Why Buying a Home is NOT the American Dream

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience. Live it is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Ever notice how everyone talks about buying a home like it's a rite of passage, but nobody talks about the 30 years of payments, the surprise roof leaks, the HOA letters about your mailbox color. Yeah. Welcome to the American dream, brought to you by the people who make money when you're in debt. All right, I get it. Listen, for decades, we've been told that renting is throwing money away. But today, I'm going to pull back the curtain and show you why. For a lot of folks, buying a home is actually the fastest way to lock yourself into financial stress. And I'm going to prove it with some real numbers for both a high cost city and a more affordable one so you can decide for yourself what's right for your life. This is building your money machine, where we help you master your money, eliminate financial stress, and live a life of choice. Because earning more doesn't make you free. A money machine does, though. And that freedom, it doesn't start with your next raise or your next paycheck. It starts the moment you get your money to work harder than you do. Think of this as a bit of financial education with a side of sarcasm and a whole lot of heart. And I'm your host, Mel Abraham. And I started this out thinking that I was going to have success with a pretty spreadsheet in the corner office, not having to talk to anyone. Well, I learned the hard way and the fun way that money without meaning is like a treadmill with a view. You run, but you're not getting anywhere. In this episode, we're busting one of the biggest financial myths in America. And I'm pulling it, pulling out my rent versus buy calculator, giving it to you for free to show you exactly how home ownership makes sense or doesn't make sense and how expensive it can be. All right? And if you ever wondered whether buying is really the dream or just a debt trap, stick with me. Let's do this. We've been sold a lie. The American dream, okay? Supposed white picket fence, a 30 year mortgage, and a house you own, okay? But for millions of Americans, that dream is less about freedom and more like a lifetime subscription to stress. And I'm going to prove it here. All right? We're going to walk through some numbers and we're going to do that. So. So let's just start to understand where this dream came from. Here's how this, this whole thing came from. I think it didn't fall from the sky, but after World War II, we had something called the GI Bill that meant cheap land and new suburbs popping up like dandelions, okay? Banks were happy, builders were happy, politicians were happy. Because a nation of homeowners is a nation of people with mortgages. Translation. Predictable. Locked in customers. Throw in glossy magazine ads of smiling families in front of shiny new homes and boom, you got yourself a culture script. That's what happened. And once your parents and grandparents bought into stopped being just a financial choice, it started becoming part of their identity. Part of your identity. And that's why buying a home feels like a goal for so many people. It's not just about the bricks in the wood. It's about the status, it's about the security. It's about not feeling like you're falling behind. The problem is the script was written for a different economy and it doesn't automatically lead to freedom anymore. I remember when I was getting ready to publish my book, I was having a conversation with one of the team members at the publisher, and he said to me, I don't know if I can ever own my house or buy a house. And I said, what do you mean? He says, it's too expensive. Interest rates are up and housing costs are up and values are up. I don't know that I can afford it. And I said, well, let me ask you something. Why do you want to buy a house? And he said, well, it's the American dream. I said, wonderful. My question is, is it your dream? See, we've been sold this because, including me, you know, when I was just coming out of college and everything, one of the things my parents said to do, go buy a house. Go buy a house. Go buy a house. Go buy a house. That's. That. That'll set you up. And maybe it does in many cases, but in other cases it may not. We've all heard it, you know, where they sit back and say, well, renting is just throwing money away. Yeah. And going to the gym once guarantees a six pack. Right. Okay, that, that's the thing here's the truth. Renting without a plan is a waste, but so is buying without running the numbers. Because when you own your mortgage is just the minimum cost. We always, we many times look at the mortgage, but there are so many costs over and above that. Add to it property taxes, add to it insurance, add to it maintenance, repairs, closing costs, the lost opportunity cost of taking that down payment, putting it in a house that could have been invested. And for the first 15 to 20 years of that mortgage, the bank gets more money than you do in the sense that you don't get the equity buildup. It's like planting a tree in your yard and the neighbor eats all the fruit for the two, for the first two decades. That's the game we're playing now. Does