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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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Jay Hinrichs, Ya know Jay, my Grandma had a picture of you on her night stand.... just saying!
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Roger LeePro Member
Investor · Needham, MA · Member since 2017 · 37 posts · 15 votes
8y
I say Buy because I look at it as my Cost of Living expense, as a parent I need my kids to grow up in a safe neighborhood and learn with the best possible education I can provide. I’m also a DIY’r and following another landlords rules are tough to swallow so The luxury of having my own space and using my time to do the things I enjoy.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
@Jay Hinrichs
@Jay Hinrichs
"you can basically never sell.. other wise your going to give a huge chunk if not all of it back"
That to me is the wrong attitude for a investor to have regarding wealth accumulation. Profit is profit. To not access the wealth you have created because you must pay taxes on it is odd. Why bother working for something you can never have. It is like the CA investor sitting on a 2M property not wanting to sell because tomorrow it will be worth even more. If they do not sell they will never have anything.
Wealth without value.
Today I earn a income from my investments, tomorrow I will sell and retire. If I only keep 50% of my money that is 50% more than not retiring and having to continue working. I have planed for that day as all investors should.
The underlying problem is that the wealthier a investor becomes the more wealth they believe they need. They are addicted and, like and addict, never want to stop till they die.
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
If I understand correctly, if you sell a property after you have depreciated over 27 years you will pay tax (more or less) on the full sale price. Paying that sucks, but the good news is that over those 27 years your tenants paid off the mortgage, so you just end up with a smaller profit. If that's correct it doesn't seem so bad to me.
0 Reply
Lana Lee
Philadelphia, PA · Member since 2017 · 364 posts · 109 votes
8y
Originally posted by @James G.:
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?
Congratulations, James! You have started an awesome discussion which has been intertaiting us all day long. I am following since the beginning and learned so much. So many great experiences and advices from both new and seasoned investors!
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Lana Lee
Philadelphia, PA · Member since 2017 · 364 posts · 109 votes
8y
Originally posted by @Eric James:

If I understand correctly, if you sell a property after you have depreciated over 27 years you will pay tax (more or less) on the full sale price. Paying that sucks, but the good news is that over those 27 years your tenants paid off the mortgage, so you just end up with a smaller profit. If that's correct it doesn't seem so bad to me.
As I've learned today you have to pay not only capital gains taxes but taxes on the depreciated amount. Not sure what % that is.
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
Right, but at least that depreciated amount has been paid off by your tenants over all those years.
1 Reply
Liz C.
Property Manager · New York, NY · Member since 2016 · 388 posts · 90 votes
8y
Dave Foster thank you Dave for explaining the @, now I am try to undestand does your company help to set up something after we used the 27 years depreciation ?
0 Reply
Liz C.
Property Manager · New York, NY · Member since 2016 · 388 posts · 90 votes
8y
Thomas S. So true, I keep telling myself to slow down but I can’t . So is like two me fighting inside . One say invest more another one day slow down and enjoy the life :-)
0 Reply
Matt K.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
8y
Originally posted by @Jay Hinrichs:

@Matt R. TAX DEFFERED NOT TAX freeeeee you know that Dude !!!
wrong Matt meant Matt K
Wait a second.... cash out refi is a new loan... which must be paid back so no tax correct?

1031....... is where the deferment comes from right?

So couldn't one pay off, then cash out refi, pay off, refi as many times as they want?
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Account Closed
Riverside, CA · Member since 2017 · 412 posts · 296 votes
8y
Originally posted by @Matt K.:

Originally posted by @Jay Hinrichs:
@Matt R. TAX DEFFERED NOT TAX freeeeee you know that Dude !!!
wrong Matt meant Matt K
Wait a second.... cash out refi is a new loan... which must be paid back so no tax correct?

1031....... is where the deferment comes from right?

So couldn't one pay off, then cash out refi, pay off, refi as many times as they want?
A lot of this discussion changes with the new Tax Law and 199A Deductions.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
8y
Some states with long term capital gains, depreciation recapture, medicare tax, and state income tax you can lose as much as 50% of your equity upside if you do not exchange.
A commercial lender told me one time of a doctor client that set up his 2 pharmacies he owned as trusts. He was way up in the years and set it up where once he passed the heirs would not get all the proceeds at once. Instead they would get so much cash flow a month until they reached a certain age and maturity as to have full control of the asset.
Something like that. It was a way to give comfort knowing the kids could not blow all the equity right away on dumb stuff.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Matt K., That's exactly what some do. But the refi then requires an element of active investing to ensure payment of principle and interest to the lender. And using refis to provide living cash is fraught with risk as a retirement strategy. Go talk to any older than average sacker at a Publix Grocery Store or Dominos delivery driver about the risks of real estate leverage.
At some point in time some folks say enough and simply want to live on the return from their assets. That's when passive fractionals or wholly owned NNN properties become the next step. They're designed to simply throw off passive cash. These types of things have their place. Some folks like their jobs and want the passivity these can yield. For some folks like @Liz C. is talking about its a place to park a property after you've exhausted depreciation but don't want to pay the tax or continue to actively manage. We got clients going here at all stages So it's not just an end game approach. It's just one that has to match your objectives and strategy.
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Steven Gesis
Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes
8y
Originally posted by @Omar Khan:

