People today are so worried about the risk of price declines on real estate ownership, but while this is a legitimate concern and should be taken into account, there are many other issues and items of which future homeowners should be aware. Many of these can be mitigated by taking the proper due diligence steps to better protect yourself. Unfortunately, few people do that.
Luckily for now, these are risks that you as a renter do not need to worry about; but when you take the housing ownership plunge, they will be waiting for you. So here are three important, yet simple, examples that you should consider.
Example 1: HOA Fees Going Through the Roof!
You buy into a condominium complex and make the delightful discovery that the Homeowners Association Fees are relatively low at only $180 per month. However, you did not review the HOA financials, and now you find out that the HOA was way under-budgeting their HOA fees, so within two years, they increase the fees from $180 to $380 per month.
The end result? You are now paying $200 more per month (or $2,400 per year) than what you originally anticipated when you bought the condo. And with the reality of HOA fees going up, make sure to be aware!
Example 2 – Insurance – Not Carrying the Proper Type and/or Amount of Coverage:
You bought a house five years ago and obtained an insurance policy that allowed for a $200,000 reimbursement if the property was destroyed. But now, construction costs have gone through the roof so it would now cost $400,000 to rebuild the house.
But you have not raised your limit enough over the past five years, and unfortunately, your house burned down and now you’re stuck with only $250,000 of insurance.
The end result? The insurance company gives you a check for $250,000 and you will need to come up with the extra $150,000 to rebuild your house.
Example 3 – Investment Returns – Way Below What You Anticipated:
Scenario 1: You bought an investment property and figured out your investment returns would be about 6.5% cash on cash. That is Scenario 1 in the below scenario analysis chart.
But you did not do enough research to realize that rents are not $1,600 per month as the real estate broker said, but actually only $1,475 per month. Therefore, your returns are not really 6.5% but instead are closer to 2.21% as long as your expenses are correct.
The end result? Instead of making $2,275 per year positive as you projected, you are experiencing negative cash flows. This means you are outlaying another $2,700 per year on this investment.
For some more information on other risks and issues you should consider, check out this old post: Buying Property? Here's a Checklist to Avoid Problem Issues.