Those on one side continue marching towards financial freedom alongside Dave’s “baby steps.” At the same time, the other side keeps hollering, telling us we need to wake up. Dave Ramsey insists everyone needs to pay off their consumer debt, save up their emergency fund and their kids’ college tuition, and then start aggressively putting away money to buy their own home–all in that order.
Dave’s argument was in the previous Struggling Student Rants. Then, you have financial celebrities like Robert Kiyosaki, Tony Robbins, and Grant Cardone. These self-proclaimed financial gurus claim those at the top of the financial food chain just want to keep the ostriches from taking their heads out of the sand. It’s tough to decide who to believe, as they all present very good arguments.
Kiyosaki (2017) explains that the school system and our parents teach us early on that houses are a solid investment–but they’re not (p. 13). He says a house, like a fancy car or a boat, is a liability and a waste of people’s money. Eyebrows raise at this when I mention it, but I agree. The author explains that a home is not an intangible fixed asset like it’s advertised to be. True assets put money in your pockets, whereas liabilities take money out of them (2017, pp. 80-85). Kiyosaki presents many arguments against homeownership, simply for the sake of owning the roof over your head, but nonstop expenses are an essential one. Owning a home, or a part of it if there’s a mortgage, comes with owning countless expenses. If you’ve been renting until now, you may feel more empathy towards your miser landlord once you realize the expenses involved.
Most are familiar with common utility costs, including natural gas, electricity, and water. Then, there are the elective utilities, such as cable and internet service–although after COVID-19 people have come to realize they are not so elective after all. You will also need a landline if you live in a remote area with no cellphone reception. All these costs may, or may not, form part of your rent, if you’ve rented until now, so you may already be familiar with them. On top of these standard utilities, the water bill will contain a separate fee for sewer charges. Most municipalities charge sewer rates based on water usage. Then there may be a separate fee for trash and recycling—sometimes included in the water bill, sometimes in the property tax bill. Speaking of which, property taxes are typically based on where the property is; the square footage of the lot and home; the style of home; as well as any improvements made to the property itself. Improvements might include things such as adding a swimming pool or renovating the basement to make the home more comfortable. It all depends on the municipality.
Filipowicz and Globerman (2019), from the Fraser Institute, explain, “The rate at which property is taxed depends on the jurisdiction in which it is situated, as well as its use” (p. 1). Property taxes also usually include a charge which they disburse among the local public school boards and libraries, regardless of whether you have school-aged children or not.
Finally, heaven forbid your municipality decides to upgrade or make repairs to your street! You and your neighbours should have thought twice before complaining about driving through potholes to get home. Guess who has to foot the bill for that? If you guessed the homeowner, you got it right. The majority of the time the city or town will throw these charges back into the property tax bill. Sometimes, though, the homeowner might get a nice surprise: a separate charge altogether.
Scared yet? If you’re already familiar with these costs and think nothing of them, one thing you may not have thought of are operational costs. Operational form part of commercial property expense management practices. They are not a common practice with private home owners though. Operational costs include items like general HVAC upkeep, such as furnace maintenance; water heater maintenance; plumbing failures; lawn maintenance; and the list goes on. You get the idea.
My family thinks I’m crazy because few residential owners will, in practice, set money aside each month to pay for maintenance and upkeep. Yet, when your furnace completely breaks down in the middle of January, or the water refuses to stop seeping in through the foundation, you’ll quickly realize the value of a fund specifically set aside for these standard repair costs. The same principle applies to anything which needs periodic care or will otherwise depreciate–such as a roof, siding, or insulation. It’s rare someone has at least $10,000 lying around, to replace the 30-year shingles on the roof. This is where your operational fund kicks in and you should consider adding it to your budget as a monthly expense.
Finally, as far as standard expenses go, there are also certain insurance policies that need to be in place. Most people know that when buying a home they need a down-payment. Anything less than twenty percent, though, requires mortgage default insurance from Canada Mortgage and Housing Corporation (CMHC). This is simply because the bank wants to make sure they’ll get their money back. This insurance isn’t for you, the borrower, though. It protects the lender, who pays the premium to CMHC. If the borrower defaults on the mortgage, CMHC reimburses the lender for the balance. So why is this your expense? Because the lender will almost always pass this cost on to the borrower. They don’t want to absorb the cost of a bad underwriting risk if the borrower lacks the funds needed. This insurance premium is typically included into your mortgage, so you might not even see it if you don’t know what to look for. But it’s a sizeable amount you shouldn’t ignore because you’ve likely lost two to three–months’ wages right there. “The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums” (CMHC, 2018)
Then there’s your standard property insurance policies, which cover damage to your own home and property. These are much more expensive than a tenant insurance policy because they don’t only cover your furniture, they cover the entire building and any outside structures, like your garage and shed. These policies also help cover defence costs and any liability someone living in the home encounters.
