The learning curve is too steep for us to recommend that you invest in business you do not know. You can lose a lot of money before your learn the ropes. If you want to get into commercial real estate without any previous experience we strongly suggest that you read everything you can about investing in and managing commercial properties.
Bowman All of these books are cheap and available through Amazon. If you are already investing in residential real estate and want to get into commercial real estate you should consider buying a split unit. A house that offers commercial space on the first floor and residential space on the floor or floors above. This is a good way to get some experience with commercial real estate without the risk that are associated with a strictly commercial unit.
A split unit allow you to earn money on the residential units while you figure out the commercial rental market. The absolute best option is if you can find a split unit where the commercial unit is already rented with a multi-year lease. Buying a split unit is no substitute for reading about commercial property managing and you should still ready everything you can get your hands on.
The more you know. They likely are stuck if the neighborhood goes further into the toilet. Having grown up in an apartment, I can safely say that this is not the case at all. You have a lot more room to play in a safe apartment enclosure than a backyard of anything but a mansion. Good public schools mean high property taxes or high concentrations of expensive property, which give an advantage to renters as property taxes are effectively spread out among all renters—thus you still end up paying less for an equivalent apartment in the same neighborhood as a house.
Our apartment was a popular choice for families for all of these reasons including landlords and managers who have been part of the community for decades. And kids are more flexible than you think—they can get used to sharing walls in a good apartment a lot easier than used to arguments between their parents caused by bad financial decisions again, having experienced both. The LL must cover all costs, the same costs one would incur as a homeowner roof, furnace, taxes , and maybe even some profit. Over the long term, how can it be cheaper to rent?
Why would anyone hold houses as rentals if the rental lost money? Another way I look at it — if people make money on rentals, then as a renter I am on the losing side of that equation. The landlord is subject to simple supply and demand. Many landlords are simply not sophisticated enough to calculate all costs associated with home ownership. See my examples above and in my book. If you have units, you can negotiate better deals on a lot of maintenance tasks. If many of your properties are multi-unit properties, you have fewer roofs and often less maintenance cost per unit than a standalone property.
One of the main reasons the landlords will rent for too little is that they often bought the property decades ago, and have long since paid off the mortgage. The rents they charge are inappropriately low because they are still anchoring the rent on what they paid, rather than what the property is now worth. Not to mention the real benefit from renting is the ability to depreciate your house values for taxation purposes. Where I live in Texas, this is a huge deal because of the high property taxes via no state income tax. I know several people who rent their homes at break even cash flow for the ability to lower their taxable income by k a year through depreciation.
Ramit is right.
Thank you so much for this. I am 25 and all of my friends are purchasing their first homes, and on top of that quite a few of my friends are real estate agents. I have been asked times why I am not even looking at buying my own home. I tell each and every one of them, that it doesnt make sense. I have pointed out all of the things that you mentioned in this video, when something breaks paying for it out of pocket or making a phone call, adding in the costs of insurance, maintenance, higher utility bills dependent , taxes, etc.
Buying a house is an emotional purchase and in most cases should not be an investment choice, and do not try to kid yourself into thinking that is anything but. Thank you again, reading your material constantly makes me reevaluate my own thoughts and opinions, and sometimes satisfyingly reflects those I already have. Keep up the great work. My financial success is based on purchase of my first house. The discipline it took to launch me into homeownership getting my credit under control and saving some money led to profitable sale of first home and purchase of two others, one also for a profit, the other still owned.
It is definitely part of what we learn but if I had learned from my parents, I would have avoided it—they lost massive amounts of money in a divorce after purchase of a home. Depends on your circumstances. Also, depends on what you want to spend your money on. I also might have been in the rubber room because of noise from neighbors. I can keep pets. That same amount would get me a no-bedroom apartment with a view I can get on the way home from the grocery store. I felt pressured to buy a house because people of my age were expected to get married and buy a house and have a family.
She bought in The house is probably worth half a million now. Salaries for the same jobs have not gone up by that much. One goal all of us should have is to be able to burn a mortgage some day. Getting there without going up in flames, that is the trick.
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I have gone up in flames several times due to my ill advised purchasing of a home. You are very correct in making your assessments here. I often tell folks…do not try and fit a square peg into a round hole, when it comes to purchasing real estate. Solid advice Ramit, very solid advice.
