Real estate has recently become an investor’s darling again, promising gains in this rising market. However, most underestimate the full financial implications that come with buying property, especially if this is your first house or else first investment property. Just because you have saved up for a down payment doesn’t mean that you are financially primed to step into the real estate market.
Securing a Mortgage
Some banks make it sound easy: all you do is ask for a mortgage and you have one. In the end, it’s not that simple. Depending on your income, the status of other loans, the size of the down payment, and the assessed value of the house you are interested in buying, this first step might just become your greatest hurdle. This can become an even greater problem in markets where the competition is fierce and many buyers put in competing offers, often without a condition for financing. This can leave you in a difficult financial and legal situation, in which many turn to trusted private mortgage lenders that can provide quick funding solutions in time of need.
Property Taxes
Property taxes were an expense you never directly had to deal with when living at your parents’ house or in a rental. However, they can be quite the annual expense depending on where you live and the size and nature of your property. Make note of last year’s tax amount when looking through the listings because sometimes it can become a factor which breaks the budget.
Maintenance
Many people buy houses because it makes fiscal sense to them, but others also consider it as a chance to gain independence. No more asking the landlord to switch out the carpets for wood flooring, or waiting to no end for an updated kitchen. Rather, you can do whatever you’d like to the house (assuming it’s common sense), offering a free pass for those who like to renovate, redecorate, or putter around in the garden. However, even those who don’t like these things will most likely end up having to pay to have them done. That’s because when you buy a property, it’s your responsibility to maintain it, including replacing damaged or outdated aspects like the roof, the boiler, or whatever else needs to be addressed. When calculating the true cost of a home, remember to include the money you will be spending annually on these projects. Even if you plan on doing them yourself, the cost of materials and initial investment into tools like lawnmowers, saws, etc. can add up to a small fortune.
Closing Costs
You know how when you shop online, something can seem like an awesome deal, but by the time you make it to the check out, you realize that it was a waste of time? This is a reality when buying a home, however, it’s not as easy to just closing the browser and moving on with your life. The initial cost of the home doesn’t include things like land transfer tax or legal fees, which combined can be more than 2% of the purchase price. It doesn’t seem like that much when you add it to the total cost, but remember it’s a cost you can’t put on the mortgage and need to have available right away.
Making Your House a Home
Depending on whether you will be living on the property or whether you will be renting it out to tenants, you will have to either partially or completely furnish the place. This could include buying all-new appliances, furniture, window coverings, trimmings, décor elements, etc. The purchasing of all these items can sometimes be as high as the cost of the down payment you just put down. Therefore, either keep some money in reserve for this exact reason, or else look for an opportunity to purchase a furnished house within your price point.
Of course, there are more financial implications when it comes to buying a home, like paying utilities, insurance, and potentially condo fees, however, those might seem more obvious than the potentially larger-than-expected mortgage, property taxes, maintenance costs, closing fees, and expensive “nesting”. This usually does not detract from the attractiveness of real estate investing, however, it can affect the timing of a less-experienced investor. It’s important to be financially prepared for the entirety of the costs and still maintain cash flow throughout the process, or else buying a home can become a very painful experience.
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