Today, we are addressing a burning question that you have probably asked yourself at some point – should I buy or rent my home? If financial independence is your goal and you’d like to experience it sooner rather than later, then purchasing your primary residence shouldn’t be your first thought. It’s only going to extend the journey to your goal since owning a home isn’t an investment vehicle. Learn why there is no such thing as security, why your own home won’t set you free, and how to do the math and decide between owning and renting.
- Why buying a personal residence isn’t an investment
- Dave Ramsey’s and Suzy Orman’s misleading real estate advice
- Why there is no such thing as security
- Being independent vs. being secure
- Why your primary residence is a liability
- Why the house won’t be yours even if you own it free and clear
- How long-term appreciation affects the math behind buying a house
- Why you must take into account the impact of inflation
- When you should start thinking about buying your own house
- How to live in a 1.35 million-dollar Los Angeles home for $1,500 a month
- How to do the math and decide whether to buy or rent your home
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Speaker 1: This is Theriault Media.
You want to be a real estate investor, but you don’t want to do the work. If there were only a way where someone else could do it for you. Now, there is. Tune in here each and every Tuesday on The Epic Real Estate Investing Show for Turnkey Tuesdays with your host, Mercedes Torres.
Mercedes Torres: Hello and welcome. Welcome to Turnkey Tuesdays brought to you by Epic Real Estate Investing. My name is Mercedes Torres and I am lucky enough to be partners in crime with Mr. Matt Theriault, the guy who created The Epic Real Estate empire. Just to go over the ground rules of this show, if it happens to be your first time here, welcome. If not, to my regular listeners welcome back. This is The Real Estate Investing Show for busy people, busy people just like you.
The reason I created this show is designed for that busy person who understands the importance of real estate but just doesn’t have the time to do it all themselves or maybe are too afraid to take the first step or perhaps are tapped out at their real estate investing journey and need help at growing it. Today, we’re going to talk about one of the most frequently asked questions. I mean, it is so frequently asked that maybe even you have thought and wondered yourself the same thing.
It seems to be a real mind opening subject. And the subject is, should I buy or should I rent a home? Or in the context of investing: should I first buy my personal residence or should I first buy an investment property? Now, the one thing that’s funny about this question, because every time it comes up, I have to think about it myself almost. I mean, I keep revisiting the question myself and I keep doing the math just to make sure. Yes, I do.
Believe it or not, I know I do math every single day for every single property that comes across my desk, but just to make sure I do the math, I keep making sure of it because the reality is it’s just been so ingrained in our psyche, in our society that everyone should own their own home. The more successful I become and the more money I make, I do indeed catch myself every once in a while looking for a home to buy so that I can live in it.
Even more often, I catch myself just imagining the idea of being a homeowner. I share that because from someone that teaches real estate investing and real estate investing principles, the idea of owning your own home, it’s just so deeply rooted in my own wiring that sometimes that wiring overrides what I actually know and the math that I’ve actually done over and over again. Me too I wonder, “Should I buy a house or should I rent my home?” Again, because I too want to be a homeowner.
I mean, there’s just some real unspoken satisfaction in owning your own home. And there’s nothing wrong with that, by the way. There’s nothing wrong with owning your own home. I mean, not for me and not for you. What is wrong with that concept is thinking that buying your personal residence is an investment move. Because the reality is it’s not. Well, it’s not a good investment move at least, it may be a quality of life move. That’s not bad, it’s because it’s a self-actualization move, but it’s not a bad move. It’s just a terrible investment move.
In fact, it’s probably the worst investment in America based on how many people actually invest pound for pound, so to speak… It’s the worst investment in America because 200 million, 200 million Americans are invested in their primary residence. So, it has been proven mathematically that your primary residence over the last 75 years is the worst performing investment in America, period. The irony is your financial gurus, the ones that you look up to for financial advice, for investment advice, like your Dave Ramseys and your Suzy Ormans… Yep. I said their names.
I mean, I say their names because it’s no secret. Their advice is no secrets. They are on national radio, they have their own podcasts. They’re on national TV with their advice, so it’s no secret that their advice is to buy your primary residence and to pay it off as fast as you can. In fact, Dave Ramsey really hates the idea of a 30-year mortgage. He says, “Go 15 years every chance you get or at least, get into the house, get a 30-year mortgage and just wait for the time to be right for a 15-year mortgage and when it becomes immediately available, jump at it. Pay that home off,” he says.
I mean, that’s terrible advice. It is absolutely terrible if you do the math. Now, let me clarify. The advice is terrible because if you like the experience of any financial freedom before the age of 65 it’s terrible advice if you value independence over security. That’s the caveat. I’ll go into that one a little bit later, but before we go further right now, let me just ask you a question, but I really want you to think about it before you answer. Okay? So would you rather be secure or would you rather be independent?
Now, before you impulsively answer secure, if that’s what you’re leaning towards, just think about it. Think about what being secure is. I mean, a slave can be secure. They can get security from their master, they can get protection from their master, they can get a place to sleep and maybe some food. Their master is still a master. Indeed, they do have all of that.
