Author: Susie Q

How to Read Stock Charts

How to Read Stock Charts

Wouldn’t it be great if you could improve your investment returns by owning securities when prices are increasing and selling them before they crash? If you learn how to read stock charts, you might have a chance at doing so. People take many different strategies 

A Reverse Mortgage for Retirement Planning

A Reverse Mortgage for Retirement Planning

A reverse mortgage can be a valuable financial management tool for seniors and their families.  However, if misunderstood or misused, borrowers and their heirs can encounter any one of a number of different challenges. In this post, I’ll define “reverse mortgage” and provide illustrations of 

Smart Account Choices Juice Long-Term Growth

Smart Account Choices Juice Long-Term Growth

Compound interest allows your investments to grow exponentially in value.  This post provides six online compound interest calculators to help you understand the benefits of compound interest on the future value of your investments.  Importantly, you can see the impact of income taxes on the ability of your investments to grow.  The six compound interest calculators will cover most of your account types:

1. Basic

Then building in the effects of income taxes on:

2. Appreciation

3. Cash Returns

4. Cash Returns AND Appreciation

5. Final Withdrawal

And finally:

6. Comparisons Across Accounts

You can pick from among these compound interest calculators to find the one(s) that best match your situation.

Compound Interest Formula

All of the calculators use the basic compound interest formula:

Compound Interest Formula

The calculators differ in the types of returns and related income taxes.  The Basic Compound Interest Calculator works great if you don’t care about income taxes or you already have your money in a tax-free account.  The next three calculators help you understand the impact of income taxes if you hold your money in a taxable account.  Next, the fifth calculator applies income taxes when the money is withdrawn as happens with a tax-deferred account.

I saved the best calculator for last.  It compares the future value of your after-tax investments based on the type of account in which you hold your assets.

Using the Calculators

Before going into the details of the calculations, here are a couple of tips:

    1. The interest rate should be the effective interest rate.  That is, if interest is paid more frequently than once per period, the interest rate you enter should be the total interest paid in the first period divided by the initial principal.  This calculation allows you to reflect the benefit of compounding when interest is paid more often than once per period.
    2. Enter percentages as numbers, not decimals.  For example, enter 50 and not 0.50 for 50%.
    3. To move between input fields, you can either click on each field with your mouse or use the tab key to go to the next field or shift-tab to get to the previous field.  The calculator output is the accumulated value of your investment, i.e., your final balance.

Basic Compound Interest Calculator

The first calculator demonstrates the benefit of the compounding of interest.  Other returns, such as dividends and appreciation, compound in the same way.  In this post, I’ll use compound “interest” to cover all types of returns.

To use this calculator, first input your initial investment (also known as your initial principal or initial balance).  Then input the rate of return (rate of interest) each period and the number of periods. The interest rate should be the return you expect per period.  For example, if your periods are years, then you will enter the annual interest rate.



In these calculators, the portion your return that is distributed in cash, such as dividends or interest, is reinvested at the rate of return you input.

This calculator ignores income taxes on your returns. Alternately, you can think of the implicit income tax rate as being 0%.  As such, the ending balance corresponds to what you would have if you already hold your investments in a tax-free account, such as a Roth retirement account in the US or a tax-free savings account (TFSA) in Canada.

Calculator with Income Taxes on Appreciation

This calculator applies income taxes using the following assumptions:

  • 100% of your returns are in the form of appreciation.
  • You sell your investment at the end of the last period.

There is one more input than in the previous calculator – the income tax rate on appreciation. In the US, the tax rate on appreciation for most people is 15% plus your state income tax rate.  In Canada, it is 50% of the tax rate on your wages which, for most people, corresponds to a tax rate on appreciation of 10.25% or 13% plus provincial income tax.



Calculator with Income Taxes on Cash Returns

The next calculator applies income taxes by assuming that 100% of your returns are in the form of cash distributions, such as dividends or interest.  For this calculator, you will enter the income tax rate on cash returns.  In the US, the tax rate on dividends for most people is 15%.  The US tax rate on interest is the same as the tax rate on your wages which, for many people, is 22% or 24%.  In Canada, the tax rate on both dividends and interest is equal to the tax rate on your wages which, for most people, is 20.5% or 26%.



