Wealth

Self-made millionaire: ‘Don’t buy a home—unless you can afford to waste money’

I love investing and it is a major reason I became a millionaire. However, I’ve learned that purchasing a single-family home is not always a great investment. 

This realization dawned on me in 2003 when I was a newlywed with my first child and I bought my dream home in Los Angeles. As time passed, I didn’t see any return on the time and money I invested in my house. I sold the house and used the equity for a few rental properties. My family then became renters again.

Don’t get me wrong: I still support homeownership. Today, I own three homes — two of which I rent out, and the third is my primary residence. However, many people find that owning a home is a financial burden.

Here are the reasons why I don’t believe buying a home is a smart investment, especially considering rising inflation and high home costs:

1. Profits are eroded by rising costs

Let’s suppose you buy a home for $100,000 with a $5,000 down payment. The house is sold 10 years later for $200,000.

It looks like you killed the house: After paying your mortgage, you turned $5,000 into $100,000. You forgot to factor in the cost of owning that house.

  • 10 years of interest at just 6% per annum $60,000
  • 10 years of property taxes at 2% per year $20,000
  • Real estate fees at 6% $6,000

Total cost before maintenance $86,000

This gives you a net return on investment of $14,000, or 14 percent of the $100,000. Your investment returned 1.4% per a year over 10 years. We didn’t include the cost of roofing, plumbing, or other maintenance fees.

The rule of thumb is that you will spend approximately 1% of your home’s price annually on maintenance. However, fees can be more costly during high inflation.

Tip: Do not expect to make a profit when you buy a house. Do not buy a house if you don’t have enough income.

2. You are not dependent on the market if you have no cash flow

True real estate investments provide you with monthly passive income — or cash flow — after all the mortgage payments, property taxes and maintenance.

Your home’s value is dependent on whether it provides monthly cash flow. It costs money to live there, not to wait. PerhapsMake a profit. 

Tough times can often increase the value of rental properties while single-family homeowners are hurt. It’s easy to sell a rental property.

Tip:Only buy if you see a trophy property for sale below its worth, can afford to pay cash and are certain that there is a profitable exit due t the surrounding market.

3. There are limited tax advantages over commercial real estate

You cannot write off more than 20% of the value of your home. tax exemption of one $250,000 gainEvery two years, a single family home is sold..

You can’t invest in your house if you want to invest in income-producing realty. The tax benefits have skyrocketed.

Rent income is subject to taxes. However, you can deduct certain expenses on your tax return. This includes mortgage interest, property taxes, operating costs, depreciation, and repairs.

Tip:You can make passive income by investing in rental properties that are subject to favorable tax conditions.

When is it a good idea for a homeowner to buy a house?

My opinion: Don’t buy a home — unless you can afford to waste money.

A home is best described as a place you can call your own and that provides stability. There are many other options if you want to create wealth.

I don’t believe owning a house should be considered the “American Dream.” For the most part, it’s simply a place to live — and there are always costs attached.

Correction: This article was updated to reflect the fact that rental income is subject to tax.

Grant CardoneThe CEO of Cardone Capital, bestselling author “The 10X Rule,”The founder of The 10X Movement. He is the owner and operator of seven privately-held companies and a $5B portfolio of multifamily properties. Follow him on twitter @GrantCardone.

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Source: CNBC

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