Now, master, of course, it’s an analogy. In our world, that master is more commonly known as a J-O-B. Now, Dave and Susie would have you believe that debt is your master as well. They say, “Eliminate all your debt and avoid on taking new debt.” That’s their advice. All in the interest of security. They say, “Live below your means. Make sacrifices. By golly! Stop buying daily Starbucks,” they say. That’s their advice. All in the interest of security.
Well, personally I’m offended by their advice and I really feel that you should be as well. I mean, I’m not going to make up your mind for you. You can still make up your own mind, but I’m going to tell you why I’m offended. The first reason they did not gain their financial independence following their own advice. I can assure you of that. Their advice, I mean, it may preserve wealth, but it will not build it. Their advice may stabilize your position in life, but it will not improve it. Maybe it gives you a bit of peace of mind and that false sense of peace of mind, I mean it’s a false sense at best. Maybe it does that for you.
Dave and Susie, they created their wealth through streams of income just like we talk about on this show right here every single week. Let me repeat that. Dave and Susie created their wealth through streams of income. They weren’t focused on saving piles of cash, piles of money. They didn’t do that to improve their situation. What they’re telling you to do to improve yours, they didn’t do, no. They focused on creating streams of money. They have been doing that from the get go, and one of their streams of money comes from selling this keeps you where you are. They sell the advice.
And the second reason I’m offended by their advice is they really don’t believe you can do it. They don’t believe you can gain financial independence, your financial independence. And that’s what gets me really offended. They know that you don’t believe you can gain your own financial independence either. They know you don’t believe it. So the information they impart is information that appears to your fear, to your doubt, to your lack of belief in yourself. That’s their business model, to create their streams of income and you can’t blame them. It’s a good business decision.
Well, it’s a good business decision for them on their part because the majority of their customers are people that live in that space. They want to appeal to as many people as possible because the more people that they’re able to impact, the more money they’re able to make creating those streams of income. That’s where the majority of the people live. They live in doubt and in fear. Their lack of belief in themselves, that’s the middle class. This advice is for middle class and their advice is for the poor aspiring to be middle class. They sell an impact advice that appeals to their desire for security.
The irony is there’s no such thing as security. I mean, it doesn’t exist. Nothing in this world except taxes and death is secured. Nothing is safe. In fact, the world is becoming a less secure place with less secure options by the day. In fact, I dare to say by the minute. I mean, the world is changing so fast to accurately predict what can provide security for the future. Given fact my friends, the US Department of Labor currently estimates that today students enrolled in college will have 10 to 14 different jobs, not in their lifetime, but by the age of 35. That’s one out of four employees right now.
They’ve been with their current employer for less than one year, one out of four. 25% have only been with their current employer for less than one year. One in two employees have been there for less than five years. And the top 10 jobs in demand in 2016, those jobs didn’t even exist in 2006. “So what does that mean?” You’re asking yourself. “Mercedes, why are you going down all these statistics?” My point is we are currently preparing our students for jobs that don’t even exist yet.
I mean, they don’t exist using the technologies that haven’t even been invented yet. So, in order to solve problems, we don’t even know what the problems are and we’re teaching our college students for stuff that perhaps doesn’t even exist. For the first time in history, the first time ever, we’ve got four generations working side by side. First time ever. We have the Traditionalists, the Baby Boomers, we’ve got Generation X and now we’ve got Millenniums who are all very different in the ways that they think, the way that they grew up, even the way they communicate.
I mean, the Traditionalists, we like to write things down. The Baby Boomers, they say, “Call me.” Generation X, they’re all about an email, “Send me an email,” and the Millenniums, “Oh, text me. Please text me.” That’s what the Millenniums are saying now. Then over the last one or two years, the rise of Pinterest and Facebook and Instagram and Snapchat, people are communicating less and less, and worse they’re actually using pictures now to communicate.
Emojis, pictures, videos, live videos, and even Snapchat and even Facebook. They are not even posting words, they’re posting pictures. The world is changing so fast, who could predict what’s going to happen next? I mean, the statistics that shows the top 10 jobs in demand today, they didn’t even exist 10 years ago. How could you prepare for something if it doesn’t exist yet? One out of five marriages last year, the couples met online and one out of those five that gotten divorced, blame their divorce on Facebook.
More unique information will be created this year worldwide and we’re not even aware of it. People, I mean, seriously, we may as well grasp this now because it’s happening. Now, think about this right now. Just think of it. When you were growing up, did podcast exist? They didn’t exist for me, I had cassettes. In fact, I used encyclopedias to search for information. My son asked me the other day, gosh, I felt so aged. He said, “Mom, what’s an encyclopedia?” Everything that he wants to learn about, he either Google’s or says, “Hey, Siri,” or he goes on YouTube to figure it out.
