“Don’t buy a house unless you can afford to waste money”

I love investing in real estate and this is one of the main reasons I was able to become a self-made millionaire. But I’ve learned that buying a family home isn’t always a good investment.

I realized that in 2003 when I was newlywed with a newborn and bought my dream home in Los Angeles. But as time went by, I saw no return for the money or time I put into my home. So I sold it and used the equity to buy some rental properties. Then my family rented again.

Don’t get me wrong: I still support home ownership. Today I own three houses – two of which I rent out and the third is my main residence. But at the end of the day, owning a home costs many people money out of their pockets.

This is why I believe that buying a house is not a wise investment, especially now with rising inflation and high property prices:

1. Costs eat up profits

Let’s say you bought a house for $100,000 and put down a $5,000 down payment. Ten years later, you sell the house for $200,000.

It looks like you did it: You turned $5,000 into $100,000 after paying off your mortgage. But you forgot to calculate the cost of owning this house:

  • 10 years interest at 6% per year: $60,000
  • 10 years property taxes at 2% per year: $20,000
  • Property fees of 6%: $6,000

Total cost before maintenance: $86,000

That leaves you with a net return of $24,000 (or 24%) on that $100,000. Over 10 years your investment has returned at 2.4% per year and we haven’t even factored in the cost of roofing, plumbing, paint and other maintenance fees.

A good general rule to keep in mind is that you spend about 1% of the purchase price of your home on maintenance each year, but these fees can be more expensive during periods of high inflation.

Tip: Don’t buy a home expecting to make a real profit. Instead, only buy if you have enough income, passive or active, to pay for mortgages, property taxes, and upkeep.

2. No cash flow makes you dependent on the market

True real estate investing provides you with a monthly passive income — or cash flow — after all mortgage payments, property taxes, and maintenance.

If your home isn’t delivering a monthly cash flow, its value will always depend on there being a homebuyer who is qualified to purchase and who likes your home. You pay to live in it while you wait may be make a profit.

Hard times often boost the value of rental properties and hurt single-family homeowners. If I’m selling a rental property, all I have to do is find someone who wants to make a profit, and that’s not difficult.

Tip: Only buy if you find a trophy property that is selling below its value, can afford to pay cash and are 99% confident there is a profitable exit based on the surrounding market.

3. Limited tax benefits over commercial real estate

So when is it worth buying a house?

https://www.cnbc.com/2022/08/11/millionaire-and-real-estate-expert-dont-buy-a-home-unless-you-can-afford-to-waste-money.html “Don’t buy a house unless you can afford to waste money”

Joshua Buckhalter

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