Epic Real Estate Investing - Should I Buy My Primary Residence? | 3rd Degree Thursday

Episode Date: September 25, 2014

Your primary residence is the greatest investment you can make, or is it? Could it actually be the worst investment you could make? The unequivocal answer is revealed here today! ------- If you have a question, comment or concern that you’d like Matt to address live on the show, send it to him at [e-mail] and type "3rd Degree" in the subject line… or leave him a voicemail on the Epic Hotline at 1-888-891-7203.   See you tomorrow for a new episode of Financial Freedom Friday!     Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello and welcome. Welcome to Third Degree Thursdays. This is the show where I subject myself to you giving me the third degree. All righty. So I got a great question from Jimmy in Central Florida, Jimmy Fuentes. And Jimmy writes, hey Matt, I'm Jimmy, 24 from Central Florida. Found you via your interview on the eventual millionaire podcast at just the right time. I listen to the free course and I'm in.

Currently, I've been listening to the past podcast episodes. So I was trying to catch up and soak in the awesomeness and something caught my attention. I would love to hear you elaborate more on the topic of buying a home for personal use is a bad investment. I see the big picture and you've quickly made me reconsider what I was hoping was my next move in life of buying my own home. I believe I understand why it's not a good investment. But if you can elaborate as much as possible on the topic, I would be a happy camper. Cheers, Jimmy. All right. Jimmy. Good. Good. Thanks for the question. And I love this question. I don't think even after hearing what I'm about to share with you once or twice, like it still takes a while to sink in. And I'm occasionally after going and check for myself. So I'll gladly address your question. And I'm going to address it here as well as I can in this format, trying to do a shorter format. Who knows? I'm kind of passionate about this topic. Maybe I'll go on for longer than normal.

For a really detailed explanation, should the one I provide here not be sufficient, go ahead and check out another one of my podcasts, Do-Over. Just type in Do-Over and iTunes, and it'll come up, and go to episode number 58. I dedicated that entire episode to this very question. And kind of what I was alluding to, the one thing that's really funny about your question is, I keep kind of revisiting it myself with regard to my own personal life. Like, should I buy a house? Should I buy my own primary residence? Or should I rent again? because I too, I want to be a homeowner.

And there's nothing wrong with that. Not for me, not for you. What is wrong with that is thinking that buying your personal residence is an investment move. Like it's a good investment. No, it's not. Well, it's not a good one at least. It's a quality of life move or a self-actualization move. I mean, it gives you a warm and fuzzy feeling move.

But it's a terrible investment move. In fact, it's probably the worst investment in America. And just about, you know, I think it's what, I don't know the numbers, but a good portion of our country, that's their primary investment, quote unquote. Now, there is an exception, however, whether you should buy or not. And it's a very small exception. And I'll get to that in just a second. But, you know, simply let's just kind of start. Let's make it really, really simple.

And I'll use Robert Kiyosaki's definition of assets. versus liabilities. Assets, they put money in your pocket. Liabilities take money out of your pocket. Very simple. Assets put money in, liabilities take money out. So that house, does it put money in your pocket or does it take money out? Takes money out, doesn't it?

It does. And now you might think, well, what about appreciation and all this stuff? And that puts money in my pocket eventually. And, okay, we'll discuss that. If that's where you stand, we'll discuss that. because there are some people out there that still, even after hearing that definition, I believe Robert Kiyosaki is full of it when he says something like that. But when it comes down to it, poor people, they buy liabilities and then they go to work to pay for them, right?

And rich people, they buy assets and let their assets pay for their liabilities. That's getting their money to work for them. So given that, is your primary asset, is it working for you, or are you working for it? is your primary residence an asset or a liability? Well, it is a liability. And I'm going to try and approach this from every angle to remove all doubt. And anyone that has a great argument, I would love to hear it. And I would love to address it, say, on next third degree Thursday.

