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YOUR HOME IS NOT AN INVESTMENT. DOES THIS SURPRISE YOU?

When a friend told me this story it broke my heart. A family member near retirement was determined to buy a home so that his children would one day inherit the asset.

He found a home, and though it was a big stretch, he also found a lender. He was now a homeowner.

Yet little did he know that he was buying at the peak of the real estate market in 2008-ish. At that time, Americans still believed that they were missing out on a “sure thing” if they did not buy, buy, buy. There was a “gold rush” frenzy as couples and families reached for the American Dream of home ownership.

Hasty ventures often have sad endings. Within a couple years the home purchased at an inflated price had lost nearly 50 percent of its value and he was forced to sell, ruining his credit rating and divesting the so-called asset that he hoped would help his heirs.

The man’s reasons for getting into the market were all wrong. But not because of the feverish need to own a home. Right now, at a time of relative economic calm, millions of Americans are making the same mistake.

What is the terrible mistake?

Professionals looking to buy a first home believe they are investing in an asset that eventually will turn a profit.

Wrong. Housing is a consumable service. Like bread and water. You need it, so you buy and consume it. Whether you rent or buy a living space, you should be grateful you have a roof over your head. As I say, it is a consumable service, just like food, that is essential to your survival.

In other words, why should a home in a nice neighborhood be treated like an investment vehicle?

Professor “Real Estate” Debunks TheAmerican Dream

Todd Sinai, a real-estate professor at the Wharton School of the University of Pennsylvania, has a message that many Americans may consider UN-American.

In an article by Alex Morrell for BusinessInsider.com Sinai debunks the American Dream of homeownership.

“People get caught up in this notion of ‘Oh, if I buy a house it’s an investment, so I can do it at any time,’ but it’s not,” Sinai told Business Insider.

Sinai outlines several major glitches in our way of thinking.

ONE: If you spend X-dollars each month for rent it’s OK to spend twice as much or more on a mortgage. Why? It’s an investment!

No, no, no. Sinai says “The amount you pay for housing should comport with your needs, goals, and budget.” The outlay has nothing to do with trends or the always-hoped-for growth of property value.

Allow me to put it in another way. In my FREE guidebook “Millennial Money: Wealth Power Habits for Physicians and Other Professionals,” I encourage professional people  to create a list of assets and liabilities. In short, assets are things you own, whereas liabilities are things you are buying, such as a home. The former must exceed the latter or you are in the red. As you know, I want you to be In the Black. And that won’t happen if your housing costs suddenly double or triple simply because you decided to buy a home.

TWO: When the price of our home grows in value, you can sell and make a nice profit and pay for college for our kids. 

I sincerely hope that happens. It has happened to me, and I was very pleased. But when I sold the homes I owned for a profit I wasn’t living in them.

You, on the other hand, are selling a home at a profit (we hope) that also is providing a roof over your head. Let’s say you get a good price. But then what? Sinai points out, “…you’ll still need a place to live, and you’re buying in that same market with expensive home prices unless you go back to renting.”

The professor goes on to mention that closing a deal on a home, however profitable, is an expensive process. You will pay taxes, there are fees to brokers, and closing costs with banks. All of which will nibble away at your windfall.

THREE: You can only win in the housing market if you own a home or duplex or something.

This is incorrect, and reveals the outmoded way of thinking that limits even my generation (I’m in my 40s). This idea that the common man and woman can only thrive if they own their own home is untrue. And it does us great harm if we don’t broaden our vision for financial wellbeing.

As I’ve said many times, millennials are not buying into the American Dream by way of home ownership. They are content to rent, if by doing so they can have an excellent lifestyle without bearing the 30-year burden of a mortgage.

Yet even that group of doctors and healthcare professionals must be savvy about investments. They too must realize that just because they don’t own a home doesn’t mean they cannot invest in the housing market and expand their net worth.

Professionals with incomes in high tax brackets should consider buying shares of multifamily and commercial (light industrial, storage) real estate that generates a stream of income. By doing so, they can claim legal tax deductions to off-set profits (and operating cash distributions) and defer taxation. Then he or she has the option to use tax savings to purchase more passive-income real estate. that improves taxation and portfolio growth.

There are other methods of investing in markets, and you must avoid the pitfalls of “the next hot property” and high yields as versus strong education and analysis when considering purchases. My free guidebook will help you sort through the choices.

If you wish to buy a single-family home, I encourage you to do so—but with eyes wide open. If you can find a home that fulfills your needs as you build a medical practice and raise a family, then you have likely already created an assets/liabilities chart. You know you can afford your dwelling and live in a style that is not harming you—or your future.

For young doctors, it may seem odd or unnecessary to mention retirement so soon—so I won’t. Instead, think in terms of reducing clinical hours for periods that give you more time to rest and enjoy life.

At the same time, remember the adage, “You make money in real estate when you buy, not when you sell” because this suggests that making wise decisions early in your career may be the best chance you have of enjoying an abundant lifestyle when you are ready to hang up your stethoscope and go fishing. Or sail your yacht.

Thomas Black, M.D.

P.S. I’ll be on the West Coast this spring speaking with medical groups. The theme is helping physicians create a foundation of reliable wealth.  I would also enjoy speaking to your school, hospital staff or medical group. Please contact me.

 

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