Costs necessary to compare home ownership costs with rental costs

Currently, we rent an apartment for $940 a month. That cost includes:

  • The right to live here…
  • Gas
  • Water
  • Garbage pickup
  • General maintenance (for example when our dishwasher or heater break down, someone comes and fixes it within a day or two with no additional charge.)

We’re looking at buying a home. In addition to information about the mortgage, PMI, and taxes, I need to know what else I ought to sum up in order to make a meaningful comparison with that $940/mo figure given above. So for example, obviously I need to figure out how to estimate the gas, water and garbage costs. But when it comes to general maintenance, I don’t know how to estimate that. (Plus if I understand correctly there are monthly payment type plans one can enter into which cover some of the things that would count under general maintenance? Is that true or am I talking crazy?)

I also need to know what other costs I should add into the sum that may not be covered by any of the above. For example I know there’s this “homeowner insurance” thing which is either obligatory or practically obligatory. How much should I expect that to cost, or does it strongly depend on particular circumstances?

And what other things do I need to anticipate in calculating a meaningful comparison with our current rental rate?

In case any of this information is useful:

It’s a $129,000 asking price, zip code is 46219 (in Indianapolis, IN).

ETA: I tried looking at my power company’s website, and elsewhere around the internet, to try to figure out how electric bill costs could be expected to compare as well, but for one thing, didn’t find any info, and for another thing, I imagine this can vary widely from house to house anyway.

The realtor may have the current owner’s utility costs - won’t hurt to ask. I’d add 10-20% to the numbers they give you to be safe.

If you have the address, you can call any insurance agent and get a quote. Safest to call a few - the rates can vary quite a bit by company. Get recommendations of agents from family or friends. It will completely depend on the location, size, construction date, etc. etc. of the house, so there’s no way to get a reliable “expected” cost without just getting a quote. They should be happy to help - that’s how they make their money after all. And yes, unless you’ve got $129,000 in your pocket, the bank you’re taking a mortgage from will require you to get insurance.

There are home warranty companies where you pay a monthly fee, and they’ll come out and fix or replace major appliances that break. Personally I don’t have one, and I’d investigate it VERY thoroughly and be aware of what it does/does not cover before buying one.

A rule of thumb for maintenance costs is 1% of property value per year. Obviously, that can vary a lot. New construction should need less. Old construction should need more. The expected maintenance costs probably should be determined based on the value of the structure more than the land, since a huge house in a low-cost area will have more maintenance costs than a little one in a high-cost area (although places with higher land values probably have higher labor costs for maintenance work, so the land value will have some correlation with expected costs).

If you don’t have electric heat, then your electricity costs probably won’t change that much from what they are right now in the apartment. Electricity costs are mostly related to your actual usage. You’re still probably going to have the same number of refrigerators. You’re still going to be turning on lights and televisions and stereos in about the same patterns. Unless someone in your household is in the habit of leaving lights on everywhere, then a bigger house won’t use much more electricity than a smaller one.

You are missing a big one: real estate taxes. Taxes vary by location. If you are looking at a specific property, you can call up the county assessment or tax revenue office and find out exactly how much taxes are. If you are just thinking in a general sense, taxes usually total about 1.5 to 2.5 percent of a property’s value on an annual basis.

Maintenance and repairs are periodic and vary, so that’s hard to predict.

You should aslo deduct the amount you save on income taxes by deducting for interest paid on a home. If your house payment is $2,000 a month a big portion of that is deductable from your taxable income. I would also add in appreciation and equity gains.

Thanks so far guys.

Hey here’s a related question. The house apparently has something called “knob and tube” wiring which the person who showed us the house told us has made some people hesitate to buy the house.

Can you tell me why this might be? Is it dangerous? Expensive to maintain? Or what?

To get a meaningful comparison, you’d probably need to estimate:

  1. Interest expense (not total mortgage payments). Yes, the full amount of your mortgage payment is deducted from your bank account each month, so you certainly need to budget for it. However, part of the mortgage payment goes towards principal. You don’t lose the principal portion of your payment as a cost; it gets turned into equity.
  2. Annual PMI, if you have to pay it, is typically 0.5% of the loan value.
  3. Annual property taxes. A quick Google search is showing the property tax rate for 46219 is about 1.1% of the total property value.
  4. Annual Maintenance; a hand-waving budget approach is to sock away 2% of your property value each year to cover maintenance. This isn’t a particularly accurate way to budget since home age, land costs vs. building costs, home condition, and a variety of other factors influence how much maintenance you need to do. But it’s a ballpark number, at any rate.
  5. Utilities: Going to vary widely depending on your usage patterns, condition of appliances, home insulation, size of the house, and other factors. Ask your agent for ballpark numbers.

