Thursday, November 4, 2010

Keeping the House from Owning Us

My wife and I recently purchased a house here in Omaha. Consequently, I have been thinking a lot lately about real estate and all the costs associated with being a home owner. Just thinking about the things we will have to do to this home… I can already see the reasons why some weary homeowners head to an apartment lifestyle skipping.

So how can we keep the house we are excited to own from owning us?

I am approaching it with a three step philosophy:house_money1

  1. Remember what you bought.
  2. Know what it costs.
  3. Keep your horizon in check.

Remember What You Bought

It often happens in small business that an individual starts a company or buys a franchise and essentially bought themselves a job. Truly successful entrepreneurs never buy a job – they buy investments. A job is the daily grind, the rat race, hand-to-mouth – the profits from the business are your paycheck and there is nothing left for re-investment into the business. An investment is current income plus growing revenues and eventually a cash cow that doesn’t require the owner to be in the trenches every day.

A house is similar. Too often people buy a "place to live rather than an investment. Let me be clear, I am not saying that personal residences are a source of income or should be treated as such. I think we all have seen that a mind set like that spells disaster circa 2008-2009.

An entrepreneur recognizes that an investment requires capital and work but they expect to build something meaningful – otherwise they would just go get a job working eight to five. When we are talking about a house it’s important to remember that the work you are doing on the property should be improving its value or improving your satisfaction with the space. A house is not just an asset that will hopefully be worth something when you sell it (2% growth per year is a decent estimate) it is an expression of who you are. If you aren’t into that, an apartment or condo might be a better fit for you and that is okay.

Know What It Costs

As a homeowner you have to remember that the down payment and closing cost were just the beginning of your cash outlay. Even imoney-house-1024x682f you bought a brand new home  there will still be things that need kept up or even break down. Here is a nice rule of thumb: a homeowner should plan to save an extra amount each month for “fix-it” expenses. This should be 1.5% of the value of your home annually. So if you own a home that is worth $150,000 then you should save at least $188 per month.

Even if you don’t use the money you saved in a given year, keep saving! You might have a couple good years but then you might have to replace the roof – good news you have been saving for that, no need for a home equity loan. A house requires up-keep and up-keep requires a few dollars. 

Keep Your Horizon In Check

A house is a long term commitment and the real benefits only come over time. Perhaps in the late 1990’s and mid 2000’s you could buy a house in California and it would appreciate 40% in two years but that bubble popped. As a home owner you have to be willing to stay in the house for an extended period of time. It’s just the way it is. If you want to move around and experience different lifestyles you should probably rent.

I am definitely writing to myself today. I am certainly no expert on being a homeowner but I have had an opportunity to observe quite a bit. What about you - How do you keep your home from owning you? Do you do something special to help keep your perspective as a home owner in check?

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