Be a Homeowner Not a Renter
Probably one of my favorite topics, other than pay yourself first, is be a homeowner, not a renter. So, I am an unabashed crusader, campaigner, believer in real estate and home ownership, period. And then it never changes. So like when the great recession hit and home prices were going down, and people were like, oh, what do you think of home ownership now? I'm like, I think it's on sale, like (audience laughs) I think I can go to Miami and Las Vegas and San Francisco and New York and I can go to all these places, Arizona, and now homes are all 50%. Now in certain markets, homes are less expensive than it would cost to build them. That's called buying house below replacement cost. You wanna know when to make money in real estate? It's when everything goes wrong. Now, you wanna know the other time to make real estate? Just buy a home and live in it for the rest of your life, it's goin' up in value long term. So, I think the smartest investment that you'll probably ever make in your life...
time is the homes that you buy and live in. So, I've made a whole lot of money from investing and the most money that I've made is buying a house and living in it. I, but I'm lucky too, I lived in great cities. So I lived in San Francisco first. Actually, I'll go all the way back. The first place I bought a home was in Danville, and I'm not talking about buying your first house. I did not have the money, I bought a home almost right out of college. So people talk about how do you start in real estate, and I'll tell you how I started. I didn't, I was renting a bedroom in San Francisco for 600 bucks a month with five other guys. If you're young, watching, you can relate to this, this is like a San Francisco story. You live in cities and you live in these apartments and you share bedrooms and you do whatever you can do to live in these cities. And I did that too. And then I said to one of my best friends from growin' up, who was doin' the same thing, I'm like, you know, if I take my $600 and you take your $ we could afford a mortgage payment. We could afford a $200,000 mortgage payment. So we can go out and buy a house for $225,000, we just need to come up with the 25 grand. Happened to be he was in the mortgage business, so he knew that that's right, like, so we just need $25,000. So we each need 12.5. So I, in six months I can, you know, I'm saving, you're saving, let's save $12,500, let's buy a fixer upper, let's move into it, then let's rent bedrooms for our buddies then we own the property. And that's what we did. So my first investment property, that's how I bought my first, wasn't my first investment property, that's how I bought my first house. You know, young people go, how do I get started? Sometimes you partner. Make sure you have a legal document for this, though. I'm still best friends with my buddy, I'm gonna see you, Andrew, in two days. But make sure you have legal documents. That was how I get started, and then my next apartment was in San Francisco. The best investment you're gonna make is the homes you live in, this is like The Return of Real Estate. Guys, real estate always returns. Here's what you should know, here's the truth. And this is really important for millennials, okay, so this is an old slide. I'm gonna show you the new slide. 1963, real estate was $18,000 for a house. Remember I told you that my parents bought their first home, it was $27,000, Oakland, California. Nice house, too. Average price of a home, we're looking at $204,000 in 2011. By the way, you can see here, market went up, market came down. I do interviews, and people are like, markets, real estate's never coming back again. Really? (audience laughs) Here we are, here's the real estate market that hasn't come back again. We're now at 290 in 2015, for an average price home. How many of you, and I always just say, most people today are driving cars that cost more than a home cost in 1963. So here's the benefits of real estate you guys, it's pretty darn simple. Number one, it's forced savings. So, 64% of Americans own a home, all kinds of attention to the fact that it's less than it's ever been, it's only 3% less than it used to be. It's leverage. That house that I bought with my buddy? We didn't put down $225,000, we put down $12,500 each and we borrowed $200,000 from the bank, and we got leverage, which is called other people's money, otherwise known as the bank's money. We