Calculator with Income Taxes on Appreciation and Cash Returns

The next compound interest calculator adjusts your ending balance for income taxes on both appreciation and cash returns.  There are two inputs for each of returns and income tax rates – one for each of appreciation and cash distributions.  The sum of the two return percentages should equal your total return estimate.  You enter the returns separately to appropriately reflect the differences in the timing and amounts of income taxes.



Calculator with Income Taxes Upon Distribution

This calculator adjusts your ending balance for income taxes paid on the entire amount of your investment when it is withdrawn.  The income taxes in this calculator correspond to what you would pay if you withdrew the ending balance from a traditional retirement plan in the US (401(k) or individual retirement account – IRA) or a Registered Retirement Savings Plan (RRSP) in Canada.  This calculator has only one income tax rate.  In both the US and Canada, the tax rate is equal to the marginal rate on your wages and other ordinary income.  As noted above, for many people in the US, 22% and 24% are common ordinary income tax rates and typical ordinary income tax rates are 20.5% and 26% in Canada.



Comparison Calculator

This last calculator lets you compare your final after-tax balance based on the type of account into which you put your money. The three types of accounts are (1) taxable, (2) tax-deferred and (3) tax-free. The most common tax-deferred accounts in the US are traditional 401(k)s and IRAs.  Canadian RRSPs are also tax-deferred accounts. Roth retirement accounts in the US and TFSAs in Canada are tax-free accounts. This post provides more information about these types of accounts.

The first three inputs relate to the amount you have to invest and your returns, as in the previous calculators.   The remaining four inputs are the tax rates applicable to your:

      • Cash distributions.
      • Appreciation.
      • Ordinary income now.
      • Ordinary income when you withdraw money from your tax-deferred account.

For all three types of accounts, the calculator assumes that you earned the money you invest during the calendar year in which it is first invested.  As such, income taxes (at your ordinary income tax rate today) are deducted from your initial account balance if you put the money in a taxable or tax-free account.  There is no up-front income tax if you put the money in a tax-deferred account.

In all three accounts, the amount invested equals the initial amount you enter minus any up-front income taxes.  Periodic income taxes are calculated using the Calculator with Income Taxes on Appreciation and Cash Returns if you put your money in a taxable account.  The Calculator with Income Taxes Upon Distribution is used for tax-deferred accounts, using the estimate of your ordinary income tax rate when you retire.   There are no additional income taxes (i.e., other than the up-front taxes) for money put in a tax-free account.

This calculator illustrates the concepts discussed in these posts on tax-efficient investing in the US and Canada.



How Short Bets on GameStop Took Big Slides

How Short Bets on GameStop Took Big Slides

The financial news in the past week or so has been full of stories about GameStop, AMC Entertainment Holdings (AMC), Blackberry, Reddit, r/WallStreetBets, hedge funds, short squeezes, margin calls and Robinhood, among other things.  Many of these stories explain parts of what is happening.  However, 

Don’t Sweat those Mortgage Terms

Don’t Sweat those Mortgage Terms

A mortgage is key to buying a residence for most people.  Mortgage loan documents are often lengthy and full of technical terms.  As such, many people either don’t read them in their entirety or don’t understand the details.  As with all contracts, I recommend that 

Rental Property: Real Life Experiences

Rental Property: Real Life Experiences

Many people view residential rental property as a great investment.  I’ve never had any interest in committing the time I perceive is necessary.  I’ve also not made much money on my residences.  As such, I haven’t seriously considered the purchase of investment property.

To get the true story, I interviewed three of my friends who are, with varying degrees of success, real estate investors.  I was quite surprised to learn that, in spite of the problems they faced, they all agreed that buying rental property has been a great financial decision.  In this post, I’ll provide insights into the financial benefits of real estate investing, along with the time and expense commitments.  Lastly, I’ll relate some of their “ugly” experiences and the lessons you can learn from them.

Introduction to Interviewees

I interviewed three friends, all of whom have owned rental property, to get their insights.  I’ll refer to them as K, J and B.

K and B are both retired now, but started owning rental properties when they were working as professionals in the insurance and manufacturing fields, respectively.  J and her husband are also both retired.  J’s husband was a building contractor for most of his working career and J is very handy and creative, so they both have lots of hands-on skills that are helpful to landlords.

K and J have had very positive experiences with rental property, though J has had a few significant problems.  B, on the other hand, had a terrible experience.  You’ll see most of her inputs to this post in “The Ugly” section towards the end.

What Rental Property Do They Own

K owns five properties in multi-family, multi-story properties.  The buildings range from ten to 100 units.  In the largest building (with 100 units), there is a front desk attendant.

