How to improve your return on investment when buying a home

Return on investmentTo improve your return, be on the lookout for potential run-away costs. Your fixed costs will be your property tax, mortgage and insurance and then there are the unknowns. Let’s reduce your unknowns even before you close!  The main areas where you could see runaway costs are in maintenance, mechanicals, and energy. Follow these suggestions and you will improve your return on investment when buying a home.

Don’t skimp on home inspections

It’s standard practice to have an inspection of the home before you close on it. Be aware that some inspectors are more thorough than others, and different types of homes have different kinds of potential issues. It’s not a one-size-fits-all situation.

First, find yourself a home inspector notorious for being very thorough. Second, figure out: what are the major risks for the particular type of home you are buying?

For example, old brownstone houses often have issues with cast iron sewer pipes running under the home and out to the city sewer line. You might consider asking to have the pipes thoroughly inspected. You could save yourself a $40,000 cost later on, if the basement needs to be torn up and pipes replaced.

Another example: a quick, visual inspection may not detect termite damage, if there is no exposed wood to examine in a completely finished basement. You might consider asking to have a more thorough termite inspection. You could save yourself a huge cost that isn’t generally covered by homeowners insurance.

My point is, don’t be shy to ask for additional inspections! I understand that in extremely competitive markets, it can be tricky, as bidding wars and cash-only offers with no inspection contingencies can be de rigueur. Even so, try to protect yourself as much as possible by looking for and identifying potential issues as best you can.  You are not being unreasonable, you looking to protect your investment.

Consider the age of the home and all the components

That 1890’s house with the period details and original wood work is so seductive, but while you are swooning, note the ages of the roof, boiler, siding, etc. and also the replacement costs. Underestimating the replacement costs and schedule can leave you utterly unprepared financially.

Consider this true story: a pair of homeowners bought a big Victorian with great bones at a steal of a price. Sounds like a great investment, potentially. But when it came time to replace the slate roof two years later, they discovered that each 20-foot square area would cost $10,000 each, or $120,000 for the whole surface, which turned their good investment on its head.

To reduce your risks, make a list of all major components, their age, their expected lifespan (you can see a list of average component life expectancies here), and whether they are in or out of warrantee. Doing this before deciding on a home to purchase will make your comparison of potential homes as investments much more informed!

Get data on energy costs and make a plan

What does it cost to heat and cool the home you are looking to buy? Energy costs are one of the major costs that homeowners have every month. For example, if the house you have is running a 40-year-old gas boiler with shoddy insulation and window unit air conditioners, the energy costs will be very different from a well-insulated home with a new energy efficient HVAC system. Energy costs will vary according to season and climate, of course.

It’s a good idea to ask for ballpark energy costs from the current owners, and also do your own research given the type of heating and cooling units and square footage.

You will want to learn the lifespan and replacement costs of your energy-related components.  Consider the windows, skylights, heating and cooling systems, insulation and type of energy used. What can you plan to upgrade that will pay for itself? Homeowners often have a lot of opportunity to make strategic energy upgrades, because improving energy systems have a direct effect of lowering costs, making the return on investment higher.

Energy efficiency upgrades have some of the highest returns on investment of any home improvement. You might also consider learning about how to get the best deal on energy costs, and how to plan for an energy upgrade without making a mistake

Compare thee well

Once you have the skinny on the expected costs, you can do a more accurate comparison when deciding between two properties. Home buying is an emotional decision, but that doesn’t mean you can’t also have a great financial outcome!