Advertiser Disclosure: rich & REGULAR is a member of affiliate marketing programs and may receive commission in exchange for promoting products and services.
If you’ve been following us for a while, then you know how I feel about home ownership. It’s not that I’m against it buuut I definitely don’t believe it deserves all the credit it gets as a sound investment. In our experience, most people have bought into the notion that home ownership is the single greatest contributor to wealth creation. Why? Well, because that line is spewed from almost every soapbox and spread in almost every direction…like all the time.
From politicians, to non-profit agencies, bank commercials to financial gurus to dining room tables all across America most people are fully on the “home ownership is a great idea band wagon“. But as I’ve said before, “if buying a home was such a great investment, why don’t I know more rich people”? I know plenty of “homeowners” aka “borrowers” but I don’t know nearly as many rich people. Why?
There are tons of reasons for this such as the complexity of real estate appreciation, inflation, interest rates, investing decisions, stagnant wage growth, consumer debt and on and on and on. Sure, there’s the argument in favor of home equity but if we’re being honest with ourselves, home equity is just a number on paper. Until you’re ready to sell, it doesn’t mean much. I wont get into any of that in detail but the point is relying on your primary residence as an investment is pretty Ricky…I mean risky. Or maybe I do mean Pretty Ricky as in, a really bad idea that for some reason people really like.
Following this flawed mantra has proven to be destructive. In particular, Black wealth was severely damaged post recession because so many people had the vast majority of their wealth tied up in their homes [equity] and not diversified across other investment vehicles. As a result, when the housing market tanked, so did most of their wealth. Whether 2008 was an anomaly or natural market correction, the fact remains if all of your eggs are in one basket [housing] you’re rolling the dice.
That aside, earlier this year, we made the decision to purchase a new home. We described the math behind this decision a few months ago, so there’s no reason to re-hash it here. Instead, I’ll use this opportunity to offer a shift in perspective. Up to this point, I’ve been very deliberate with my word choice because I want to be absolutely clear in what I’m about to say. That is—
there is a HUGE difference between home ownership and real estate investing.
One of our favorite personal finance bloggers have really strong opinions about this. In fact, they’ve gone so far as to say houses are a scam. We won’t go that far but if you can, take a moment to stop and think for a second about it.
In summary, they are saying as an investment, home ownership as it is commonly undertaken, where you provide 10-20% of the purchase price as a down payment, not including closing costs, the cost of ongoing repairs, property taxes and insurance is a horrible investment COMPARED to taking that same 10-20% down payment and putting it into less costly, less hands-on and less pocket draining investments that actually pay you interest and compound over time. From that standpoint, we completely agree.
We now own two rental properties and our approach for managing them is VERY different from the approach we took for purchasing our primary residence. Technically, our second rental was our old primary residence BUT I knew ten years ago that it could someday become a rental. Furthermore, the moment we secured our new home under contract, our mindset changed for how we would manage repairs on that property.
Here are 4 reasons our new home is not a real estate investment
1. Investments bring cash in, our primary home sends cash out
When we bought our first real estate investment (2014), our primary goal was maximizing cash flow [passive income]. That is, we wanted to make sure after the monthly rental mortgage payment, HOA fees, insurance, property taxes, cushion for vacancies and repairs were all paid, that there was an acceptable amount of profit left over. So far, that has worked in our favor AND we’ve been able to increase profit through rent increases with the exception of this year due to a crappy tenant.
With the purchase of our new home, there is no cash inflow—only outflows. Thankfully, much of our primary home mortgage will be offset by our rental income. But even still, if you think about it, no good investment takes money OUT Of your pocket every month.
2. Taxes, taxes, taxes
With our rental property, we didn’t consider taxes heavily into our decision to invest. The reason for this was because the tenant was paying for it. We’d already factored it into our cash flow analysis so if they did actually go up, we knew we’d have the opportunity to pass that on to the tenant through rent increases.
On the other hand, we absolutely factored in property taxes for our new home because it has an immediate effect on our budget since that payment comes directly out of our pocket. We also know that the likelihood of spikes in our property taxes are considerably higher for our new neighborhood but given the perks, [for now] it feels worth it. While they are deductible, it is still cash going out that otherwise could be working hard[er] for us in the market.
3. Interior finishes and appliances
The decisions we made for our rental property interior finishes and appliances were completely different versus our home. For the rental, we knew it would attract a specific type of tenant so we were mindful of the degree of finishes we put on key areas of the home. Secondly, we reviewed similar properties in the area to make sure we renovated ours appropriately. The goal was to invest in the amenities that matter to the tenant you’re likely to attract, not to make it as nice as we would like it to be.
