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 buying a home 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 $14,000 (or 14%) on that $100,000. Over 10 years your investment has returned 1.4% 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.
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.
For example, you are limited to how much interest you can write off your home and you can only a Tax exemption on a $250,000 gain on the sale of a single family home every two years.
But if you’re going from investing in your home to investing in income-generating real estate, tax benefits skyrocket.
While rental income is taxed, there are certain expenses that you can deduct from your tax return, including mortgage interest, property taxes, utility costs, depreciation, and repairs.
Tip: To earn passive income from real estate, invest in rental properties with favorable tax conditions.
So when is it worth buying a house?
My Opinion: Don’t buy a house unless you can afford to waste money.
A home is, at best, a place you can call your own, and it can offer stability. But if your goal is to create wealth, there are so many other options, such as B. Investments in the stock market or in commercial real estate.
I also don’t think home ownership should be considered an “American dream.” For the most part, it’s just a place to live – and there’s always a cost involved.
Correction: This article has been updated to reflect that rental income is taxed.
Grant Cardone is managing director of Cardone capitalBest-selling author by “The 10X Rule” and Founder of The 10X Movement and The 10X Growth Conference. He owns and operates seven private companies and a $5 billion portfolio of multifamily projects. Follow him on Twitter @GrantCardone.
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