1) Your Home is NOT an Asset, It is a Liability
I have discussed this in previous blogs, but for those who didn't get the chance to read it, I would like to emphasize this point. If you have an option between an expensive house and a cheap house, your CPA will likely tell you to get the more expensive house due to the tax benefits and due to the fact that it can be a great investment. Don't fall for this trap! While it is true that there are tax benefits to having a nice house, what the CPA forgot to mention is that the more expensive the house is, the more expensive your interest payments are going to be! Getting a house that you can't afford can hold you back from financial freedom for a VERY long time. Take this into account, In the year 2017, homeowners in San Francisco spent 42% of their income on their mortgage payment. FORTY- TWO PERCENT. If you are losing 42% of your income every single year to mortgage payments and interest, how would you be able to manage your money, make investments, and ultimately become financially free? In "Rich Dad Poor Dad" by Robert Kiyosaki, Kiyosaki explains how the wealthy define an asset and a liability. An asset makes money, and a liability takes away money. Having a mortgage payment every month (especially one this high) not only puts you in debt for the next 15 to 30 years, but if you end up not being able to make your payments, you're house will be foreclosed, and your credit will be severely hurt! I'm not saying that buying a nice house is bad thing... What I am saying is make sure that are financially free BEFORE you want to enjoy the luxury of having a nice house. So remember.... Next time (Or the first time) you're going to make this big purchase, you are purchasing a liability!
2) You Have Better Financial Options Than Buying a House
For most people in America, buying a house is the single biggest investment that the average person makes in their entire lives... Is this a mistake? Many wealthy people think so. Putting a lot of money into your house can limit your ability to make future investments, so what is your other option?..... Living for free. You read that right! Let's say that you're looking to make your first home purchase. You find a house for $200,000, which means that you need to come up with around $40,000 for a down payment. This will give you roughly $6,500 a year in interest payments, and roughly $5,500 in principle payments, for a total of $12,000 a year towards your house (Ouch!). Now what if instead, we took the same $40,000 and bought a duplex for $200,000... We rent one side to a tenant, and you live in the other side. Let's say you charge this person $900 a month for the comfortable 2 bed 1 bath that he is living in, and from that you profit about $500 a month, or $6,000 a year. Congratulations, you have just cut your expenses in half! What if you did that with a quadplex; think you might be able to live for free if you budget correctly? This my friends, is the beauty of real estate.
3) There Are a lot More Out of Pocket Costs Than You Think When Purchasing a Home
When you buy a $300,000 you're only paying $300,000 plus interest right? WRONG. Let's take a real life example from Nomad Capitalist and think about this for a second... So the average price of a home in the United States is about $355,000, which means you would need $71,000 to purchase this home. This gives you a loan balance of $284,000, and we'll assume a 3.5% interest rate (by the time you buy a home this interest rate may be 8%). This gives you a monthly payment of roughly $1,700, and a total principle and interest payment of $612,000 by the end of the mortgage (which is $257,000 more than the original amount). If you have an average property tax of 1.15%, you will spend an additional $122,500 over 30 years. Lastly, let's include the upkeep, maintenance, and repairs at 1% per year, which is $106,500 over 30 years. This is a total of $841,000 over 30 years (Ouch!)! "But James, I now own this house in 30 years and my net worth has gone up due to appreciation, right?" While this is true, You have also lost a tremendous amount of money during this time, and if net worth is your concern, there are MUCH better investments that one could make to increase their net worth. Next time you're thinking about purchasing a home, realize that you're buying more than just the house itself; you're buying the expenses that come with the house as well.
The point of this post was not to discourage the thought of purchasing a home altogether, but rather, to inform home buyers what they are getting themselves into once the purchase is made. Yes, purchasing a home does have it's benefits... For one, you get a place to call your own, but there is one HUGE benefit in owning a home. If you or someone you know owns a house for 2 years or more, they are entitled to a $250,000 tax exemption when they sell the property ($500,000 if you're married)! You can thank Trump's new tax plan for keeping this law. Don't let Uncle Sam take money away from you that is rightfully yours! If you are going to buy a house, know what you are entitled to, and don't forget to always live below your means. If you can't afford it, you can't afford it. Money is a lot easier to make when your expenses are low, and if you purchase your home with all of the information contained in this post, you will be one step further on your journey to financial freedom. Thanks again for reading, many more to come.
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