buy a house that was too small for us.

Having noticed that some houses for sale have a large master bedroom which is great yet then you have a look at the remaining bedrooms which can be quite small.

We held out to find a house for sale that kept the other bedrooms fairly large too so if we ever have guests or children that they would have a larger size room. That was by choice.

 

My first garage

 

The garage space and amount of parking was an issue too like I mentioned above when looking at every house for sale that we visited.

I’d never owned a house with a garage before so having the opportunity to buy a house with a garage was new to me. We had seen houses with single and double garages which seemed to be fairly straight forward, you’re able to park one car or two in them.

Having viewed a number of houses for sale with a garage and a half, it seemed like a waste of money and/or space.

One was more like a garage and a quarter leaving you enough room to put a large waste bin in the one remaining corner by the garage door and the car. Call me strange but if I’m paying for a garage and a half, where is the rest of it?

 

Basement

 

Basement renovations seem to be the most common living space addition that happens in the home here and can add a fantastic area in any home. That is except the some of the ones we visited.

One basement had two nasty issues that were glaringly obvious as soon as you walked down the stairs. Having the basement listed with a bathroom rough-in, you’d expect that to be a simple install of sink, toilet and shower.

Not in this house, for some reason the builder had decided that the toilet waste pipe should be installed at the bottom of the stairs.

Why the original home owner didn’t complain or get it moved is beyond me. It was too late though because the basement had been “Professionally finished” which was odd, considering the entire basement, lights and sockets included ran off of one light switch. Something tells me that’s not professional.

The basement laundry room in one house for sale made me laugh when the floor drain was actually higher than the floor level because of someone’s installation. I’m guessing it was to allow a certain amount of flooding, but not enough to destroy everything.

That was the same house with live electrical hanging down from the basement ceiling. Another basement you’re paying for twice over, once for the house purchase and then again for getting it all ripped out and re-done.

If you’re planning on buying a house with an unfinished basement, try to envision a finished basement and how the space would work.

Does the furnace need to be moved?

Is it possible to install the laundry near the roughed in plumbing? 

These questions may seem slightly weird, but you’d be surprised what some builders get away with.

I found one house where the furnace and hot water heater was so close to the stairs that it would have all had to be moved 6 feet around the corner just to make a wide enough walkway from the stairs to the main basement living area.

 

Things N’ Stuff

 

There was other amazing things wrong with other houses which were listed as a popular feature yet were a complete disaster.

The deck on one bungalow that had warped and had been forced upward by the frost and was left with an almost eight inch drop towards the house.

It was just another example of something included in the price of a house sale yet was just another cost being passed on to the potential buyer.

Sure the home inspector might catch this and you can negotiate the price but do you really want to invest your money in a home that was not maintained?

That’s only a question you can answer and whether you are willing to soak up any surprising costs that could pop up that you can’t see.

It’s probably another reason I’ll aim for hiring tradesmen to come in to do specific home inspections if we were to ever buy a house for sale again.

 

Do what’s right for you

 

Don’t get me wrong and think I’m just being some kind of a house snob. I just wanted to make sure our money was being put into a house that we didn’t have to tear apart what we just paid for.

There were plenty of well-kept houses for sale but they just weren’t right for us due to location, size or other priorities not being met.

Yes, we’ve had a couple of unforeseen problems in our house, but you can’t see everything that’s going to happen.

However, if you can see existing problems right in front of your face and yet it still hasn’t deterred you from buying that particular house for sale you may want to consider what you haven’t yet seen.

Oddly enough we bought the home that was not properly marketed by the real estate agent and have enjoyed our time spent in our new home.

When you go and look at houses for sale do yourself a favour and spend a little time looking past the fluff and shiny stuff and invest a little time looking into your potential future home.

After all, you’ll be left with the bill for getting it all fixed if something goes wrong that you could have easily prevented.

What’s some of the worst things you’ve seen when you were looking for house to buy?

 

Money-quote

 

Are You New To Canadian Budget Binder?

