Apologies in advance, but I’ve had it! I’m driving myself crazy thinking about this topic.
At first I thought this was a “European thing,” but it’s not. This is a global mindset and a wrong mindset… and something I need to get off my chest.
So, here goes…
Every week lately I meet new people and talk to family, friends and co-workers who tell me they are really excited because they are “investing” in a house. When we get to talking about it, I learn they are really not investing in a property; rather they are buying a family home and HOPING it will appreciate so they can one day sell the house at a profit.
People, people, people… as much as I like and/or love you let’s get something straight…
If you are buying a house for your family and you to live in… this is NOT investing. It is simply buying a family home. But I’ll get to that more in depth in a minute.
Right now, if you want to learn what investing actually is, read a couple of my articles on this site.
That should tell you why buying your family home is NOT investing. But to help you I created a quick video series on the topic recently. If you didn’t watch it, now’s your chance. (I was on a bit of a rant, so forgive me.)
Your Family Home Is Your Family Home.
So why do I say this?
Just the other day, yet another of my friends told me he was putting down a big chunk of change… $150,000 cash money… on a down payment for his home. He told me he was excited to be making his first investment by “investing” in this home.
Something snapped in my brain. I wanted to yell, “NO… it is not investing. It is simply buying a home for you and your family to live in, all the while hoping your property will appreciate so that one day you can sell it for a little profit!!”
Instead I kept calm and had a bit of a conversation with him about it, but tried to stay positive. Maybe he doesn’t realize that the appreciation he is HOPING for may never happen.
Due to lots of life events, like (I hate to say it, but hey…) divorce, illness, loss of one’s job and income, and even a death in the family, can take your plans off-course real fast. You may end up refinancing and taking money out of your home to cover costs of whatever comes along. Or maybe you’ll take out a HELOC (second mortgage) to cover the costs of actually fixing your property up… or putting braces on your kids’ teeth or whatever you need a large amount of money for.
I know a number of people off the top of my head who have little to zero equity in their homes due to these exact reasons.
Looking at your home purchase now, is it an investment… or is it really, as Robert Kiyosaki says, a huge liability? (HINT: It’s the latter.)
It is a home for you and your family to live in and grow out of, so one day you will sell it and use the money you earn to put into another home. Due to capital gains taxes, the rules tell us that we have a range of time in which to do exactly this. You can buy a property of equal or greater value.
I am not a tax expert nor am I an accountant, so be sure to confirm that last bit of info with your professional financial people.
Do You Have $80,000 or More to Put Down?
Let’s say you have $80,000 or more sitting in a savings account.
You’re looking for a family home and you find one, so you decide to put all that money into a down payment… which is a good amount to put down. But that is also a rule when financing your purchase through a bank. If you can’t buy the house all-cash, you will put down a fat percentage and pay off the rest over 15 to 30 years, according to the terms you agree to with the bank. (And the bank sets those terms.)
Let’s say the price of the house is $400,000. That means you owe only $320,000 and the house is fully yours, right? WRONG.
That is simple math… not banking math.
I’m not here to give you a math lesson or show you an amortization table that would make you never want to purchase a family home or get into a mortgage again. But I can say that you are only putting a fistful of dollars toward the principle each month; the rest is going to the bank in the form of interest.
They will then lend that money out others to “help them” do the same as they helped you do in getting into your family’s new home.
None of this is investing… even if you think your home will go up in value.
Buying a family home (for your family to live in) is not a strategy… there is no strategy in this situation. Instead of earning money through true investments you are burning money by paying for all the things that come with home ownership, like broken pipes, slab leaks, new roofs, toilets that need replacing… and the list goes on.
If you were to add up all the expenses over the time you’re living in your house, you’ll see that they can add up pretty quickly, so is your house REALLY appreciating, or down the line when you go to sell are you just sort of making some of your money back?
So What If Your Home Appreciates? What Then?
Let’s walk through this part together…
(And forgive me if this comes across a little harsh.)
You buy the house today for $400,000 in hopes it will appreciate and you will be able to sell it down the road for $500,000 or even $600,000. Let’s say this actually happens and you find a buyer.
You have to move, which means packing up all your personal belongings, all the members of your family, all your furnishings and everything tucked away in the storage spaces of your home that you have collected as a family for years.
You have to repair anything that needs repairing, you need to leave the house in tip-top condition for the next owner, and you have to find a new home for your family.
Are you willing to do that if it means putting on average $50,000 to $100,000 in your pocket that by that time may be worth far less than it was when you purchased your home?
I have a family, so I know what this might feel like. My wife and two sons mean the world to me. The thought of moving all of us to another home is overwhelming and if it meant I’d have to do that to put $50,000 or maybe $100,000 in my pocket, I’m telling you that I would be hard-pressed to do it. I probably wouldn’t.
There’s a reason for my hesitation. Moving happens to be way up there on the list of the MOST stressful things one can do in life. Know what else runs a close second on that list of things that cause most stress? Death and divorce. In fact, it’s a pretty short list, which tells you something. If moving is on it, you may not want to sign up willingly to do it.
I’m not saying you should never buy a family home or that you should never move from that home to another. What I am saying quite clearly in this article is that you cannot call buying a home for your family to live in an investment. It isn’t.
If you’d like to learn about what investing in real estate for fun and profit really is, let’s chat. There’s no way I’m going to force you into anything but perhaps a new way of looking at things and all the many options you have as someone who invests in cashflowing properties… a.k.a., real investing.
I don’t bite and you’ll walk away with some excellent information.