J started with single family homes, but then invested in a triplex.

B owned a brand new townhouse in an association.  She rented it out when asked by her employer to take a two-year assignment overseas.

The Good from Rental Property

My friends reported many good things about owning rental property, including fulfilling their motivations for owning rental property and providing a return on a diversifying investment.

Motivation for Buying Rental Property

Neither K nor B intentionally bought their first properties as rentals!  As indicated above, B rented out her own residence when she was working and living outside the country for two years.

K bought a place in downtown Boston near where she worked.  She worked 22 miles from home, so planned to spend the night at the condo when it was snowing or she needed to be in the city until late.  K decided to rent the condo only when she realized the current resident was paying good money each month in rent until her lease ran out.  She decided using the apartment as a rental property was a much better idea than having a place to stay every now and then.

J, on the other hand, bought rental property intentionally for that purpose.  She wanted a more dependable monthly cash flow to supplement their retirement saving. Also her husband being a contractor was a big plus for purchasing properties that needed remodeling.

Advantages

For both J and K the biggest advantage, by far, is financial.  J appreciates the rental income to support her retirement and the ability to build equity.

K has been fortunate to own in Boston where there is a low supply and a high demand for housing due to the plethora of colleges/universities.  Therefore, rents continue to increase and the market value has more than doubled on each of the units.  And she has a “free” place to stay in Boston for those rare times when the tenants vacate an apartment early.

Investment Returns

Both K and J say that the returns on their investments have met or exceeded their targets.  K says, “Our decision to have rental properties in Boston is the best financial decision we have made.”  J points out that, “the longer you own the property, the better the return.”

In addition, rental property returns aren’t highly correlated with many other common investments, such as stocks and bonds.  It therefore adds diversification to portfolios.

The Bad from Rental Property

To attain the nice investment returns from rental property, you need to commit a combination of time and money.

Expenses

The main costs of ownership are the original investment, insurance, property taxes, maintenance, and repairs.  The original investment will be either the full cost of the property or the mortgage down payment.  In either case, you’ll have closing costs both when you buy and sell the property.  If you have a mortgage, you’ll need to make the mortgage payments.  Depending on the type of property you own, you may have condo or homeowner’s association fees.

K also pays for cleaning and touch ups between tenants – things like broken refrigerators, plumbing problems, etc.  Through the years, she has had assessments for building improvements – the lobby was refurbished, elevators updated, laundry room refreshed, etc.  Before these capital improvements were implemented, the condo board researched and obtained the support of residents to allow the costs to be assessed.

Most rental-property expenses, including those for cleaning or for assessments, are deductible from your income for tax purposes.

Time Commitment

K and J take different approaches to splitting their commitments to their rental property between time and expense.  K’s husband takes care of all of the time commitments which are primarily paperwork (property taxes as well as income taxes).  These activities take an hour or two each month.  And the inevitable problems (water leaks) don’t really take a lot of time, but they are random and can happen (for example) when they were hiking in Slovenia which is annoying!  They have a property management company (see next section), but sometimes they have to provide input.

There were three women living in one of K’s two-bedroom apartments.  For some reason, two of the three women didn’t get along at all.  They would scream and throw things at each other.  One of them kept calling K’s husband to ask for advice.  He never understood why they called him!  Finally, one of them moved out, ending that time commitment.

J’s husband, on the other hand, takes a much more hands-on approach and commits much more time.  Up until recently, J and her husband did not use a property manager.  During that time period, she and her husband spent a lot of time on maintenance and cleaning in between renters.  They also spent time advertising, meeting with prospective renters and checking references whenever there was a vacancy.

Damage Stories

Both K and J have had tenants damage their properties.  Here are a couple of their stories.

The tenants in one of K’s apartments were frying chicken and forgot about it.  There was a rather large fire.  It was extinguished, but it caused a few thousands of dollars of damage.  The tenant’s parents paid for 1/2 of the damages.

J had a tenant who hadn’t paid his rent in several months, as he had lost his job and didn’t have enough money.  After many attempts to contact the tenant by phone and email, J and her husband entered the house.  They found all sorts of damage to the house and were confronted by the local police on their way out!  The damage was done by the tenant’s son who stayed in the house while the tenant was on vacation.  The police arrived because the tenant reported that there were trespassers on the property.  Because J and her husband could document that they had tried to contact the tenant numerous times, they were considered to be in the house legally.  The tenant was willing to move out, but wanted his full deposit back.  He tried repairing the house, but made it even worse.