Now, my kid is seven years old. Figure that. When I was growing up there wasn’t Google, there wasn’t YouTube, there weren’t podcast, there wasn’t Siri. I mean, more unique information will be created this year worldwide than over the last 5,000 years. The amount of new technological information, it’s doubling every year. And for students that are getting their technical degree, they just enrolled in college, half of what they learn, their first year of study is going to be outdated by their third year of study.
So forget security, forget it because there’s really no such thing. The only thing for certain, the only thing that can be secure about life-changing is that it will continue to change and you better change with it. And that includes your thinking. The work, work, work and save, save, save mentality to then invest 10% and to diversify portfolios, clip coupons, live below your means and buy a home and pay it off as soon as you can, that is antiquated thinking. It doesn’t work anymore. And honestly, it hasn’t worked for a very long time, but we still hold on to that antiquated advice from our financial guru and we hold that advice in high regard.
I mean, we treat it like Gospel. The world is a very different place than when that advice was first established, and when that advice actually did work, it was a very different place. Listen, I’ve never met Dave and Susie. I have haven’t. I’m sure they’re really nice people. They must have amazing families and they’ve done really well for themselves, but think about it. Did they do well for themselves practicing what they’re telling you to practice? There’s nothing personal against them.
I know that they have millions of fans and perhaps you even you’re a fan perhaps, and you may be offended by my assessment of their advice because you’ve realized that you perhaps are actually following it, following that advice. It’s not bad, it’s just what you were accustomed to do, and now I may have confused you. You might feel I’m crazy or you might feel a little convinced right now. They aren’t the only ones that think this way by the way.
I’m just using them as an example because they are household names, they are on national TV, they do do radio. They also have their own podcast. You know who they are, but you really don’t have the ability to perhaps consult your own financial planners, and perhaps, even perhaps your financial planner is fans of theirs and gave you the same advice. And if you’re following that advice, it doesn’t make you bad. It doesn’t mean that it’s great, but it doesn’t make you bad. It doesn’t make you right or wrong, it simply makes you misled for today’s world.
The answer to whether you’re doing the right thing or not, it’s woven into the answer of this question. And the question is, would you rather be secure or would you rather be independent? Well, let’s go over the difference a little bit. What is the difference? Generally speaking, with security you still will likely have to work and you’re going to have to bob and weave with the times of jumping from either one job to another to keep up with the market inflation, the changing world. Now, that’s security.
Now, if you happen to bob and weave at the right times and if you make all the right guesses of 10 to 14 different jobs that you’ve had, you can have some sense of security. Mind you, you’d still be a slave. I mean, a slave to your job, a slave to your debt. You still have a master. A slave to expenses. Most of the world is the slave to one of those things. With independence though, you’re free. You don’t have to work. I mean, you can if you want to, but you don’t have to. Debt isn’t holding you down with the dependence and expenses aren’t causing sacrifices in your life.
With security, your choice is limited. With independence, you have options, and at the end of the day, that’s really what life is. The life of independence is all about a life of options, a life of free choices, choices to do what you want to do when you want to do them and with who you want to do them with, with regards to anything else like time and price tags. This type of independence to which I’m referring to, the type of independence that I want for you, that’s what I’m referring to.
Then again, it’s your decision. So what’s more important to you? Security or independence? Now, by the time this episode is over, if security is more important to you, you’re likely to pursue your primary residence prior to an investment property, but if independence is more important to you, then purchasing an investment property first is what you’ll likely do next. Now, if you’re a little confused, no worries, I get it. It can be confusing, especially because it’s been ingrained in our psyche for so long.
So I’m going to clear this up for you and I’m going to ask that you reserve your decision on which direction you’re going to take until the end of this episode. Deal? Okay. So just sit here and listen for a minute, then collect all of the information and then make an educated decision that’s best for you. By the time we’re done here today, you’ll have an answer that best serves you, your lifestyle, your family, you. So the question is, should I first buy my primary residence or should I first buy an investment property?
Cool? All right. So to begin, I’m going to use Robert Kiyosaki, the author of Rich Dad Poor Dad. As you all know, Matt and I are huge fans of Kiyosaki. We’ve been lucky enough to work alongside with him. We’ve been lucky enough to interview him and talk to him and really connect with him. So I’m going to use him as an example, and I’m going to use his definition of assets versus liabilities to get started just to keep it really
… simple, okay. So, assets, they put money in your pocket. Very simple. Liabilities, well, liabilities take money out of your pocket. Generally speaking in our world, the poor and the middle class, well, the poor buys liabilities, and then they get up every day to go to work to pay for these liabilities. The wealthy, on the other hand, they buy assets, and then they let their assets pay for their liabilities.
Given that, I’ll be asking you, or I’ll begin by asking you, is your primary residence, is it an asset, or is a liability? Does your primary residence put money in your pocket, or does it take money out of your pocket? If it takes money out, then is it the best investment? Well, your primary residence, it takes money out of your pocket, doesn’t it? Yeah. Your primary residence is a liability. You have to pay the mortgage every month, don’t you? And you have to pay the property taxes every year. You have to pay for insurance, you have to pay for the upkeep of the property. You have to pay for the maintenance on the property. You have to pay for the whole darn thing, don’t you?
