Are You House Poor?

I can’t believe the number of people who leap into home ownership without a clue about the financial responsibility they’re undertaking. Home ownership is NOTHING like renting. If you figure you can afford a home because the mortgage payment is almost like rent, you’re going into this with your eyes shut tight. You’ll have utility costs. You’ll have taxes. You’ll have insurance. And then there’s maintenance… the cost everyone likes to ignore. When the roof leaks, the furnace gives up the ghost or a window breaks, you’re tapping your savings and whining about “if only you’d known.”

Resist the urge to guestimate what these costs will be. Find out. Ask friends and family in the area what they pay for heating, electricity, water, oil, whatever your house consumes.

Look at real estate listings to see what the taxes on comparable homes in the area are running at.

Call your insurance broker to get a quote on what it’ll cost to insure your new nest.

Calculate your maintenance budget. Use the rule of thumb of between 3% (for a newer home) and 5% (for an older home) of the value of the home for maintenance every year. Don’t wimp out on this. If your property values are horrendously high because land costs are way up in your area, use the home’s replacement value for your calculation.

If you aren’t prepared for the costs associated with home ownership, you’ll end up filling the gap in your cash flow by using credit, and your savings will go to hell in a hand-basket. If you want to have a home and be able to save too, you’ve got to have a plan that is both realistic and achievable. There’s nothing warm and fuzzy about being house poor.

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Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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29 Responses to “Are You House Poor?”

  1. The maintenance cost that you have mentioned seems very high to me but maybe I am spoiled because my husband does all the maintenance labour- other than a roofer a couple of times. He has done roofing also but decided to hire this time. What exactly are you including???

  2. Only after my mortgage was paid off did I then feel the cost of home ownership was approximately the cost of renting. The utilities, insurance, taxes, savings for replacement and maintenance items, lawncare and gardening, etc., added up to about what rent would be.
    The advertising for new developments often tells you different, as do some real estate agents (but they’re on commission), so people need to smarten up and do their homework as Gail says.

  3. I agree with Linda too – when we were looking at a possible move, I was SHOCKED at how much the bank would approve us for to buy a home. I told the mortgage broker (whom I trust) that there was no way we could afford that when you factor in all the costs and she agreed but said the banks would approve us anyway. She commended me – most people, she said, focus on what the bank will approve and use that to buy a home. To me, that’s insane!

    We are in a small home and have contemplated moving but stay since we can afford this and still have a lifestyle. One thing that also made me angry when we considered moving and we finally decided housing prices were too expensive, friends kept telling us (and of course the bank) – “but interest rates are so low”! Really????? And what happens when those rates go up?

    One thing hubby and I agree on is that we do NOT want to be house poor.

  4. Gail,

    I’m so glad you raise the issue of maintenance when it comes to the true cost of home ownership. This is an area I find not all homeowners heartily embrace. When I was house shopping last (Spring 2010) I was shocked by the poor conditions of generally nice homes. Folks had not repaired broken tiles / scrapes on walls / completed some projects (we saw one home that was hand-built, lovely design and layout, but not a single room was finished – trim missing, door frames off kilter, etc) and of course there are the biggies – roof, age of furnace, etc.

    The home we bought was 6 years old at the time, owned only for the last 4 years as it was a model home / site office for the first two. The previous owners called the house “no maintenance”. Hah! That just meant they did no maintenance. The broken / unrepaired / unfinished items led us to put in an offer $35K under asking, and they took it! When people choose not to maintain their homes, are they calculating the effect on the home’s value?

    We used the cost of replacement to calculate a home maintenance budget and our first list of repairs came from the home inspector’s report. Each year for the last 3 years we spent just over that budgeted amount and only now do we feel the house is being maintained. What we’ll do for the next two years will be improvements.

    We plan to sell and move again in 5-6 years (retirement! yay!!) so now we’re focussing on the maintenance to keep the home in good shape and yield a fair asking price.

    Some items we’ve had to repair as part of the maintenance of our home include light bulb replacement (previous owners had 7 of 9 bulbs burnt out in a few rooms), electrical socket repair, replacing cracked tiles, repairing wall damage / paint, replacing a poorly performing toilet, repairing leaking faucets (that would be all of them!) re-sealing all the sinks, showers and tubs, repositioning some duct work in the basement for better air flow, furnace maintenance, patch to ice damage on roof, and some maintenance to the deck. With the exception of the roof and basement duct work, most of the work was minor. We did the labour but still had to buy tools and supplies. I can see how some homeowners overlook the smaller stuff, but it sure adds up over time.

    Thanks for reminding us to consider all the costs. And I echo the previous poster’s comment that once our mortgage is gone, then our home owning costs will equal what we previously paid in rent. Very true!