Property Management Services

K and B use property managers, whereas J hasn’t until recently.

Using a Property Manager

K used the woman who sold her the properties as a property manager for many years.  K paid her based on the rental property management services she used.  For example, the manager might tell K to purchase new blinds.  The manager would order and install the blinds and then charge for materials and labor.   The manager would also solicit tenants for apartments with a non-renewing lease.

In the future, K plans to use a “real” property manager rather than the informal arrangement she had previously.  The new manager charges from 3% to 7% of monthly rent depending on how much service is needed.  K has chosen the 3% option because the 7% option is a truly hands-off, i.e., the manager will collect rent, pay vendors, etc. and provide a monthly statement of accounts for her review.  With the 3% option, the property manager is the first point of contact when, for example, the refrigerator stops working.  He will assess the situation then call with his recommended solution (e.g., buy a new refrigerator).  Once K has agreed to a solution, he’ll arrange it all and send the bill.

Property Manager Prices

Property managers have different rates depending on how much or little you want them to do.  J provided me with the pricing plan for a local property manager.  The prices ranged from 2.9% to 11.9% of annual rent, plus a set-up fee of about $200.  For 2.9% of rent, you get advertising, property showing, tenant screening, and a six-month tenant replacement guarantee.  At the middle price point, the management company also provides rent collection, maintenance coordination, online account access, 24/7 emergency response and bookkeeping.  At the high end, bill pay, move-in and move-out videos and much more extensive reporting are provided.

B’s property manager charged $250 a month to collect rent, pay mortgage and HOA dues.

Doing It Yourself

J and her husband have managed their properties themselves for the past 10 years, but recently hired a property manager.  J says, “Managing your own property is a huge time commitment, but can save a lot of money if you’re willing to put in the time and do the work yourself.”

Cautions and Advice

K and J both agree that the single most important rule in renting is to have good tenants.  If you aren’t careful, renters and their pets can cause damage.  K would never ever allow pets in her apartments even with a healthy security deposit.

J prefers multi-family properties as she always has income from at least some renters.  With single family homes, there were sometimes a month or two with no income.

J also recommends being flexible with your plans. Sometimes, financially, it is better to keep a rental or sell it depending on the market and your own situation.

Along the same lines, K suggests being flexible about tenant improvements.  One time, the daughter of a CIO of a major investment firm was living in one of her apartments (the one with the chicken fire) while she was an MIT student.  She really wanted hardwood floors in the apartment (it had carpeting at the time), so her dad paid for half of the cost of installing hardwood floors throughout the apartment.  Of course, K and her husband said, “Yes!” The tenant also wanted to paint her bedroom a rather dark purple color (for which she paid) and K and her husband agreed to that.  While it sounds like a hideous color, K actually liked it and it is still the same color today.

Other Things That Can Go Wrong

Lief at Physicians on FIRE started quickly with his investing in real estate.  He “lost everything” due to a combination of his timing in the real estate market, his rapid entry into the market and his lack of understanding.  Learn more in his post.

The Ugly from Rental Property

Sometimes, rental property can be much more problematic than damage from small fires and tenant’s adult children.  B’s story is really ugly, but had some benefits nonetheless and several lessons learned.

What Happened

B hired the father of a friend as a property manager to handle everything while she and her husband lived in London.  Everything seemed to be going smoothly until an awful phone call from her mortgage company saying it was foreclosing on her condo.  The property manager had been in business for 30 years.  Unfortunately, his accountant had slowly been embezzling small amounts from prior clients for years.  When B’s account arrived, the embezzlement started immediately, including not paying any of her bills and taking all the income.  Within three months, B received the foreclosure notice from her bank!!!  She fired the property manager and, to salvage her friendship with his daughter, paid the missed mortgage payments and fees herself.  It took seven years before B and her husband’s credit recovered.

Other Issues

In addition to the financial issues, B’s neighbors and friends called to complain about the noise from the renter’s Harley Davidson motorcycle.  There was physical damage to her home as well.  A small (less than 15 pound) dog chewed all of the floor trim and peed frequently in the bedroom.  B and her husband had to have the floor trim throughout the condo and the flooring and sub-flooring in the bedroom replaced.  To top it all off, there was a leak under the master bath sink that was either never seen or completely ignored.  As a result, B and her husband had to replace a living room wall and have the resulting mold mitigated.