On the flip side, in our primary home, we splurged on almost everything because well…we wanted it. Not to mention, we believe the home will also serve as an asset we can use for business purposes. But until we do that and are able to monetize accordingly, its an expense we incur immediately.
4. Deductible expenses are a win-win
Owning rental real estate is like a gift from the US tax Gods. Basically, all associated expenses tied to the rental property can be deducted as business expenses when we file our taxes. This was part of the reason why we were able to remain level-headed when we got stuck with a runaway tenant and repairs. Even if those expenses exceed rent collected, we can claim that loss for the year and use it to reduce our taxable income, thus lowering our effective tax bill at the end of the year and saving us money.
For our primary home, we can’t do that $hit! Virtually all improvements, repairs, additions are paid for using our disposable after-tax income and offer zero tax benefit with a few exceptions for “energy efficient” appliances and a handful of incentives the government throws out there every now and then. Now, we will be able to claim our mortgage interest deduction assuming it’s worth it to itemize versus taking the standard deduction.
So those are a few reasons we don’t consider our new home a real estate investment. If we did, then we’d consider it an absolutely horrible one that costs us money every single month. On the other hand, we consider our rental properties investments because they save us money and make us money versus our primary home which costs us money.
Yes, while we do factor the market value of the home into calculating our net worth we know that value [today] is largely offset by the mortgage liability tied to it. With that said, the cash we used to secure the home is stagnant and tied up in equity. If we’re lucky, our new home will increase in value over time and we actually feel it has a pretty good chance to but, we’re not banking on it.
If you’re interested in earning passive income through real estate investing, we suggest starting with roofstock.com. Their online marketplace allows you to seamlessly buy, manage and own tenant-occupied rentals across the US.
Create your free account today by visiting www.richandregular.com/Roofstock
9 Comments
Leave a Reply
Advertiser Disclosure: rich & REGULAR is a member of affiliate marketing programs and may receive commission in exchange for promoting products and services.
If you’ve been following us for a while, then you know how I feel about home ownership. It’s not that I’m against it buuut I definitely don’t believe it deserves all the credit it gets as a sound investment. In our experience, most people have bought into the notion that home ownership is the single greatest contributor to wealth creation. Why? Well, because that line is spewed from almost every soapbox and spread in almost every direction…like all the time.
From politicians, to non-profit agencies, bank commercials to financial gurus to dining room tables all across America most people are fully on the “home ownership is a great idea band wagon“. But as I’ve said before, “if buying a home was such a great investment, why don’t I know more rich people”? I know plenty of “homeowners” aka “borrowers” but I don’t know nearly as many rich people. Why?
There are tons of reasons for this such as the complexity of real estate appreciation, inflation, interest rates, investing decisions, stagnant wage growth, consumer debt and on and on and on. Sure, there’s the argument in favor of home equity but if we’re being honest with ourselves, home equity is just a number on paper. Until you’re ready to sell, it doesn’t mean much. I wont get into any of that in detail but the point is relying on your primary residence as an investment is pretty Ricky…I mean risky. Or maybe I do mean Pretty Ricky as in, a really bad idea that for some reason people really like.
Following this flawed mantra has proven to be destructive. In particular, Black wealth was severely damaged post recession because so many people had the vast majority of their wealth tied up in their homes [equity] and not diversified across other investment vehicles. As a result, when the housing market tanked, so did most of their wealth. Whether 2008 was an anomaly or natural market correction, the fact remains if all of your eggs are in one basket [housing] you’re rolling the dice.
That aside, earlier this year, we made the decision to purchase a new home. We described the math behind this decision a few months ago, so there’s no reason to re-hash it here. Instead, I’ll use this opportunity to offer a shift in perspective. Up to this point, I’ve been very deliberate with my word choice because I want to be absolutely clear in what I’m about to say. That is—
there is a HUGE difference between home ownership and real estate investing.
One of our favorite personal finance bloggers have really strong opinions about this. In fact, they’ve gone so far as to say houses are a scam. We won’t go that far but if you can, take a moment to stop and think for a second about it.
In summary, they are saying as an investment, home ownership as it is commonly undertaken, where you provide 10-20% of the purchase price as a down payment, not including closing costs, the cost of ongoing repairs, property taxes and insurance is a horrible investment COMPARED to taking that same 10-20% down payment and putting it into less costly, less hands-on and less pocket draining investments that actually pay you interest and compound over time. From that standpoint, we completely agree.