got tax breaks, you get tax breaks. It's one of the best tax breaks left in America is a mortgage deduction. Probably, I don't think it's going away. Actually, I don't think it's going away, I don't think mortgage deductions are ever going away, I think that this is too big of a deal in America. You also can buy a home, sell it, and get total tax regains. So when you're single you can sell a home, make $250,000 if you're single, and not pay taxes. There's nothing else you can do that with. You can be married and you can sell it and you get a half a million dollars in gains, and you can do that every two years. I talk about that in Start Late, Finish Rich. You get the pride of ownership. Just tends to feel better owning something than renting. It can be more work, I'm not gonna, you know, there's no doubt. Well like, the beauty of renting when things go wrong is it's not your problem, right? Like, I rent a ski house. Something goes wrong with that ski house, I just call the landlord and, you know, I only use that house for basically 10 weeks, so why would I wanna own that house all year long? That's not my problem. That's a cheap way to have the use of a house. Real estate proves to be a great investment. It just does, I just showed it to you. You also can't get rich renting. The average renter in America is worth less than $5,000, and the average homeowner today is worth over $172,000. These numbers vary from year to year, but on average homeowners are worth 31 to 46 times more than renters. So, millennials, talkin' to you right now, the single biggest mistake that millennials are making financially is putting off buying a home. And part of it's because it's expensive to buy a home, but it was expensive to buy a home when I bought a house. You gotta scrape and scrap and borrow and figure it out, and sometimes you do it with friends. You're not buying a dream home, but you have to get in the game of real estate, because real estate is the escalator to wealth. And if you're in a good location it's the escalator that goes a lot faster. Now, not all markets do what a San Francisco or New York or Chicago or San Diego, or, but a lot of these markets do. So it depends on your market also. So, buy a home. Second smartest thing you can do once you buy a home is pay it off early, now we go to the bi-weekly mortgage plan. So this was a big thing in the Automatic Millionaire book, was what the McIntyres taught me, they talked about in lesson one, is they paid their mortgages off early. So, a mortgage payment here, you take a $300,000 mortgage and you have a $1500 a month mortgage payment. If you pay 750 every two weeks what happens is you make one extra payment a year, and so in this example that mortgage at 4.5%, this is a recent calculation. Where'd I run it? Bankrate. A $300,000 mortgage at 4.5% you're gonna save $40, and pay the mortgage off in 25 years. All you did was take your mortgage payment, split it in half, pay half every two weeks. This is where you should all go wow. Now, I've talked about this for over a decade. When The Automatic Millionaire came out I talked about this. So you would think everybody does this. It's still a really small percentage. It's a great technique, most banks now offer it. So call your bank and see, do they offer a bi-weekly payment plan? In most cases they're not charging for it now, and I think it will help you pay your home off earlier. One thing to say about paying your home off earlier, I already did this numbers before, this was actually the new numbers. This is the slide with up to date numbers. One thing about paying your home off earlier, again, it's just forced savings. You need the money, then you've got your own piggy bank to go access it. You can always go touch that money later. You can refinance the house, or you'll sell the house and in most cases most of you will sell your homes with totally tax free profit 'cause you won't hit a half a million dollars in gains, although in the Bay Area you might. And you'll use that money for retirement. People go oh, a home is not a retirement account. Let me tell you something, guys. A lot of people are retiring off their homes. They are selling their homes in expensive cites and they are relocating. Okay, people are relocating from California, and where are they going? Tell me where they're going.
South Dakota. Denver. Oregon, Arizona. (audience responds) Did you just say Boston? Austin, Las Vegas.
