Whenever someone says my home is an investment I cringe. It is all I can do to keep my mouth shut.
I simply nod and think to myself “Does this person know the definition of an investment?”
Here’s my definition of an investment.
A small outflow that puts a massive inflow in your pocket with the least amount of time and risk that you can repeat until you are rich.
I have a client that invested $1,000 into Apple stock. She thought Apple made a cool computer. This was when Steve Jobs came back and fired the board of directors.
Apple was dying at the time and I was a skeptic. We are talking 1997 when Apple actually made a deal with Microsoft. Easily considered the lowest point in Apple’s cultural history.
Still, it was only $1,000. She could easily afford to lose the entire investment.
She rode it up, then down then back up again. I know very few people who can do this. She is a rock.
In 1998 the stock hit $7 a share. She held on while all of Wall Street declared the death of Apple.
When Steve told us MP3s suck and he had a better plan, I was a skeptic. Who cares about downloading music?
When Steve told us our phones suck and he had a better one, she kept riding the stock up.
When Steve told us we needed a tablet, after Microsoft failed miserably in the tablet space, she held on.
She never sold.
Today, it is worth over $100,000. It cost her nothing to maintain and she never had to pay a nickel in taxes.
Oh, it cost her no time. She simply called me and said buy Apple.
That is my definition of a perfect investment. The problem is you can’t repeat this success. How many Apple stocks are out there?
My first rental cost me $5,000 down. It took lots of time and money to fix it up. I later sold it and exchanged the profit tax-free into 2 more rentals.
I kept doing this. Buying more rentals with my profits until I had a bunch of them.
Repeat until rich.
Oh…I’m still working on the rich part. It is a slow process. Just like the tortoise versus the hare. Slow and steady wins the race.
I traded time/sweat equity to nurture my little investment. While it cost me a lot of time in the beginning, I knew it would pay off in the end.
My plan was simple…Buy one duplex per year for ten years and become a millionaire.
After 8 years, I hit my goal early. So I changed my plan to 1 rental a year until my kids go to college. Instead of duplexes, I focused on three, four or five plus multi family properties.
In theory, the plan was more units means more rent checks. If a couple of units go vacant, I can still pay the mortgage. This is why I hate single family homes. If the unit goes vacant, you can’t pay the mortgage.
Today, these rentals put a lot of money in my pocket each and every month with very little work compared to my career. All I do is manage my team.
I have chosen to work hard on them but really don’t have to since they don’t take lots of time to manage when I’m not renovating units or buying a new building that needs repositioning.
Right now, I’m renovating one unit a month. It’s a lot of work and stress.
By the time my kids go to college, all the units will be optimized and they won’t have to graduate with tens of thousands in student loans since all the big renovations will be over and done with. All the money spent on upgrades will be sent to the school of their choice.
This is what drives me to become the landlord with the best product for the best price. Once you have nice properties, you can attract nice tenants and free up your time.
Trust me on this. Crappy properties attract crappy tenants.
Once the kids are out of college, I can focus on retirement without relying on my day job or that moody fellow called Mr. Market who screams at me each day about the value of my IRA. Some days he is happy and the portfolio looks great. Other days he is crabby and wants to kick the dog so my IRA value drops.
If I really wanted to save time, I could hire a property manager and pursue other passions.
I get calls all the time from people who want to manage my portfolio. Even if I paid a property manager, it would still put a lot of money in my pocket.
When I run the numbers, I’d rather run my own management company. 10% off your top line revenue is a huge hit when you are paying for mortgages, taxes, insurance, maintenance and capital improvements.
Eventually, I will trade up and hire a professional management company. That’s the natural progression of a real estate investor.
I live in a home. It is a side by side townhouse. I call it a duplex.
I hate my home.
I have to shovel the walks and snow blow the driveway in the winter.
In the summer I have to mow the lawn and clean up leaves and all the minor annoyances that come with landscaping.
Sometimes, I have to repaint the deck, hire someone to patch the roof or replace the water heater. I deal with all sorts of distractions that wouldn’t be there if I were a renter.
This summer we had an epic windstorm. Trees fell and I had to break out the chainsaw and clear the mess.
My power was out for 5 days while my tenants power was out for a day or so. I’m looking at buying a generator now. If I rented, I wouldn’t need one.
How funny is that?
Landlord no power.
Tenants lots of power.
I’m just glad they had power otherwise they would have made my life miserable. I once had a tenant call me when the power was out. Here’s how it went.
Tenant: Hey Cory, my power is out. Sorry to bother you.
Me: Is all the the power out or just your kitchen or bedroom? You should check the fuse box.
Tenant: No, all the power. Can you fix it?
Me: Hmmm, sounds like we need an electrician and it is Saturday night and I will have to call him tomorrow. Tell you what, look out your window. Just want to make sure it is not the building. Do you see any street lights on? Neighbors lights?
Tenant: Nope, it is pitch black out there. Whoa…the whole block is down.
Me: Looks like it’s the power companies fault. I’m sure they will be there shortly.
Tenant: I need power! I’m watching Netflix and I have a paper due tomorrow and cannot charge my computer. Can’t you fix it?
Me: Sorry, don’t have a bucket truck.
All my life I was taught that you need a home to be successful. A home is an investment. It is the American dream.
The only reason I own my home is my tenant next door pays my mortgage. Three kids, a dog and a cat and rent arrives early. She rocks!
Prior tenants were the same-professionals looking for the convenience of renting versus owning in a nice neighborhood.
Plus, no landlord in their right mind should rent to me. I have two kids and two dogs. I’m a big risk.
I could easily purchase a nice home but I view it as a terrible waste of time and money.
Home ownership is painful. If you disagree, go visit an estate sale.
The poor kids have to deal with all of mom’s junk, selling the home and then the aftershocks of strained familial relationships as a result of the disposition of the estate.
Are you still convinced a home is a great investment?
9 Reasons Not to Own a Home
- Negative rent to mortgage spread. Yes you have to live somewhere, but a mortgage plus taxes and insurance (PITI) is typically higher than a comparable rent payment. A good rule of thumb is your monthly PITI should be less than 1% of the value of your home assuming you put nothing down. If your home is worth $250,000, then you should pay less than $2,500 per month. If it doesn’t, then you are better off renting.
- Dead equity. You might have a few hundred thousand in equity. What good is that? Does is it put money in your pocket? Do you get a 1099 at the end of the year stating how much interest or dividends you earned off your equity?
- Out of the blue property tax and insurance increases.
- Homeowners insurance that gets cancelled as soon as you file a claim. Renters insurance is 90% cheaper than homeowners.
- Natural disasters like floods that can wipe out the value your home in the blink of an eye.
- Forces you to buy stuff you never need. Like a state of the art snow blower and a generator for epic wind storms.
- Keeps you chained down. Mobility is money.
- Your home value is subject to the whims of your neighborhood. Need to sell a unique property? Ya gotta wait until another unique property that is similar to yours sells for the right price in the right area. Welcome to the world of real estate comps where they can only look back twelve months.
- More expensive to unload than a variable annuity or cash value life insurance contract. After it is all said and done kiss 10% of the value goodbye after you spend a fortune prepping it for sale, paying the realtor and closing costs.
Does this sound like the American Dream?
I’d rather get lucky and buy Apple.