I have owned and prospered with real estate and you are neglecting the real question. The question even mentioned the idea of renting it out to cover the mortgage. There is no better investment in most jusistictions than real estate. In twenty year the property will have been paid off by renters and statistically be worth more than the purchase price. I challenge you to find a better investment with as little risk…. Most people do the latter. There are no free lunches. Real estate investment, to be profitable, is a full-time job for someone — whether you hire someone to do it or you do it yourself.
You have to find renters to fill the property, since every period the property is vacant takes money directly from your pocket for the mortgage. Remember how Ramit always has us remind companies and employers how expensive it is to find new customers or employees? You just want to flip the house? Do you know how to spot the differences between a fatally flawed house that will eat you alive and a diamond in the rough? Do you understand what it will take to polish the diamond? Do you have the skills, the tools, and the manpower, or are you going to have to hire them?
Do you understand what level of restoration the market will support for that location and class of property? Will the market support the price you need to achieve in order to turn a profit? We are about 4 years away from paying off our home. That might look like a waste of money but it will put me in a great position to buy rental property once this house is paid off. I bought my house in I live ia a high-cost town. Shortly after I bought my house, prices dropped and stayed low for years.
My house will be paid for in 5 years. And I was able to refi at a low interest rate, so my payments are now less than renting a similar house. If I want, when I retire I can rent my house out for more than the mortgage payment for a nice stream of cash flow. I can move to a lower cost area and make money off my house. So, since I had the resources, I bought a 3-bedroom condo with the intention of living in the master to have a private bathroom I was 33 so I was due , where I could control everything about my living environment, get the benefits of home ownership and collect rent on the other two bedrooms, usually from something professionals.
I chose to buy rather than continue to rent because: 1. It locked in monthly costs as long as I needed only 1 room; costs actually declined as other 2 rooms rent increased. Because of my unique situation as a single person who was willing to rent 2 rooms to others careful screening process , I feel like buying worked very well for me, but only because I had concrete plans for how to benefit from buying. I own a commercial real estate company in San Francisco and I rent a three bedroom, Victorian apartment about one block from Duboce Park.
San Francisco is one city where it rarely makes sense to own a property unless of course, it is for those intrinsic reasons! Great article Ramit! Thank you! My father always told us that renting was throwing money away. My mother-in-law was fixated on our saving money to buy a house as soon as we got married. This became an obsession with her and she kept pressuring my husband — as if this was more of a priority than anything else, including getting along as a couple. I will be 40 this year. I know that is no real reason to base purchasing a home solely upon, but I have rented since I got out of college and I noticed I was spending money to update the houses I rented more and more.
Sure, I got a rent deduction based on reimbursement, but the thing is, some other renter as well as the landlord are benefitting from my hard work and ambition, whereas I will never enjoy it ever again. The money and time were just thrown away as far as my enjoyment in the long run. The bones are good, it is just aesthetics need to be addressed to update the place. I never really felt pressured, I am just at a point in my life where I am ready to make that all important, life altering decision. It is just my son and I, and I want a place where we can call home and make memories.
For me and mine, it is our time. Ramit makes absolute sense. I used to be in the same mode of thought as you, Ramit. Since I have no idea how long I will live, and the thought of saving up a specific dollar amount to live off of, I like the thought of renting out the property to supplement my retirement savings. Does anyone else share this train of thought? What faults can you find in this? Not saved it — invested it. Again, not slamming real estate as a general thing. And if I find out you read my blog and bought without running the numbers, I will hurt you. I can clearly see the extra costs involved.
For example, I have thought about if my rent and mortgage were of equal amounts I would still have bills, maintenance, furniture to buy etc with a mortgage. I love renting because I can pick up and leave if I change my mind after a year. My desire is to own a small beach house as a rental property. Any advice, then, for a prospective first-time landlord wrestling with this conundrum?
That area has been hit twice in the last few years with storms, so seems to be a fact of life now. So good. I missed this point in my comment above. Yes, I experienced this myself with one month of Vacancy. In my scenario is that I have hired a bad real estate agent.
As soon as I changed to a new one, I got tenant straight away.
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I have done researched, compared and shopped around. Vacancy rate is 0. Quite the contrary; many people simply walked away from their mortgages when prices dropped and they were significicantly underwater with hardly any consequences other than a ding to their credit. Real estate leverage is more or less one-way, especially with low down payment financing such as FHA. When prices are rising or stable, leverage allows people to rack up tremendous amounts of net worth even if prices only keep up with inflation.
