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Dealing with Unexpected Housing Costs as a Home Owner

4 July 2019

Housing prices are up, and bank loan requirements are getting harder to meet. You’d think the Canadian dream of homeownership would be gasping for breath, but on the contrary, demand is alive and kicking. Even millennials, a demographic known to spend on experiences rather than investments, contribute a large chunk of the market, with 43.6% of them having already realized the dream and another 39% intending to buy in 2019.

The current economic and regulatory challenges have spurred homebuyers to become more creative with financing, turning to private mortgage lenders like CMI for more flexibility and embedding income-generating methods into their homeownership strategy. For example, millennial owners are opting for properties that have a basement or spare room that can be rented out.

Overall, homebuyers have become much more cautious and strategic with taking on loans and committing to home purchases. Those who are already paying down mortgages are leveraging their growing equity in order to generate additional income through businesses and the purchase of more properties.

Even the most prudent of investors, however, may miss the critical details that seldom make it to relevant conversations. First-time homebuyers, especially young ones who aren’t surrounded by peers with much experience in real estate, are particularly vulnerable to this pitfall. You just don’t know what you don’t know.

To maintain a good credit standing (which you can leverage later on) and avoid becoming “house poor,” it’s wise to prepare for these homeownership costs that even chronic advice-givers often forget to mention.

  1. Closing costs
    So the seller of your dream house just accepted your offer. Congratulations! You’re one step closer to adding a major asset to your portfolio. You don’t want bill shock to dampen the joy of the moment, however, and that’s why it’s important to factor in closing costs right at the beginning—when you’re setting your budget.Before even applying to get pre-approved for a mortgage or making any offers, consider the costs beyond the actual price of the property. Closing costs—which include insurance, taxes, legal fees, and possible inspections—will more or less be around 4% of the purchase price.

    You can better anticipate the costs and fees associated with your purchase by finding out as much information on the property as you can. Don’t be shy to ask the owner or the broker about closing costs. While there will already be accepted practices as to who pays for what, sometimes there’s room for negotiation.

  2. Higher utility bills
    If you’ve gotten used to condo living, you may be surprised by how much more you consume in a larger space. Maybe your bigger, double-door fridge requires more energy, or you need more water to clean your new home. Whatever the case, move in your furniture along with the efficient, resource-saving habits you’ve already developed.A rental property may also generate utility bills even if it hasn’t been occupied. Don’t put the cart before the horse when investing in additional amenities meant to make your listing more attractive. For example, you can offer free WiFi to a potential lessor but clarify that installation will proceed only after the I’s have been dotted and the T’s crossed.
  3. Preferential renovations
    Sure, you were prepared for maintenance costs like waterproofing and repairs, but there are some things you don’t realize you want to be altered until you actually start living in a new space. Maybe you want additional shelves installed, or you soon discover that the current kitchen configuration doesn’t work for you. Keep in mind that you will adjust and get used to some things but not others. You’re going to find at least some inconveniences that bother you enough to get you to open your wallet.New property owners may also want aesthetic improvements, whether they mean to reside there or not. While a homeowner will want to make the place feel more like their own, an investor may want to increase the value of their investment or make adjustments to make the asset more aesthetically consistent with the rest of the properties in their portfolio.

    For these reasons, do more than one ocular prior to making an offer on a property. Pay attention to your daily use of your current space, and imagine doing the same things when walking around your prospective purchasers. Are the kitchen cabinets low or high enough? Does the bedroom have enough shelf space? You can even bring your own measuring tape, so you can conduct an initial survey.

  4. Pest control
    You may have taken into consideration that you will now have to shoulder any maintenance costs, but potential homebuyers often forget that they can no longer call the landlord for a rat infestation. However, whether you’re a landlord, a house flipper, or a homebuyer, problems with creepy-crawlies don’t have to bankrupt you.While a professional will do a much better job of finding existing problems or potential entry points, you can at least check if the property you’re eyeing is close to rivers, dumpsites, or other known sources of pests. Regular maintenance will also keep these types of problems to a minimum and prevent more expensive damages in the future.
  5. Interest rate appreciation
    Whether or not your mortgage is on a fixed-interest term, rate hikes will affect you because they impact everything else—the property taxes you pay, the purchasing power of the market, and the value of your new property.This is why it’s important to make sure your cash flow can weather rises in interest rates, which are out of your control. Also take into consideration the current and future value of your property; if the area it’s in is depreciating in land value, you might end up being tied to an overpriced mortgage.

Property ownership shouldn’t be dampened by financial woes caused by a lack of preparation. As a rule of thumb, the CMHC states that your housing costs, including mortgage payments, should not exceed 32% of your monthly income. Treat this number as a point of reference rather than permission to borrow up to a third of the value of your paycheck. Leaving more room for the unexpected will give you peace of mind and allow you to actually enjoy your new home.

Remember that you are building your asset portfolio, and owning property should improve the quality of your life rather than become a burden. Homeownership opens doors that can grow your income and subsequently loosen up your cash flow; for example, as you pay down your mortgage, you’re also building your credit score and increasing your chances of getting other types of loans, which you can then use as capital for a new business or investment. Ample preparation for costs will prevent late mortgage payments and help you keep an excellent credit standing. Additionally, a good reputation will always pay off.

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