Reno. They're going to all of these places. They're selling their home that they paid a quarter of a million dollars for, it's worth a million today, it's their primary savings vehicle, they're selling it tax free, and they're movin' over to Arizona and they're buyin' a $250,000 home. And they're takin' the $750, and they're putting it in an investment account and they're living off the interest. Happens every single day. If you're at home and you're renting, 30 years from now and you keep renting, it's not happening to you. So you have to be in the game of home ownership. Which takes me to, these are all the benefits of the bi-weekly mortgage plan. It's faster, it's easier, it's automatic. How are we doing it? Automatic. How to bubble proof your real estate. Number one, make sure you can afford your mortgage. So, whatever the bank says they will loan you, don't borrow it all. If the bank will loan you $300, don't borrow $300,000. Borrow 250, 'kay. Lock in your mortgage rates for 15 to 30 years, don't do short term adjustable rate mortgages. Yeah, just don't do 'em, 'kay. Unless you're a sophisticated investor, unless you really know what's going on financially, with rates this low just lock in your rates, be done with it, don't think about it. Pay extra on your mortgage, avoid interest only, avoid interest only mortgage payments. Now, again, sophisticated investor, can you do an interest only mortgage? Sure, but most people, much better off just to pay it off. Avoid using home equity. Don't use home equity. People who use home equity to pay out credit cards, they wrack those credit cards back up within 18 to 24 months and now they have no home equity left. Don't use credit cards. Oh my God, some of these banks, they actually will attach a credit card to your mortgage, don't ever do that. Yeah.
But my question is, your home equity interest rate is usually lower than your credit card.
Yes it is.
So comparative speaking, you pay less expense.
Yes, it's true. So let me repeat what she just said, if for any reason the mikes weren't working. A home equity loan is less expensive than a credit card. Typically those home equity loans are 5.5% or lower, so if your credit card is 29%, financial logic would say I'm gonna take money out of my house, at 5.5% I'm gonna pay off that credit card debt. Right? And people do it to the tune of billions of dollars a year. I worked with one of the biggest banks, and when I sat down with the person in charge of the home equity division and they said, you know, you're publicly against home equity loans, I said yes I am. She said, why are you against them? I said because people who borrow money out of their house pay off their credit cards, and yes it's financially intelligent, and then in two years they're back in credit card debt and now they have no equity in their home, and now when the market goes down they are upside down on their house. And this person who worked at this bank said to me, our people don't do that. Really, how much did you do in home equity loans last year? Two billion. You're telling me of the two billion dollars, that nobody in that group is actually gonna borrow money and wrack up those credit cards again in two years? Not our people. That's a lie. (laughs) By the way, I didn't end up working with that group. So they're counting on you borrowing money at that rate, and they know that you'll come back. It's just not safe. Even though it's mathematically smart, I am telling you, unless you can guarantee yourself that you're not gonna get yourself back into credit card debt, don't do it. And I've just seen the pain too often. Too often I see people do this, and then they don't, they had a nest egg, and then the nest egg's gone. So. I want to go into how to go from homeowner to automatic millionaire homeowner, coming from what you were just saying. So, how did the McIntyres do it? They bought a home, they paid the mortgage down. That home now cash flowed, so they could rent it. They took a little bit of home equity out of that property and they used it to buy another home on the same street, and that's how they bought their next house. They only had two homes. And interestingly they bought it on the same street, they didn't do what most people do. So most people in America, they buy a starter house. Let's say they buy a three bedroom, two bath house. Over time they build a family and then they buy a bigger house, so they sell their home and then they go and get a bigger mortgage and a bigger home, which can work but it doesn't lead to owning rental properties. So if you're going to ever pull equity out of your house, the only thing I want you to pull equity out of your house for is an asset, not a liability. I want you to pull equity out to buy an investment, not to pay off a credit card. That's my big point. You borrow money to buy assets, you don't borrow money to buy liabilities on things that are already used. Does that make sense? Like, those credit cards, all that stuff that you paid for, it's already gone. So you rent your current home, you use the equity to buy a, little bit of equity to buy the next one, then you invest in a second home. I've always said that, you know, most people if they just bought three homes in a lifetime, you're good. Multiple unit properties, that are what are called two and four unit properties are also great, that's where you live in one unit and you rent the other unit. Those tend to be the way most people get into actually investment properties, other than the first home, second home process. Invest in commercial real estate. That's the more sophisticated strategy is to invest in commercial real estate. Can be extremely profitable, I actually started my career in commercial real estate, and what I will tell you is this. The most important, if you're gonna buy commercial real estate and you're self employed and you own a business, the single best investment you can ever make is to buy the building that your business is renting. So buy a property, have your business rent from it. Now you own that property. 