John Beckett's Real Estate Blog

Before deciding to move to that new location, make sure you know how much it will really cost you to live their. Residents fed up with high property taxes or expensive housing may be tempted to relocate to a home in a lower-cost region. People who fail to do their homework may get burned. Whether you are moving by choice or by necessity, you should evaluate all the costs of relocating because costs vary a lot even within a metropolitan area. Before you move, weigh the following costs:

Transportation

After housing, transportation is the second-biggest expense for most households, according to the Center for Neighborhood Technology in Chicago. Costs can be high whether residents drive their own cars or use public transportation. The first calculation when it comes to choosing a place to live should be this: You don’t live your life in your home, you live it outside your home. While homeowners generally are urged to keep housing costs to no more than 31% of income, the combined costs of housing and transportation should not exceed 45% of income. Many home shoppers budgeting for a new home weigh their monthly payment, taxes and insurance, but they don’t always estimate their transportation costs. It’s a mistake to think of transportation costs purely in terms of commuting. For every five miles that the average person drives, only one mile is for commuting. People need to think about the compactness of their neighborhood, how far they need to drive to reach places like the grocery store, school and medical offices.

Taxes

Taxes are especially important when comparing the overall cost of living in one area to another. Property taxes will be estimated on each home listing, but everyone should also review sales taxes and state and local income taxes. Some states also have personal property taxes on items such as cars and boats, which can add to the cost of living.

Insurance and utilities

It is recommended that people contact their insurance agent to receive an estimate of the costs of car insurance and homeowners insurance in the new location. People moving to a flood-prone or tornado-prone area may find they need additional hazard insurance. Car insurance costs depend not only on the car and driver, but also regional theft and accident rates. Utility costs also can vary from region to region. Utility costs have a lot to do with the size of the property and the energy efficiency of the design and the systems. The best way to estimate them is to get copies of the utility bills from the owners.

Other costs

Even the cost of basic groceries and medicines can vary from place to place. For example, someone earning $200,000 in Washington, D.C., would need 30% more income to maintain his or her lifestyle in New York City. By contrast, that same D.C. resident could earn 33% less in Dallas and still maintain the same lifestyle. It’s very important for people to know what the fees are and what they cover in terms of amenities and maintenance. You need to look at the association’s finances and ask about the rate of increase in fees. Of course, costs are not the only factor in deciding whether or not to relocate. I think the primary consideration should be quality of life.  As long as they can afford to live there and still save for retirement, people should choose where they want to live.

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If you’re pondering whether to buy or rent, you know the decision is partly an emotional one. If you detest landlords and have plenty of money to put toward a house, you may prefer the pride of ownership, regardless of how low rents go. On the other hand, if you plan to leave town in a year, the transaction costs involved in owning make it a prohibitive prospect. For most people, the choice is tougher. If you’re settled in a hometown and want to make the financially smartest move, a few mathematical calculations should lead you toward an answer. First, you find a home you’d like to own and calculate its “capitalization rate.” The cap rate is the amount of rental income you would earn if you bought the house and leased it out at the market rate. You express the amount as a percentage of what you’d pay for the house. So if you plunk down $100,000 for a house that you calculate could produce $5,000 a year in rental income, you’d say the capitalization rate on the house is 5%. The higher the cap rate, the better for the buyer. If the home you wish to buy has an implied cap rate that is equal to or higher than the return you think you can safely garner in stocks or bonds, it probably makes sense to go ahead and buy. What’s nice about a cap rate is that you don’t have to guess at what housing prices will do in the coming year. You only need to know what you’d pay for a home now and what it would rent for now. It’s important to calculate the cap rate correctly. Rental income is not the same as gross rent. Get a couple of local real-estate agents to tell you realistically what the house you wish to buy would garner in annual rent. Then subtract property taxes, insurance and a reserve for routine upkeep. What’s left is your rental income. (A good rule of thumb is that rental income is two-thirds of gross annual rent.) If you do buy, of course, it’s not as though you’ll get rental checks in the mail. The rental income figure you calculate is the amount of money you’re saving by not having to rent your own home. For most of us, those savings will be directed toward mortgage payments. (For a few years, those payments will mostly go to covering interest. Eventually most of it will go toward paying down the principal on your loan, which is as good as putting money in your pocket.)

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