Finance advice for adult people

[Diadhuit]

Hi,

I'm in the lucky situation of not having big finance issues.

Yet I still need advice.

I bought a house, so now I have a mortgage. I would like to repay it early.

 

I will need to do extension reroofing in around 5 years and buy a new kitchen around the same time.

 

I will also have a tenant, if it makes any difference.

 

How much should I keep in an 'emergency fund' and how much on a 'works to do' one? I'm thinking percentage of salary if possible.

 

Anything that could help me not overstretching?

 

Thanks

[Jean]

Full disclosure: while I work in construction (engineering - though more structures than homes oriented), I'm not a homeowner and have no direct experience with this. I also live in Switzerland and have no Idea of the american market and tax system.

 

So, I can't tell for the US market but around here, a rule of thumb is roughly 1%-2% of the house building costs, to adjust to inflation, for overall maintenance and reparation costs. If you haven't built the house yourself, it might be hard to know its building cost, in which case you might estimate it at the value for which you bought it. Be aware of any market distortion that may have made this price artificially high or low. Note also that the buying price includes the land, which doesn't incur the same costs as the house (costs that can usually be estimated individually since they come back from year to year).

 

From some quick Google searches, I see that roughly the same numbers are used in the US. There also seems to be a 1$ per square foot rule. I'd try to adjust it to the cost of living of my area (either particularly high or low) to take into account the real costs I'd incur. A good idea is probably to calculate the three numbers (1% of the house cost, 2% of the house cost and 1$ per square foot) and see where on this spectrum I'd feel safe with savings.

 

Your situation is different since you already know you'll have some predictable expenses to do. Any chance you could get a quote on the extension reroofing and new kitchen? if you can, I'd take it, add 10% as a security measure, adjust for inflation on a 5 years basis and put that aside for when the time comes to do these repairs. If an emergency happens in the mean time, just delay the expected repairs and use your fund to deal with it. Then, once these investments have been done, I'd switch to 1-2% of the cost of the house savings in order to be ready to deal with unexpected repairs.

 

Anther option would be to not put any money aside for it and check with your mortgage issuer if you'd be able to extend it if needed. You could then pay back your mortgage quickly and dig into it again in case of emergency (and/or plan to do it on purpose for your 5 years planned costs). You could also go for a line of credit on your house instead of an extended mortgage. People who have dealt with it will have better advice than me on this. I'd check with my mortgage issuer what my options are if the counseling meeting is free of charge (as it should be).

 

I'd check the tax code to see if any money used for home repairs and maintenance is deductible and optimize for it.

 

I'd also plan for vacancy in case my renter cancels the lease (or dies, or declares bankruptcy, or whatever) and I can't find another one quickly.

 

Be wary of hidden costs and plan accordingly. Property taxes, other expenses paid by the landlord (it's sometimes the case for utilities around here), potential conflicts with the renter or neighbors (anticipate legal fees) and all these sort of things. People with actual experience dealing with rental real estate will have better advice than me on this. It's probably worth it to investigate the available insurance options but you have probably done it already (don't over insure but do insure any cost that you would not be able to afford should the risk happen).

 

I'm not sure how helpful any of this is, I guess it depends on your level of savyness on these kinds of investments. Perhaps the most important advice of all is: enjoy the journey!

[Diadhuit]

Full disclosure: while I work in construction (engineering - though more structures than homes oriented), I'm not a homeowner and have no direct experience with this. I also live in Switzerland and have no Idea of the american market and tax system.
 
So, I can't tell for the US market but around here, a rule of thumb is roughly 1%-2% of the house building costs, to adjust to inflation, for overall maintenance and reparation costs. If you haven't built the house yourself, it might be hard to know its building cost, in which case you might estimate it at the value for which you bought it. Be aware of any market distortion that may have made this price artificially high or low. Note also that the buying price includes the land, which doesn't incur the same costs as the house (costs that can usually be estimated individually since they come back from year to year).
 
From some quick Google searches, I see that roughly the same numbers are used in the US. There also seems to be a 1$ per square foot rule. I'd try to adjust it to the cost of living of my area (either particularly high or low) to take into account the real costs I'd incur. A good idea is probably to calculate the three numbers (1% of the house cost, 2% of the house cost and 1$ per square foot) and see where on this spectrum I'd feel safe with savings.
 
Your situation is different since you already know you'll have some predictable expenses to do. Any chance you could get a quote on the extension reroofing and new kitchen? if you can, I'd take it, add 10% as a security measure, adjust for inflation on a 5 years basis and put that aside for when the time comes to do these repairs. If an emergency happens in the mean time, just delay the expected repairs and use your fund to deal with it. Then, once these investments have been done, I'd switch to 1-2% of the cost of the house savings in order to be ready to deal with unexpected repairs.
 
Anther option would be to not put any money aside for it and check with your mortgage issuer if you'd be able to extend it if needed. You could then pay back your mortgage quickly and dig into it again in case of emergency (and/or plan to do it on purpose for your 5 years planned costs). You could also go for a line of credit on your house instead of an extended mortgage. People who have dealt with it will have better advice than me on this. I'd check with my mortgage issuer what my options are if the counseling meeting is free of charge (as it should be).
 
I'd check the tax code to see if any money used for home repairs and maintenance is deductible and optimize for it.
 
I'd also plan for vacancy in case my renter cancels the lease (or dies, or declares bankruptcy, or whatever) and I can't find another one quickly.
 
Be wary of hidden costs and plan accordingly. Property taxes, other expenses paid by the landlord (it's sometimes the case for utilities around here), potential conflicts with the renter or neighbors (anticipate legal fees) and all these sort of things. People with actual experience dealing with rental real estate will have better advice than me on this. It's probably worth it to investigate the available insurance options but you have probably done it already (don't over insure but do insure any cost that you would not be able to afford should the risk happen).
 
I'm not sure how helpful any of this is, I guess it depends on your level of savyness on these kinds of investments. Perhaps the most important advice of all is: enjoy the journey!

Thank you!! it is really helpful!!
It does seem more or less what I found too. I actually live in Ireland, not the US.
The legal fee advice is especially good. I didn't think of it [emoji28]
I actually don't own the land, that is very low rent until 2120 (5 euro a year!)
I can't get a quote right now, but I have a rough idea of the costs of the works.
As for now, the house market is so mad that I could rent out a room for 80% of my mortgage (probably I would still get tenants if they match, yet I would not feel easy about that, it's a disgrace!!)
The mortgage allows to change month by month the overpayment, so if something happens I can revert to base payments (in real emergency I could take a payment break for six months, but would like to avoid that, obviously).
I think that to have all info I better avoid overpaying for the first year, and repay in a lump sum when I understand the expenses better... bins, property tax (that will change this year), etc.
My main fear is how to plan for a recession I'm realising...