Related articles

Photo Credit: renjith krishnan/freedigitalphotos.net

How to avoid home buying mistakes the first time

new homeHOME SWEET HOME COSTS MONEY

 

Buying a house to make a home for you and your family can be a stressful time for anyone, especially when it’s your first home.

We no longer wanted to rent any more so looking for our first home was something that came fast and furious for us.

With that comes the urgency to own a home and sometimes you overlook some of the obvious concerns. I certainly won’t be making some of these mistakes next time around.

I can remember the endless trolling through MLS listings online and then booking an appointment with our real estate agent to go and view them.

Some houses definitely viewed better through photos rather than real life, but it’s always something every house hunter has to endure.

When buying a house everyone has a list of wants and needs and a general style that they are looking for. For us, a more modern house was an easier choice due to lower maintenance costs and less chance that there was going to be hidden problems.

The trouble for any couple or family starts when they discover hidden issues with the house they thought was perfectly fine. Other life events can throw your plans off track too.

As a home owner I have found a number of things I would consider when purchasing a house even if it’s your first home.

 

Is bigger, better?

 

That large house that you have to maximize your mortgage for just to impress your friends and family can become a mill stone around your neck. A much larger house than you really need or can hardly afford costs more to run on a daily basis.

Increased square footage will go hand in hand with an increase in property taxes, heating and cooling costs, maintenance requirements and so on.

If your monthly mortgage costs are already crippling your finances, the increased costs of owning a house will tip your finances over the edge.

There is never anything certain in life, so if a job loss occurs, injury, health issues or a pregnancy that was unplanned happens, could you still afford that castle?

 

Consider staying a while

 

Jumping from property to property can cost you more than you think. You can make money from selling your house due to increases in property prices and renovations that you have completed on the house.

You can also lose money if you are selling frequently, unless of course you sell said property yourself without a real estate agent.

Take an average priced house of $300,000 and apply the typical 5% fee that goes along with it selling with an agent.

That’s going to cost you $15,000 ($16,950 with tax) to sell your house, but don’t forget that’s not the only cost associated with it. There is the fees for the lawyers, land transfer tax, moving costs and a  Canada Mortgage and Housing Corp (CMHC)  fee if applicable among other fees and taxes.

At roughly $20,000 or more per move if you keep upgrading homes over time, the costs of buying and selling can get expensive.

If you move house 5 times in a relatively small amount of time that’s $100,000 you’ve spent.

Did you actually make that much on selling the properties?

Home renovations

 

There is a common list of renovations that retain money and those that don’t with a fresh coat of paint giving the biggest return on investment. Sure you could renovate your house to the nines but is someone going to pay the over the top price for it when you come to sell?

The same applies to when you’re buying a house. Be wary of buying a house on a street where it’s the most expensive by quite a margin. A few thousand dollars won’t make much difference but paying thirty thousand over might ring alarm bells.

If you are going to pay all that extra money for a home that’s been completely renovated, make sure you’re getting what you pay for.

Having seen so many badly executed renovations during open houses to do with hardwood flooring or basements, I would advise taking a closer look.

I’m not going to spend hard-earned money on hardwood flooring just to rip it all out and start all over again.

Take a walk around the property, look closely at the finishes and the way things were renovated. Slap dash installation can suggest that most of the renovations in the home probably aren’t going to last.

I saw a brand new kitchen renovation in one prospective house and the upper cupboards weren’t even level with the ceiling. They change from one inch distance to the ceiling at one end to three inches at the opposite end.

Even if the ceiling wasn’t level, that would suggest there was even bigger problems. Your personal observations can be your biggest clues as to whether this house is for you or not.

 

Location, Location, Location

 

Quite possibly the most famous saying when considering buying a house. They even named a British TV show with the same name.

Living in an affluent area may make you feel like you’re on the way up but it might not necessarily be a good idea for you and the way your life actually is.

As a working couple, there may never be a time when you both hold a job in the same city or even travel to work in the same direction.

Picking a location that makes a commute easier and faster would be a sensible solution. Also selecting an area where each commute is roughly equal may make life a little easier so one person doesn’t feel like they’re doing all the travelling.

Consider the maths for moving closer to work and buying a more expensive house or staying outside the city and buying something cheaper.

