Why I Don’t Own a House as a Multi-Millionaire…

I'm a multimillionaire and I don't own my house and I don't invest in any property. But why isn't a house a great investment? Isn't buying property a great place to put your money? And surely it's better than throwing your money away on rent, right? Well, when you run the numbers, that's actually often wrong. And I've been saying this for years on my podcast, in my book, even on my Netflix show. You've been lied to about buying property. And in this video, I'm going to break down once and for all the four main parts that you need to know so that by the end you'll have a clear idea of the true cost of buying a house and what you should do. Starting with part one. The dream you've been sold. What is the American dream? If you're like most people, you picture a single family home with a white picket fence and 2.5 kids and a dog. Think about it. That is not an accident. Where did that dream come from? That dream is the result of decades of marketing. Some people might even call it propaganda, including from one of the most corrupt organizations in the world, the national association of Realtors. They just had a billion plus dollar judgment filed against them, by the way. Let me explain what I mean. Most people in the world do not live in single family homes like we do in America. And yet we believe that this is the only measure of success. Next up, think about the numbers themselves. Decades ago, your parents generation, certainly their parents. A house would cost roughly 2.5x your annual income. People would put down 20% and the total monthly payments would be about or less than 30% of your gross income, which includes mortgage, maintenance, insurance, taxes, all of it. Let me give you an example with some real numbers. If you make $50,000 a year gross income before taxes, that means that your house would cost $125,000. Do you know any houses right now that you'd want to live in for $125,000? And in that same example of 50k a year income, you'd put $25,000 down and your total monthly payments would be $1,250 per month. Have you ever seen a house like that in your entire lifetime? No. Things are different now. And yet we are still operating on these old rules that have been passed down to us without taking into account how things have changed. And this still doesn't explain the craziness of people who buy houses for five times, 10 times their salary with 3% down. And I'm telling you this because if you buy something you cannot afford, it might seem like you are buying your way into the American dream. But oftentimes it will come around and bite you in the ass. Which brings us to part two, the myths about owning a home. There are four main myths about home ownership, and I want you to know each of them. Myth number one, prices in real estate always go up. No, they don't. You would think people understand this after the 2008 recession, but there are powerful forces at play to get you to forget about this, such as the national association of Realtors, your family, even the government, all encouraging you to buy a house. Remember, many things appear to always get more expensive. That is the result of inflation. But in real estate, which is opaque, landlords will often discount the number of months you can pay. They'll do rate buy downs. They will do all kinds of things to avoid reducing the price while secretly reducing the price to keep up the myth that buying a house always goes up. Myth number two, the value of a house doubles every 10 years. This isn't always true. And even when the price does double price, most people forget to factor in phantom costs. Phantom costs are all the costs of a house that most people forget about their phantoms. They include things like good closing costs, taxes, property insurance, maintenance, repairs, even the gas to drive to Home Depot that you use, and your time, and of course, the cost, the opportunity cost of that down payment and what you could have made if you simply invested it in an S&P 500 index fund. In fact, it's actually quite common that you could sell your house for a higher price than you paid for it and still lose money. When you factor in all the phantom costs. Remember, it is not simply the bigger number minus the smaller number pops out profit. That's not how it works. You got to factor in all those phantom costs to get your true profit. Myth number three, you can use leverage to increase your money. This is partially true. And homeowners often point to leverage as a key benefit. You can put $20,000 down for $100,000 house. You can. If the house climbs to 120k, you effectively doubled your money. That is true. But remember, this leverage works on the way up as well as the way down. If your house declines by 10%, you don't just lose 10% of your equity. In fact, you can be wiped out. So it is important to remember that house prices don't only go up, house values don't only go up, and leverage can work for you. Or it can work against you. Myth number four. I can deduct my mortgage interest from my taxes and save a bunch of money. Ah, look, tax savings are great, but most people forget that they are saving money that they ordinarily never would have spent. As they put it, you don't spend a dollar to save a dime. In many, many cities, the amount you pay for owning a house is much more than you would pay to rent an equivalent house, especially once you factor in all the phantom costs. And remember, those tax deductions that everybody talks about, they were reduced even further in 2018. So I would not count on this. When you ask people, for example, what tax deductions, they often go, tax deductions. I go, what tax deductions? Most people have no idea what a tax deduction even is, much less which ones apply to their housing situation. Okay, now that we've learned to look past the housing propaganda and understand some of these myths, what do we need to do next? Well, that takes us to part three. Always run the numbers. Have you heard this phrase, if you rent, you're just throwing your money away or you're paying your landlord's mortgage? I got a question for you. Would you say the same thing about eating out? Would you say, ugh, you're paying the restaurant owner's mortgage when you eat that sushi? No. So why is it that that just rolls off our tongue when it comes to housing? That's because somebody invented that phrase, and. And now it's in the zeitgeist. And we resent that. We might be paying somebody else's mortgage, but we don't resent when we go and buy paper towels and pay someone else's mortgage because we're paying for value. Now, this is really important. I want you to pay close attention, especially when you are talking about high cost of living. Cities like New York, Louisiana. San Francisco, three cities I have lived in. Buying can be way more expensive than renting. In fact, it might not make financial sense at all. I'll give you an example. When I was living in New York City, I kept a very close eye on real estate. I was renting a nice place, and I saw that there was a unit right next door. Same view, same square footage, same number of