Light at the End of the Tunnel

In spite of all of these problems, B and her husband still had a positive return on their investment as they were able to sell the property for more than twice what they paid for it after four years.  By renting out the property, they were able to retain it and benefit from the appreciation.   Even with the damage to their credit rating and repair expenses, it was an excellent financial decision to retain the property and rent it instead of selling it.

Lessons Learned

B has several pieces of advice for those who own rental property based on her experience.

  • Require bi-weekly cleaning (and inspections) as part of the rental contract. B now owns a property purchased specifically as a rental.  She has hired a cleaning service and put the cleaning supplies under the sinks so the cleaners will see and can report any leaks.
  • Clearly state in the contract that no pets, motorcycles, loud vehicles or onsite vehicle repairs will be allowed.
  • Install moisture detection sensors.
  • Pay your own bills.
  • Have a legal review of your rental agreement with clear expectations and boundaries that would cause eviction or fees.

Closing

Rental property can clearly be a profitable investment, providing both cash yields and asset appreciation.  However, as with any investment, it is critical that you understand the risks and mitigate them to the extent possible.  In addition to the risks identified above, there is also the possibility that the value of the property will decrease either from general housing market trends or deterioration in the city or neighborhood in which it is located.

Property and Casualty Insurance

Property and Casualty Insurance

Protection against loss is critical for everything you do, including running your own business or earning money from a side hustle.  The primary tool for mitigating business risks is property-casualty insurance.  There are many insurance policies within the realm of property-casualty insurance, each with its 

The Home Equity Fallacy

The Home Equity Fallacy

Building home equity can increase your financial security, but it isn’t necessarily the best way to maximize your net worth.  That is, building home equity quickly isn’t necessarily the right choice for everyone, not even those who have the financial wherewithal to do so. I’ve 

Flex or Fix in Buy vs. Rent

Flex or Fix in Buy vs. Rent

Your residence is likely one of your biggest expenses.  The most common options for residences are renting and purchasing.  There are costs and benefits to both approaches, some of which depend on your lifestyle and goals and some of which depend on your finances.  In this post, I’ll explain many of the factors that can influence the decision to buy vs. rent.  In this post, I provide a detailed cost-benefit analysis of the buy vs. rent decision showing the best choice from a financial perspective depends on your financial goals.

Keys to Being Ready to Buy Your Residence

Many people feel pressure to buy a residence as soon as possible.  It is my opinion that owning isn’t the best choice for everyone.  People who are ready to buy their residence will generally have some important characteristics.  Specifically, they:

  • Want to own their home.
  • Plan to live in the same place for at least several and possibly many years.
  • Have enough money to pay the upfront costs, including a down payment, closing costs and any repairs that need to be made to the residence after closing.
  • Manage their finances sufficiently well to be able to save for expenses that are not paid every month, such as insurance and property taxes.
  • Have enough in emergency savings to pay for unexpected, possibly very expensive repairs.

Your Lifestyle: Buy vs. Rent

Before looking at the finances of the buy vs. rent decision, it is important to consider your lifestyle and goals.

Do You Want to Own Your Home?

Owning your own home has long been an American dream.  In 1928, President Herbert Hoover’s campaign slogan was “a chicken in every pot and two cars in every garage.”  He thereby implied that every family would not only have two cars, but also a home with a garage in which to park them.

However, not everyone wants to own their home.  Renters have much more financial flexibility and are able to move from place to place more easily as they don’t have the burden of selling their residence first.  Property owners are responsible for all maintenance and repairs, taking a significant burden off renters.

Other people, though, prefer to own their residence.  Reasons people prefer to own their residence include:

  • The ability to build equity.
  • The privacy offered by single family homes (which are much more prevalent among owners than renters).
  • The knowledge that, while many costs will increase with inflation, mortgage payments stay constant whereas rents have a tendency to increase regularly. I note that mortgage payments will not stay constant if you have an adjustable rate mortgage.

How Long Do You Plan to Live at this Location?

As I mentioned above, one of the biggest benefits of renting is the ability to move quickly.  While renters may have to pay one or more months of rent when they move out, homeowners need to sell their residence when they move to another city.

Markets are hot for many price brackets currently, however that won’t always be the case.  I’ve never had a residence sell in less than six months and one took almost two years to sell.