With the costs of gasoline fairly high compared to what they used to be and increasing commute times it may make more sense to live closer to work.

High mileage vehicles depreciate faster and require more maintenance and you may find yourself buying cars more often than those who live close to work.

 

Time to buy

 

When we we’re looking at buying our current house we started looking in the middle of winter, which was great for viewing the inside but completely useless when viewing the exterior.

There were some advantages of looking during the winter. You can see how parking, snow removal and prevailing weather affects the property. Check the windows, they should perform as intended.

Double glazing panels can fail, fogging, condensation trapped between panels can be an indicator that you may be spending money sooner rather than later.

Check for cold rooms or uneven heating throughout the house. A bedroom above a garage that can be colder than the rest of the house can potentially be hotter in the summer months.

It doesn’t necessarily suggest that there is missing insulation, it could be caused by the garage underneath. Consider that you may have to invest in a thermal garage door.

A garage was part of the essential list. Not so much to store household stuff in, but actually house vehicles in especially during the winter months.

If you’re going to store a snow blower in there as well, check out the room available for all your toys because there’s nothing worse than a garage filled to the top with everything but your vehicle.

There are however down sides to looking to buy a home in the winter. After buying our house and then moving in, we were quite surprised when the snow disappeared and revealed a front garden that nobody in their right mind would be proud of.

We were also surprised and annoyed at the same time when we found items that the home inspector had missed. We have since resolved those issues, but it was inconvenient all the same.

If your planning on buying a house within the next twelve months, consider doing some research.

If there is a particular area you want to buy a home in visit it during every season. View the rest of the houses in the street as they tend to be of roughly the same age.

If most people have already got a re-roof done, then a house with an original roof will have to have a new roof budgeted into the cost. It may require landscaping or re-sodding which is a less expensive alternative to improving the curb appeal.

Making a list of pro’s and con’s could narrow down your house hunting and result in a better home purchase.

We had to make compromises but at the end of the day we’re happy with our choice of house to make our home.

What are some things that you would look for the next time you buy a home that you didn’t consider the first time?

 

Money-quote

Are You New To Canadian Budget Binder?

Related articles
Photo Credit: Stuart Miles/freedigitalphotos.net

Paying rent: Am I really wasting my money?

living-room-renting

Throwing Money Out The Window

I don’t think there is a right or wrong answer when it comes to renting and wasting money or purchasing a home but there certainly are pros and cons to both.

Why do I choose to pay rent?

While the freedom of owning my own home sounds great getting there on my own may not be a reality but I am certainly going to try.

I am saving my money right now and enjoying it, though what I am saving for exactly is not set in stone. For the next 10 years I am choosing to continue to pay rent.

As a single mother I want to make sure I am fully prepared for all the costs and fees that come with being a homeowner if I do decide to make that choice down the road.

I have my mindset that in 10 years, if I am still single, I could be close to or have enough money saved for a reasonable down payment on a  house if desired.

While budgeting and saving money regularly and wherever I can I figure I could have a decent down payment saved through investments and other means in those 10 years.

I still get laughed at when I talk about using coupons with my grocery budget, even more when people see I have a coupon binder, but hey every dollar saved helps towards reaching my goal!

Could you afford a mortgage on one income?

Buying a house as a single individual with one income it is not impossible as Mr. CBB showed us while sharing his experience with “Buying a house, was I too young?” Though not impossible it can certainly be a challenge when only one income is involved.

I like the idea of owning my home and having my own space where I get the make all of the decisions. If I want to paint a room then I will paint it, instead of having to get permission from a landlord to do so and how I would love to have my own property to landscape, oh the things I could do!! Is it worth it though?

Importance of a down-payment

Without a sizeable mortgage down-payment, 25% usually of the value of the house, you incur more insurance fees as your debt:income ratio is now bigger making you a higher risk borrower.

Where I currently live, in today’s housing market $350,000 or even $300,000 would buy more than enough space for the kids and myself and still be a relatively newer home.

Saving up 25% of the home purchase price would make my down-payment anywhere from $75,000 to $87,500. Can I save that much in 10 years?