It’s not just our neighbours to the south that are court-happy nowadays and defence costs can quickly render someone bankrupt. It will all depend on the policy conditions and exclusions, so read your policy carefully. The costs of these policies will vary a lot. It will depend on factors such as your home; the values of the home and any other buildings; the location; and the insurer, to list a few. Being the frugal one in the family, I cut our home and auto insurance premiums almost in half a couple years ago thanks to AU. They have a pretty sweet deal with a major insurer for all AU students and alumni–no it’s not Geico. You should check it out in your student home-page if you’re interested in cutting costs.
There’s one thing to be cautious about, though: anyone working from home needs to have specialty insurance coverage. This applies to those working for an employer, such as now with COVID-19, or as a side-gig such as selling Avon. Not only will your typical home insurance policy not cover anything related to these things, but they also have the right to entirely cancel your insurance policy, if they find out you’ve been knowingly hiding this from them.
Last, but not least, don’t forget about life insurance if you have others who depend on you to pay the bills. When you apply for a home mortgage, the bank will usually try to convince you to buy life insurance for the mortgage through them too. They’ll try to sell you a sense of security, and explain they can add the cost to your mortgage payment, so you won’t even notice. What’s even more confusing: each lender has a different name for these life insurance policies. Regardless, they are all based around the same concept. Coverage kicks in, if one of the homeowners’ passes away, and the bank gets back the amount owed on the mortgage. Sounds enticing I know. But it’s really a type of very expensive life insurance with terrible coverage for your buck. I’m a big fan of life insurance, just not through marketing gimmicks. Erica Alini (2017) explains the reasons to think twice about these policies in her report through Global News.
Adding all these expenses up, which are not all inclusive, makes it more difficult to say, with conviction, that you want to buy rather than rent. Keeping your head screwed on straight can be tough, despite longing for exclusive rights to your home. I’ve often caught myself daydreaming of what it would feel like to deck the halls every Christmas in a mini-mansion–like Kevin’s mom in Home Alone. I also dream of long, lazy summers by my palm-tree laden pool, doing nothing but reading books and sun tanning.
But then I snap out of it and think of the bills Kevin’s parents must have had to pay, to keep up with that idyllic house. Kevin’s mom must have been either making meth in their basement or their dad fixing the books for a local Mafioso. There’s no other explanation for how they were able to provide for their family that well. I respect that not everyone wants Jay-Z’s lifestyle. And many argue that Tony Robbins and Grant Cardone can preach all they want, with millions in their bank accounts backing them up. Regardless of the difference in opinions, we all still need a place to call home. But we do need good judgement when deciding.
Grant Cardone mentions in his 2016 Entrepreneur.com blog post, “Buying a House is for Suckers.” I agree with his blog, although the title itself is badly worded. Mr. Cardone is simply trying to get his point across in the usual LA-extravagant way: homes cost money to maintain and to live in. You should first have the funds in your bank account, either in full or at least a sizeable chunk of it, before you get a loan out for what your heart desires. The most important piece, though, is that you should also have the continual income streams to keep up with the expenses of home ownership. Analyze first how much it’s actually going to cost you and then figure out how much you need coming in, and with low risk.
As you’ve just read, the mortgage payments are not the only thing you need to keep up with. I always think of this when friends and family are dead set on upgrading their lifestyle–or even when I start getting crazy ideas in my head. I’m quite possibly writing this now for that exact same purpose–to think twice before I commit our regular paycheque for the next twenty years.
As for myself and my family, we’re going to stick to renting for a while. Without a doubt, it feels amazing to not worry about the water heater falling apart or squirrels getting in the attic. I also don’t miss forking over a large chunk of change every month for property taxes. When I mention this to friends and family they either look at me as if I’ve gone off the deep end or with pity in their eyes, as if we’re now homeless. Sometimes I falter and think of the luxuries and freedom that comes with owning the roof over your head. More often than not, however, I try to ignore their comments and think of the luxuries and freedom that comes with owning multiple streams of income. And if the naysayers insist, I simply forward them Cindy Perman’s article, “20 Hidden Costs of Home Ownership.” At that point they will usually give up trying to convince me otherwise, all the while trying to conceal the horror of realization in their own eyes. Although published in 2010, it’s a very good reminder of why I want to start running like Forrest Gump when realtors approach with that twinkle in their eyes.
Kiyosaki, R. (2017). Rich dad poor dad: what the rich teach their kids about money that poor and middle class do not! (2nd Ed.). Plata Publishing.