Addressing warped views on personal real estate
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What Is A Millionaire And Who Qualifies?
About 1.5% percent of the population is classified as a millionaire, which means these folks have a liquidated positive net worth of 1 million dollars minus their debts and liabilities.
Plenty of homeowners call themselves millionaires but don’t actually meet the requirements of being called a millionaire.
Even if they sold their homes, their list of debts would quickly detract from their overall net worth.
The American dream is not the way to build wealth; it’s a way to get property, but you still don’t own the property for 15–30 years. And if we’re doing the 50 year mortgage, most can bet they’ll likely NEVER pay off their house.
Instead, they’ll likely pass on debt to those who come after them.
Mortgages = Renting From The Bank
Unless your mortgage is fully paid, you’re renting from the bank.
The distinction with owning a home versus an apartment is
- You might have more liberty to do what as you please with “your home” versus renting a unit and abiding by their property laws.
- Some have even mentioned it’s harder to get kicked out of an apartment compared to a house; this can be true in cases as well.
What Is The American Dream?
The American dream equates to owning a lovely home, a beautiful car, and the consistent ability to afford nice things (the classic ‘Don Draper’ throughout his career), but at what cost?
The lovely home is the foundation of the American dream; it’s how we’re taught to build wealth and enter the world of freedom, but why is renting a liability a dream and something so many aspire to?
Home Buyers Remorse
What many people mistake about the home purchase is the commitment required to maintain home payments over the course of 15–30 years.
What ends up happening after several months or even a few years? Buyers remorse, or financial stress when life happens, because you can’t quit your home payments unless you sell your home, which can require significant effort, time, and process.
Owning a home is not for people who don’t want to be stuck with a bill for 360 months.
If you want to build wealth, your primary residence isn’t the way to do it.
For perspective, if your home was snatched, what would be your financial situation from that point?
Homeowners Are Broke
Many homeowners don’t have that much to their name outside of their home, maybe some 401k savings or an emergency fund if they’ve been consistent at saving.
We’re still in the situation where many can’t afford to cover a $500-$1000 expense without borrowing.
Are you someone who is approaching retirement age and does not have much in your savings, but you “faux own” a home you have not paid off, yet?
Many people’s financial resources go straight into their primary residence, not leaving them with anything left to build up their liquid net worth. House poor is what they call it.
An older guy told me his retirement plan was his house. He let me know he put everything into it, so that’s what he is banking on. The house still isn’t paid off and he’s in his late 50s / early 60s.
Building a substantial net worth can absolutely come from real estate, but it may not come from your personal residence.
Your House Should Not Be Your Fallback Plan
There are two paths we are exploring for investing in this article:
- A personal residence
- Investments
You could do both if you have the strategy and funds for it, or you could go with the easiest path, which is number 2.
Why?
Post home purchase, net worth does not actually increase, it decreases, because your home is a liability until it’s paid off (and even then you must be careful that your home isn’t costing you more to keep and burning through your cash reserves).
Unless your home earns you money, it’s a liability.
Many wealthy individuals acquire wealth through real estate. It’s common knowledge.
What many fail to realize is these folks used leverage to their advantage instead of allowing leverage to take advantage of them.
Most people buy a home to reside in and for comfort. Often leading to buying more house than they need or can afford.
Wealthy individuals use leverage to buy more properties they rent out that earns them money and also pays off their property debt.
Another thing that homeowners forget to do after buying a home?
Investing.
They stop because they feel they can no longer afford it with these monthly mortgage payments.
How to Transition Your Home from a Liability Into An Asset
Guy 1
Guy 1 is approaching 60 and almost owns his home.
He doesn’t have any investments outside of his home.
I asked about his retirement plan, and he said he’s banking on his house and the equity he builds.
His current equity is modest at best.
He hopes his home provides enough for him in retirement. But he didn’t mention selling it or planning what to do with his home after he pays it off.
Guy 2
Guy 2 is approaching 50 and uses his home as an Air BnB as his income and investment.
He’s turned his home into an asset by renting it and making a profit.
Smart.
Guy 2’s strategy is more productive than Guy 1’s strategy, who is hoping for an equity payout to cover him throughout his retirement years, but there’s one thing poking at the situation.
He’s got all his income and investment tied up into one property.
He has no diversification, income sources, or other investments.
Guy 3
Guy 3 is in his 30s and already has half a million bucks net worth.
He owns no property and has no intention of getting one any time soon.
He will have a million+ dollar net worth in a few years or less.
His investments will reel him in an average annual income of $60,000 — $100,000/ year.
What does he intend to do?
Continue investing.
Who’s Got The Best Situation?
I think we all know the answer.
Even if guy 3 decides to buy a home within his means, he will still be better off because he has a much more diversified portfolio and isn’t banking on his home as his primary investment and income source.
Summary
If you buy a home, be sure you continue investing in other assets, which also means you shouldn’t buy a home that eliminates or mitigates your ability to invest and save resources outside your home.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.