I believe it is possible and I am trying everyday to find new ways to save, though it is a challenge I have accepted it with full determination to make it a success.

Again, I do not desire a large, luxurious home. I honestly do not want to clean it and would rather see my money go into savings and time spent with my kids then into more housework. I do not make a ton of money so being smart with what I do make is key.

I don’t want to be able to make my mortgage payments, stretch my dollars to pay taxes and maintenance costs while having nothing in my house or unable to put food on the table so a sizeable down payment is important.

Getting in over your head

Owning a house in our society comes with the status quo of being successful. If you can handle a mortgage then you must be doing something right!

The town I grew up in and still live in has boomed in the last 10-15 years with multi-million dollar homes that are absolutely beautiful but seem to be put on the market quite often as people are finding they really can’t afford them.

A large, lavish home or mansion is not something I ever desire, even if I were to ever win the lottery, I don’t want to clean it, especially as a single mom with enough already to do, but I would be happy with something that will meet our needs space wise, yet comfortable.

More space equals more cleaning time and more space for junk and clutter to build. If you have read some of my past blog posts you will know that these are two things I have been working to reduce the amount of time in my life that I devote to them.

Keeping up with the Jones’ is definitely not a smart choice when it comes to purchasing your home. A house is a major investment so why would you want to take on more than you can handle just to keep up with your friends and jeopardize losing it all?

 A close friend of mine has made many comments about how their house is costing them more than they can really afford and how it is putting a strain on all other aspects of their life, this is not where I want to be, ever!

I guess when Mr.CBB says “It’s not about how much money you make it’s how you save it” really is important not only to spending on everyday items but big ticket items as well. If we keep buying on credit or spreading ourselves too thin financially it will put a strain on our lives and for me, it’s not worth it.

If I am going to own a home it will be within my means, but only if and when I am fully prepared. Our quality of life right now is not lacking anything because I do not own where we live.

Benefits of Renting

Many will argue that renting vs. buying your home, apartment or condo is like throwing away your money.

This argument stems from the fact that unlike owning a home where you build equity, there is no return paid on your monthly rent payment. While this is true a mortgage can also be a good way to throw some money away.

Typically, until the 5th year of a mortgage the majority of your monthly payment goes towards interest while hardly making a dent in the amount of principal paid down.

  • If you sign an all-inclusive lease then your single monthly rent cheque pays for everything, utilities, property taxes etc..instead of several separate bills and fees when you own a house or a condo.
  • A single, all-inclusive monthly payment is much easier to work into your budget than fees and bills that can vary from month to month.
  • Renting does not require you to come up with thousands of dollars for a down payment,  closing costs and fees for things such as building inspections, legal support, property  taxes and insurance. Though you are not building equity from your home you are saving these costs which can become money you can put into savings, therefore still giving you return on your investments.
  • When your lease is up you can move! Moving  to Western Canada is something I dream of and hope to make a reality someday. Moving out when a lease is up requires a lot less time in paperwork and avoids penalties and fees you may incur while trying to sell a house.

Buying a home is a major investment and can be a great investment if you are prepared for it. Choosing to rent and save money while making informed choices of where to save that money whether it’s in stocks and bonds or even just a Tax Free Savings account can be a great investment as well.

My goal right now is saving to be able to afford a down payment though that might be not what I actually end up doing with it.

If I choose to continue renting after 10 years then I have an x amount of dollars in savings that I can continue to put to work building our savings and investment portfolio.

Heck who knows maybe one day I’ll meet the man of my dreams and not have to buy a house on my own but even then we will have an awesome start at paying down a mortgage, two incomes and less interest to pay sounds great to me.

In the meantime I am happy paying rent and planning for the years ahead. A stable future for the kids and I is what I look forward to, whether it means investing in a house, paying for the kids schooling or re-investing it into the market, it will be money well saved and put to good use no matter what.

Do you rent and would you consider buying a house right now?

Katrina-CBB

Post Contribution: 

Katrina is regular contributor for Canadian Budget Binder and is as passionate about personal finance as she is gardening. Katrina is a horticulture graduate with over 10 years experience with landscaping and greenhouse production.