it make sense? I mean, full transparency. I own my home, okay? I am a homeowner now, but it was a lifestyle choice, not a financial choice. It was a lifestyle choice that, a financial impact, but it wasn't, I got to do this because this is going to make me wealthy. This is the path to wealth, okay? Because your home is not an investment, it's simply a lifestyle choice. And lifestyle choices should be made with math and intention. Not fomo, not Pinterest boards, not, not social media, not Instagram. See, the real danger is people think they're buying stability, but what they're actually buying is inflexibility. You can't just pick up and move when opportunity calls, not without bleeding money. And that's where a rent versus buy calculation comes in. It starts to tear back the curtains to see the real numbers. And so I'm going to jump to the calculator so you can see it on the screen. And you can download it by going to melabraham.com homebuy totally free. You can download it, you can do your own calculations and you'll start to see based on your assumptions, whether it makes sense or not from a financial standpoint. Now, mind you, you still may make the decision to buy, but it becomes a lifestyle choice that you have to integrate into your financial plan, just like we did here. But it can't be a choice that says, this is the foundation of my wealth building plan. All right, so we're going to, we're going to look at two different cities. One is Los Angeles. I wanted a high cost city and I figured I'm either going to go to Los Angeles or New York. Well, let's just do Los Angeles. And what I'm going to look at here is the median house value currently and In Los Angeles, it's $970,592. So let me jump to the calculator. This is what it looks like. And I'm going to, I'll bring it up on the screen. I'm going to walk you through it. But let's just look at Los Angeles first. Okay. And let's put the median house in here at 970,000 and I'm going to round it to $600. Okay. So we have the median house in there. And now when we look at this, there are other costs. And this is the thing that most people don't think about. If we're going to buy a home, we have to make a down payment. And in this case, that down payment is 194,120. We assumed a 20% down payment. Now could you, could you pay less? Yeah, you could, but let's just do a traditional 20% down. That means that you're going to get a loan, a mortgage for $776,000. And let's presume that you're going to have a six and a half percent mortgage rate. Okay. They're somewhere between six and six and a half percent now. And it's going to be on a 30 year mortgage. So those are the assumptions we make. But the things that we don't think about are some of the additional items that I have listed here. Okay. So your monthly payment on that loan is $4,908, but you still have real estate taxes. And real estate taxes in California can range from 1% to 1.3, 1.4%, depending on your city and county that you're in. So I just used 1.2%. Your homeowner's insurance, it's all over the board. It can be crazy. Like, my son lives in a fire zone, and because he lives in a fire zone, they're surcharging him almost $10,000 a year on his homeowner's insurance. But I put in here 0.6% as an average on a monthly basis. Okay. Homeowner's fees. I assumed no homeowner's fees. But if you had homeowner's fees, that's going to add additional expenses. There are certain areas, like we live in a homeowner's fee situation. There's other areas where I've lived where there were none. Okay. And then repairs. This can be all over the board. Because if it's a new home or an old home or a home like ours, which is, which is literally by the water, trust me, saltwater, eats at everything. And the kinds of repairs we go through is crazy. All right? And when you buy a home, you're not thinking about that, but these are the things that we need to look at to see if it makes sense. And then, and then I hear it all the time. People say, oh, well, there's a tax shield because you can deduct the interest. Yes, you can. All right, So I put a tax rate in here to figure out the tax. Tax shield. And then we know that costs go up every year. So I assumed a 3%. A 3% increase every year. That means that my initial monthly costs on this home bare is 67.68. Okay, if I presume that the annual appreciation the home is 4.9%. Okay, this is. That is the 10 year average of appreciation in Los Angeles, 4.9%. And I assume that I own the home for 10 years, and the selling cost to get out of the home when I sell it in 10 years is 6%. The value of the home in 10 years is 1.56 million. The selling cost is 93,000. That means that the estimated net that I get out of that is a little less than a million and a half dollars. But I still owe the loan because my loan balance is only gone down to 658,000. Remember, the first 10, 20 years, you're paying more interest than you are paying principal. So ultimately, my net proceeds from selling the house is 813,000. So you sit back and say, okay, I bought it for 970. I ended up with 813, but I only put $200,000 down. So that's not bad. Well, let's look at all the numbers, because that's the thing that people don't look at. The total real estate cost during that time was $133,500. That