When prices decline, there is very little downside at least comparably speaking when the only thing you can lose is a small down payment. I partially agree. Houses are deeply emotional in the American psyche. An additionally compelling argument against buying especially for 10 years or less is the ridiculously low actual percentage of equity you build initially. The majority of your early payments are interest. Bought condo less than 1yr right out of college year at 22yrs old in San Diego at the height of the refi boom.
Was doing loans making 10Gs a month 6 months in a row that started to ramp up to 18Gs late Too aggressive even with an increasing income in a market that was in a boom phase, new profession and buying the worst type of property at the height of market in area of San Diego that saw home values begin to fall first. Some lessons I learned are when you are just beginning to make good money let it breathe do not force large transactions allow yourself to grow into it, be extremely cautious buying in any form of boom, be cautious making your core income from a boom industry and buying property during a boom as you could get SQUEEZED from both sides worst case scenario.
Did go over the scenario with my parents beforehand and they advised for me to make sure that I understood the total costs and ramifications. Sure the Real Estate Agent made probably near Gs selling me the house so there was an incentive in it for him. It is astounding how many people do not understand the US tax system.
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Deductions, credits, brackets… they are simple concepts when you take the time to learn, but many people just recite the incorrect phrases they hear other people say without ever understanding the reality. This is especially true when people talk about raising taxes on certain income brackets. I managed to sell that just before the bottom fell out of the housing market and have re-invested in another home in another city. Actual real estate investing, which includes things like: identifying a growing market, examining rents in comparable properties, knowing your product type well industrial warehouse space?
Interestingly, whilst being on the receiving end of that amount of loss was sickening at the time, in a strange way it sort of feels worth it now as cutting out losses and ditching the house gave us our freedom to leave the country and follow our dream of moving to Vancouver, Canada to live which we did two months ago.
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All three of my siblings and most of my friends are owners. I listen to never-ending stories about their problems with their houses. The kitchens, the bathrooms, the landscaping, on and on. All the reasons to avoid renting disappear if you have the right landlord. I love renting. I have a two-bedroom house, nice neighbors, and big trees. My landlord has given me a new roof, new stove refrigerator and water heater, painted the outside, and refinished the hardwood floors. I am in a similar situation to Gretchen. We have rented our house for 17 years.
We did not have the means to buy in the mid nineties when places were cheap. For years I felt like I missed out, but now I am relieved. So many of my friends took out home equity loans after houses here tripled in price and now are saddled with huge debt and stress about finding money for repairs, etc. Right now, even though we plan to stay in this area, buying makes no financial sense whatsoever! We would have to pay more than double that and move to a total junker in a less desireable neighborhood if we decided to buy.
Our landlords live right across the street at LOVE us. I do lots of easy cosmetic work on the house painting, landscaping, etc and act like I own it, but we have no property taxes and if the hot water heater explodes or the furnace breathes its last gasp, I just need to make one phone call and it is taken care of. Maybe if there is a huge bust in the market we will buy then. We know the landlords pretty well, but there is still that uncertainty about the future. Buying a house was the worst thing that ever happened to me.
I bought in when markets were decent, and Have spent 3 years in the foreclosure process w Bank Of America. In our note moved over to BofA. Getting divorced didnt help- I moved out in and my ex got the house but my name was still on the note. Since I made an actual salary and he was an investment advisor w no stable income they wouldnt remove my name from title or the note. The buyers walked. I would have too.
Never happened. I rent now and feel great about it. Id urge anyone thinking about buying a house to make sure you really want to be there for an extended period and to be prepared for a shit storm if you need to get out from under it quickly. So when that type of change Happens along w markets falling you must be aware that you are liable for what you purchased and could get into a long, credit effing process.
Anyone want to buy a 7 year old town house in a quiet St Louis neighborhood? Or know a really good OTC anti-depressant? A house that you own and live in is a liability. A house that you finance properly and positively cash flow is considered a successful investment. Like any other successful business investment, you should look at the cash flow.
Successful investors buy and create positive cash flowing businesses. I think personally if I was to start all over I might buy real estate for investment, but rent myself as what is the point of burning all your dough on a mortgage and locking yourself into one place and be house, buy to rent and rent yourself for freedom! Tom: This is true, but it depends a lot on the society itself. Family, friends, and fellow apartment-dwellers are a lot more likely to approve of raising kids in apartments if you actually live somewhere where everyone does it, like London or Hong Kong. In most of the US, relatives will act like you might as well just sign the kids up for welfare and get it over with, and other people in the apartment complex unless they also have kids, and frankly in the US most apartment buildings full of families with kids are not in the best parts of town are likely to be annoyed with you if your kids are not perfectly behaved at all times.