Her goal is to share her knowledge and experiences blogging about gardening and her continued passion for personal finance in hopes of motivating others. While being a single mom of two and an in-store marketing representative for major retail shops she also runs her own Landscaping Services in Southwestern Ontario.

Money-quote

Are you NEW to Canadian Budget Binder?

Related articles

Photo Credit: 123RF

 

Reader question: When should you renovate your new home?

construction

Renovate Your Home When It Is Right For You

A fan sent me an email the other day and asked me the question, When should you renovate your new home? He said that him and his wife had just bought a home and they weren’t sure if they should renovate before they moved in or after they moved and wanted to know what we did when we bought our house.

Home renovation checklist

It was a question that I really didn’t have to think much about because we are in this position now. We did not renovate before we moved in and preferred to save the cash first before renovating. When we bought our home I created a checklist so I knew exactly what I needed to do although over the years it seems the list keeps growing. It was easier to read my list as I was going along rather than trying to remember in my head. Every smart planner will have a list so they have information to fall back on. There is no custom list here, you design your own. Grab a piece of paper and start making notes.

I also wanted to have the opportunity to fix what needed to be fixed on my own rather than paying someone else to do it unless of course a tradesman is needed for the job to get it done right. Besides it gives my wife time to go through those renovation type magazines to pick out what she likes.

Neighbourhood home renovations 

Every time I look out the window in the morning there is a new renovations truck on our street at a neighbour’s house doing something. Our homes range in age from 15-25 years old so most things inside the homes may be outdated and need freshening up or are starting to fall apart due to age.

Our neighbour who is a single-homeowner told me the other day while I was weeding the garden out front that she was in the middle of having her bathroom re-done and this is after living in the home more than 8 years. What she said was that she could only afford to do x amount per year to upgrade her home but when she moved in even though the house needed some work she decided to save the money to do over time.  So, not everyone wants to rush in and have the fast and ready or instant home (just add water) before they move in.

Needs vs Wants

Not everyone wants to spend money renovating their home, heck some people think we’re nuts for wanting to put a brand new kitchen in but it’s something we want to do, for us. There are however differences between renovation needs and wants. We don’t need to renovate the kitchen just yet but we do need to focus our attention towards the bathrooms.

In the summer we see many homes up for sale around us and open houses that garner lots of attention only because we are in a sought after neighbourhood. Just lately though we notice that of the homes that sell before the new owners move in they have a tonne of renovations done to the house. I have to question the worth of these renovations so soon after purchase when I consider the price they paid for the home.

When you live in a house for even a year or two you can judge which renovations are wants or needs and how you want those renovations to turn out. When you use the house on a daily basis you will learn what you like and don’t like which gives you time to start saving money in your budget for exactly what you want.

Too many renovations

When you are already buying a home at the top of its value you must be careful how much money you soak into your home because you may never recoup that money for a long time, if ever. An example would be a modest home that was on the market for $495,000 around the corner. This house was priced at the top range of what the home would sell for. It sold in less than 2 weeks for $5000 less than asking price. The home has an in-ground pool, deck and is a back-split.

Over the course of 4 weeks after the previous owners moved out we watched contractor after contractor tear the inside of that house apart. Not only did they put in all new flooring, new bathrooms, new kitchen they also put on a brand new deck. They even got all the interior doors removed, sprayed and then re-hung.

In my head I’m running numbers viciously because I can’t believe how much money they are willing to put into the home after purchase. I can understand if you scored a great deal on a house like we did and then decided to renovate but not at the top price range.

What would happen in the event that they needed to sell fast right after renovating? They are risking losing money on the house because their house might not be worth as much as they think it will be, although I often say “it’s worth as much as someone is willing to pay”. This is when you may see a house that is overpriced for the area and the homeowners get upset at the real estate agent asking, Why has my home not sold yet?

The thing about that is you can’t have $500,000 comparable homes on one street and then a similar home to those and you price it $100,000 more because you renovated it but who will want to buy it? You know the real estate agent will pull the comparables for the potential buyer and they will compare those prices to that of your home. If you are not sure of the value of your home you can log in to MPAC to view your MPAC home assessment or call them for a copy to be sent in the mail. While you can see the value of your home you will also be able to see what other homes in your area are valued at and that may give you a better idea of which direction to go.