is for the 10 years. The total insurance cost is 66,000. The total repair cost is 55,000. The principal interest pay down is 588,000. The original down payment was 194,000. That means that what you actually spent over the 10 years is over a million dollars. Now we get, like I said, a tax deduction for the interest. So you get some savings, and it saved you $117,000. So that means the net cash outlay was $921,000. The ownership of this home, when you look at it and you sell it based on this cost you $100,000. Well, what does rent do? All right, so I looked at the average Rents in LA just the same. Now I move over to the rent side of this and the average rents were $2,800. So I'm going to use $2,800 here and I'm going to put in here. And there's some very important assumptions when you do this. So I'm going to use the same inflation factor for the rents. That means my rents are going to go up at 3% every year. I need renters insurance, so we'll get renters insurance based on the rent. And that means my monthly rent cost is going to be 2836. Now, rents go up every year. So we inflation adjust it for the same time period of 10 years. And so you look at the total rents of $396,000 compared to the $921,000 of the cash outlayed here for homeownership. And what that ends up looking like is that the net savings to rent is $524,000. That's a monthly savings of $3,756. Now here's the deal. What do you do with that? $3,700 makes or breaks the equation. If you turn around and don't and spend it, then this is not going to bode well, and I'll show that to you. But let's assume at first that you're going to invest 100% of that in the market. So there's a couple of things that happen. You don't pay the down payment, so you're going to invest the down payment of 194,000. You have to put a security deposit down. So you're going to reduce it by that. You're going to invest the 3756 every month. Let's assume you get 8% a year over 10 years. Then the total investment value at the end of that period is $990,000. Okay, the benefit from renting in this scenario is over a million dollars if we invest at 100%. Now what happens if we invest 0%? So if I go in here and I go 0%, what does that do? It still nets you out half a million more. Okay, now what happens if the rents are actually, let's say more like $5,000 a month? Okay, and, and now you look at it and it's still starts to add, it still adds up to more than half a million dollars more. Even if we don't invest the difference. What happens if I invest 50% of the difference? Still $600,000. Okay, so my point is this. We need to run the numbers. Now. Let's just play around with this for a moment. Let's go to a less cost kind of state. Let's look at Minneapolis. Now, that house was 300 and 337,500. Call it $600. Okay, so that's going to change all the numbers on this side because the down payment goes down to $67,000. All the costs, and now all of a sudden the cost is $2,300. Now, also, though, the appreciation is different over time. And let's just say that that is 2%. So here there's a net cost of 162,000 to own the home. And if I go over here for the rent, the average rents in Minneapolis were 1500. Whoops, fifteen fifty dollars. Still, when you look at it at the bottom line, $357,000 better off if I invest 50%. Okay. Of the savings. Point being, is this okay? I'm not saying not to buy a home. I am saying that you need to run the numbers. If you're making a lifestyle decision, make the lifestyle decision with your eyes wide open. We tend to not think about the phantom costs and the stuff that nobody is bragging about on Instagram, like the $25,000 to put a new roof on, the 70,000, $75,000 that we had to spend to put new windows in. The $12,000 we had to do because of a surprise plumbing issue that we had to re sleeve some of our drainage. The $1,200 for the fancy front door because your HOA says you can't have that because it's not an approved color. It's not to not do it. It's to do it with your eyes wide open and to know what you're trying to do. See, in the different markets, the numbers will run differently. Depending what you do with the differential, the numbers will run differently. So I am not anti home ownership. What I am is I'm anti blind homeownership. The American dream shouldn't be a mortgage, because that's truly what they're selling. The American dream should be freedom to live where you want to work, how you want to not have your net worth wrapped up in drywall to allow you to do that. Renting is not failure unless you take the savings and blow it on brunch and boat payments. The smart move sometimes is to rent when the numbers favor it. Invest the difference into assets that actually make you money while you sleep. Because earning more doesn't make you free. A money machine Does. Okay, so if I were to buy a home, the first question we gotta ask, and I think that there's six things to check in here and that is this. The first is, is it your dream, not the American dream, Is this something you want for lifestyle? For reasons I don't know, maybe it's because you want to live in this neighborhood, maybe because of schools. But you could be renting. And remember, the rent is the maximum you're going to pay. There's no real estate