  5. How do you now if you home is old enough to need the 5%? On my house, the number I get seems high. We do maintenance and repairs every year and yet that number is four times the most expensive year we have ever had. It is three and a half new roofs (did that last year) or nine new furnaces (three years ago) or 15 new water heaters (also last year). I’m trying to envision a sudden maintenance issue that would take the whole amount but not be covered by insurance….. The Calgary flood comes to mind, but I don’t live on a flood plain

  6. When we rented, we had to buy our own appliances and paid for our own utilities. We had electric heat, so when we bought our home heated with oil, our utility costs were comparable. Insurance was a very small increase (at the time we bought our house, we paid $30/month!!!); now, the difference might be greater though. Our biggest cost difference was commuting costs; because we bought a small affordable house out of town, our commuting costs skyrocketed.
    There are many things one can do to keep maintenance costs down; the biggest one is to not let things go too long. Having a handy person in the house who is licensed in a skilled trade certainly helps too. I don’t get people that spend thousands of dollars on updating a kitchen or bathroom, but then complain and/or skimp and/or delay when it comes time to replace the roof or windows. Of course, our friends “lucked out” by doing so, so that when the roof leaked, insurance covered half of the costs. Insurance in my mind should not be used for neglect.

  7. @ Linda and Mees

    I too remember being shocked by the amount of mortgage the bank would approve. I remember thinking, with that mortgage my kids would have to eat the drywall.

    We have always based our home purchases on our own calculations, never the bank’s. At 45 we are about 2 years away from being mortgage-free and we are finally tackling some long-dreamed of renovations, including wheelchair accessibility renovations for my child, which will be paid for in cash.

    I think a lot of young couples look at these lovely homes, read pretty magazines, and watch HGTV, and want it all. Who doesn’t?!?! I know I did! But it took me until 45 to begin to approach having my dream home with new furniture. We had hand-me-downs and second hand stuff for most of the first 20 years of our marriage.

    All in, I LOVE the freedom (financial and otherwise) of knowing that, if all goes as planned, we will have paid-off our mortgage by the time our eldest begins university. We also maxed our RRSP’s throughout all of this. It wasn’t fun at times, but the freedom of knowing that our retirement is well in hand and we will be mortgage free when our eldest starts university is pretty sweet. In two years we will still be young, healthy, and at peak earning years and I have a few dreams that I want to begin to explore fulfilling!

  8. Good post BUT again with the 5% of house value for older houses? Gail – it’s not like it was 30 years ago, where as a general rule, the bigger the house, the more expensive it was. Now it’s all about location. There’s no way that my little 1300 sq. ft house in Toronto built in 1961 valued at $650,000 requires MORE maintenance dollars than a 2500 sq. ft house built in 1993 in Trenton that’s valued at $300,000. 5% of $650,000 is $32,500. Even if I took what we paid for it 6 years ago, there’s still no way we’re paying $20,000 a year in maintenance costs. Personally and I keep a good lid on our finances, I’d say we pay between $5000 and $10000 a year in maintenance (some years more, some years less).

  9. When we bought our house it needed electrical upgrading right away. It cost over $6000 and that was fairly inexpensive given the amount of work done. I think 5% on an older home is pretty accurate.

  10. avatar Genevieve Says:
    July 4, 2013 at 11:11 am

    Maybe 5% is high but I would say you do it up to a certain amount of money depending on the size et age of your house. And then re-start doing it when you use some of it. We just re-did our roof, for the first time in 21 years and it cost us $21,000. And I am not talking the price or redoing the foundation a few years ago or the bricks in the near future… We have money put aside bust some repairs are really costly. And believe me we ask for between 3 and 5 submissions, check with our neighbors (foundations is a problem in my neighborhood) and go see work they have done… But it is always better to be prepared than sorry!

  11. It is totally possible to spend 5% (or more) on yearly maintenance for an older home.

    For instance last year we replaced our very large deck and our entire fence, which ended up costing thousands in materials (my husband did all the labour). The stain alone was hundreds of dollars! We also replaced all four of our ceiling fans (almost $1,000), did some landscaping updates (another $1,500) and had to do some other minor repairs. By Gail’s rule-of-thumb we should be saving $15K a year for maintenance and I’m sure we spent most of that.

    The year before that we replaced the roof on the house and garage, which my husband also did but it still cost over $7,000 in material. This year we are going to replace our 35-year-old furnace….several thousand there. Next year we’d like to replace all or most of the windows, which will take up all of the $15K and then some. Thanks to following Gail’s Rules we have a home maintenance account that we put money in every month and are able to pay cash for all of these purchases.

    Having a handy-man hubby who knows how to build and repair things has saved us thousands of dollars over the years. But I find that these skills are a dying art, there are many people who don’t have a clue how to hang a ceiling fan safely, build a deck or a fence, etc.

    Because we won’t use credit to upgrade our home we will never have a flashy new bathroom or a kitchen with granite countertops and a $3,000 fridge. But those things don’t matter to me, I’d rather have money in the bank and not have to eat gruel when I’m 80!

