Forget everything you’ve been told! On today’s Financial Freedom Friday, Matt explains why your home is a TERRIBLE investment. Learn how to avoid investing with your emotions, a simple trick to help you decide whether to rent or buy, and a superior alternative to investing all your money in one house.
What You Will Learn About Why Your Home is a Terrible Investment:
- Why your home is a terrible investment
- How to avoid making emotional decisions with your money
- The stigmas you must overcome to be successful
- The painful truth about what you pay to live in a house
- A much better alternative to investing in a house to live in
- A simple trick to help you decide whether to buy or rent a house
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Matt Theriault: Hi, I’m Matt Theriault at Epic Real Estate, and welcome to another episode of Financial Freedom Friday.
Speaker 1: It’s time for Financial Freedom Friday, with Matt Theriault.
Matt: So last week, maybe it was two weeks ago, we put up a meme on our Instagram account. If you wanna follow us, we’re @epicrealestate. But we put a meme up there that said, “Your primary residence is the worst performing investment in America.” And, that ignited some spirited conversation. And you know, it’s understandable. And we talked about this … I think a couple weeks ago, when we were talking about the 401K, we were talking about the IRA, about being careful not to invest with your emotions. But, rather invest with your math.
When you’re talking about your primary residence, there’s probably even more emotions attached to that investment than there is to the 401K. So understandably, people have never heard anything like that before. They had a lot of questions and a lot of comments. But, let’s look this. We’ve all been told that the first thing you do, and most people do, their biggest purchase, their biggest investment in life is going to be their home, is going to be their primary residence. That’s what people set out to do, is when you leave the house, that’s kind of what you’re thinking about. When you get married, that’s kind of what you’re thinking about. “Where are we going to settle down, where are we going to buy a house?”
There’s even a stigma attached to it is, you have a higher place in society if you’re a homeowner, versus you being a renter. Again, that’s all emotional. All those decisions are based on emotions. But, let’s look at it as an investment. If you actually do the math, what happens there? When I say it’s a bad investment, most people will think, “Well gosh, I bought this $500,000 house 30 years ago, and today it’s worth a million bucks. It’s doubled in price, I got this paid off an asset that’s worth a million dollars. How could that be a bad investment?”
Well on the surface it seems like you actually did pretty well for yourself, doesn’t it? If you go and you start adding up the mortgage payments that you made for 30 years, the interest payments that you made on the original purchase price. You look at the property taxes, you look at the insurance on the property, you look at the maintenance and the upkeep. Maybe you had happened to do some remodeling here and there maybe. Over 30 years, there’s not too many markets or too many scenarios where the appreciation of that property outpaced all of those expenses. It seems really hard to believe, but if you just kind of add it up, it’s kind of a painful truth. It’s eye-opening to a lot of people when they look at that.
There’s nothing wrong with purchasing your own house, it’s just you have to be careful you call it an investment. If you even consider it an investment. It’s an emotional purchase, and we don’t invest in our emotions, right? We invest with our math.
Here’s a different scenario. Let’s say this $500,000 house, you put 20% down, so you put $100,000 down towards that. And, you made those payments over the next 30 years, and at the end of those 30 years the house is paid off free and clear, and you own a million dollar property, of which we already kind of talked about, you paid at least a million dollars for it, okay? Really no different than stuffing your money under the mattress for 30 years. Once, at the end of 30 years, you have as much as you stuffed under there. Kind of this house, buying your primary residence, kind of works the same way.
Here’s the alternative. Let’s say you took that $100,000, and you split it up, and you bought two investment properties worth half that. So 250, $250,000 houses, you put 50 grand down on each, you got a mortgage, and you held onto those, and then you rented your home, okay? Over 30 years what does that look like? Well at the end of 30 years, those two also doubled, so now you have two properties worth $500,000. And, collectively worth a million bucks. So, what’s the difference? You got this a million dollar house, and you’ve got these two investment properties worth a million bucks. How are they really different?
Well, the big difference is, on the house, the million dollar house, you paid for that. You paid those expenses. On these two, million dollar property, or this million dollar income properties, the two $500,000 properties that you have now. Who paid for that? Your tenant paid for that. So, what did you get to do with that million dollars that would have gone towards your house that whole time? I mean, that’s a million dollars extra, ’cause someone else bought this for you, right?
That’s a big difference. This is an investment. This is an emotional purchase. It might make you feel good, it might make you feel accomplished, it might elevate you into societies standards. But, are you wealthier? Are you better off? No, you’re not, right? You want this one over here. Do you want these investment properties that someone else paid for, for you, okay?
Think about that as you’re thinking of where you’re going to live, all right? And, how are you going to live there? Here’s the caveat. If it costs you more to rent than it does to purchase, then go ahead and purchase. You still need a roof over your head, so you still have to pay for that over those 30 years. But, if in your area it costs more to purchase than it does to rent, then I would recommend a rent. And then let your investments pay for your rent, or at least offset that considerably for you. A lot of times what happens is, I mean this is my situation. I live in Los Angeles, I live in a 1.6 million dollar house. The payment on that would be significant each month.
But, I rent that property. I wouldn’t want to buy that house. I wouldn’t want to have that monthly payment every month. I wouldn’t want to have the upkeep, I wouldn’t have to pay California property taxes. It’s a significant chunk. I mean oh gosh, that’d be like 15 grand maybe, 20 grand a month after everything’s all said and done. But, I can live there for a fraction of that, in a much nicer house. And, my rental units are actually paid for my living. So, not only am I getting wealthier because I decided to do something different with my money, and put it into an actual investment that paid me. I’m also living in a nicer house than I would probably afford if I went out and decided to purchase it.
Consider that, just a different way of looking at things. You’ve got the information, do with it what you wish. But, yeah, the primary residence, kind of the worst performing asset in America. The real estate produces more wealth than any other investment vehicle, any other industry. But, no one said that you had to live in that real estate for it to work, all right?
So that’s it for today. I’ll see you next week on our other episode of Financial Freedom Friday. Take care.