Is Buying a home for idiots?

Investor · St Louis, MO · Member since 2017 · 250 posts · 181 votes

Hi BP. I’ve heard a lot of real estate investors, including Grant Cardone, say that buying a home is one of the worst financial decisions you can make. What is everyone’s thoughts in this matter? I know that house hacking is a good decision but I’m not referring to that. The question is: if you had a choice to buy a house and be in debt for 30 years, or pay a landlord rent every month, which would you choose? Why?

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Omar Khan

Rental Property Investor · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes

@James G. That depends on a # of factors including where you live, your cost and tax structure, your future plans, purchase price, growth and inflation expectations, mortgage details, closing costs, etc.

NY Times has a great calculator: NY Times - Rent vs Buy Calculator

Essentially, there is no right or wrong answer because it all depends on your personal situation. The average person who considers their home an asset is wrong. No financial planner/advisor worth their salt, uses the value of an investor's house as part of their net worth (regardless of what posters on this forum believe). It is not considered acceptable, conservative practice. Owning your own home is considered a "shelter to substitute" i.e. if you don't own a home, you will rent. There is an imputed cost to both decisions (invisible as it seems to many individuals).

Nonetheless, the same house, if bought, say at 30-40% below market value can be a great investment. But the economics of owner-occupied house suck and do not make for a good long-term investment. Hence, most professional investors eventually either move up to multifamily or move into commercial assets.

Grant Cardone isn't wrong on this one. Remember, most people buy a house they can't afford with money they don't have to impress people they don't like (harsh but true).

P.S. There are many reasons to buy a house. They are emotional and valid. For instance, if you work hard, save money and dream of owning your own place. You should buy it! Many people with kids buy over priced houses in good school districts. But those aren't investment decisions (although, they are valid and should be given importance).

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Lana Lee:

Originally posted by @Jay Hinrichs:
Originally posted by @Lana Lee:

Originally posted by @Ryan Ingram:
Is both, an option? What if....your business entity owns your residence and you treat yourself exactly like a tenant. Market rent, set aside capex, the whole 9. Happy medium, or more insanity?!?!
That’s what I’ve done, and I can happily report that I am my best tenant. :) The home is consistent with my investment philosophies and other homes that I’d want to buy and hold.
Could you please tell a little more about that. What business entity owns your primary residence. Did you set it up before buying your home or transferred the ownership after purchasing primary residence? And do you have an actual rental lease with your entity?
Thank you

you lose the tax free exclusion.. and are subject to depreciation recapture .. .not sure why you would do that.
Sorry , I very new and don't understand what is depreciation recapture?
when you have a rental your allowed to depreciate it over time. when you sell it you have to recognize the depreciation as gain on your taxs if your property never went up.. you will have to pay tax on the recapture.. you can avoid that by doing a 1031exchange
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Sarah Lorenz
Specialist · Ann Arbor, MI · Member since 2016 · 356 posts · 191 votes
8y
It's not just the 30 year mortgage you need to think about--don't most people buy a home so that they can have a significantly lower cost for housing in retirement? Some people are living much longer now, outliving their retirement. Can you really afford a house payment in your 80s that is quadruple or more what it is in your 20s or 30s? That $2000 payment now could be $8000 in 40 years. Do you really want to retire and have all your living expenses continue to rise, outside of your control? Despite all the BP plans to 10x it and kill it with multi-family, sometimes things don't go your way. You could encounter reduced circumstances that you cannot recover from, like job loss late in life, major illness, injury, a divorce or a spouse that dies early and leaves you with less social security and pension than you'd planned, etc. Many Americans will contend with heart disease, cancer, diabetes, and their astronomical costs for care, even with Medicare. A modest house might not be a great investment on paper, but if you're 75, having a paid-off mortgage and just taxes/maintenance to pay vs. rent that relentlessly goes up 5-10% a year might mean the difference between being comfortable and being destitute.
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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
8y
Let's understand some basic math. On average not buying a home in a major CA city has proven over the decades to be a very unwise decision long run. If some can't understand that math, they are probably in the wrong business.
If that is just a personal choice not to own, cool but don't think for one minute that is a better financial move long haul on average. Grant broke his own rule in CA and made 5 mil if you needed more proof.
Good luck!
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Shawn Clark
Investor · Middle River, MD · Member since 2017 · 191 posts · 127 votes
8y
Originally posted by @Jay Hinrichs:

