Unexpected expenses of property purchase and ownership
April 12, 2010 8:55 AM   Subscribe

Long time renter, first time buyer. What am I forgetting to budget for? When you bought a house, what expenses took you by surprise? How much of a cash and credit reserve should I keep available for the first six months?

To avoid jinxing this potential house deal, let me put it this way: I'm trying to plan for what happens if this house purchase doesn't fall through in the next two weeks.

Due to a change in how they calculated what I could finance, I'm having to pay more out of pocket than planned and will be cutting my cash reserves down to just over $1000. Beyond that, I'll have my retirement funds (in a Roth IRA) and $18k in unused credit card lines. And that's it.

I can cover the mortgage on my income, but after construction is finished (two months) and I find renters (four months?), the rent will actually cover the mortgage payment, so I'll be able to put all my income to saving an emergency fund. But in these first few months when I'm covering the mortgage and my current rent, and getting the lower two units in the house as appealing to renters as possible, I know I'll end up accruing some debt.

So, I am trying to make an extremely solid budget and map out my cashflow for the next six months. I can predict my personal expenses, but I don't think I know all the house-related expenses I'll incur. Can you take a look and see what I'm forgetting?

One-time costs:
- Closing costs
- Utility start-up fees (do they charge to come out and turn on water, gas, etc.? do I need to buy garbage bins? do any of these accounts require a deposit?)
- City building permit fees
- Some (second hand) appliances, like a stove and fridge
- New locks for the gates and shed
- A U-Haul rental
- These two Nolo books
- No budget for repairs, and no need to paint the interior, since the mortgage includes a six-digit construction budget (as a scope with a "not to exceed" cost contract) with a 15% contingency for unforeseen problems outside the scope (see my past questions if you want to know how extensive the repair work will be)

Monthly costs:
- A monthly mortgage payment (PITI)
- Monthly utilities: gas & electric, water & sewer, garbage, phone & internet
- Either lawn costs or the (beer) cost of borrowing a friend's mower
- Some maintenance costs, hopefully minimal or done under the construction warranty in the first few months

Planning to borrow or go without until things stabilize:
- Interior decoration
- Tools and how-to books
- Landscaping costs and lawn tools
- Any furniture that I don't have now
- A housewarming party!

What else? What costs took you by surprise when you bought your first house? I learned a lot from this thread already. Am I wrong to assume that having just replaced everything in the entire house, I don't need to plan for many repair costs for the first three to six months?

Or, to the extent that I do need to expect some unexpecteds, after listing every planned expense I can think of, how much of a cushion would you be sure to keep on hand for unavoidable things that will just come up, and how much of it would be in cash (vs. credit)? I need to pick a bottom line for myself that I don't touch, as I can see that there are going to be so many expenses will make complete sense, if I could afford them.
posted by slidell to Work & Money (23 answers total) 45 users marked this as a favorite
Sounds like you've been pretty thorough. You could check this too.
posted by Go Banana at 8:59 AM on April 12, 2010

Make sure you budget in the closing costs 6 months worth of property taxes. if the house has oil heat then oil costs.
posted by majortom1981 at 9:00 AM on April 12, 2010

I can only think of window coverings (that you probably dealt with under decorating). It sounds like you've been pretty thorough.

The big thing I find is to not get carried away with any further small improvements (a couple hundred bucks here and there can add up quickly).
posted by bonobothegreat at 9:09 AM on April 12, 2010

Best answer: Insurance? The big deal for me with a new house was that even though I had a lot of credit available the rural local workmen couldn't be paid with credit cards, so I needed to find a way to write them [local preferred] checks or get cash. Feel free to look for renters early once the place is showable but maybe not entirely finished. Also to get the place rentworthy you may have to invest in some small things like lightbulbs, windowshades [cheapie blinds is what most places I know have] and maybe some fixtures that the place is expected to come with [towel rack? toilet paper holder?]. Nothing a $200 card at Home Depot can't handle, but worth planning. Also if oyu have a basement making sure stuff there is off the ground in case of water and etc is worth some initial investments.
posted by jessamyn at 9:12 AM on April 12, 2010

appliance repair, or an appliance repair plan through your utility company, home owner's insurance, if you're looking to rent, cost of advertising, an attorney to draw up your rental agreements...
posted by HuronBob at 9:12 AM on April 12, 2010