bedrooms and bathrooms. And I tracked it. It would have cost me 2.2 times more to own than what I was paying in rent. Let's just say I was paying $3,000 a month in rent. It would have cost me $6,600 a month to own an equivalent property. You know what I did instead? I said, first of all, I like renting. If I have a problem, I just text my landlord. And second, I took the 3,600 extra dollars I would have spent owning and I just invested it in the market. And guess what? I made more money doing that renting and investing the difference than I would have owning. No Home Depot trips, no renovations, no problems with the faucet. Just living my life, texting my landlord, sitting back on the weekends and chilling, and investing $3,600 per month in the market. Look, I'm not saying your financial situation will be exactly the same, but if you buy a house where without opening up a spreadsheet and entering some numbers, you are making a huge mistake. I want you to run the numbers, I want you to look at the home you're thinking of buying and calculate the true cost. That includes property tax, which will go up. Maintenance costs, which are unpredictable but still need to be factored in. Even the $25,000 roof repair that's going to happen 11 years from now. You. You need to properly account for that. Now, mortgage payments, opportunity cost. Use this to work out the real monthly payment of owning a house and then compare that number to the cost of renting a similar property. If owning is considerably more, then financially speaking, it might make sense to rent and invest the difference. On the other hand, you might discover that it makes great financial sense to own. If that's the case, God bless. But I want you to understand these numbers before you make the biggest purchase of your life. Now, what about property as an investment vehicle? What about buying a property and renting it out? Well, I will say that it can work, but you've got to really know your numbers. And in my experience, most landlords do not even know their own basic numbers. Much less are they able to properly plan and set aside money and treat owning a property as a business. In fact, in my experience, over half of the people who write to me in financial trouble are there because of one of two things. Their housing costs or how much they spend on their cars. So buying a house should be thought of as a purchase. First, a very expensive purchase and an investment. Second, why. Why do you need to think about your house as a purchase, not an investment? Let me tell you, there are two reasons. First, the problem of risk. If your house is your biggest investment, then how diversified is your portfolio? Think about it. If you're paying $2,000 a month to a mortgage, are you investing $6,000 a month elsewhere to balance your risk? Of course, Not Second, real estate in general offers a pretty poor return for individual investors. Yale economist Robert Shiller found that from 1915 through 2015, home prices increased on average, only 0.6% per year. I know this sounds crazy, but it is true. Go look at the data now. If you want to grow your wealth, my suggestion would be first, Invest in a 401k. Go with index funds. Let them compound over time. If at some point you want to add in profit. Property as an investment? Sure. Part of a well diversified portfolio. If you want to own your house to live in, treat it as a purchase, not as an investment. Okay, we've got one part left. But before we jump into that, if you're watching this right now and you've made it this far, hit subscribe because we've got tons of new videos coming, chock full of new ways of looking at money. Which brings us to part four. Is buying a house ever a good idea? I want to make sure nobody misunderstands me because a lot of people have accused me of saying you should never buy a house. That's not true. In fact, I will buy a house myself one day. And as I said, it's going to be a terrible financial decision, but I'm going to do it anyway. What I am against is poor financial decisions and simply following what everyone else is doing without ever running the numbers. So how am I planning ahead to buy a house? Well, here are five questions I'm asking myself and I recommend you do the same. Question number one, will I live here for 10 plus years? That's because when it comes to all the costs that you will incur, including those transaction costs and closing costs, you want to amortize or spread them out over 10 years. It's kind of like buying a new car. The minute you drive it off the lot, it loses pretty sizable percentage. That's the same thing with a house, but nobody talks about it. The minute you buy a house, you lose tens of thousands of dollars. So you want to spread those costs out over at least 10 years. That way you have a very good shot at coming out with a good financial outcome. Question number two. Will my total monthly housing costs be less than 28% of my gross income? Let me explain. This is really important to know. Why gross income? Because some people take out tons of money to max out their 401k. We want to start from apples to apples. Gross income, why 28%? Well, 10. Typically that was considered a good amount to manage risk. It's really hard to stay below that. Number so maybe in a high cost of living city with low amount of debt, you can stretch it 32, 33%, but you want to be very careful because the higher you go, the more risk you have and the less you will be able to have any money to do anything else. Question number three. Have I saved 20% for a down payment? I'm not saying you have to put 20% down, but saving 20% down is a signal to yourself that you can actually save money consistently. And that is something you will have to do once you own a house. Question number four. Am I okay if the value of my house goes down? Well, you should be okay because house prices go up and house prices go down. House prices go up and you might actually still lose money once you factor in all those costs. So you should not buy a house if you are thinking it's going to be a magic way to get rich, because for many people it's not. But. But if you're buying a house saying, look, I've calculated the numbers, I'm okay if it goes up or down, I'm buying this as a house, a place to live, that's a good sign that you might be ready. Question number five. Am I excited about buying? Do you know how many people I speak to who just feel so beaten down because everybody around them has told them, you should buy a house? You're a failure until you buy a house. Oh my God. You're throwing money away on rent and they genuinely feel like failures. You are not a failure if you rent. I could go out and buy a house today and I choose not to. I want you to be empowered to run the numbers and make a decision for your rich life. Forget what your parents say. Forget what your friends say. You decide what is right for your rich life. Now, if the answer to any of those questions is a hard no, and then it's probably not the right time to buy. I hope this video saves you money and helps you create your rich life. Now check out this video to watch more.