CPA Gone Mad Issue 3: December 19, 2016
It’s official: Interest rates went up. Does this mean you need to jump on the low rates and buy a home?
First, this newsletter is focused on the home you live in. Rental real estate is a different animal. If you can earn a good cap rate on a rental property with whatever the interest rate is, it could be a good buy. I’m working on some future reports and books on rental real estate for you. But I have to finish trying some techniques myself to ensure they’re safe enough and easy enough to be implemented with minimal effort for long-term wealth building.
Second, you’re not going to like this article. Some of this repeats what is in my report Let Your Asset Allocation Build. It goes against mainstream and specifically what real estate agents and mortgage companies will tell you. They’ll say rates are going up, so now’s the time to buy a home. My best friend is a real estate agent and about to be a broker with his own business. My sister just got her real estate license. They won’t like this article.
Basically everyone I know from college owns the home they live in. Guess who doesn’t own the home he lives in? Yours truly. I rent. And I don’t mean to brag. I most likely make more money and have more money saved than all of these people who own their homes.
Now, I do own a house in Shippensburg, Pennsylvania, where I went to college, that I rent to students. I’m buying a condo in Myrtle Beach, South Carolina, which is being built and will be rented as a vacation rental. But I live in Los Angeles and rent an apartment.
Why do I rent? Because I can’t afford to buy something as nice as my apartment with cash.
And you should not ever finance consumption. So rates going up shouldn’t dictate whether you run out and buy a home. Because you shouldn’t be borrowing money to buy the home you live in.
Of course, mainstream financial outlets want you to buy a home. And so does the government. It helps keep the whole financial industry in business. Think about this for a minute. Real estate agents get paid when you buy or sell a home. Mortgage originators earn fees every time you get a mortgage or refinance. Banks and Wall Street hold the loans collecting the interest over time. Insurance companies sell you homeowners insurance.
The only one of those industries that makes money off my renting is an insurance company selling me renters insurance. And that’s basically free when combined with car insurance.
Financing consumption makes you poorer. I’m sorry, but it does. If you don’t have the money to buy the things you’re going to consume, you should not buy them. Don’t finance your groceries, Christmas gifts, car, vacations, or home.
Agreeing to pay for something later that you’re using today is not how you build long-term wealth. Rich people collect interest. Poor people pay interest.
I know the argument you’re going to make right before you click unsubscribe: “But my home is an investment because it goes up in value.”
Don’t you always need a place to live? If your current home goes up in value and then you sell it, doesn’t that just mean you’re now paying more for the next home you buy? Now, if you eventually downsize your house or move to an area with a lower cost of living, you could sell your current house and pocket some money when you buy your next house.
But don’t mistake that for your investment going up. You reduced your consumption. By making the decision to lower the amount of home you own or to live in a less desirable area, you decided to consume less. So this money you pocketed is not due to an investment going up; it’s due to your deciding to reduce consumption.
I can’t afford to buy a home in Los Angeles. Especially one as nice as the apartment I live in. But I can pay my rent in cash every month. I’m not giving someone else even 3% a year to “own” a home just because the mainstream financial outlets present an image that I need to own a home.
I’m saving that 3% a year and living in a small but really nice apartment. I’m not letting mainstream financial outlets make me poorer and them richer by collecting interest from me. I’m taking steps today to create a better future for me tomorrow. Saying I own a home is not helping create a better future. Saving on interest from consumption is allowing me to save more money. Which gives me more capital to invest. Leading to my long-term wealth building being able to compound every single day.
This is the same reason I still drive my 2003 Honda Accord. I paid that car off eight years ago and basically have been consuming it for free. Why would I want to go spend more money and even pay interest on that money to get a new car? That would make me poorer. Maybe I’d impress other people, but who cares? My financial situation is better than theirs is.
I suggest you begin to compare yourself to others in terms of how your financial future is setting up. And not worrying about what someone perceives you as “having” today.
To your health, wealth, and personal freedom,
Chad A. Walker, CPA, MBA