Many people often forget that the cost of owning something does not end with what you paid for the asset. Oftentimes, there are recurring fees that you have to spend to keep and maintain your property. Let me explain the different levels of the cost of ownership.
At the very basic level, the cost of ownership is really just limited to what you paid for it, such as a ball pen, or a pair of eyeglasses. One notch above it are those that require some temporary minimal storage costs such as groceries that you keep in a refrigerator or ice cream that you need to keep in a freezer.
Another category are valuables that may not require any additional costs but you may opt to spend some money on it for your peace of mind. Examples of these are expensive wristwatches that you may want to have periodically serviced, gold and diamond jewelry that you may want to spend on a proper safe, put in a safety box or even have insured. This would also include numismatic coins that many collectors spend additional amounts of money to have professionally graded and encapsulated.
Moving on to a more complex level of ownership are those that would require multiple periodic costs and involves the government. An example is vehicle ownership. You need to have your car periodically serviced to keep it safe and in good running condition, which in the Philippines is every 6 months or 5,000 km whichever comes first. There are also a number of mandatory requirements such as third party liability insurance and annual vehicle registration which requires a smoke emission test which may become a full blown motor vehicle inspection. For businesses owning the vehicle, this also means an annual depreciation expense.
At the apex in terms of costs is real estate property ownership. Even with just land, you will have to pay your annual real estate property tax to the government and depending on the location, there could be association dues involved and security expenses to prevent your land from being squatted upon. For properties that have improvements such as a house or building, you will have to pay separate real estate property taxes for those which is normally higher than that for the land. Additional costs are needed to maintain and secure the improvements, which are also depreciable assets.
You need to take into account all these costs and taxes when you acquire any asset, especially if you had to borrow money to acquire the property, which would mean you now have to add the payment of the interest and principal to your cost or ownership. If the property is an earning asset such as those used in business, being rented out or generating cash flow, then your expenses may be covered from this investment.
The situation is different if the asset is a non-earning asset. This would mean that you have to budget or make provisions for the periodic or recurring costs, expenses, fees and taxes at the appropriate time. For example, paying your real estate taxes ahead of schedule normally gives you a discount of as much as 20%. On the other hand, paying late means having to pay a penalty. Making a decision to own something should not just be based on the acquisition costs and its upside potential for appreciation, you definitely need to take into account the cost of ownership as well.
(The views and comments of the author are his own and not of the newspaper or FINEX. Comments may be sent to [email protected])