There’s a whole lot of money that comes out of your pocket every month that you have to go to work for every single day. Hence, it’s a liability. There’s a lot of money coming out of your pocket, and per Kiyosaki’s definition, your primary residence is a liability, contrary to popular belief.
Now, contrary to popular thinking and traditional thinking, it’s not an asset, therefore it can’t even be defined as an investment. You see, an investment is something that pays you back. It puts money in your pocket. That’s an investment. Your home pays you nothing. Wait, wait, wait, wait, Mercedes, I know, what about appreciation, right? All of you out there are thinking what about appreciation. What about owning the property free and clear, isn’t that an asset, Mercedes? If it’s paying me back appreciation, isn’t that an asset? No, it’s not.
Even if you follow the Dave Ramsey plan of real estate investing and paying off your mortgage early, you still have to pay your taxes, you still have to pay insurance, you still have to keep paying the maintenance. You have to upkeep the residence. In fact, the house isn’t even yours if it’s owned free and clear. Try skipping out on property taxes, and see how long you can keep your house if you don’t pay your taxes. You’ve got all those expenses still, even if your house is owned free and clear.
You still have the property taxes, and insurance, and the maintenance. It’s still taking money out of your pocket, even if you own it free and clear. But wait, isn’t it still an investment, because without a mortgage, isn’t there equity building? Appreciation, right, Mercedes? True, that’s true. You don’t have a mortgage payment, and you do still have equity. All of that money saved into your house. But it’s all locked up in your home. What good does it do if it’s just sitting there doing nothing?
Nobody has achieved financial freedom by eliminating their debt alone. Don’t confuse debt free with financially free. Let me repeat that. Don’t confuse being debt free with financially free. They’re not the same thing. What you’ve done by paying off your house early is, you’ve retired your money before you’ve retired you. Your money, while it’s locked up in your home, it’s done working. It’s kicking back doing nothing while you on the other hand still have to get up every morning to go to work to support it. You have to go out every day. I mean, you may not have to pay off your house anymore, but you still have to eat, you still have to pay that property taxes, you still have to put clothes on your back, and you’ve got healthcare to pay. There’re all those needs, right. Those are just essentials to live.
Don’t you want to do extra stuff too? Like, don’t you want to have fun in life, like go out on a date with your spouse or your significant other? You still want to take family vacations. You still want to have get togethers and family outings. Don’t you want to do all that stuff? That paid off house, that doesn’t help with any of that. Don’t you want to do all that stuff with your friends, family and loved ones? That paid off house, that’s not helping you with any of that.
During that time while you’re working so hard to pay it off, that home was actually interfering and preventing you from doing all that stuff with your friends and family. Remember, an investment is something that pays you back more than what you’ve paid for it. Your primary residence, that doesn’t pay you ever. Come on, Mercedes, you’ve addressed the appreciation part enough. What about appreciation over time? Real estate always appreciates over time, right? True, it does appreciate. Now, we don’t have a crystal ball, but history does say that properties do appreciate over time, and if you want to access the appreciation in your primary residence, you can. But you either have to sell it, or you have to refinance the money out, which creates a new dilemma. I mean, you still have to live somewhere, right?
If you sell it, you have to go out and find another place to live in, whether you buy it, or whether you rent it. If you buy another place, well, now you have a new mortgage. If you refinance it, guess what, you’ve created the same debt that you had to work so hard to originally pay off. Insane, right?
Despite what we’ve all been taught, ladies and gentleman, our primary residence, it’s a terrible investment. The operative word here, investment. It may be a good purchase, it may make you feel good and accomplished. It may make your spouse happy. It may even establish order in your life. But it is not a good investment, it never is. Never.
Now, I know you’re thinking, come on, Mercedes, did you say never. I did. I said never, and I’ll explain it. Imagine you just wrote your final check to payoff a 30 year mortgage, okay. You follow that, right? Stay on the course, you paid every month religiously, and you strike that final signature to pay it off, and the bank sends you the deed of trust. You’ve paid off your mortgage, feels so good, right? Sure it does. It feels great at the moment.
It probably feels like one of the best accomplishments of your life, because you’re realize that you just paid $100000 for 30 years, $100000, and it’s now valued at $300000. That feels amazing. Now, historically speaking, a long stand in the housing market pretty much guarantees that you’ve gained equity in your property. Now, I say this all the time. We don’t have a crystal ball, but chances are that history will repeat itself, and you have gained some equity, and it looks like you’ve tripled your investment. You’ve effectively created a pile of cash.
How can you not be financially prudent, right? How can you say your primary residence is never a good investment, Mercedes? I’ll say it, and let’s take a look at that long-term math, and then I’ll show you why I say never, and I’ll show you what I mean.