When we bought our home for $265,000 the same model on our street was selling for over $300.000 a mere 12 months after. Now, 4 years later a couple are over $400,000. Our house is 1 of 4 in our subdivision. I’m afraid we don’t live in a custom-built home but we do live in a home built by a well-known builder in town.

Time and funds

When we decided that we would wanted to buy rather than rent the savings for a new home was kicked into high gear while we were renting. We couldn’t afford to complete all the renovation needs or wants before moving into our current home purely because the spare cash wasn’t available.

After saving up for a down payment on our home which was more important to us we figured our home was livable and so what if the carpets were purple. Over the course of time projects have been completed mostly on the basis of priority. It’s a slow process but unless you have the available cash to complete all the renovations before you move in that’s the way it happens.

There is an alternative but taking out a line of credit against the property or increasing your mortgage just seems bonkers. Unless you’re planning to stay in the house for the entire length of the mortgage you’ll be paying for those renovations even after the house has long since been sold. We wanted to be mortgage free before we were 40 so it was important to us that we kill the mortgage as fast as we could while taking care of projects along the way. Saving up by budgeting for renovations and searching for the best deals on quality products for your home project may help you to save some money or renovate your home for less like my friend Catherine at Plunged in Debt did. They renovated their first home for under $25,000 and it worked out for them even though they are as savvy with money as we are.

Handyman work

There are advantages to doing all the renovation work before you move in. First, you don’t have to live with the mess that comes with renovations and secondly there’s no inconvenience of nowhere to wash dishes for example. You can get your ductwork cleaned out and then move in to basically a new house and enjoy that new house smell.

The homeowners at the time were both very old and did no renovations to our home, not even the roof. When we went to put an offer in we considered the comparables and knew we had room to go down on this one given the state of the home.

The previous owners smoked in the house, carpets had burn marks in them and were very old, nothing was upgraded, no deck, unfinished basement.. and a few other things. The one thing we loved about our home was the size and layout and new we had stumbled on to a gem. The house was bought the same day we found it, with-in hours actually. We’re not into flipping houses and I wouldn’t spend my money buying a house that has been flipped by someone else.

All these contractors coming into homes to renovate is great for the local economy,I suppose, but I do have to wonder where the skills of modern man have disappeared to? I can rarely remember any contractors at our home as a child growing up as my father was in the trades and taught me skills that I have retained over the years. However, when looking at open houses with my wife while shopping for our current I noticed vast amounts of badly executed DIY jobs.

DIY home improvement show

I blame some of those HGTV home and renovation shows for trying to get people to renovate on their own when they have no skills whatsoever to get the job done right. The list of home renovation shows on TV is endless but not useless as there is always something to learn although sometimes I wonder where they come up with some of these ideas for TV shows.

Even Mike Holmes says do it right, so do it right. As much as I enjoy watching those TV programs it doesn’t make me a professional it only gives tips and ideas. Working in the trades of education and experience and not something that the average person will learn overnight or by watching the tube. All kidding aside, if you don’t know what you are doing, don’t begin a project and waste money that you worked hard for to botch up a job that may cost you more in disaster clean-up down the road.

So when it comes to renovations I’d sooner renovate as I go along taking my time to make sure I do it right and the way I want it rather than spending thousands upon thousands before I move into a home. If I need to call in the right people to get the job done, I’ll do it. If you fancy watching those DIY renovation reality shows and want to take on a project, be warned and at least do your homework.

Taking the time to save up the cash in our budget  that we need to pay for our renovations has worked for us rather than rolling it into the mortgage or line of credit. It’s a personal choice either way, do what makes you happy.

What renovations did you do to your home before you moved in?

Did you add the renovation costs to your mortgage or line of credit or did you save up cash? 

Was there a job you completed on your own where you should have called in a professional?

Money-quote

Are you NEW to Canadian Budget Binder?

Related posts:

Photo credit: Freedigitalphotos.net