The key to financial independence can be staring at you, right there, unlocking your front door. New home owners will take great pleasure in paying towards their own equity for the roof over their head, as opposed to lining the pockets of landlords. Though this is a great first step to becoming free from financial burdens, there are many costs and potential profit that can go unforeseen. Here are a few tips for new homeowners in what to look out for, as well as how owning a home can be the key to an early retirement.
Ignorance is not bliss
Maintenance work and interest rates. Two things that can be neglected when renting an apartment, but can’t when owning a home.
Maintenance costs are often underestimated, with many seemingly minor issues getting overlooked “for next year”. The problem is, these issues become expensive when neglected. Staying on top of your home care with a fixed budget is smart, but it can be difficult to calculate, with any figure you settle on appears arbitrary. Well, the one percent rule isn’t a bad starting place, which states that the average maintenance cost is around 1% of a house: budgeting $4,000 per year for a $400,000 house.
Other factors may influence this budget by +-50%. If your home is brand new or was recently renovated, then this figure may be an overestimate. The opposite is true if the home is 100 years old, located in a flood-risk area or poorly looked after.
It is also worth bearing in mind that interest rates will not remain the same, which means budgeting for variable-rate mortgage repayments to potentially increase. To recover from the 2008 crisis, many countries have extremely low interest rates, but these are expected to creep back up. The US have already risen there’s gradually over the previous two years, with the UK’s forecasted to rise in late 2019.
Contracts over contacts
It’s no secret that most big projects can cost much more than is quoted or planned, we’ve all heard the horror stories. Flicking through your contact book to ask semi-skilled friends or having a go at it yourself can therefore be very tempting. Don’t be tempted.
Perhaps painting the spare bedroom or amending furniture can be great to try yourself, learning new skills and saving money. But fundamental repairs to the house should be treated with great respect, as your property is of great value as much as it is a home.
Tiling, electrics and plumbing are jobs that can tempt us into attempting but should be left to a professional. These jobs have very costly repercussions when they go wrong and can get messy very quickly such as rewiring a light switch or improperly installing sink.
Don’t get caught off guard
Maintenance costs and interest rates aren’t the only cost that can arise unexpectedly. Property taxes are usually based on a mixture of local tax rates and your property value, two things that are prone to change. This is worth accounting for in your budget when moving into a home, as rates vary greatly depending on location, but it is also worth noting that this expense will likely increase in the future with the same home. From 2000 to 2010 property taxes had almost doubled in the US, whilst in the UK, council tax rose from £26.6 billion to £28 billion in 2017.
It is also worth having your home independently valued by an estate agent or local builder. It is possible that you purchased your first home for either more or less than its value. This will guarantee that you are insuring your home for what it is worth, so you can avoid overpaying in premiums.
Locations that are prone to natural disasters often do not offer standard insurance that covers for flooding or sinkholes. It is important to understand what is covered, for which you can either seek out insurance with greater coverage, and if there is no option, save specifically for such an emergency.
Using your home to reach financial independence
For many who have early retirement or financial independence (FI) as a core goal in life, getting on the property ladder as soon as possible is a must. This is somewhat ironic, as FI enthusiasts often preach about avoiding debt at all costs; it must be remembered that FI and being free of rent and mortgage repayments is a long-term goal, with the home being a very important factor.
Whilst this may be a 20-year plan for some, the home can be used proactively to contribute towards this goal by being used as a revenue stream in the here and now.
One method of raising revenue using your home is to rent out a portion of it. This may include putting the spare bedroom on Airbnb with a nightly rate. Investing in some nice furniture and interior along with some salesmanship may provide a healthy passive income, which can really be lucrative in the summer. Additionally, taking this to the next step and building a suite for guests, perhaps a cabin in the garden or converting a garage may be a worthwhile investment with a better separation of living space.
If guests aren’t a passive-enough income for your personality or lifestyle, then renting out space may be a better option. If you have a large off-road space that can fit a RV or a boat, then it’s possible to rent this out for those who want somewhere to protect their vehicles from the weather. Renting a parking space in an urban area or near a large workplace can also be in great demand.
There are opportunities for some extra side-income for new homeowners, but these may be taken more seriously when striving for financial independence. Treating your first down-payment as an investment in yourself as much as it is a home can provide you with income opportunities. This approach may lead to the mortgage paying itself off, with a thoroughly planned budget to account for unpredictable expenses being equally as important.