House Poor No More

Romana King’s book House Poor No More is a comprehensive collection of useful knowledge for all aspects of owning a home, including detailed lists of home maintenance tasks, improvement projects, and much more.  The writing is upbeat and engaging.  To the author’s credit, she quantifies the costs of just about everything.  Unfortunately, this book was written just before interest rates shot up, so several numerical examples look like they are from the “before times” (only 9 months ago).  As has been common in our society for many years now, the author is too positive about taking on large debts.  Those who took on far too much debt while ignoring the possibility of interest rate increases are now facing significant pain.

Some Positives

As a long time homeowner, I thought I had a good handle on home maintenance.  However, King’s comprehensive list of home maintenance tasks covers many areas I know little about.  The many things to check and possibly repair is daunting; some readers may see them as a reason to keep renting.  

Homeowners who aren’t prepared to inspect every aspect of their homes on King’s schedule can still benefit from understanding how various parts of a home work so they can handle problems as they arise.  For example, I’ve always known that it’s bad to have standing water near your foundation, but King goes into detail on the best ways to prevent water damage.  She is also very thorough in her discussion of mould.

“Don’t trust anyone with your own best interests.”  King says it’s a bad idea to trust bankers and real estate agents too much.  Rather than helping you decide whether buying or selling a home makes sense for you, they are often blinded by the fact that they will benefit from the transaction.

“67% of homeowners complain about their home’s lack of storage.”  King suggests several solutions to this problem, and I was pleased to see that the first solution was decluttering.  As someone who grew up with a hoarder who was constantly trying to create more storage areas, I appreciate the value of throwing worthless junk away.

“If you must use your electric [clothes] dryer, be sure to toss a clean, dry towel in with the wet load, as this will significantly reduce drying time.”  I hadn’t heard this before.  It could make a good grade school science project.

“If you have a longer amortization period left and don’t have a lot of equity in your home—especially if you’re a new homebuyer who stretched just to buy in—then consider making extra payments on your mortgage first [before investing].”  In the debate about whether to put extra money against the mortgage or invest it, too many commentators just compare expected investment returns to the mortgage rate and declare that everyone should invest.  It’s refreshing to see someone sensibly taking into account risk level in this decision.  If you can handle rising interest rates or a period of unemployment without financial panic, then invest away.  Otherwise, reducing debt should be the priority.

When making decisions about owning multiple properties, “think about after-tax returns, not before-tax earnings.  When you tally it all up, all that matters is how much you keep, not how much you spend or how much you pay to the government.”  Focusing too much on minimizing taxes leads some people to sacrifice both before-tax earnings and after-tax earnings.

Some Negatives

According to one table in the book, you can afford a home in Canada whose sale price is 8.4 times your income, but in the U.S. it’s only 4.7 times your income.  The U.S. figures come from a Bankrate mortgage calculator, and the Canadian figures are based on a 3.5% mortgage where half of your gross income goes to the combination of the mortgage and $600/month for property tax, insurance, and utilities.  Devoting 50% of your gross income to housing is dangerous, and this analysis ignores maintenance costs.  King devotes 80 pages to estimating home maintenance costs, which total between $2.49 and $9.56 per square foot per year (depending on how much you can handle yourself versus hiring a contractor).  For a 2000-square-foot home, this increases housing costs by $5000 to $19,000 per year.  After paying income taxes as well, this doesn’t leave much for food, transportation, clothing, and other necessities.  Add in today’s higher mortgage rates, and anyone following this plan is cooked.

There is a table summarizing maintenance costs that is muddled.  Its headings say “annual budget,” but the table contains 5-year figures, and one of the numbers is off by $3000.

Another table examines the return on home renovations.  In the example given, a $155,000 investment gives a 72% return over 5 years.  However, this return has little to do with the renovations.  In fact, King assumes that only 60% of renovation expenses get returned when the house is sold.  The rest of the “profit” comes from assumed rising house prices.  Further, the profit figure ignores property taxes, home insurance, and maintenance costs.  To be fair, one should count the savings from not paying rent as well.

In a discussion of the risks of using leverage, King stresses the importance of sticking to a long-term strategy.  However, becoming nervous and selling at a bad time isn’t the only risk.  If you lose your job, and your creditors force you to sell, it makes no difference if you were committed to sticking it out for the long term.

When it comes to mortgage-breaking penalties, “the idea behind the IRD [Interest Rate Differential] is to compensate the lender for any loss due to a mortgage being paid off early (and assumes the funds are being lent again at a lower rate).”  Unfortunately, the IRD calculation used by most of the big banks goes well beyond fair compensation.  They play games with posted rates that boost the IRD by artificially lowering the assumed interest rate the funds will get when re-lent.

King gives a list of “smart ways to bankroll a home renovation.”  I’m with David Chilton on this one.  Growing debt to renovate is often not a good idea.  Sadly, now that interest rates are rising, many Canadians are regretting their decisions to borrow against their homes.

“It’s important to find a good homeowner insurance policy from a reliable provider.”  This is true but unhelpful.  How many people can name an unreliable home insurance provider?  I can’t.

Conclusion

This book teaches the purpose of all components of a home and how to maintain and renovate them.  It includes estimates of costs and the return on investment when you sell your home.  However, readers need to think for themselves on the dangers of stretching their budgets too far when buying a home.  It’s no fun to find out you can’t afford the home you want, but living house poor or being forced to sell is worse.