taxes, there's no insurance, there's none of the repairs that's on them. But the mortgage is the minimum you're going to pay. So we need to look at it now. So one, is it your dream? Two, are you willing to stay seven years or more? The fact of the matter is buying a home because of the friction of getting in and out, the sales costs in and out of it, the exposure to the market, all that stuff, it's not something to be done for one year, two years, it's something to be done for a long period of time. The longer we carry this out and you can run the numbers when you download the calculator, the longer you run this out, the more likely it starts to make sense to own. And, and so one of the things you got to look at is am I willing to be here for a long term? Do I, is there a possibility of a job move? Is there a possibility of something else? Okay, now one of the things that I've done with my homes historically is when I moved from one home, I didn't sell it. I turned it into an income property and rented it. So now I have an asset that's cash flowing. That's a different game and I don't have that here, but it is something you can do. Now the question is, the third question is, do you have the 20% down plus the emergency fund? When you're first starting out and you're trying to get into your first home, I get it. Getting 20% down, especially at home prices to where they are is really hard. So you can get into a home for less. However, you take on a lot more risk because you are taking on a lot more debt. You have much less equity. In all likelihood, they're going to add in something called pmi, which is mortgage insurance, because there isn't as much equity and they want to insure it, which is a tack on fee on top of the mortgage that's going to be there. And you can put it into the analysis. I have a line item for you to be able to do it here if you do that. But whatever that down payment is, I prefer to be as close to 20% as possible. Do you have that plus the emergency fund in place to make it make sense so you have the liquidity and are you prepared for the ancillary contingent expenses that you haven't planned for that might come up when you move in? Things like, well, that couch doesn't fit there so we need a new couch. Or if we get a new couch going, new TV and we got to get new nightstands and we got all those things. Your total housing costs, number four is your total housing costs need to be under 35%. I mean total housing costs, not your mortgage. Mortgage, interest, insurance, real estate, taxes, maintenance, hoa, everything, all in costs. And that is tipping the scale. I'd rather have it at 30%. Will you be. And then number five, will you be fine if the value of your home drops 10 to 20%? And then number six, you are buying for your life plan not because your brother in law did it or you were told to do it. Okay. I don't care that your mother keeps sending you Zillow links. The question is, is this purchase based upon your plan for your life? Which kind of goes back to is this your dream? Okay, so if you're going to look at this and you've answered those questions, then I want you to take and Download the Rent vs Buy calculator. Okay? You can go to melabram.com homebuy to get it and run the numbers. So you are 100% clear on the numbers because before you buy, you run the numbers. Don't trust your gut. Don't trust the headlines. Trust the math. Don't trust the real estate agent or the broker that's trying to sell you in it. They have a conflict of interest. Do your own analysis. And here's the other caution. Beware of the emotions attached to the home because they are really good at having you picture your life in the home. And now all of a sudden, this not only becomes a financial decision and a lifestyle decision, it becomes an emotional decision. And when it becomes an emotional decision, sometimes we make bad choices when it comes to finances. Remember this, the real American dream. It's not about an address, it's about building a money machine. So your life is funded by choice, not by chance. And that dream, that one is still alive. And let's go after it. All right. I hope that this helps. I hope this gives you a different perspective and a tool that'll give you the path to try and dial it in. Make the right choices for the right reasons in your life and no one else's and not because someone else said so. All right, Let me know what you think. Let me know what you come up with. I'd love to hear from you and I'd love to hear about your journey on your path to financial freedom. I'm on a crusade. I want to light the path to financial freedom for a million families and I want one of them to be you. All right. Until I get the chance to see you in the next episode or on your path to financial freedom. As I always say, always, always strive to live a life that was you. See you next one. Thank you for listening to the Affluent Entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com group and I'll see you there. And that's it for this episode of Building youg Money Machine, where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcast, or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom your birthright and I want to help each and every one of you claim it. Thanks so much.