@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).
Omar, very well framed, I think you say it best: "depends on your personal situation" - I also believe one can argue for and against -
1 Reply
Omar M.
Rental Property Investor · Miami, FL · Member since 2017 · 51 posts · 24 votes
8y
@James G.
@Omar Khan
@Brent Coombs
@Alexander Felice
@Russell Brazil
Rich Dad Poor Dad 101...buy assets not liabilities. A house is a liability unless it pays you. You want cash flow while you wait for real estate to appreciate. The rich use their assets to pay for expenditures (rent). The poor and middle class use their income to pay for their expenditures. (paying for a mortgage with your paycheck) Grant Cardone is right, own a bunch of doors and use a tiny fraction of the cash flow to pay for your rent (expenditure). I can't remember which show from Grant Cardone it was but he pretty much said that buying a house is like paying for groceries for the rest of your life. Renting costs more but gives you the ability to be nimble and free.
2 Reply
Matthew Olszak
Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes
8y
3 Reply
Omar M.
Rental Property Investor · Miami, FL · Member since 2017 · 51 posts · 24 votes
8y
@Matthew Olszak Good point. I think the idea is that you can only reduce your expenditures so much but there's no limit to how much you can increase your assets and income. Renting gives you much more mobility and less headache which in turn allows you to pursue more assets. Just my opinion on things.
1 Reply
Matthew Olszak
Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes
8y
Originally posted by @Omar M.:

@Matthew Olszak Good point. I think the idea is that you can only reduce your expenditures so much but there's no limit to how much you can increase your assets and income. Renting gives you much more mobility and less headache which in turn allows you to pursue more assets. Just my opinion on things.
Looks like you caught my post right before I removed it :-).
I agree, renting allows you to be more mobile, unless of course you purchase properties that will cash flow when rented as your primary residence. Like many others have stated, it depends greatly on where you are in life and what you want. I personally want to reap the rewards of my hard work, and as such have purchased a home I can enjoy and improve upon and alter as I please. Others keep reinvesting their money to the death and never enjoy the fruits of their labors. To each their own.
3 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
Originally posted by @Matthew Olszak:

[I voted for this post after you edited it! I believe Omar's "groceries" analogy is nonsense!]...
0 Reply
Michael Ristom
Fort Walton Beach, FL · Member since 2017 · 23 posts · 9 votes
8y
The real answer here is, "What are your goals?". Once you have a goal then it's time to figure out the path you'd like to take in order to achieve that goal. The arguments presented in this post are valid (for the most part). The problem behind this whole thread is, the question posed does not have an associated goal attached to it. Is your goal financial freedom, stability, low risk investments, high risk investments, predictability, excitement...?
Everyone can argue until they're blue in the face. The fact is the answer to your question is... it depends. It depends on your personal goal(s).
1 Reply
Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y
The answer depends on your market. A place like Denver over the last few years has appreciated 10% year over year, buying a house to live in would have been smart, in hind sight. The problem is, you don't really know that it will do this when you buy it, especially at retail price. Speculation sometimes works out. Most homes purchased to live in are bought at market value, not as an investment and they pay zero percent cash on cash.
On the other hand, Americans that live in a small town cannot rely on appreciation. Their personal residence only appreciates at the inflation rate, which has been around 2% for the last decade. In that case, @Russell Brazil , I would rather own $600K in rental real estate that I can earn 15-20% rather than a personal residence because the income produced from the investments would afford me financial freedom. Most people are broke, so I don't compare myself to them. The bar is too low.
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
@Anthony Dooley in the scenario you describe.. I think people can have both.. price of homes are so cheap in those areas you just pay cash for them... or pay them off quickly.. 40% of these areas the homes that are owner occ are paid for.. that's a little known tid bit.
then go do your landlording thing.. but you have home base that your not having to deal with some landlord ... to me renting is a complete waste of money .. in those areas when housing is so cheap.
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Ryan Smyth
Specialist · Tampa, FL · Member since 2018 · 11 posts · 12 votes
8y
An appreciating market certainly has an impact on whether or not to buy/rent.
2 Reply
Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y
@Jay Hinrichs I agree that you can have both, but if I could go back and do it again, I would buy investment property first and then buy the personal residence from the increased income. I disagree that renting is a waste of money. Shelter is one of the basic necessities of life, and that is worth paying for just like food and clothing.
1 Reply
Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
8y
Originally posted by @Omar M.:

@James G.
@Omar Khan
@Brent Coombs
@Alexander Felice
@Russell Brazil
Rich Dad Poor Dad 101...buy assets not liabilities. A house is a liability unless it pays you. You want cash flow while you wait for real estate to appreciate. The rich use their assets to pay for expenditures (rent). The poor and middle class use their income to pay for their expenditures. (paying for a mortgage with your paycheck) Grant Cardone is right, own a bunch of doors and use a tiny fraction of the cash flow to pay for your rent (expenditure). I can't remember which show from Grant Cardone it was but he pretty much said that buying a house is like paying for groceries for the rest of your life. Renting costs more but gives you the ability to be nimble and free.
Robert Kiyosaki doesnt believe in owning a home, does t believe in long term investing, doesnt believe in diversification and he wants to be on the gold standard, and sells $10k get rich seminars. Ive never read his book that has created this rich dad cult, but every time the guy opens his mouth he sounds like a complete fool.
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