What most people fail to consider is that over 30 years, that combined principal and interest payment will amount to approximately double, if not more than the original purchase price of the home. Now, this does depend on your interest rate that you got and how much money you put down. That is your only variable. But in most cases, you can count on paying at least double in principal and interest than the purchase price of your home.
Let me explain it further. Let’s just say you purchased your home for $100000. Now, in some places, $100000 is insane. In California, doesn’t necessarily exist, but in the mid west and in the south, $100000 could easily buy you a three to four bedroom two bath property. Single family residence that is, okay. So, let’s just assumed you’ve paid $100000 for the purchase of your home. Just in principal and interest alone, you probably paid a little over $200000 for your home. That’s the amount of payments over 30 years. Then when you do the rest of your math, when the 30 years are calculated of property taxes, 30 years of insurance, 30 years of maintenance and upkeep, and all that is accounted for, you will see that you pretty much paid almost $300000 or more for your home.
In other words, you want to work every day for 30 years to religiously pay your mortgage every single month, because you thought you were investing in your future. After 30 years, you’ve come to find that all you really did was deposit your money into a zero interest saving account. You deposited over $300000 in the span of over 30 years, and that’s exactly what you have, a $300000 free and clear home.
It’s a wash, ladies and gentleman. It’s a complete wash. Just do the math. It’s a 0% interest wash. Listen, my friends, it’s wonderful to own your own home, don’t get me wrong. The feeling of accomplishment is over the top amazing. I mean, you can get tremendous satisfaction, you can get comfort and enjoyment of the home that you create for yourself, especially if you remodel it, and you repaint it, and you upgrade. It’s amazing. It’s just the way you wanted. It’s the pretty color, you’re making your wife happy. In many cases, you might make your family happy. If you want to own your own home for personal reasons, go get a good deal, and get a great purchase, and do it.
However, as an investment, it just doesn’t work. Remember, an investment is something that pays you money. It pays you back more than what you pay for it. So, 0% doesn’t qualify. Yo, it’s certainly, certainly not the expectations, right. I mean, if you were fortunate enough to get approved for a really low interest single digit rate, and you got a great deal when you purchased your property, and you purchased the home at the right time in a higher appreciating area, you can experience an acceptable rate of return on your investment, and maybe we’re talking about you’re the exception to the rule.
We’re talking about the norm, okay. Besides, do you really want to gamble your financial freedom on an expectation of what the market can do? Your personal home, my friends, it’s not an investment. I truly hate to burst your bubble, because I see bubbles burst over and over again, especially when I have conversations with many of you. When I share this information with you over the phone on a personal level, I break some hearts often, because I know that $300000, that sounds awfully nice, right. That $300000 home paid off free and clear sounds really good. I understand how this feels. I understand how you could fall under that trap, because I myself believed it for a very long time. I mean, think of it, 200 million Americans have this same thought process, so you’re not alone.
It’s what you’ve been told to do by your parents, by society, by media. It seems completely counterintuitive to dismiss an exchange of $100000 for $300000 as a bad deal. But once you do the math, it is indeed a really bad deal. You can see that, right?
I know, you still may be struggling with the concept. I mean, when I broke down the math, and I studied it, and really analyzed it, trying to explain this to my parents who are 76 and 80 years old, I mean, they thought I was nutso. They still think I’m nuts, but they have finally started to see the light, because they know I own a portfolio of properties. They also know that I don’t own the home that I live in now. I guess in the grand scheme of things, you can manage to save $300000. I mean, $300000 you probably wouldn’t have saved, unless you were paying your mortgage, right.
You’ve heard this before probably. Your home, it’s kind of just a forced savings account, a more enlightened sector of society at least understands that, that it’s a forced savings account, a 0% interest savings account, but it’s still a forced savings account, right. You do have $300000 if you’ve paid off your mortgage, that you probably wouldn’t have unless you did purchase your own home, right?
Not so fast. I’m sorry top be the shedder of bad news, but it actually gets even worse, because our math would not be accurate unless we accounted for inflation. Inflation is a real thing, and you have to factor in inflation. That has to be a part of your equation. So, over the last 40 years between the timeframe I found, so between 1968 and 2011, that’s what I was able to find published, the average published inflation rate settles somewhere between 3-4%, making your home worth less in real dollars than when you bought it.
For your financial position to actually improve, your investment returns and your home appreciation must outpace inflation, and if the current inflation rate is 3%, and the rate of return is 3%, you’re standing still, or possibly even losing money. I mean, you can find conflicting statistics left and right, and my opinion about your home appreciation, it’s not my opinion, and it’s also about inflation, and how the two are related. But after some diligent research, and I do mean diligent, I researched and cross researched sources, and if you decide to do the research yourself, I totally invite you to do this, because, my friends, I am not making up these statistics or these numbers. You can go out and research it yourself, and if you do, make sure that you pull your data from multiple sources. Don’t just stop at the first one that agrees with your hunch. Don’t just do a basic Google search that proves your data right. Pull your data and investigate through good source information, and then cross reference your sources.
