Are you looking at the WHOLE financial picture or will “extra” unexpected costs bite you in the tush?
Never underestimate the impact of additional costs on your bottom line. I personally always try to buy in areas with no HOA’s, lower taxes and lower insurance rates. I will do this even at a higher house cost. These extra fees add no value but are cash flow “suckers”. A home that has a higher house value will be paid off as long as it is a “Better House.”
3 bd Townhouse w/HOA House w/no HOA
$240k verses $280k
$1440 (PITI) $1620 (mortgage Principle Interest, Taxes, and Insurance)
$250 HOA Fee NO HOA
So taxes and insurance staying the same, my more expensive house with a higher rent potential would be less than my townhouse. I have also found that houses rent quicker as more people don’t want a shared wall. Therefore in this case you are going to pay less per month and potentially make more money by not doing the HOA. This is not saying that you shouldn’t buy in an HOA neighborhood but that you should look at your end expense not just the “purchase price”.
When we bought our first pure investment rentals the biggest non-critical but still miscalculating mistake was not looking at the tax cost. When we were first looking into a home in a certain neighborhood we were told that the taxes were going to be higher for investors. What we didn’t realize was the cost was triple! So my 90k house was going to cost me over $2300 a month. As a financial major this was hilarious because it was almost more expensive than the property we owned in Virginia by almost triple. While this certainly did not “kill” the deal it was a valuable learning experience.
The other thing is to take into account is that when the house value increases so do our taxes. When the market values improve for you neighborhood your assessed tax value will increase with the market values. That is why buffer room is sooo important. My 90k house is worth much more in the land of appreciation. For a buy and hold investor, whose taxes are already high, it makes my yearly tax weekend even more “wine” inducing. While we have been lucky that the appreciating sales market has also cause the rental market to appreciate. This won’t always happen. Therefore to prevent your “equity” high house from cash flowing poorly, causing the “need” to sell. It is important to make sure there is a buffer to allow you make it through lean years.
My point to all of this is LOOK at everything and know that no matter how hard you do your due diligence there will be a learning curve. Trust me when I tell you this. While my “mistakes” that I discuss on this blog might make me look unprepared the truth is that experience is the best classroom out there. Learn from my mistakes. Make sure you always check the “additional” costs beyond mortgage and interest. It is very important to look at everything. Debt is still very cheap, so these extra costs matter more than they did in past buying cycles.
What have you learned from YOUR mistakes?1