So I'm going to state my case. And if you got something, yeah, but what about this? What about that? I'll go ahead and I'll respond, all right? So it's a liability. No ifs ands or buts. have to pay the mortgage every month. That's taken money out of your pocket. You have to pay the property taxes twice a year. It's taken money out of your pocket. You have to pay for insurance.

You have to pay for the upkeep of the property and the maintenance of the property. I mean, if something breaks, you got to pay for it. You have to do a lot of paying, don't you? There's lots of money coming out of your pocket, isn't there? Your primary residence is indeed a liability. I mean, it's not even close to being an asset. So therefore, I mean, it really can't even be defined as an investment. You see, an investment is something that pays you. You know, you you more than what you paid for it. Never forget that. That's what an investment is. It's something that pays you. It's got to pay you more than what you paid for it. So the big question is, well, what about appreciation? What about owning it free and clear? It's an asset then, right? No. If you pay off

the mortgage early, you still have property taxes, you still have insurance, you still have out keeping maintenance. You're still paying for it. Still taking money out of your pocket. True, you don't have a mortgage payment anymore, but you have all of that money in the form of equity, it's all locked up in your home. What good does it do? I mean, nobody has ever achieved financial freedom by just eliminating their debt. It's got to go much deeper than that. Certainly that helps in the process, but you're not financially free yet just because you

have no debt. And when you pay off that house or you buy the house, I mean, essentially, we're, essentially what you're doing is you're retiring your money before you get to retire. Your money while it's locked up in your home, see, it's locked up in your home, it's done working, it's sitting there, it's done working, it's kicking back, it's doing nothing while you, on the other hand, still have to go, you still got a lot to do, right? You got to get up every day and you got to go out and you still got to earn a living. You got to eat, you need clothes on your back, you got to, you got health care to pay for and your family needs all of those things as well right a paid off house

doesn't doesn't uh take care of that for you and those are just the essentials what what what don't you want to do stuff too i mean don't you want to go out and have fun and don't you want to do stuff and have fun with your family and with your friends that paid off house ain't helping you do any of that and and in in in that moment when it's not paid off where you're still making those payments it's actually interfering and preventing you from doing all that stuff Remember, an investment is something that pays you more than you paid for it. Your primary residence does not pay you. Ever.

Now, if you want to pull all that money out that you put into it and say it, it did appreciate over time and you got to pull out more than what you bought it for, but to do that, either you've got to sell it to get access to it or you got to refinance, right? Which creates a new dilemma. You still have to go live somewhere. So you've got to buy another place to live. if you sell it. And if you refinance, hey, you just recreated the same debt that you worked so hard to pay off.

Kind of insane, right? You know, despite what we've all been taught, our primary residence is a terrible investment. I love real estate. You know that. Real estate is the final frontier where the average person has a real shot at creating true financial freedom for themselves. But not your primary residence. It's a terrible investment.

And the operative word here is investment. It may be a good purchase. but it is almost never a good investment. Let me clarify that. Let's say, imagine you just wrote that final check to pay off your 30-year mortgage. Feels pretty good, right?

You've worked hard all your life to pay that off and boom, it's done. It feels good for the moment. It probably feels even better when you realize the home you paid, say, let's say $100,000, say you paid $100,000 for that home initially. And 30 years later,

now it's valued at $300,000. And historically speaking, you know, a long stay in the housing market pretty much guarantees this rate of return. Wow, right? It looks like you've tripled your investment. You effectively have this giant pile of cash, don't you? I mean, how can this not be financially prudent by tripling your investment? Well, let's take a look at the long-term math to show you what I mean. What most people fail to consider is that over 30 years, the total combined principal and interest payments,

will amount to approximately double. So, yes, you have this $100,000 house that is now worth $300,000, but over the 30 years you actually paid $200,000 for it. So it didn't triple because you paid $200,000 for it. So when the 30 years of property tax is included, the insurance and the maintenance, when all that's accounted for, I mean, you probably actually paid really close to $300,000, for your $300,000 home. In other words, you went to work every day for 30 years

and religiously paid your mortgage every month because you thought you were investing in your future. And after 30 years, you've come to find that all you really did was deposit money into a zero-interest savings account. And you deposited $300,000 over 30 years. And that's exactly what you have after 30 years. You've got a $300,000 home free and clear. It's a wash.