10, 15, 20 years later, business can be gone, you might not even be able to sell the business, but you own the real estate. Which is, if you own a business, your number one goal is to own the real estate you work in. This happens to be, by the way, this one tip, this is, when I was at Morgan Stanley the clients that I had that were the wealthiest became wealthiest by accident. They owned their own business and they bought the real estate, and in most cases at the end of their career that business might be worth a million or two million dollars, the business, but the real estate was worth five million, or 10 million, or 15 million, or 20 million. I've been teaching, you know, all my buddies in New York they, this was one of those things when I teach entrepreneurs I always talk about this. And I have now, because I've been in New York since 2001, some of the stories from my friends they're like, you hammered it into me and now my building's worth 10 million dollars and they paid two million for the building. So it's just, it's a very, and also you don't need a big business. Let's say you have a small business. You could buy a condominium and rent from it. You're allowed to do that. You can buy another house and rent from it. So lots of ways to make that work as an investment. Questions?
If you have a property that you think you might sell off in a few years, or use as a rental property, would you still suggest to pay down the mortgage as you were saying before?
If I had a property that I think I'm gonna sell in a couple years, it depends, because here's the question. Are you selling that property and doing a 1031 exchange?
So for those of you who don't know what a 1030 exchange is that means you have a property, and you can sell it as long as you identify another property and you do it correctly within 45 days, you can go from property A to property B and not pay taxes on the gains.
That's only on income property, not your primary residence.
Only on rental property, yes. So yeah, that's a good point, it's only on rental property. So, on a rental property if I thought I was going to be focused on cash flow, then I might pay it down, but in most cases if I think I'm gonna get, move that property in a year or two I'm probably not gonna accelerate the payments. I might want that money for the down payment or something else. By the way, you can take a home that you live in and you can rent it for two years, and then you can do a 1031 exchange. Now, here's another trick. You can do a 1031 exchange and if it's actually a home, after two years you can move into that home. Then if you live in that home for two more years, now it's a primary residence. Now you've avoided the 1031 exchange tax and you've converted it to a primary residence, and you made another quarter of a million to a half million dollar bump up. Yeah, these are all legal tricks. Somebody said to me, can you show me how to legally embezzle money? These are the tricks, these are the things that rich people spend time figuring out how to do so they don't pay taxes.
I just wanna touch on some of the online questions here, I wanna keep things moving but there have been many questions around this similar topic, and a lot of people would love for you to just kinda touch on quickly about keeping up with the costs of repairs. So Priska said, what about the possible enormous cost of keeping up with the home, major repairs, if you are not handy around the house, we do have to upkeep this. What do you say to people who maybe are intimidated by having to repair their own home?
Deal with it.
Deal with it.
Go on Fiverr, get somebody to come over from, you know, like, there's all kinds of people today who will fix things for you at a low cost. I don't know, I think, I don't usually hear the issue of this, what do I do about, you know, the work that's involved in fixing up the house. More often what I hear is, it seems like such a risk to borrow all this money to buy a house. And I actually look at it differently, to me you go rent a place for a year, you're on the hook for a year. If I go buy a home, and I need to move, I could sell the house. So I look at it a little bit differently.
That's a great point.
So I don't actually know if I finished my point with millennials, which is millennials, don't listen to people telling you that you shouldn't buy a home. 'Cause for the millennials, the longer you wait to buy a house the further away that escalator of wealth gets from you. It's still a great idea to buy a home in your 20s and your 30s. Now if you think you're moving in a year or two, it's less of a great idea. But what ends up happening is you move to a city you think you're gonna leave in a year or two, and the next thing you know, seven years have gone by. Just like that, all the time.