I would definitely get one of those home warranties. Do your research as to which one, but those things are generally well worth the cost.
posted by MexicanYenta at 9:28 AM on April 12, 2010

Best answer: Home warranties
posted by MexicanYenta at 9:29 AM on April 12, 2010

I know people who have gotten expensive surprises with new construction, finding out that things they thought were included in the contract were actually not, like gutters and sidewalk repairs. Hopefully your contracts are all comprehensive and thorough, but be aware that these surprises do happen.

I'd also allow a budget for the "teething issues" that new construction can have. Minor issues tend to show up over time, for example, no matter how thorough the plans were. Sometimes that's free warranty work by the contractor, but sometimes it comes out of your pocket, like if you realize that you need a new outlet or whatever.
posted by Forktine at 9:32 AM on April 12, 2010

Response by poster: Great answers so far, thank you. (For one thing, I had forgotten that entire class of things like light bulbs, window blinds, and towel racks.)

> The big thing I find is to not get carried away with any further small improvements (a couple hundred bucks here and there can add up quickly).
> even though I had a lot of credit available the rural local workmen couldn't be paid with credit cards

I can already see that some of those further small improvements or upgrades are going to look mighty sensible. The construction budget basically pays for the most economical form of everything. Some things, like flooring, can be easily upgraded later and/or will be trashed by renters anyway. But if there are things inside the walls that it'd make sense to do one degree better, I might see if I can afford it. (E.g., it'd be smart to run separate gas lines to the different units while all the drywall is off so they can be metered separately.) Do you guys have any recommendation about how much you would keep on hand in cash and credit?

Thank you all again. I really appreciate all of your comments and suggestions.
posted by slidell at 9:56 AM on April 12, 2010

For me, appliances were a huge expense. We need a washer/dryer and a refrigerator. We ended up finding a great used fridge on craigslist for about $450, which was way more cash outlay than I would have liked. I wanted to get a used washer/dryer the same way, but we just didn't have the available cash to pay for it. We ended up buying a new set from Best Buy because we could finance it.

And yes, we had to pay deposits to get all of the various utilities turned on. Getting gas/electricity alone cost us over $200 in deposits.

I found the month following closing to be extremely stressful - watching my checking account balance dwindle down to nothing very quickly was scary. Just make sure you have more cash on hand than you think you need - things are going to come up.
posted by tryniti at 10:05 AM on April 12, 2010

Best answer: Have the amount of your insurance deductible available on demand, says the girl whose 6-month-old house sprung a leak and required 1600 sq. ft of hardwood floor replacement.
posted by mckenney at 10:20 AM on April 12, 2010 [1 favorite]

There are a couple of unforeseen cash bonuses:
- A mortgage is always paid "in arrears" which means it's paid at the end of the month, not the beginning. When you finance a house, you have to pay pre-paid interest, which will be for the month in which you get the mortgage. So, the 1st full month you own the house, there's no mortgage payment. If you got a mortgage today, April 12, the 1st payment would be due June 1, for principal and interest for May.
- When you get tenants, they give you 1st & last month's rent, and you usually have to pay interest on the last month's rent that you hold as security, but you have use of it, if needed. Keep this well-documented. Tenants always think they gave you more than they really did.

- Utilities may require a deposit to start a new account.
- It may be a good idea to get new fridge(s); older ones are quite energy-inefficient and may be hard to find. Stoves - no big deal. Check out freecycle; people often get rid of old stoves.
- Cleaning supplies.
- I wouldn't skimp too much on basic landscaping. The better it looks, the better renters you'll find.
- The quality of your tenants makes all the difference. If you have to spend on ads, do it. Craft a good craigslist ad, and get good pictures. You might have to pay a photographer.