Zero interest. I mean, it can be wonderful to own your own house. You can get a tremendous amount of satisfaction and comfort and enjoyment from the home that you've created for yourself after remodeling and repainting and upgrading and decorating it just the way that you want it. If you want to own your own home for personal reasons and can get a good deal, hey, it can be a great purchase. However, as an investment, it just doesn't work most of the time. most of the time. I would say all of the time. I mean, certainly there are exceptions.

I mean, if you were fortunate enough to be approved for a low, single-digit interest loan and you purchase your home in a higher appreciating area and you time to just write, I mean, you could experience an acceptable rate of return on your investment. Maybe. But we're not talking about the exceptions. We're talking about the norm. And the norm is the vast majority of cases. Besides, I mean, do you really want to be able to?

to gamble your financial freedom on being an exception. You know, generally speaking, your home is just not an investment. I truly hate bursting this bubble because I know that that $300,000 was sounding awfully nice, wasn't it? I understand how you could fall into this trap, too. I mean, besides, the fact that it's what we were taught to do, it seems completely counterintuitive to dismiss an exchange of $100,000 for $300,000 as a bad deal. But once you do the math, it is indeed a bad deal because you did not exchange one

$100,000 for $300,000, you exchange your $300,000 for $300,000. It's a wash. You can wash your hands of it. That's what I'm doing here if you can hear that. In the grand scheme of things, you did manage to save though $300,000, right? I mean, you did manage to do that. I mean, that's $300,000 you probably wouldn't have saved unless you were forced to by paying your mortgage, right? So it's not such a bad deal, right? I mean, at least you do have the $300,000. Ah, not so fast. I'm sorry to share that this bad deal actually gets worse. I mean, our math actually would not be truly accurate unless we factored in inflation.

You know, over the last 40 years, the time that I looked up between 1968, 2009, the average published inflation rate, that's what I found that's published, that's why I chose those years. It settled somewhere between, I don't know, three to four percent over the last 40 years, making your home worth less in real dollars than it was when you buy. bought it. I mean, for your financial position to actually improve, your investment returns, your home appreciation, must outpace inflation. If the current inflation rate is 3%, and the return on your investment is 3%, you're just standing still or possibly still even losing money. I mean, you can find conflicting statistics and opinions about how your home's appreciation and inflation are related. But after some diligent research, if you're really diligent about it, just don't take the first thing that you find,

and you do some research and get a nice cross-section of sources, you're going to see how you didn't even save $300,000 in your zero-interest-bearing savings account. This means that the $300,000 that you saved has slightly less value in our economy today than your $100,000 did 30 years ago when you purchased your home. You didn't make one dime on your investment. You actually lost a little bit,

or you stood still at best. You worked for 30 years to pay off your home and you're no better off financially than when you started. History shows that housing appreciation, quote unquote, that rate, that appreciation rate and the inflation rate run relatively neck and neck with appreciation losing by a nose the majority of the time. So technically, houses don't appreciate. Now, the dollar value, the dollar amount increases, that rises. but the actual buying power of those dollars has been kept at bay by just normal, all everyday inflation. All right.

So it's not all bad, right? We still have $100,000. I mean, $300,000, right? But where is your $300,000? It is locked up in your home, isn't it? That's how we started this. That's how we got through. We kind of come full circle.

You saved $300,000, and you can't even, you. use it unless you refinance your savings back out, which most people have to do. Eventually, in retirement, they've got to do that to make ends meet. So you just recreated the debt that you worked so hard to pay off. Do you recognize the insanity here? You spent 30 years of your life toiling away to pay off your home thinking it was an investment. Now you can see that it's really not so great of an investment, is it? And once you finally paid off your home, you had to refinance the money back out,

creating a brand new mortgage, you're back at square one. But wait, there's more. Although signing that final check can be quite the rush, and you're now living the dream, right? Isn't that a house pretty old? I mean, it's 30 years old. If you bought a brand new, could be way older than that. It's a little outdated. I mean, how much longer is the roof going to hold up?