In addition, most sellers use a realtor who takes between 5% and 7% of the purchase price as a commission on top of your other selling costs.  If you need to sell your house within a few years, these transaction costs can more than offset any appreciation in the value of your home and possibly any equity you have built.  As such, how long you plan to live in your current location will influence your decision to buy vs. rent.

Your Current Financial Situation: Buy vs. Rent

There are two aspects of your current financial situation that might affect your buy vs. rent decision, possibly precluding you from owning your own home.  They are your ability to afford a down payment plus closing costs and your ability to tolerate unexpected expenses.

Do You Have the Down Payment?

Most banks require you to use your own money to make a down payment on a residence as a prerequisite to getting a mortgage.  The percentage of the purchase price that you need to pay as a down payment typically ranges from 3.5% for an FHA (Federal Housing Authority) mortgage to as much as 20% for a conventional mortgage.  You’ll need to talk to a lender to get the specifics for your situation.

A higher down payment, as a percentage of your purchase price, typically leads to a lower interest rate on your mortgage.  Also, if your down payment is less than a certain threshold, often 20% of the purchase price, you may incur extra fees.  For example, if your down payment is low and is guaranteed by a Federal agency in the US, your lender or the guarantor may require one or more types of mortgage insurance that could cost between 1% and 3.5% of the loan amount up front plus up to 1% of the outstanding principal annually.  NerdWallet provides more details, but again I suggest you talk to your lender to get the specifics of your situation.

Some people try to borrow money from friends or family members to help with their down payments.  Most lenders are quite careful to look at the source of your down payment.  If you can’t show that you saved the amount of your down payment, you may be required to provide extra documentation confirming that the money was a gift and not a loan.

Can You Tolerate the Unexpected Expenses?

One of the benefits of renting is that the landlord is responsible for maintenance and repairs.  If you own your own home, these costs will fall to you.  When you first buy your home, you can get a sense for the important costs that you might incur in the short term if you have a home inspection.  I strongly recommend a home inspection as a contingency when buying a residence.  When we bought a house recently, we were able to reduce the purchase price by about 3.5% for repairs we were going to have to make shortly after purchase that hadn’t been identified in any of the disclosures.

You also need to be aware that, once you’ve owned your home for a while, things break and they tend to be expensive.  I’ll talk more about the possible amounts of maintenance and repair costs below.  But, before you consider buying your residence, you need to make sure you have enough money in savings or a line of credit that will allow you to pay for possibly major repairs on fairly short notice.  Examples include your furnace (at least a few thousand dollars), your hot water heater or water softener (probably USD1,000 each) and, every 15-25 years, your roof (often USD10,000 or more and possibly up to USD50,000 depending on the size of the house and type of roof).

Costs of Ownership

In this section, I’ll list the important expenses related to owning your residence and provide very rough estimates of their costs where I can.

Down Payment & Mortgage Principal

You need to make a down payment when you buy your residence.  The down payment itself isn’t really a cost of owning your residence, but rather just transfers your cash asset into equity in your home, which is also an asset.  The same is true for the principal portion of your mortgage payments – you are converting cash into equity in your residence.   Nonetheless, your down payment and mortgage principal impact your cash flows.

Mortgage interest

By comparison, the interest portion of your mortgage payments is a cost of owning your residence.  The amount of your mortgage interest will vary based on the original principal on the loan, the interest rate and the term of your mortgage.  My post on loans provides more information about the split of mortgage payments between principal and interest.

Property taxes

Most real estate is subject to property taxes.  In places I’ve lived, property taxes have helped fund local (city or town) and county governments as well as school districts.  In most cases, property taxes are calculated as a tax rate times the estimated market value of the property.  My experience is that the estimated market value is fairly close to accurate when you first buy your residence, but can start to diverge fairly widely.  As of 2018, the average property tax rate in the US was 1.1% of assessed value, but varied from as low as 0.27% (Hawaii) to as high as 2.21% (New Jersey).

Homeowners insurance

Homeowners or condo-owners insurance protects against loss or damage to your residence and its contents.  It also provides liability coverage in case someone is injured or their property is damaged as the result of something that happens at your residence.  The cost of your homeowners insurance will vary widely depending on what perils are present where you live.  For example, insurance is much more expensive in the Southeastern US due to hurricanes and the West Coast of North America due to earthquakes than in most of the rest of the US.  The cost also depends on how much liability limit you purchase.  The data in this article from Business Insider shows average homeowners costs of 1.6% for homes with values less than USD50,000 to about 0.4% for homes with values about USD200,000.

