How to create your own affordable housing

There is a constant debate on the internet about buying a home as opposed to renting.  Before we go any further about buying or renting lets just say that my philosophy is always to own. So this isn’t a rent talk blog.  This blog is about why you must buy right when it comes time to buy.

Buy just enough home

The problem isn’t buying or renting the problem is that people are buying too much home.  I almost fell into this trap and I am still trying to convince my wife that is a trap.  One of the key mistakes people make is buying what the bank qualifies them for.  The bigger the loan the more money the bank makes. The bigger the loan though the less income you have to invest in things outside of your primary residence.  You have to leave room for wealth generating activities so you don’t end up house rich and cash poor.

During the housing boom someone I knew bought a seven bedroom, 4,000 sqft home that they didn’t need.  It was an amazing house with a ton of space, more space than they needed.  When the market corrected they ended up being upside down on the home and decided to let it go.  From there they rented for a year or so until they cleaned up their credit then they bought a home that is more right sized.  They now have a mortgage that they can more than manage out of one persons income, they have equity and they have a mortgage that can get paid off rapidly compared to the jumbo mortgage they had before.

A lot of people fell into this trap. I don’t blame them.  The problem is that after this boom and bust some people bought right and some people swore off buying altogether.  That is not the solution. Renting longer term is like trying to build wealth with a hole in the bucket.  Renters don’t get rich, renter make their landlords rich.  Thus, renting should never be a long term wealth building strategy. 

House is not an asset

In the book Rich Dad Poor Dad, Robert Kiyosaki uses the phrase “your house is not an asset” over and over and over and he is right.  The thing is that just because something isn’t an asset doesn’t mean that you shouldn’t buy it.  There are smart liabilities and then there are dumb liabilities.  A house is a smart liability because while it costs you money it also saves you money and it can be turned into an asset.  An apartment just costs you money.

If you leave your house with equity  you walk with a check.  If you leave your apartment they send you a bill for cleaning, carpet and paint and THEY keep the equity that you gave them.  Their multi family complexes appreciate just like your single family would.  There is still equity working you just don’t get any of it.

A perfect example of a house turning from liability to asset is my friend’s rental property. Prior to marriage him and his wife owned their own home.  When they got married they kept her home (liability) and turned it into a section 8 rental property (asset).  Now they have about $100k in debt on it, $300k in equity and it cash flows $1,000 per month with the refinance that took the payment down to pennies. If his wife was renting they wouldn’t have either of those.  That house is basically their retirement.

Home ownership is affordable housing

One benefit of financial intelligence is that it lets you take in facts and come to your own conclusion not the conclusion that you are being sold.  Right now I see a huge arbitrage in home buying in America.  With rents being so high we are back in times when it is less expensive to own than it is to rent.  In Southern California and in all other major cities across the country it just costs way too much to rent “luxury” when you could own your own place.

For example, a 2br in Murietta CA rents for 2,000 per month but a 2br condo sells for $200,000. The mortgage and HOA on that $200,000 condo would be $1500/mo compared to renting for $500 more.

This same example can be seen everywhere including Los Angeles. The rent to own disparity is huge especially in multi family.  The wise move these days is to buy that fourplex in Los Angeles (Compton) that might cost you half a mil, when you can rent the other three units for $1500 (easy) as opposed to paying $3,000/mo for your own unit in the city.  The mortgage on $500,000 is around $3,000 per month.  This would mean that you would bring in $4,500 gross rents per month ($1500 monthly positive gross cashflow), AND you live for free. The added bonus is that Compton is in the path of progress and your fourplex could be worth one million in five years as the area further develops.  Compton is the new Brooklyn.

The key takeaway from this post is to read books, get educated and learn how to play the game.  Don’t expect special interests and people who got burned to give you sound advice. The opposite of buying too big is not to not buy at all. The best move is to buy the right sized home.  Ownership will never let you down.  Rentership will keep you poor and leave you with nothing to leave your heirs. Remember the people who rent because its comfortable and easy look up and years later they could have bought three homes.

Don’t be selfish, your living situation isn’t just about you and your budget.

Be great, invest well

Todd Millionaire

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