  12. I’m not saying there won’t be years where you spend a lot and it will vary by the house believe me I know. But you don’t have to usually replace the furnace, roof, or electrical every year – and if housing prices go up another 11% this year (like they did last year) it seems unlikely that based on that and that alone maintenance costs will go up 11% too which is how the math works.

  13. This might be a silly question, but should we put aside maintenance costs on a new construction condo?
    The condo fees are approximately $120 a month (small unit, no pool/elevator).

  14. I believe the point to a percentage saved for maintenance costs considers the idea that when owning a house, your irregular planned spending because larger and more volatile.

    This is the more conversative approach, similar to having large sums of cash available in an EF.

    You never know when the poop will hit the fan, so be prepared.

  15. avatar Stephanie H. Says:
    July 4, 2013 at 1:37 pm

    My house may not be picture perfect (still don’t have base boards) but I perform maintenance as required. I’m slowly making improvements to the house as I have cash in hand. Within in the next few months I will finally have a hood for my kitchen range (my house didn’t have one so this includes both duct, electrical and roof work). One thing to keep in mind is depending on the cost of living in an area the cost of having work increases as the contractors have the same increase in overhead you have in your life. It also isn’t unusual once they have plenty of work to adjust the cost of doing work to the neighborhood. I could make my house look great on the surface but then I would both be house poor and the important components of the home could suffer. I walked into my older home with my eyes wide open thanks to a great home inspection. My next big ticket item will likely be my HVAC unit.

  16. When we bought our house we knew it was a money pit but it was the best that we could afford. The first year we spent about 20k on doing the things that had to be done and every year we planned to do a few more items that need to be done. After 15 years we are starting again with the cycle of bathrooms, carpets, paint etc. Last year was a bad yr with the cost of a new septic, roof, and repairing the damage the septic dude caused to everything else he went near. We have no mortgage now so it allows us to plan and save a bit easier for repairs and upgrades. I finally got a house account set up for the repairs instead of using the line of credit but it was hard to convince the other half this was a good idea. I wish I had pushed for the account sooner but it was not a battle I wanted to have before now. Instead of the 5% of the house in the account we sat down in December and made a list of need to do’s and want to do’s. We prioritized them and are setting aside money every month to at least cover the stuff that has to be done by the end of the year. If we have extra money we will start on the wants. At least this way we are trying to set aside money for maintenance and it does take away another argument topic. There are days I would love a new house that did not need as much tlc, but as soon as I take the time to have a cup of tea on the deck and remember all the good times that have happened in this house, I don’t mind all the work.

  17. Geoff, she explained that. Ignore the purchase/resale price which yes, is mostly due to location. Go by the replacement cost of rebuilding the home from scratch (it’s printed on your insurance policy). Condition of the home and appliances/fixtures, age of the home, weather or not you have a strata counsel you pay into to maintain the exterior, extra stuff in the yard (think in-ground pool), personal time and skill level to do repairs or weather you need to factor professionals for most tasks will all influence this price and make that 3-5% go up or down. Some years will be less, others will be more but these numbers really are an accurate reflection and if you are setting it aside regularly a major repair hopefully will come along after the fund is built up so it can be handled promptly and properly. There will always be little minor things to fix that are cheap like a new switch plate or a fresh coat of paint. Then there are irregular things like having to redo windows and the roof which can get super costly (so one can easily go over 5% that year). Also think about appliances that will eventually break down or need service. :)

  18. @Geoff It says in the original post that if most of the value of your home is due to location, use the replacement value of the physical house. So if it would cost you $120 00 or $200 000 or whatever to build the same house, it’s 3-5% of that number. It should be on the insurance forms I believe. Besides, Gail doesn’t force people to follow her recommendations. If you feel strongly that you need less, plan for that but if it backfires you may feel silly!

  19. This is a tactful blog title — would have called it “Are You House Dumb?”

  20. We did our research when we bought and determined that our costs would be approximately double owning versus renting. This was because utilities and insurance were higher, as well as having bi-weekly accelerated payments and maintenance savings to consider. After a year in the new house, this has worked well for us with our monthly costs being approximately $1,700 versus $900 when we were renting.