We now own two rental properties and our approach for managing them is VERY different from the approach we took for purchasing our primary residence. Technically, our second rental was our old primary residence BUT I knew ten years ago that it could someday become a rental. Furthermore, the moment we secured our new home under contract, our mindset changed for how we would manage repairs on that property.
Here are 4 reasons our new home is not a real estate investment
1. Investments bring cash in, our primary home sends cash out
When we bought our first real estate investment (2014), our primary goal was maximizing cash flow [passive income]. That is, we wanted to make sure after the monthly rental mortgage payment, HOA fees, insurance, property taxes, cushion for vacancies and repairs were all paid, that there was an acceptable amount of profit left over. So far, that has worked in our favor AND we’ve been able to increase profit through rent increases with the exception of this year due to a crappy tenant.
With the purchase of our new home, there is no cash inflow—only outflows. Thankfully, much of our primary home mortgage will be offset by our rental income. But even still, if you think about it, no good investment takes money OUT Of your pocket every month.
2. Taxes, taxes, taxes
With our rental property, we didn’t consider taxes heavily into our decision to invest. The reason for this was because the tenant was paying for it. We’d already factored it into our cash flow analysis so if they did actually go up, we knew we’d have the opportunity to pass that on to the tenant through rent increases.
On the other hand, we absolutely factored in property taxes for our new home because it has an immediate effect on our budget since that payment comes directly out of our pocket. We also know that the likelihood of spikes in our property taxes are considerably higher for our new neighborhood but given the perks, [for now] it feels worth it. While they are deductible, it is still cash going out that otherwise could be working hard[er] for us in the market.
3. Interior finishes and appliances
The decisions we made for our rental property interior finishes and appliances were completely different versus our home. For the rental, we knew it would attract a specific type of tenant so we were mindful of the degree of finishes we put on key areas of the home. Secondly, we reviewed similar properties in the area to make sure we renovated ours appropriately. The goal was to invest in the amenities that matter to the tenant you’re likely to attract, not to make it as nice as we would like it to be.
On the flip side, in our primary home, we splurged on almost everything because well…we wanted it. Not to mention, we believe the home will also serve as an asset we can use for business purposes. But until we do that and are able to monetize accordingly, its an expense we incur immediately.
4. Deductible expenses are a win-win
Owning rental real estate is like a gift from the US tax Gods. Basically, all associated expenses tied to the rental property can be deducted as business expenses when we file our taxes. This was part of the reason why we were able to remain level-headed when we got stuck with a runaway tenant and repairs. Even if those expenses exceed rent collected, we can claim that loss for the year and use it to reduce our taxable income, thus lowering our effective tax bill at the end of the year and saving us money.
For our primary home, we can’t do that $hit! Virtually all improvements, repairs, additions are paid for using our disposable after-tax income and offer zero tax benefit with a few exceptions for “energy efficient” appliances and a handful of incentives the government throws out there every now and then. Now, we will be able to claim our mortgage interest deduction assuming it’s worth it to itemize versus taking the standard deduction.
So those are a few reasons we don’t consider our new home a real estate investment. If we did, then we’d consider it an absolutely horrible one that costs us money every single month. On the other hand, we consider our rental properties investments because they save us money and make us money versus our primary home which costs us money.
Yes, while we do factor the market value of the home into calculating our net worth we know that value [today] is largely offset by the mortgage liability tied to it. With that said, the cash we used to secure the home is stagnant and tied up in equity. If we’re lucky, our new home will increase in value over time and we actually feel it has a pretty good chance to but, we’re not banking on it.
If you’re interested in earning passive income through real estate investing, we suggest starting with roofstock.com. Their online marketplace allows you to seamlessly buy, manage and own tenant-occupied rentals across the US.
Create your free account today by visiting www.richandregular.com/Roofstock
9 Comments
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on November 1, 2018 at 12:22 PM
We still live in the only house we’ve ever owned. We raised three kids from infancy to millennial adults in it and it was a great family investment, but I never considered it a smart money maker. In fact I would never advise anyone to buy a house that costs more than they could eventually walk away from. Our house was never worth more than one year of our income and now it represents such a tiny portion of our net worth that I don’t even count it as an asset. That’s the only way you can really look at a house because neighborhoods can decline and destroy almost all the value in a house. Fortunately ours has not but it happens all the time.
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on November 1, 2018 at 1:54 PM
We completely agree with you. Thanks so much for sharing!