I had a 2 family house, other than moving costs, no big surprises.
posted by theora55 at 10:34 AM on April 12, 2010

Hopefully you won't have any tenant related costs in the first 6 months, but they are a possibility. Even with the most thorough screening you might have to deal with an eviction. Then you'll be stuck with not receiving any rent as well as paying legal fees. I'd recommend holding off on the interior decorating and other costs for your unit until you have an adequate cushion to absorb an unplanned vacancy.
posted by Crashback at 10:44 AM on April 12, 2010

Property taxes may cause your escrow amount to go up within a year if they go up. Any parking permits or other transportation/car costs that may change with your location.
posted by ejaned8 at 10:46 AM on April 12, 2010

Best answer: 1) Builder's risk insurance. Depending on what you're doing, a traditional homeowner's policy may or may not cover your house while it's under construction* but it will almost certainly exclude the cost of building materials while they're on site. Either you or your contractor needs to secure a builder's risk policy, but you're going to wind up paying for it either way. Given the high cost of metals these days, things like pipe and conduit are increasingly targets for theft.

2) Figure out whether homeowner's insurance** and property taxes are folded in to your mortgage payment. It's entirely possible that the figure you've been quoted for your mortgage payment includes these things already. If they aren't, you could easily be looking at an extra $100-300 a month if they aren't.

3) As it looks like you're buying this house as an investment and looking for renters, you should probably plan on having at least a few months' rent on hand should you be unable to find a renter, even if you can afford the mortgage without them. The month you don't have a renter could be the month you really need that extra few hundred bucks, e.g. your car breaks down or you have unexpected medical expenses. At worst you've got a grand or two sitting in a savings account. At best, you avoid some potentially painful liquidity issues.

4) A monthly appliance budget. These things don't last forever, and unless you've been planning for it, getting a new furnace/washer/air conditioner can put a huge hole in your monthly budget. Figure out how often you plan on replacing them and spread the cost over that time.

5) A CPA and a lawyer. The CPA you'll want for your taxes, so you're looking at establishing an ongoing relationship with them. Depreciation of assets, which is going to be very important for you, isn't something best done by laymen, and this could easily save you thousands of dollars over the next few years, making the $500-1000 you'll spend every spring totally worth it. The lawyer you'll use more on an as-needed basis, e.g. drafting your lease contract the first time, helping you out with landlord/tenant issues, etc. but having a pre-existing relationship will make it a lot easier to get the help you need when you do need it.

*If you're just doing some remodeling you might be okay, but if you're doing a teardown you probably aren't. Discuss the details with your agent.

**Since this is a rental property, you're going to want to discuss that with your agent too. You want coverage for the structure and your personal property but not for your renters' personal property. Insurance carriers generally have products designed for landlords which will give you the coverages you want.
posted by valkyryn at 11:02 AM on April 12, 2010

I'm a little confused on the landscaping line item. You say you're willing to go without it, but also you're looking to rent the place. I'm not sure what the current landscape is, but if it were me, landscape (i.e. curb appeal) would be a high priority since the goal (I assume) is to attract quality renters. My experience has been that those renters that don't care about appearances before renting also don't care about appearances during renting.
posted by forforf at 11:10 AM on April 12, 2010

I replaced the roof on my current house as part of my purchasing it.... 3 months later a hail storm rolls through and I had to replace it again!

Combine your car/auto insurance with your home insurance to ensure you have the *lowest* possible deductible.... the difference between 1% and 2% of your home's valuation is a pretty penny....

Also... if your planning on planting any fruit/nut trees... do it sooner rather than later... $200-$250 on 6-8 fruit trees NOW will make you way happier than $500 in trees later.... (many times type a few years to produce)
posted by anthroprose at 11:57 AM on April 12, 2010

Response by poster: Oh, yes, theft of construction materials or just-installed piping is a huge concern -- thanks for that reminder, valkyryn.

The monthly payment definitely includes the homeowners' insurance and an escrow for property taxes, and I'll apparently be pre-paying five (yes, five for some reason) months of property taxes with the close.

