You finally saved enough money for the down payment on a house. And you finally qualified for a mortgage. You researched and home shopped to find the right first home. You made an offer. And finally, you closed on your first big investment … a new home! Congratulations!
Now you are starting a 3 to 7 year cycle of owning and managing your first home. Where do you start? How do you maximize the value and minimize the ongoing expenses? What do you need to do to maintain this asset? How do you manage the improvements you make to the house? How do you avoid falling into the “money pit” trap where your house financially consumes you?
It all starts with the realization that your house is your largest asset, biggest expense, and that one day in the future you will sell this house and probably buy another one. This financial reality means that you need a system to track the various financial aspects of your house on an ongoing basis through the entire homeowner lifecycle. Then it is a rinse and repeat process, probably another 3 to 4 times in your life, as you buy and sell other homes.
Let’s start with the asset side of the equation. You agreed on a purchase price and put a down payment on the home. The value of your house the day you closed is that purchase price. The value of your equity in the home is the amount of your down payment. But the real estate market is dynamic and changing due to economic, neighborhood, and market conditions. You want to track what the forecasted value of your home will be in the next 3 years, as you hope the value of your home will appreciate.
There are two ways your equity in the house can grow. One is the forecasted value goes up because you live in a desirable neighborhood. The other is each of your monthly mortgage payments reduces the principal balance on your mortgage. Therefore, it is important to know what your remaining balance is at all times. Then compare that against the estimated value of the home to see what your equity is your house.
With home expenses, they fall into four different categories. First you have property related expenses like the mortgage, home insurance, and property tax. Next is utility expenses for electricity, gas, water, and sewer. The last is other services such as internet, pest control, or other optional services. These first three categories are regular bills, but they usually don’t get billed on the same frequency. It is a good idea to establish a monthly cash flow expense budget so you know each month what the total payments will be.
The last category is annual preventative maintenance and repair costs. This one catches first time homeowners off guard the most and can be the most expensive. Your home is a collection of equipment, materials, appliances, etc. These things need regular preventative maintenance to keep them running efficiently. If you don’t have a home maintenance schedule, you don’t realize what needs to get done which results in higher utility bills because the home is operating inefficiently. And worse yet, things break before their useful life and you have unplanned and expensive fix it or repair costs.
If you bought a home that needs some remodeling, this is another big financial area to manage. Plan out all your desired home remodel projects. Research brand and pricing options for all the items required for each of your projects so you can establish a good budget that includes what you like and what you can afford. Track all the costs, receipts, and warranties as these are additional investments in the house that impact the tax basis of the home.
Staying in control and aware of the asset, expense, and additional investments in your home will keep you well prepared when you decide to sell the home in the future. This is where you are trying to maximize the value of your house in context with the market conditions of your neighborhood. You can use this digital history as a way of differentiating your house from competing houses on the market that were not well maintained. And you know exactly where you are financially with your home equity and tax implications based on an agreed selling price.
Your first home is exciting and daunting at the same time. Maximize the lifestyle aspects of the home by enjoying all the day to day activities in the home. But be smart about managing all the various financial aspects of this big investment that has a big impact on your total net worth.