Originally posted by @Lana Lee:
Originally posted by @Ryan Ingram:

Is both, an option? What if....your business entity owns your residence and you treat yourself exactly like a tenant. Market rent, set aside capex, the whole 9. Happy medium, or more insanity?!?!
That’s what I’ve done, and I can happily report that I am my best tenant. :) The home is consistent with my investment philosophies and other homes that I’d want to buy and hold.
Could you please tell a little more about that. What business entity owns your primary residence. Did you set it up before buying your home or transferred the ownership after purchasing primary residence? And do you have an actual rental lease with your entity?
Thank you

you lose the tax free exclusion.. and are subject to depreciation recapture .. .not sure why you would do that.
There's a guru out there (more like a club, very well known) that teaches people to "own nothing, control everything". I bet it came from there.
1 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
"nothing wrong with having your home were you live paid for and set up for the rest of your life.."
I agree but I do it differently. Once mine was paid off I pulled out all the money I could and invest it into a income fund ( I still have 200K as my business funds by way of a HELOC). The cash is as secure as in my home and generates more income than I would be saving in interest on a mortgage. The money is still mine it just isn't held as dead equity. I have the ability to pay it off tomorrow, any day, if I choose but that would be unwise.
Personally my plan when I eventually retire is to liquidate everything, home, income properties, everything except my cottage, and move into either a rental or a retirement home. Retirement means not working.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
@Thomas S. that's great for a Canadian with Canadian tax code.. but us investor who has owned a rental for 30 years has now fully depreciated it..and when they sell it they have to recapture all that depreciation and pay the tax.. and its a whopper LOL... this is why I say once you decide to go down this road to fully utilize your cash flow your enjoying now you can basically never sell.. other wise your going to give a huge chunk if not all of it back when you do sell .. ( unless you have substantial appreciation.. )
@Shawn Clark Oh ya the guys that make a living selling to the perpectually paranoid LOL..
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Liz C.
Property Manager · New York, NY · Member since 2016 · 388 posts · 90 votes
8y
Jay Hinrichs , I am always curious about what shall we do after 30 years. I have property that I did 1031 and have 10years left or so. Any advice on those or just hold and not sale? Pay higher tax on rental income as well?
1 Reply
Liz C.
Property Manager · New York, NY · Member since 2016 · 388 posts · 90 votes
8y
Jay Hinrichs , I am always curious about what shall we do after 30 years. I have property that I did 1031 and have 10years left or so. Any advice on those or just hold and not sale? Pay higher tax on rental income as well?
0 Reply
Liz C.
Property Manager · New York, NY · Member since 2016 · 388 posts · 90 votes
8y
Why can’t I @ at people?
0 Reply
Lana Lee
Philadelphia, PA · Member since 2017 · 364 posts · 109 votes
8y
Originally posted by @Liz C.:

Why can’t I @ at people?
You have to wait a couple of seconds while your comment is being posted. Otherwise you will post it twice .
0 Reply
Keith Jourdan
Property Manager · Metro Detroit, MI · Member since 2008 · 305 posts · 362 votes
8y
Depends on the market and your goals . Here in Metro Detroit my mortgage is $1600, to rent a similar house would cost $2500 a month. Buying in the Midwest is a no brainer.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Liz C.:

Jay Hinrichs , I am always curious about what shall we do after 30 years. I have property that I did 1031 and have 10years left or so. Any advice on those or just hold and not sale? Pay higher tax on rental income as well?
this is when you put them in a family trust and let your kids take over at step up basis. and start all over.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Liz C., if you a drop down will appear of all who have contributed to this forum. Otherwise you can only tag your colleagues by @followed by name.
We have clients on their 3rd and 4th generation of passing down real estate wealth buy holding until death and then taking advantage of the step up in basis upon death. That's a pretty slick way to get rid of that profit without paying tax. But you have to die to get it.
Folks taking advantage of this the most 1031the assets into passive cash producing products specifically designed to throw off cash for as long as 20 - 25 years. There's products that match or slightly exceed normal stock market/dividend yields but maintain the integrity of your 1031 and don't trigger depreciation recapture.
There's even products designed to make provisions for long term passive debt from a 1031 called "zero coupon NNN properties". They provide no ongoing cash flow but pay down the asset so your heirs own the asset free and clear at the end of the term. We're in due diligence on one right now for a client. They're very heavily skewed to the sponsor but in the right set of circumstances can be a pretty powerful wealth transfer tool.
Others set up ongoing LLCs or trusts to own assets with their heirs so the entity continues. This allows the asset to also be milked of it's equity every so often so it's not a dead asset.
@Jay Hinrichs, I can't believe you haven't brought up timber yet! Log wait log again - generation after generation. Share crop farm land also.
Sorry gang I'm the curmudgeon - "own nothing, control everything" is a nice soundbite. But ownership is the ultimate control -whether your primary or other. It's not the ownership that hurts or helps you - it's the use of it and plan for it.
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Matt K.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
8y
Originally posted by @Sarah Lorenz:

It's not just the 30 year mortgage you need to think about--don't most people buy a home so that they can have a significantly lower cost for housing in retirement? Some people are living much longer now, outliving their retirement. Can you really afford a house payment in your 80s that is quadruple or more what it is in your 20s or 30s? That $2000 payment now could be $8000 in 40 years. Do you really want to retire and have all your living expenses continue to rise, outside of your control? Despite all the BP plans to 10x it and kill it with multi-family, sometimes things don't go your way. You could encounter reduced circumstances that you cannot recover from, like job loss late in life, major illness, injury, a divorce or a spouse that dies early and leaves you with less social security and pension than you'd planned, etc. Many Americans will contend with heart disease, cancer, diabetes, and their astronomical costs for care, even with Medicare. A modest house might not be a great investment on paper, but if you're 75, having a paid-off mortgage and just taxes/maintenance to pay vs. rent that relentlessly goes up 5-10% a year might mean the difference between being comfortable and being destitute.
I can't speak for everyone, but a house I buy in my 20's or 30's is not going to be the house I live in when I am retired. Plus, I don't get how everyone seems to overlook the investment side of things.... If something drastic happened I could easily live in my one of my rentals. Plus if I was retired then I likely wouldn't need to live near my job, I probably don't have kids living at home and or going to school, I have a lot less criteria then I do now.

But if I use all my money to buy a house instead of investing... how do I take advantage of the equity in my house? If I refi then my payments are no longer cheap, if I sell it's likely all the properties around me are now more expensive the same price as I'd sell mine for. I guess I could sell and downgrade, but that doesn't seem like a good idea... I guess the other option is a HELOC and borrow against my house and invest the equity... but then I'm risking my primary house. If I don't service that debt I lose my primary house and maybe my investment. At least with an investment house if I was to get it forclosed on, it's not my primary....

Or even crazier idea, what if your 75 and sell off or leverage your paid off rentals.... and use that money to buy your paid off primary that fits the needs of 75 yr old you, vs 20-30 yr old idea of what future you needs.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
@Dave Foster death and tax's Timber for sure if great long term wealth builder as we know.. but you still have basis in the timber and you have to pay tax when you harvest.. but you can do just like other real estate and pass it down and step up the basis.
my main point here.. is with those that buy a few rental props exiting is not always a joy and can be a shocker.. Like when I sat with my tax man in middle of dec.. and I said what the heck is this.. he said owe by the way you sold how many of your rentals that's your recapture.. ... you would have thunk I would have known right.. but no use.. I had way to much debt to have to 1031 and I don't want to be in the rental business so just pay the tax man and move on.
And my kids don't want rentals.. they want to inherit my notes :)
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Matt K.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
8y
Originally posted by @Jay Hinrichs:

@Thomas S. that's great for a Canadian with Canadian tax code.. but us investor who has owned a rental for 30 years has now fully depreciated it..and when they sell it they have to recapture all that depreciation and pay the tax.. and its a whopper LOL... this is why I say once you decide to go down this road to fully utilize your cash flow your enjoying now you can basically never sell.. other wise your going to give a huge chunk if not all of it back when you do sell .. ( unless you have substantial appreciation.. )
@Shawn Clark Oh ya the guys that make a living selling to the perpectually paranoid LOL..
Cash out refi that bad boy and use your tax free $ as needed lol.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
@Matt R. TAX DEFFERED NOT TAX freeeeee you know that Dude !!!
wrong Matt meant Matt K
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Jay HinrichsI know a grandpa whose grand kids are going to be very happy with the Walgreens he's buying for them as an absolute NNN after 1031ing some commercial rental assets.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Jay Hinrichs:
@Matt R. TAX DEFFERED NOT TAX freeeeee you know that Dude !!!
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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
8y
Depending on where you want to live as a non personal home buyer, at a certain point you may want to ask yourself...how much rent do you want to pay in your 40s,50s and or retirement?
You can run the numbers and see what rents 3-6% compounded annually might look like in a highly desirable location compared to today. When many run those numbers longer term, they run to the nearest broker.
Good luck!
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
@Dave Foster well my kids are going to be happy with the 110 acres I have in Hillsboro Or in about 20 years when I am old an feeble or maybe not here.. that thing will cook off for about 50 to 75 million and at the point it will be free and clear they are just going to have to pay the tax LOL or they can do a massive 1031 and set themselves up.. basis is only 5.5 mil ... you know the gambler I am .. but some day it will happen.. its surrounded by the city has all services and is 1.5 miles from Intels main campus. so I gut out the 150k a year payments all for my kids.. talk about negative cash flow LOL..
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Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
8y
Originally posted by @Jay Hinrichs:

@Thomas S. that's great for a Canadian with Canadian tax code.. but us investor who has owned a rental for 30 years has now fully depreciated it..and when they sell it they have to recapture all that depreciation and pay the tax.. and its a whopper LOL... this is why I say once you decide to go down this road to fully utilize your cash flow your enjoying now you can basically never sell.. other wise your going to give a huge chunk if not all of it back when you do sell .. ( unless you have substantial appreciation.. )
@Shawn Clark Oh ya the guys that make a living selling to the perpectually paranoid LOL..
Jay:
In Canada the CRA refers to depreciation as Capital Cost Allowance (CCA) ... and it is calculated differently. If you claim CCA on an asset (such as a rental property), then if you dispose of that asset for more than then its depreciated value, the balance is recaptured as income in the year of sale {and there is no cap on the recapture).
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
@Roy N. Roy can you choose not to depreciate so your not subject to recapture.. I learned also we in the states have to take the depreciation we don't have a choice
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Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
8y
Originally posted by @Jay Hinrichs:

@Roy N. Roy can you choose not to depreciate so your not subject to recapture.. I learned also we in the states have to take the depreciation we don't have a choice
Here it is {still} an election, so you do not have to claim the CCA.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
@Roy N. well I told my tax CPA well then don't depreciate this stuff .. he said you can't not .. LOL so I am stuck.. but owe well.
I had a client one time he was a lender of mine in my HML company in Oakland.. Famous DJ acutally right up there with Wolfman Jack.
we were at lunch and he said to me I owe 300k in tax's this year ( now remember this is mid 80s) my jaw dropped .. and he said but no worry it would be bad if I did not have the means to pay it.. just means I made a lot of money.. I never forgot that.
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