I'm definitely going to talk to a CPA and maybe an attorney, but I'm hoping to get by on Nolo Guides until the place rents and then have that consultation in six months (saving every record and receipt until then).

Over time, I'll definitely accrue an emergency fund to cover a new roof or an unexpected vacancy, but for now, I will at least (find out what it is! then) keep my deductible on hand. I'm currently planning for it to take two months longer to find renters than I think it will, so hopefully that's enough.

The points on landscape timing are well-taken. I will include as much as possible there. An Urban Releaf group is also apparently starting to give out free trees, so that might help.

So true, tryniti: I found the month following closing to be extremely stressful - watching my checking account balance dwindle down to nothing very quickly was scary.
posted by slidell at 12:10 PM on April 12, 2010

Not to quibble, but you should really talk to that attorney before you rent the place. Getting a tenant to sign a replacement lease a few months into their tenure just isn't going to work. Nolo guides are great and all, but they're no substitute for getting a contract properly drafted by an attorney actually working for you before you have someone sign it. The things are actually illegal in some states as contributing to the unlicensed practice of law, and even in states where they are legal they're sorta shady. A few hundred bucks today could easily save you thousands of dollars and a lengthy legal headache down the road.

Spend a little money and do it right the first time.
posted by valkyryn at 12:17 PM on April 12, 2010

Best answer: Debris removal! Whether you're renting a dumpster or hiring someone or borrowing a friend's truck and taking multiple trips to the dump.
posted by desuetude at 12:58 PM on April 12, 2010

Small tips to avoid expenses:
Don't install an icemaker in the fridge. The line that takes water in for it often springs a leak as it ages (a few years) and can leak into the floor or wall for a while without being detected, and then you have to replace the floor etc. In general as you're supervising construction, be vigilant about water - vent fans in the bathrooms with showers, be sure the liners around the shower are installed well, etc.

In your landscaping, educate yourself about making it low-maintenance. (Eg pea gravel as groundcover in some places can be ok, means less mowing; choose species that are suitable for your area's water levels, so they don't require extra chemicals or watering to thrive). Low maintenance may mean spending more up front to put in good soil, and then you won't need to fertilize and struggle in the coming years. Don't plant invasive species if you can avoid it (google your state + "invasive plants"). Put the cost of landscape maintenance materials and labor into your budget. Your town may have free or reduced cost materials available, check online and ask around.

You may want to test the house for radon once it's built, and then budget for radon remediation in the future. (this would not be a super time sensitive thing, though)
posted by LobsterMitten at 2:13 PM on April 12, 2010

We did a similar project several years ago, and these were things that mattered.

Our adjustable rate mortgage went up and up then down. Every month we would have to pay 100.00 to 200.00 plus more. Then Greenspan changed that. Rates are low now but can go up.

The apartment renovation was completed just as the dot-com bubble burst. Our well referenced tenants were gone after 4mos of a 1 year lease. The deposit and security covered our loss some. Contracts aside it's a hassle and a big expense to hunt people down and get them to pony up.

2 months later we have reduced the rate on the rental and accepted a different sort of tenant. Fortunately they turn out to be great.

The new roof leaked in a major storm, The cable installer ran a drill into an electric line and on and on.

After 3 years super tenants leave and our best efforts produce the two biggest flakes you can imagine, the rent was always late and came in partial payments. They discover drugs and sketchy friends...They moved out after 9 months but left all their furniture, dishes laundry etc.

Paint again, carpets cleaned, cabinets stove refrigerator are nasty.

It was a party. Credit checks background checks etc are helpful, but our best tenants were the least qualified of the three.

Finally unless you hire someone to manage the unit you are on call 24-7.
posted by pianomover at 11:57 PM on April 12, 2010

Response by poster: Thanks again! LobsterMitten, I've started thinking about low-maintenance everything since you suggested that, and valkyryn, it's useful to know that you don't think Nolo is sufficient. pianomover, that's interesting to hear that tenant-screening was such a random effort for you. I really appreciate all of this help and will let you know how it goes once these next few months are all over.
posted by slidell at 8:38 PM on April 18, 2010

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