You’re going to see that you didn’t even save $300000 in a zero interest bearing savings account, if indeed you did pay your mortgage first. You don’t have what you think. This means that the $300000 you saved in paying off your $300000 mortgage, it means that you have less value in our economy today than the $100000 that you did 30 years ago when you purchased your home.
You didn’t make a dime on your investment. You probably even lost a little hoping that you at least stood still at best. So, what does that mean? You worked for 30 years to pay off your home, and you’re no better off financially than when you started. You didn’t save a dime in forced savings account. You have exactly, or less than what you had when you purchased your home.
History shows that the housing appreciation rate and the inflation rate run relatively neck and neck. With appreciation, it’s actually losing by a hair. Its losses by just a little bit over time are so incredibly close that technically, houses don’t appreciate. There’s no such thing as appreciation. I know, bold statement. I know. But inflation squashes it. Inflation squashes appreciation.
Now, the purchase price, does it remain still? That appreciation, that actual buying power of those dollars has been kept at bay by normal every day because of inflation. By the way, that inflation that you do find, that normal inflation rate that government publishes, it doesn’t factor in the rising cost of food or energy, just FYI. That 3% and 4% inflation number that I just referred to that you consistently find going up the realm of 7 to 9, it gets even worse. I know it stings, doesn’t it?
I’m sorry, but seriously, you’ve got to know this stuff. You’ve got to know all of this, so you can do something about it. Like I said, none of this is my opinion, my friends. I urge you to do your own research. I’m not pointing at a conspiracy. This isn’t conspiracy theory. I’m not representing the republican party. I’m not speaking on the point of view of the democrats. In fact, I hardly ever reference any political stance or party when I speak. I’m merely walking you through a math equation, an unbiased math equation that is proven by statistical information, like interest rates, inflation, appreciation, depreciation, everything. Do the math, my friends.
Okay, so, let’s go back. You still have $100000. I mean, $300000, because the home cost $100000 30 years ago, you’ve paid it off, and you’ve paid off a total with everything that you’ve paid with taxes, insurance and upkeep of the property, $300000. You follow me, right? Okay, so, you’ve paid off your home 30 years into paying your mortgage every single months, it’s locked up in your home, that $300000, isn’t it? You’ve saved, I guess we can call it you’ve saved, $300000, but you can’t even use it unless you refinance your savings back out, which most people have to do in retirement anyway, because that’s
The only way they can make ends meet, now you’re starting to see the insanity here, my friends? You’ve just paid off this home. You’re now fully retired. You can’t live off Social Security so, chances are, you’re going to have to access that bank account which, in turn, is going to create another mortgage payment. At age 80, just so you can live comfortably, you’ll have to access that money in your paid off home. You spent 30 years of your life toiling away to pay off your home under the disguise that it’s going to be an investment.
Now, you can see that it’s not a great investment, right? I mean once you’ve paid off the home, the only way you can access it is by refinancing to get the money out which, in turn, is creating this brand-new mortgage. You’re back to square one at the age of retirement, but wait. There’s more. Although signing that final check can create that amazing feeling of accomplishment and you’re now living the dream, isn’t the house old now? Could it be outdated? What about the pipes? What about the wiring? Could the foundation have shifted? I mean did the roof hold up 30 years? Did you buy the house brand-new? Is it only 30 years old or is it now 60 years old, because you had to buy a previously owned property?
You’re going to have to fix stuff even if you own it free and clear. Oh wait a minute, but you’re now in retirement age. Could be 70, could be 80, could be 85, how are your knees holding you? How about your heart? Were you a smoker? Are your lungs okay? Think about this. You’re going to require serious maintenance not only on your home, but on your health. Medical expenses at the age of 75, 80, they ain’t cheap. Surely, you can see that paying off your whole mortgage, paying that off, is a terrible investment. In fact, it sucks.
Listen, I’m not saying don’t buy a home for you or your family. I’m not saying that at all. There’s nothing wrong with buying and paying off your primary residence. What I’m suggesting is for you to consider when to actually buy your home. Given even more consideration to the priority that you’ve assigned to paying it off, if financial independence is your goal and you’d like to experience financial independence sooner rather than later, then purchasing your primary residence, that shouldn’t be your first thought. It’s going to extend your journey to financial independence.
Why? It’s not an investment vehicle. It will never deliver financial freedom to your doorstep. No one has ever retired on paying off of their mortgage alone. This could be home equity heaven, if you will, but you won’t retire from paying off your home. If your primary residence is such a bummer investment, how are investment properties different? I get that question all the time. I know that perhaps you are possibly thinking that or thinking along those lines. Don’t fall victim to that same math. Yes, indeed, they do. It’s not you making your mortgage payment on an investment property, is it? It’s not you getting up every morning to go to work to make that payment on time.
