The worst decision I ever made was buying a home. Or two.
Not only that, but for reasons I describe below, real estate is going down.
When I ask people why they buy a home they give me several reasons:
A) It’s a great investment. In the long run it will be your retirement savings.
B) It’s roots for your family.
C) You’re throwing away money when you rent.
Let me respond to each:
A) “IT’S A GREAT INVESTMENT!”
Imagine an investment where you put up most of your savings, if not all.
Then you borrow 400% more to pay for the rest of it
Then you spend another 50-100% to fix it.
Then every year you spend more than you thought you would on maintenance (hence the cliche “a house is a money pit”).
Unless you are an expert on house maintenance, it will always cost more per year than you thought.
Then you spend a good chunk on interest payments.
Not only that, the “investment” is not liquid. Meaning, you can’t sell it in a day like a stock, or take money out of it like a checking account.
In fact, when you MOST need the money, like in a recession, the house is unsellable.
So, the fact that it is “illiquid” means you should make more on this investment than a comparable risk investment that is “liquid” like the stock market.
These are all the qualities of a HORRIBLE investment.
But this is exactly what people do when they buy a house. EXACTLY!
You have to GET PAID for any additional risk you take.
If one investment is illiquid and another is liquid, then the illiquid investment should historically earn more.
The Case-Shiller Housing Price Index has returned 3.7% between 1928 and 2013. The stock market has returned an annualized 9.5%.
Let’s pick another time period: 1975-2013. A $100 investment in a home would have returned $100. A $100 in the stock market would have returned $1,600.
This does not include the interest rates you pay. 30 year rates right now are 4%.
If you borrow $100,000 to buy a house, you aren’t paying $100,000. Over 30 years, you’re paying an additional $234,000 in interest payments.
So your net return is probably close to zero or negative.
And, of course, this does not count maintenance, or property taxes, which could be up to another 4% per year.
This cash is “flushed” down the toilet when you BUY a house. Because you can’t use that cash for anything else for years or decades.
That is called “opportunity cost”:
- The cash you put down
- Your interest payments
- Your maintenance costs
Your property taxes.
This can be put in the stock market, or private investments, or you can take courses that can improve your skills, allowing you to make more money, etc.
Or you can have cash in the bank. Peace of mind is an investment.
I lived for four years only in Airbnbs. I had no belongings. I just moved from one stranger’s place to another.
Over and over. I saw how many other people lived. I had no roots. I felt like I barely existed. I liked that feeling.
I called a friend of mine. She said, “You need to now get an apartment. Women are going to think you are creepy.” She was right. I got an apartment.
I LOVE my apartment but it’s a rental.
I have two years left on my rental agreement but eventually I might be forced to find a new place when I don’t want to. This would not happen if I owned.
I have no roots. And I now have five kids (three step-kids).
And yet… each month I pay 1/2,000th of the cost of buying (when I factor interest, taxes, maintenance). So renting is nothing compared to the cost of buying.
But I have no “roots.”
And yes, most other people don’t either.
The average ownership of a home is 11 years. As families grow, they need bigger places. And when kids are out of the house, families often downsize.
So the “roots” argument is B.S. for the average person.
C) ”THROWING MONEY AWAY ON RENT!”
1) When I rent a house I just need to pay by month.
2) To buy the same place I live now I’d have to put 3.5 years of rent payments down as a MINIMUM “down payment.”
For me, personally, I like to have cash in the bank for the inevitable ups and downs in the economic cycle.
When you absolutely NEED that money (i.e., in a recession), you can’t sell and you can’t borrow. You CAN’T get the money back.
I like to sleep at night.
3) Property taxes + maintenance + mortgage usually equals rent.
In fact, unless the owner is a housing expert (rare), it’s cheaper to rent than pay property taxes + maintenance + mortgage.
Renting = more cash in bank = more sleep.
If you know what you’re doing, buy a home.
But you have to know A LOT to get this right as both an investment AND/OR a lifestyle choice for 20+ years.
DATA: Real estate is also about to go down.
Do this: In your area, look for a chart of “days on the market” for the average home up for sale in your state.
In almost every area of the U.S., that number had been going down for years (i.e., it was easy to sell).
Now, in 2019, it’s going up. Fast!
Meaning, it’s taking longer and longer for houses to sell.
Just like 2006.
BUT BUT BUT…
I DO BUY REAL ESTATE.
What? Didn’t you just say it’s the worst?
I own three apartments in Panama, one in Brazil, and one in Mexico.
What the…? What about everything you just said?
I own because I GET AN UNFAIR ADVANTAGE.
The key to any investment, any entrepreneurship, any step outside the comfort zone, is to remove risk as much as possible.
The key to any investment is to ask yourself, “Why me?”
Why am I getting a deal that the other several hundred million people in the U.S. are not getting?
You have to EARN an unfair advantage.
You have to work for it. If you say, “Housing always goes up,” then you are gambling. If you say, “Demand in Chicago is going up so I’m going to buy a house here,” then you are guessing and gambling.
You have no real advantage.
For me, I have a very specific real estate strategy that I’ve worked hard for.
(Note: This is not a recommendation. This is MY strategy but might not work for you. Find your own strategy!)
I look for:
- Countries that are growing but real estate hasn’t yet grown as fast
- Apartment complexes still being built so prices will go up faster than my interest payments once the project is finished
- Developers with proven track records over decades of finishing development projects, even in bad economic cycles
- Places where being an American helps (many projects want American buyers so that locals will be more enticed into buying. Usually that means I can negotiate an “American” price — i.e., cheaper than locals).
I have connections that help me find this situation. People who have worked on building their own network over decades.
For any investment, of money OR TIME, figure out your unfair advantage.
If you’re going to write a book, what unique thing do you have to say? It has to be 10x unique. Not 10% unique. Else nobody cares.
If you’re going to start a company, what about you makes this the only company in the world that does what it does?
If you buy a stock, what do you know, and why, that nobody else does?
If you want to buy a house, for instance, buy a house with one of the four Ds: Death, Debt, Disease, Divorce.
If you put in the work to find a house where someone just died so the estate wants to sell the house cheap to pay off death taxes, then you can get a good deal.
If you put in the work to look at tax rolls and see who is in debt to the government, then you can get a good deal.
That’s an example of you removing risk to get a good deal.
The only advantages are “unfair.”
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