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on November 4, 2018 at 4:58 PM
I wonder if/how your advice changes in cities with high rent/housing cities. Seems my parents stretching beyond means to purchase in 80s SF changed our entire family wealth structure in a way that bolsters a next generation and now a third
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on November 4, 2018 at 5:56 PM
Hi. Thanks for your comment. Our perspective wouldn’t change much. Of course, there are examples where people experienced high appreciation but they are few and far between. For most people, their home is a financial drain on their lives and all we’re suggesting is to re-think how reliant they are on that home to be the generator of wealth. It’s far more practical for people to diversify the vehicles they place their wealth in, especially in a market like we’ve experienced over the last 10 years.
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[…] Why our new home is NOT a real estate investment […]
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on April 1, 2019 at 6:02 AM
Truly, this is a right blog. Real estate resembles a blessing from the US charge Gods. Fundamentally, all related costs attached to the investment property can be deducted as operational expense when we document our charges.
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on April 25, 2019 at 10:26 AM
Great post and I totally agree. My home is shelter not an investment. My retired, 73-year-old mother owns a $300K home that is fully paid off but she only has $12K in the bank. She only gets $2K in social security/pension. I’m trying to convince her to sell the house because the cost of ownership is way too much. She’s scrimping and scraping to pay bills when she has $300K in equity. Nope, she loves her home and doesn’t want sell it and move. And doesn’t want to borrow from it. One broken A/C, water heater, roof issue and she’s up a creek. I won’t stop until I get her to cash out, get a cheaper place, and use the proceeds to enjoy the rest of her life without financial issues. My next fight will be to keep the money-hungry, beggin-azz relatives away from her. hahaha
Thanks for the post and great info. God speed!
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on June 26, 2019 at 6:22 AM
Absolutely right. we look forward to this soon.
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on October 19, 2019 at 3:45 AM
I agree with lady blue. I live in NY and watched my parents finance college for 4 kids off their small home in the Bronx and still have 350k in equity if needed. I purchased in Brooklyn at the “worst” time, at the height of the market right before the bubble burst. But now have over a million in equity that I have tapped to purchase two investment properties.
We still live in the only house we’ve ever owned. We raised three kids from infancy to millennial adults in it and it was a great family investment, but I never considered it a smart money maker. In fact I would never advise anyone to buy a house that costs more than they could eventually walk away from. Our house was never worth more than one year of our income and now it represents such a tiny portion of our net worth that I don’t even count it as an asset. That’s the only way you can really look at a house because neighborhoods can decline and destroy almost all the value in a house. Fortunately ours has not but it happens all the time.
We completely agree with you. Thanks so much for sharing!
I wonder if/how your advice changes in cities with high rent/housing cities. Seems my parents stretching beyond means to purchase in 80s SF changed our entire family wealth structure in a way that bolsters a next generation and now a third
Hi. Thanks for your comment. Our perspective wouldn’t change much. Of course, there are examples where people experienced high appreciation but they are few and far between. For most people, their home is a financial drain on their lives and all we’re suggesting is to re-think how reliant they are on that home to be the generator of wealth. It’s far more practical for people to diversify the vehicles they place their wealth in, especially in a market like we’ve experienced over the last 10 years.
[…] Why our new home is NOT a real estate investment […]
Truly, this is a right blog. Real estate resembles a blessing from the US charge Gods. Fundamentally, all related costs attached to the investment property can be deducted as operational expense when we document our charges.
Great post and I totally agree. My home is shelter not an investment. My retired, 73-year-old mother owns a $300K home that is fully paid off but she only has $12K in the bank. She only gets $2K in social security/pension. I’m trying to convince her to sell the house because the cost of ownership is way too much. She’s scrimping and scraping to pay bills when she has $300K in equity. Nope, she loves her home and doesn’t want sell it and move. And doesn’t want to borrow from it. One broken A/C, water heater, roof issue and she’s up a creek. I won’t stop until I get her to cash out, get a cheaper place, and use the proceeds to enjoy the rest of her life without financial issues. My next fight will be to keep the money-hungry, beggin-azz relatives away from her. hahaha
Thanks for the post and great info. God speed!
Absolutely right. we look forward to this soon.
I agree with lady blue. I live in NY and watched my parents finance college for 4 kids off their small home in the Bronx and still have 350k in equity if needed. I purchased in Brooklyn at the “worst” time, at the height of the market right before the bubble burst. But now have over a million in equity that I have tapped to purchase two investment properties.