Podcast: Play in new window | Download
Subscribe: Apple Podcasts | RSS
When it comes to home ownership a lot of people say that it’s a no brainer, that buying a house is the best investment you could possibly make with your money, and in many, many situations I believe that is actually true but it’s not always true, and so it’s not a fact.
Let me give you an example:
In 2006, I was living in Florida, and I was looking at buying this townhouse. It was $300,000, and it hadn’t even been built. The pre-construction sales were going on, and people were jumping all over them, and prices were skyrocketing.
Now, the general sentiment at the time was that a house will only appreciate, it will only go up in value and so you just buy and you know it’s going to go up in value. Well, what happened during the Great Recession and the housing bubble bust was that, that wasn’t true. What I saw with my own eyes was that housing prices can go down, and they did. I actually ended up not buying that townhouse and in a few short years I saw that price go from $300,000, and people bought at $300,000, and in 2009 and 2010 they were selling ’em for $140,000. The people who lived there were actually in a situation where they had a loan for $300,000, but they couldn’t sell that townhouse for anything more than $140,000, $130,000. They were so far underwater many of them had no other option but to either suck it up and pay off something that was never going to be worth that much, or they just walked away they claimed bankruptcy, and had the place foreclosed upon.
What I’m trying to say is that what goes up often times (or according to physics) must come down. I’ve been through a couple bubble busts in my life. I was in Silicon Valley from 1998 to 2002, so I saw the dot com boom and I saw the peak and then I saw the bust. I saw what that looked like. Then I was in Florida for the housing bubble bust in 2008, 2009, and 2010.
I’m not saying that’s justification for not buying a house, at all. I just want to say that housing is not guaranteed to appreciate at all times. That is not a fact because sometimes it doesn’t.
If you buy at the peak of the market where we’ve come out of a recession, well, guess what? Prices are going to go down. Eventually are they going to go up again? Most likely, but it’s not guaranteed? Depending on the city you live in, if you’re anywhere near Detroit I would say that housing is not appreciating in that area. If you’re in San Francisco housing is going crazy. It’s skyrocketing.
So you gotta evaluate those types of market conditions. Are you at the bottom of the market or are you at the top of the market? Is it a seller’s market is a buyer’s market. With regards to is this going to be a good investment: How long are going to stay in the house? Are you looking at just a short-term play, and then you’re going to move? Or are you planning on being there for the next 30 years? All of these things take into account whether or not it’s a good idea to buy a house.
It’s not a no-brainer that it is and it’s not a no-brainer that it isn’t. You have to evaluate these things.
As you’re evaluating these things, one of the things you’ll hear again is that a house is an amazing, is the best investment you can make and I agree with you that it is among the best investments that you can make. But here’s the thing that a lot of people don’t think about: While a house is an amazing investment, what happens is you buy a house and then you fill it up with liabilities?
Let’s talk about the difference between investments and liabilities.
An investment, good investment or bad investment depending, but, an investment is something that has the potential to make you money in the future. If it’s a bad investment, then it’s got a low potential, if it’s a good investment, then it has a high potential to make you money. Whereas a liability is something that is never going to make you money. So, while a house is an investment, a couch is a liability. When you buy a sofa set, loveseat, that piece of furniture is never going to be worth more than it is on the day you bought it, it’s only going to depreciate in value.
And so, as that depreciates in value, it’s a liability. When you buy a refrigerator, that is only going to depreciate in value. When you buy a washer and dryer, that’s only going to depreciate in value. When you buy a lawnmower, that’s only going to depreciate in value. So what happens when we buy a house is we buy an investment and then we fill it up with liabilities.
And these liabilities are not cheap liabilities, they’re expensive liabilities. Everything is $1,000 when you own a house. Washer is $1,000, dryer is $1,000, couch is $1,000, refrigerator is $3,000, lawn mower is $1,000. Everything, everything, everything is $1,000.
You need a new water heater, you need a fridge for the garage because you have to have the beer fridge. Everything is a liability that you stick into a house, and then you have to replace it all. So when you look at that investment, does that investment outweigh the liabilities? Well, depending on how many big-screen TVs you buy and how leveraged (in debt) you are, you can buy a house and a lot of people will go and get pre-approved for the biggest house they can possibly afford, and then in order to pay for all the liabilities, they need to furnish that house they go into debt, and then in order to pay for groceries for their kids, they’re so far leveraged that they end up going into more debt at which point that takes a strain on our previous conversation in episode five as to whether I can quit my job or not.
Well, if you’re super leveraged all over the place and in debt all over the place, I don’t know how you can quit your job because you bought a house that everybody said was a good investment, and then you filled it up with all the liabilities, and then that put you in a
poor financial situation. But at least you own a house, which, the idea of owning a house, unless you paid cash for that house, you don’t own that house, the bank owns that house, and you’re renting it from them for at least 30 years. If you’re only going to stay there for a short time, maybe four or five years, you’re barely paying off in those first couple years, you’re paying off the interest on that. If the house increases in value rapidly, then you’re going to come out just fine, but if it’s a stagnant market, then maybe or maybe not you have any equity built up in that house. So when we look at whether or not I should buy a house, there’s a lot of things to weigh.
Some of the other things to weigh are, how much do you like doing yard work? How much do you like taking care of a home? How much do you like cleaning gutters? There are so many different
aspects to owning a home. I know it’s the American Dream, I know it’s a vital variable in the formula of American Success, but that doesn’t mean that it’s for everybody.
I personally don’t own a home.
A lot of people will say, “I can’t believe you’re renting. “You’re just throwing your money away.”
Well, I think that’s a very, very, silly statement. Am I building equity in anything? No, I’m not building equity, but I don’t think I’m throwing money away, because I’m trading money for a place to live, and I think that’s of great value. Especially if it’s way less than it would be if I actually had to own the home, and if it extends me freedom to move without any type of strings holding me down on a regular basis, that to me is very important.
To some people, they might be like, “I am going to live here ’til I die, I have no desire to move, I have no desire to travel.” I, on the other hand, like to be as free as possible so that at the drop of a dime, if the good Lord were to call me and my family to go do something else and somewhere else, that we could go and we wouldn’t have any hesitations of, “Well, we have to sell this house, and we filled this house up with all these liabilities and blah, blah, blah.”
I think I heard Suze Orman say this, and I’m not a big Suze Orman fan, but this one I did like, and it is, “What’s good for your money “isn’t necessarily what’s good for you.”
Is a house a good investment? Probably nine out of 10 times yeah, you’re going to do just fine. That doesn’t make it the best move for you just because it’s the best move for your money. So when people say that, take it for what it’s worth. Do “you”, follow your path to success, to your definition of success, and don’t worry about what the rest of the folks think.
Godspeed.
Omar
