Beware Half-Baked Cost Analyses When Buying Real Estate

posted on September 29th, 2010 filed under: Financial Responsibility, Real Estate News

It’s a PITI that people don’t know better.  Your payments on a home include Principal, Interest, Taxes and Insurance.  Yet often one or more of these — usually taxes, insurance or both — is conveniently omitted in pitching how attractive home ownership supposedly is.

For example, the Miami Herald runs an article every now and then titled “What Can You Get for $. . . .”, with a different arbitrary price point each time.  The article presents about five properties for sale at about that price point in Miami, Miami Beach, Coral Gables and surrounding real estate markets.  An introductory paragraph says how much your mortgage payment will be, but notes that taxes and insurance are not included.  Estimated taxes are listed separately in the information for each property.  The cost of insurance is stated nowhere.

Miami Real Estate -- Herald -- What Can You Get Series

If you’re not careful, you might think that the cost of ownership is basically the cost of the Principal and Interest portion that’s stated very precisely.  In the latest installment, the Herald asks What Can You Get for $647,000.  Readers are told that “[m]onthly mortgage payments (not including taxes or insurance) would be $2,561.”  Such precision.  So little meaning.

For the first property listed in the $647,000 article, taxes are estimated to be $14,163.  It’s not a big house, but insurance will surely cost thousands more.  (Would it really be so hard for a reporter to get an insurance quotation for each property before running a story?)  The monthly payment is probably more like $4,500, not $2,500.  Think that makes a difference to your budget?

Oh, and don’t forget maintenance.

As a rule of thumb, you would do well to regard the true cost of ownership as about 10% of the purchase price — o.k., maybe 9% in these days of extraordinarily low interest rates.  Why so much?  Currently, you can figure that the Principal and Interest payment is about 5%, Taxes are about 2%, and Insurance is usually about 1% to 1.5% (depending on the storm-resistance characteristics of the house).  Maintenance will add about 1% on average over time, once you take into account the intermittent big jobs (roof, paint, pavement, etc.).  Yes, you get a tax deduction for the interest and property taxes, but that’s only a benefit to the extent it exceeds the standard deduction you can get anyway.

In the example from the Herald, the reporter assumes a hefty 20% downpayment, compressing the Principal and Interest payment to about 4.7% of the purchase price.  The estimated taxes amount to another 2.2%.  So you’re at 6.9% before insurance and maintenance.  You might come in a little under 9% of the purchase price, but only if you put that 20% down.

Don’t be fooled.  Do the math.

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posted by // This entry was posted on Wednesday, September 29th, 2010 at 11:05 pm and is filed under Financial Responsibility, Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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