With an investment property, it’s your tenant that buys the home for you. It buys the investment property that you perhaps have a mortgage on. It gives you back more than what you paid for it if you did it right. With an investment property, the tenant pays you more each month than what it costs you to own it. Now, the question is, well, I still have to live somewhere, Mercedes, right? That’s the other caveat I mentioned in the beginning. You still do have to live somewhere, and you still have expenses. I live somewhere, I have expenses. I’m sure you’re thinking, why not buy it? I still have to live somewhere. Should I rent my primary residence? In the end, that’s still a payment I have to make.
If I have to make one payment, why wouldn’t it just be if I buy my own property and pay my own mortgage? Great question. It’s really logical thinking, and maybe it’s your thought process as you hear me rambling on. Maybe that does make good sense and maybe it doesn’t. Just as I said from the beginning of this episode, we’re going to do the math. The math does not lie. It does not work in our favor when it comes to our primary residence, but you still need a roof over your head, right? How is renting better?
Here too, we have to do the math again. That’s all. It’s going to be different for every single one of you, okay? Pull out a piece of paper, and I really do want you to pull out a piece of paper. Draw a line down the middle and do the math for one on one side and on the other side, you’re going to do a math for the other. On one side, you do the math for buying a home. On the other side, you’re doing the math for renting your home. Then, just choose whichever one takes less out of your pocket.
When doing the math though, it’s not just simple math. It’s not just simple math where you’re comparing the mortgage versus the rent, okay? Be real with yourself. For example, I’m going to share with you what I do. It’s going to cost me $5,000 to rent or to own, and it’s going to cost me $4,000 to rent. I’m going to go ahead and rent, or the other way around. It’s going to cost me $1,000 to own and $2,000 to rent, so I’m going to buy. It’s not that simple, my friends. You’ll need to factor in property taxes as well, insurance, maintenance, management, anything that goes into the actual home. You’ve got to factor all that in to be accurate.
Also, you’ll need to calculate, and this is a biggie, one that gets overlooked a lot, the opportunity cost of your down payment when you purchase or the deposit when you put a deposit down for a rental. Okay? For example, with a $250,000 home, to purchase it, you’ll need to put 20% down. That’s $50,000. You have to come out of pocket $50,000 to put down on your property before you start making your mortgage payments. I want you to look at the opportunity cost of $50,000. What opportunities would you be missing out on if you tied up that $50,000 in your home? Where could you put that $50,000 to work harder for you rather than it being tied up in your home?
Based off all the math that you’ve done today, I mean a simple savings account would likely generate a better return, wouldn’t it? That’s a shocker, especially with today’s rates that are being paid by your bank. We already know that your primary residence is giving you 0% return over a 30 year mortgage. Isn’t it more appealing to still have an account with .0% interest rate? You wouldn’t have to look any further. A simple turnkey real estate investment property would suffice, because a typical turnkey can make you a 9% return at least. That right there would be your answer.
My point here is to do the math, but do realistic math, all of the math, and make the decision for yourself. Now, let me give you a real world example. People get shocked about this all the time, because this is a question that I often get asked myself. I will use me as an example. As I shared moments ago, I live in beautiful Southern California. To be specific, I live in Glendale, California. We live in the hills and we have a beautiful five bedroom, five bathroom 4,000 square foot house with a giant sweeping view of a lush canyon that overlooks the entire city of Los Angeles. It’s quiet, it’s safe, it’s clean, it’s beautiful. I live on the cul-de-sac. It’s an amazing home. The fair market value of my home is 1.3 million dollars.
Now, this is what Zillow, Zillow pegged it at around 1.35. If I were to purchase my home with 20% down, that would be $270,000. That would be the down payment. My monthly payment, including my taxes and insurance, would be around $7,000. Actually, more like $8,000. It would be $7,914 to be exact. That’s what it would cost me every single month. I’d have to put down $270,000 and I’d have to pay $8,000 a month. I rent my home for a whopping $4,000 a month, close to half of what I pay monthly. I mean that’s a huge savings to my monthly expenses, right? $4,000 a month I save by renting instead of buying my own home.
I would say that on a monthly basis, if I was buying my own home, without factoring upkeeping and maintenance and property extras, just that math makes my decision to rent a no-brainer. Let’s look at this too. Not only am I saving $3,900 a month by renting, almost $4,000 a month by renting, but if I took that $270,000 down payment and instead purchased investment properties, I mean I could just be my own owner. I wouldn’t have to get creative or anything. I’d just be my own customer at my own company. In fact, at Cash Flow Savvy, I can purchase seven turnkey properties with a mortgage. Or I could flat out buy four to five turnkey properties and pay them free and clear without leverage.