Association Fees

If you live in a condo, townhouse or house that is part of an association, you are likely to have to pay association fees.  In a condo or townhouse, the fees can range from USD100 to USD700 a month.  These fees cover the maintenance, repairs and insurance for the structures, as you usually own from the walls in, and any maintenance and repairs needed for the outdoor facilities, such as road maintenance and plowing, lawn and garden upkeep and any association amenities, such as tennis courts, pools or buildings.

If you live in a house, homeowners association fees tend to be less.  I’ve lived in two houses in associations, one of which has fees of about USD250 per year and the other had fees of about USD2,500 per year.  These fees usually cover the care and maintenance of roads and any association amenities, such as tennis courts, pools or buildings.

Utilities

When you own your home, you’ll need to pay for all of your utilities.  Depending on where you live and your lifestyle, utilities can include electricity, natural or propane gas, water, sewer, trash collection, recycling fees, telephone (cell and/or landline), internet and television.  The monthly cost of utilities varies widely from location to location and from month to month.  As you budget for your utilities, you’ll want to reflect the impact of differences in weather throughout the year on electricity and gas, in particular.

Maintenance & Repairs

Many things in your home will either wear out or break at some point.  Maintenance is the process of making sure that your home stays in its current condition.  It includes cleaning, yard work, painting and replacement of appliances, carpet and other things as they wear out.  Repairs are costs associated with fixing or replacing things that have broken.  I found several articles that indicate that maintenance and repair costs average between 1% and 4% of the value of your home each year.

One of the biggest maintenance expenses is your roof.  While most roofs need to be replaced only every 15 to 25 years, the cost to replace a roof is very high.  For a small home with an asphalt roof, the cost can be as low as USD4,000.  However, for larger homes with metal or cedar shake roofs, the cost can be as high as USD50,000 or more.  Although you won’t incur this expense every year, you will want to set aside money for a roof and other major maintenance expenses every year so you have money available when needed.

Updates

In addition to maintaining your home, it is often important that your home be consistent with current trends when you sell it.  For example, when we bought a home in the late 1980s, colorful carpet, draperies, wallpaper and tile kitchen countertops were very popular.  Although we kept the house in superb condition, it was almost impossible to sell it 30 years later with those features.  We spent a lot of money replacing the carpet with neutral colors and counters with granite, removing the draperies and wallpaper, and painting the walls varying shades of gray.

If you are selling your home in a very hot market or it is old enough to be “classic,” it is only important that it be well-maintained.  However, if your house is not in a niche that is popular, it is critical to either update your home or reduce the selling price enough that the buyer can make the updates.

Sales Commission and Closing Costs

If you use a real estate agent to help sell your home, you will need to pay a commission.  The amount of the commission depends on local custom as well as whether your agent acts as just your agent or also represents the buyer.  I’ve seen real estate agent commission vary between 5% and 7% of the selling price.

There are other closing costs you will have to pay when you sell your home, such as the cost of a title search and insurance and fees to the closing agent.  In addition, in some states, you have to pay excise tax.  For example, in Washington, there is a tax of 1.5% of the selling price of your home.

Costs of Renting

Rent

Rent compensates the owner of the property (also known as the landlord) for all of the costs of ownership plus a profit.  The profit covers the opportunity cost of the money the owner has invested.

Rent is commonly paid monthly.  In addition to the rent, you may need to pay a security deposit and one or more months of rent in advance before you can occupy the premises.

Depending on your agreement with the landlord, the amount of your rent may change over time either on a fixed schedule or at the discretion of the landlord.

If you are interested in some perspective as to how much you can afford to pay in rent, you might check out this calculator from Jonathan at Parent Portfolio.

Renters Insurance

Renters insurance protects you against loss or damage to your contents.  It also provides liability coverage in case someone is injured or someone’s property is damaged (including the landlord’s property) as the result of something that happens at your residence.  Renters insurance is very inexpensive, often less than USD15 a month.

Utilities

When you rent your residence, you many need to pay for none, some or all of your utilities.  It all depends on the agreement you have with your landlord.

 

Holidays on a Budget

Holidays on a Budget

Even in normal circumstances, the holidays can be stressful.  With the concerns about travel and the impact on many people’s income from COVID-19, the 2020 holidays are likely to be even more challenging.  In this post, I’ll provide ideas that might help alleviate some of