  21. avatar Catherine Says:
    July 4, 2013 at 3:55 pm

    @ Rebs
    Really low condo fees are great for monthly budgets, but I’d still but aside some extra $$. Here’s why: condo fees only cover “common area” stuff, like snow removal, landscaping, maintenance, insurance, and contributions to a monthly reserve fund. The reserve fund is designed to cover the cost of bigger maintenance issues(like replacing a roof, or elevator) without charging unit owners a “special assessment” on top of your monthly fee.
    Now, in a newer build, the roof(or whatever) likely won’t have to be replaced for a while, but if it DID need to be replaced, and there wasn’t enough $$ in the reserve fund to cover the cost, then all unit owners get an extra bill to pay for it. Imagine getting billed for $10 000 to replace the roof, on top of what you’re already paying for your mortgage, condo fees, taxes, insurance.
    If you’re not planning on living there for very long, you could take a gamble and not put extra aside, but if you’ll be sticking around for a while, the prudent thing to do would be to save up. 1 of 2 things *will* eventually happen: your monthly condo fees will increase to build up the reserve fund balance, or you’ll get a special assessment to cover the cost of major repairs.

  22. Regarding Reb’s question about maintenance costs on a new condo, you probably won’t have many maintenance costs for your unit for a bit, but be sure to read your warranty and find out when it runs out. If you have any maintenance problems, you must put it in writing to the warranty company before the warranty period runs out. Keep your paperwork regarding all warranty claims. You can claim things like leaky faucets and builder deficiencies. Also, keep in mind that the maintenance costs in new condos often double within the first 2-3 years, because the developers don’t add maintenance costs into the calculated strata fees in order to make them seem low. Because your strata probably has very little reserve money to start with, any costs that arise such as elevator repairs will have to be covered through increased monthly fees or extra levies.

  23. As a Realtor, I am tired of hearing “they’re on commission they won’t tell you the truth”. really if you’re that ignorant to not get all of this and want to blame me for your stupidity then you deserve to be house poor. Yes I am on commission like MANY other jobs. I have to feed my family. Would you like to pay my expenses? My fees? Then shut up about what a good decent Realtor goes through to get ignorant people their dream home. Yes there are truthful honest agents like myself out here. We discuss this stuff until blue in the face and you’d be surprised how people refuse to hear it. I’ve had clients fire me because I was honest and they went ahead with someone else or alone to purchase and either end up bankrupt or house poor. Honestly I am really fed up with it. We are not all sleazy. And those of you balking as the costs or percentages in maintenance prove ignorance feeds upon itself.

  24. I like your last point Toby.
    That’s why its better to grow retirement savings than debt from a credit line/card or loan.

  25. I think most buyers do think about maintenance costs before they purchase a home, but I didn’t realize there’s an actual formula you can use, and I doubt others did either. I don’t think you can count utilities though, as most renters have to pay for those themselves today anyway, and tenant insurance is also typically a condition to rent these days too – at least in big cities. I do believe that homeowner’s insurance is much more than tenant’s though, so it’s good to get actual numbers when totaling up the cost of a home. Great post, Gail, thanks!

  26. @ all – maybe I can’t read my insurance policy at all correctly, it says the replacement value of my house is $678,000 so I don’t get it. I never paid much attention to it as it seemed ridiculously high and doesn’t cost much. Maybe it includes if something happens to the land the house sits on?

  27. Geoff, that is strange unless you have a 3000plus sqft monster with many higher end upgrades. Our home here is the opposite, OH bought as a kid and currently due to location it would cost more to rebuild from scratch then it can even sell for.

    April, My mom’s last agent was wonderful. He was right there pointing out concerns with the homes he showed (things that NEEDED to be properly inspected, things also clearly done done correctly), not showing her anything outside of the budget she set for herself and my father. If I was in the area I would have hired him as well. I’ve had agents tell me the same as you, they try to get people to think about going for less house so they have something they can comfortably afford should something happen to one spouse and not get caught up in the old owners pretty furniture or a shiny finish added in a home (while necessary repairs in that house hadn’t been done in years). Instead these folks bought the max they could possibly borrow and got caught up on stone counters. Personal responsibility to go into this educated, not be house poor or purchase crappy money sieve home is paramount.

  28. avatar Kingkaid Says:
    July 8, 2013 at 2:40 pm

    Great points and most people jump into buying a house before actually sitting down and doing some math. However I wouldn’t use your maintenance numbers. I have an old house (about 90 years or so), and even though it was nearly gutted 30 years ago and modernized, 5% annually for maintenance is a bit steep. I say this since if it is 5%, that would mean that over 20 years (ish) you have effectively paid for your house and property’s value in maintenance. Buildings last a bit longer than that, and typically the land doesn’t require “replacement”. Now 5% for everything including property taxes, that is about right.

  29. I’m with Geoff regarding the replacement value on the insurance paperwork. Apparently the replacement value of our $172,000 house is $589,000 and we live in a town of 5,000 in SWO so who knows how they came up with that number. My bank paperwork says the house is already worth $250K after 1 year in it but I don’t see how. A new construction similar house in the area would be around $275,000 so I don’t get it. I didn’t know what number to take the 3-5% from so I went through the systems of the house and added up estimated costs and time frames to replace those items. This is how I came up with our monthly savings of $415 (plus another $200 in capital costs for furniture, appliances and household items). So far it’s working for us.

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