I love investing in real estate, and it’s the main reason I became a self-made millionaire. But I understand that buying a single-family home to live in isn’t always a good investment.
I realized this in 2003, when I was a newlywed with a newborn baby, and bought my dream home in Los Angeles. But as time went on, I wasn’t seeing a return on the money or time I put into my home. So I sold it and used the equity to buy a few rental properties. Then my family became tenants again.
Don’t get me wrong: I still support home ownership. Today, I have three houses – I rent two, and the third is my first residence. But at the end of the day, for many people, home ownership takes money out of their pocket.
This is why I believe that buying a house is not a wise idea, especially in these times of inflation and rising house prices.
1. Expenses eat up profits
Let’s say you buy a $100,000 home and put $5,000 down. Then 10 years later they sell the house for $200,000.
Sounds like you killed it: After paying off your mortgage, you turned $5,000 into $100,000. But they forgot to calculate the cost of owning that house:
- 10 years interest at 6% annually: 60,000 dollars
- 10-year property tax at 2% annually: 20,000 dollars
- Real estate fee 6%; 6,000 dollars
Total cost before maintenance: 86,000 dollars
That would cost you $24,000 (or 24%) of the $100,000 net. Over 10 years, your investment returns 2.4% per year, and that’s not even including roofing, plumbing, paint and other maintenance fees.
A good rule of thumb to keep in mind is to spend about 1% of your home’s purchase price on maintenance each year, but those payments can become more expensive during periods of high inflation.
Tip: Don’t buy a house expecting to make a real profit. Instead, buy only when you have enough income, whether passive or active, to cover mortgage, property taxes and maintenance costs.
Real real estate investments give you monthly income – or cash flow – after mortgage payments, property taxes and maintenance.
When your home doesn’t provide monthly cash flow, its value is always tied to having a qualified home buyer who loves your home. You pay to live in it while you wait Maybe Make a profit.
Hard times often take a toll on rental property values and hurt single-family owners. When I go to sell a rental property, I just need to find someone who wants to make a profit, and that’s not hard to do.
Tip: Only buy when you find a trophy property that’s undervalued so you can afford to pay cash and you’re 99% sure there’s a profitable exit because of the market around it.
For example, you are limited to how much interest you can write on your home, and you are only allowed to a A tax exemption of $250,000 for the sale of a single-family home every two years.
But when you go from investing in your home to investing in income-producing real estate, Tax benefits have increased.
Income from rentals is considered a return of capital rather than income, so it is not taxed. And in business investing, there are very few limits on how much interest you can write off. Property taxes, maintenance and furnishings are deductible.
Tip: To generate passive income outside of real estate, invest in rental properties with favorable tax conditions.
So when is it a good idea to buy a house?
My advice: Don’t buy a house – unless you can afford to waste money.
At its best, home is a place to call your own, and it can provide peace. But if your goal is to create wealth, there are many other options, such as investing in the stock market or commercial real estate.
I don’t believe that owning a home should be considered the “American Dream”. For the most part, it’s simply a place to live – and there are always costs involved.
Grant Cardon He is the CEO. Kardon Capitalbestselling author “The 10X Rule” and the founder of the 10X Movement and the 10X Growth Conference. They own and manage seven privately held companies and $5 billion in multifamily projects. Follow him on Twitter. @Grant Cardon.
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