In my previous post, Top Ten Tips to Building Wealth, I wrote that one should buy a house, preferably paying cash, i.e. without incurring debt. This suggestion generated much discussion.
Yesterday I was having dinner with a friend and we had a brief discussion about purchasing cash vs. taking out a low-interest 30-year mortgage, and briefly the merits (or otherwise) of doing so.
As a follow-up, I thought to post my Top Ten Tips for Buying a House:
- DO NOT buy a residential home in the absence of Triple D. If you are patient AND plan to purchase a home based on needs rather than wants, you may be able to scoop a cash bargain!
- If you do your homework, you might even be able to purchase a home for an amount equal to what you have already saved and/or have available as a down payment on a residential property. Meaning, you may be able to buy it outright in a cash deal.
- Looking to purchase a rental property for investment? You can still buy a house today using a credit card, because there are still thousands of ‘underwater’ properties available after the financial meltdown that was caused by the housing bubble of 2008/9.
- Accountants will tell you that your home is a (fixed) asset. Albeit correct in accounting terms, it is however, incorrect in investment terms:
- Assets generate active or passive income. If you earn money on a regular basis from residential property (e.g. by renting out a home that you own), that property is an asset.
- Liabilities cost money on a regular basis. If you own a home (whether paid for entirely or not) and you live in it, that home is likely to be a recurring liability, i.e. costing you money e.g. every month.
- On the positive side, you can factor tax savings (e.g. mortgage interest deductions), and the fact that you sold the house for more than what you may have paid for it.
- On the negative side, you have to factor in 30 years of costs; like property tax; ongoing repairs and maintenance; realtor’s commission at the time of a sale, opportunity cost of not investing the down payment in 'the market;' adjusting the sales price for inflation over the period of ownership; money spent on unique and/or custom fittings like window coverings; etc.
One of the most significant drawbacks to home ownership - especially with debt - is a potential loss of personal mobility. As an entrepreneur, I want to be able to ‘lock up and go’ to wherever business opportunities and/or adventure may present, without worrying too much about the ongoing running costs of owning a residential home.
The suggestions above may help readers to think a little beyond the propaganda that politicians, educators and your parents may have shared in the past: work hard at school, borrow to go to college, get a job, borrow to buy a car, borrow to buy a house… and live happily ever after with a lifetime of debt. This is also affectionately referred to as "The American Dream."
Or... you could simply decide to build personal wealth instead.