Biggest problem is that It’s old and will most likely not carry the current load you would want these days. Many Insurance companies refuse to issue policies on it because they are afraid people will over load the system and start a fire.

Only if you itemize your deductions, though. Back when I owned two houses, it was still not beneficial to itemize rather than just take the standard deduction.

Two things to consider:

  1. The cost of major maintenance and insurance. You mentioned having little things fixed for no additional cost. But you will also have major issues fixed as well. Flood, tornado, whatever; you don’t have to come out of pocket to fix the house. Your landlord does. You can protect all your personal stuff with renters insurance, which is a lot cheaper than homeowners insurance.
  2. The ability to fuck it all and go somewhere else. To me, this is a big one. If that house starts slowly falling apart,. if the market crashes, if the neighborhood goes bad, etc. You can move somewhere else without being stuck with an upside down mortgage.

Ah that’s not good.

This may have something to do with why the place doesn’t have a dishwasher…

Yeah, I’m actually a pretty big fan of living in apartments. My wife isn’t, though, and I do wonder in the back of my mind what the heck I’ll be doing in thirty or 40 years when I’m still paying a full (and time-inflated) cost of rental…

The homeowners insurance I’m already figuring into the math I’m doing, btw.

Hey here’s another one. I’ll totally spring for the inspection/appraisal etc of course, but the person we’re dealing with is making available the one that was done by another buyer-who-fell-through two months ago. Would you trust it? If you determined it was from a reputable outfit would that make you trust it?

I know I know buy my own appraisal…

We just looked at that report from two months ago. Twenty “major deficiency” items… most or all with recommendations to get specialists to look at the problems. One that stands out is cracks, found not in the foundation itself but in nearby structural elements like porch stairs and this brick… thing… running along the bottom of the house.

That sounding pretty bad?

An inspection is around $100. Just pay for your own.

Oh I thought they were $500 to $1000. Not sure where I got that figure.

After property taxes and insurance you aren’t going to be saving much if anything over your rent, but of course you will be building up equity in your house.

Is this the only house you’ve looked at? Twenty major deficiencies? That seems like a lot. I’ve only had a house inspected once - and it was a new home - and they only found very minor stuff (which is what you would hope for).

I’d be very worried about a house that uses piss poor wiring. I assume that means it is old.

Will you be able to afford to replace the roof, furnace, or any of the other major stuff that go wrong with a house?

I checked your zip code and see plenty of houses in that price range. Can’t you look around and find a house with a dishwasher and normal electricity? When looking at houses there is a little three prong tester thing you can get at Home Depot for like $10.00. It checks for (basic) proper wiring. I’ve been amazed at the number of places it will show something wrong. That means they had at least one person working on the house that didn’t know what they were doing. How many others did they have?

Do you have a realtor? You might think they aren’t necessary, but if you find a good one - they can be pretty helpful.

Good luck.

Ours was over $400 in Utah 3 years ago. I guess you’ll have to call around and see what’s average for Indy.
Do not, I repeat, do NOT use the inspector someone who wants your money recommends.

Another things to consider is the opportunity cost associated with your down payment being tied in real estate. This may be hard to get an actual number since you can’t predict the future, but let’s say you’ve had 6%/year gains in the stock market the past few years, but the housing market in that neighborhood has only appreciated 3%/year. That’s a potential cost (or even a gain if the stock market sinks), but it’s impossible to predict.

There’s also the 5-6% realtor fee you lose straight off the bat if you decide to move. It’ll certainly vary based on how likely you are to move. For example, if you know you’ll move in 5 years because you’re going to have kids and need a bigger space, thats an extra $107/month with a 5% fee of $129,000. That’s a solid 11% of your current monthly rent.

Can you explain this a little more? How did the five years figure into the calculation? (What’s the calculation, exactly?)

If the house has knob and tube, it’s got other old systems that are going to give you trouble. This particular house needs major upgrades, and it doesn’t sound like you’re prepared to get in there and do them yourself. This is not the house for you, I think. Don’t be swayed by the old house charm if you don’t have many notches in your tool belt. They’re a TON of work, and you never know what you’re going to find when you open those walls up to upgrade the plumbing and wiring. Also, you don’t want to be living in the house while the systems are being upgraded. Get a newer house.*

*I say this as someone with many, many notches in my tool belt. I’ve done the knob and tube upgrade. This is not a minor job.