What about the pipes and the wiring? And for that matter, what about your own plumbing and wiring? How are your knees holding up? How about your heart and lungs? You're going to require some serious maintenance down the line as well. Medical expenses, they ain't cheap. I mean, surely, you can now see that the paying off of your home's mortgage is a terrible investment. In fact, it sucks eggs.

Your nest egg being one of them. Listen, I'm not saying don't buy a home for you and your family. That's not what I'm saying. There's nothing wrong with buying and paying off your primary residence. what I'm suggesting is to reconsider when you actually buy your home and give even more consideration to the priority that you assign to paying your home off. If financial independence is your goal and you like to experience it sooner rather than later, just know that the purchasing of a primary residence will extend your journey to financial independence.

It's going to take you longer to get there if purchasing your home is part of your plan. It's not an investment vehicle that will ever deliver you to freedom's doorstep. No one has ever retired on paying off their mortgage alone. Home equity heaven, more often than not, tends to turn out to be a little bit more like purgatory. All right. So don't, don't, here's the caveat that I kind of mentioned in the beginning, was buying your home, depending on where you live in the country, it could be, you've got. to live somewhere, right? So you still need a roof over your head. So do you pay rent or do you

buy? Okay, we know it's not an investment, but you still got to do one or the other. So just kind of do some math. It's just a math equation. Is it cheaper to rent where you live or is it cheaper to own? And just don't compare the mortgage to the rent. No, you got to compare the mortgage. You got to compare the insurance. You got to compare the taxes. You got to add in the maintenance of it. You can't just call a landlord and say, come over and fix the pipe. No, that's your responsibility. You got to do it. So make sure you factor in all expenses of owning a home and then just do the math. So if it's cheaper to own the home, a lot of parts of the country, it is. And if it's cheaper to own the home, then go ahead and buy it. I don't see anything wrong with that. But put down as little money as you

possibly can and don't work your butt off trying to pay it off. Okay? Just treat it like it was rent. Pay the minimum, the absolute minimum. Then once you've got your residual income through your real estate investments, through your buy and hold investments, once you've got the those up to the point where that's creating enough residual income where you don't have to work anymore, then go ahead and maybe take some excess of that cash flow that you've got from your income portfolio, your rental portfolio, and let that pay off the mortgage. And then you can eliminate that debt. That's what I mean by there's nothing wrong with paying off your mortgage. Just consider the order of which you do things. Okay. You want your money working for you.

You want your money working for you long after you're done working for it. You don't want to work real hard for it and then stole it away and let it retire before you do. Got it? That's where I'm getting at. So, Jimmy, I hope that helps. Thanks for the question. Quick note, I've just been informed, though, that I'm being taken on a surprise weekend getaway for my birthday, which is tomorrow.

So there will be no Financial Freedom Friday tomorrow. And there will be no epic episode on Monday. either as I, my vacation, I guess, is going to extend far into that. It's a surprise. I have no idea where I'm going. So I guess I will just see you next Thursday. All right. So enjoy the weekend. And oh, if you'll be in Atlanta, in the Atlanta area on October 17th, come and hang out, come and hang out for Grub and Grow Rich. All details can be found at grub and grow rich.com. Come hang out with me. Let's talk shop. Let's talk real estate. Meet the team and and we'll pound some beer and wings. And finally, should you have a question, comment or

concern that you'd like me to dress here live on the show, send it to me at Matt at Epic Real Estate and type third degree in the subject line, just like Jimmy did today. Or you can leave a voicemail on the epic hotline at 1-88-891-7203. All righty? See you next week. This show you, we're going to party like it's your birth day. We're going to sit a party like it's your birth day. And you know we don't get a podcast. This podcast is a part of the C-suite radio network. podcast visit c dash sweet radio.com