‘Don’t buy a house unless you can afford it’

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.

2. No cash flow makes you dependent on the market.

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.

3. Certain tax advantages compared to commercial real estate

So when is it a good idea to buy a house?

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