I would get more of a bang for my buck. I wouldn’t even have to get creative. I wouldn’t have to stretch my dollars. I could just put my down payment of $270,000 to immediate work. Work where that money will pay me, meaning I can buy properties outright with that money with no debt that can generate $500 a month in passive income. That would be a total of $2,500 a month, just do the math. Then, I subtract that from my rent of $4,000 a month and you get a whopping $1,500 a month. Technically, the way I see it, I spend $1,500 a month to live in a 1.35 million dollar Los Angeles home. I get all the benefits of owning rental real estate and I get that benefit through my rentals and I live in a 1.35 million dollar home.
I get the tax deductions. I get the depreciation. I get appreciation. I get all of that and I get to live in a nicer home, enjoy a nicer lifestyle that I otherwise would probably not get to do without much sacrifice. In fact, I’m not the only crazy one. We have several friends that do the exact same thing. I mean let’s face it, we live in Southern California, prices are outrageous out here. Too many of us own a bunch of rental real estate that pays for the home that we live in, pays for the penthouses. I mean it affords us a nicer house and nicer lifestyle, and I still have all the benefits of owning real estate. It’s really just changing my thought process and the things that I do, and I start living the way I’ve always wanted to live.
I still have investment properties. I still have properties that pay me. I just happen to be wise enough to do the math and know that if I own that 1.3 million dollar home, I wouldn’t get to live the way that I do, nor would it be a benefit. Now, with the investment properties, I have a surplus of cashflow. On top of that, I have all of my living expenses paid and, then, I have extra. Now that surplus that I just shared, it’s now creating my piles of cash. See? There’s nothing wrong with making piles of cash. In fact, I love piles of cash. It’s just not what I do first.
I don’t think you should do it first either. It’s streams of cash that should be building your piles of cash, generate and create and nourish and grow the streams of cash first. Those are the ones that will set you financially free. It’s the streams of cash that will set you free. It’s the streams of cash that will give you your independence. Once you’ve got those streams of cash paying for your life, paying for your house, your lifestyle, sending your kids to the best private schools, being able to pay for your children’s education, then once you’ve got that going, then you can buy your primary residence and you can let the streams of income now build your piles of cash. See how that works?
Real estate, it is, indeed, the final frontier where the average person has a legitimate shot at creating real wealth. Stop believing in the myth and the hype that you have to live in a real estate property that you own, that you can call your primary residence, your home. Now, at some point, I can imagine, I will buy my primary residence. My priority is to hit my cash flow goal first. My cash flow goal, sure, I’ll share it with you, it’s a million dollars a year in passive income. I’m almost there, because I focused on creating streams of income. I want to do that first, then I will probably consider buying my own home. I’ve done the math hundreds of times. I mean I figured it out that at that point, my income properties will actually buy that home for me.
At that point, there will be enough left over that I won’t even bother to look at the price tag. At least that is the plan, that is the mathematical, financial plan. There will be plenty left over to continue putting it away and for my son to benefit from and from his kids to also benefit from. I’ll probably continue putting my money into more investment property, I think that’s ingrained in my DNA. My portfolio will build itself at that point. Like I said, if you want to be financially independent, sure, you can buy your home. I have no problem with that. Just don’t buy your home first, make sense?
Hey, is it too late for you? I already have my home, Mercedes, I already own my own home, what do I do now? No, it’s not too late. It’s not too late at all. You’re probably thinking, well Mercedes, I already own my own home. You could sell it, but I’m not going to tell you to do anything drastic. What I would advise you to do, and, again, as I say every week, I am not a financial advisor, I am simply sharing with you what we have done over the last few years, but I would advise you to make it a goal to acquire enough passive income to cover your own mortgage. Buy income properties that are going to pay your mortgage payments, so that you don’t have to get up to go to work every day, that your tenants will pay you so that you can pay your mortgage payment.
Assign that task to your income properties, if you will. Take that task off of your plate and give it to your income properties. If you have equity in your primary residence, then you can access it by just setting it up, wake it back up, refinance your home, take a couple of bucks out and buy an investment property that will pay you, so that you can pay your mortgage. Pull out those funds alongside of it and get it to work for you. You and your funds, you and your equity united under a common goal will get you your financial independence. I know I shared a lot with you but, as you can tell, my Puerton Riconess comes out because I get so hot about these topics, because I live them.
I, too, dreamed of owning my own home because that’s why my parents ingrained in me. That’s what society ingrained in me. Ladies and gentlemen, I’ve learned that the math doesn’t make sense to do first. Not saying don’t do it at all, just don’t do that first. Consider investment properties, consider passive income, passive income done for you. That’s what’s going to set you free. Now, if you want to connect more about it, reach out to me. I always answer my emails. I always respond to every call that is set.
You can go to cashflowsavvy.com, that’s savvy with two Vs, reach out to me then or send me an email, [email protected]. Or even better, go to cashflowsavvy.com, download the Frustrated Investor’s Guide to Passive Income and you will be able to see exactly how Matt and I were able to escape the rat race. We’re still playing, I’m on your side my friends. I look forward to connecting with you, to speaking with you, and I look forward to helping you achieve financial independence. Until then, until the next episode of Turnkey Tuesday where cash flow and financial independence is king.
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