That said, it can definitely be done.
At the minimum home ownership is like a forced savings plan that historically keeps up with inflation. Purchasing real estate as an investment is usually a great path to long term wealth. There are very few other investments where you can obtain access to cheap funds to obtain a residual income stream. Real estate may not result in a positive investment outcome for those that live in their dwelling. However, we all have to live somewhere. It is a quality of life question for me.
We are in the market for a house, currently renting, but for lifestyle reasons: we have four kids. Call it delay gratification. I was considering buying a house with my wife back in , but we decided to rent the house instead. We decided to rent. Or we would have a basement of sewage. Then of course there are the Realtor fees and taxes. People say that the landlord is just passing the costs onto us which is true.
But we get those costs in an amortized form, not all at once. Depending on how the owner amortizes the cost, you may not even have to bear the full impact of the repair. If the owner needs to make a big-ticket repair and can finance it for longer than you will live there, you will not pay for the whole thing.
And like Ramit said, if the owner does a lot of renting as an apartment complex does there is a much bigger pool of tenants to share the burden. I LOVE renting. Why did I buy? And the bs about rent being money down the drain. It was mostly my ex that really wanted to buy, and we were both idiots. Definitely serves as a cautionary tale for myself and my husband as we weigh the longterm pros and cons of home ownership. Looking back, that was a dumb decision. We rent it now — but for much less than the mortgage. Our 2nd home, it made sense.
We had a kid, 2 dogs, 3 cats and were renting a small house that was poorly built, inadequately insulated and overpriced. Her bf is house-shopping currently living rent-free with his mother so he couls save money for a house. People are so emotionally attached to the idea of owning a house that the hole thing turns them in some kind of irrational mush. The sort of thing that makes people have sword duels. And a sense that having a mortgage is THE rite of passage into true adulthood.
I would love to own a house one day, mostly to have my own yard and garden, Plus, having something other than white as a wall colour would be so very awesome! I currently live in a basement appartment, so no garden at home this year. As much as I would love a house, I have specific requirements or self-conditions before I do.
My ex-spouse loved to flash. It was worse for him. I bought peace. A shitload of it. And when the common expenses were higher than our share, I always absorbed it. It took me 3 years to recover financially. Counting every penny.
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I never ever want to experience that stress and anguish again. Even if it means never being a house owner. Not worth it.
I still would love a house, but I have other priorities. Once in and once in or Test the waters? Even though it would be MY mortgage over decades!! Everyone gets so dang excited and pushes you to do it. Rates are so low! You can always sell in a few years, the market can only go up. Fortunately I had read you and Suze Orman and that voice in my head the minority caused me to back out both times. Yet sometimes the smarter decision feels that way.
I just bought a house. For the equivalent house in our market, it would cost us a month minimum. It used to be that you could OWN a house and land here in America. Now that it has been turned into Amerika, you cannot. You will NEVER own your property, and the government can take it from you at will, Eminent Domain, and if you do not have money to pay the forever property taxes you just became a renter. I remember receiving all the classic, subtle pressures to buy a house a few years ago, not long after I got my first time job.
Said pressuring parents provided the down payment, too, not to mention some family issues that complicated it, but I really underestimated the opportunity costs. I got over any interest I had in owning a home by housesitting for some wealthy people for a while. But they are wealthy only in that they own money-sucking homes that require incredible amounts of time, money and energy to maintain. Plus, finding someone to care for your home while you are gone can be hair-raising. Plus, who knows how long it took the owner to find someone who could do the project the best for the least cost?
So you may as well use it doing the things that you enjoy. Forget that noise! Instead, I rent. I like the freedom. Written from the viewpoint of a single guy in his early thirties. I think people would be better off if they would start being honest with themselves and stop calling everything they want to buy an investment. Why not simply admit that you want to buy a house because of the security or prestige you think it will provide?
I agree. Thank you for this post! I am going to show it to my entire family, who have been pressuring me vociferously to buy property. That being said, I have to admit I am tempted by all those HGTV shows that show people flipping houses or building income suits and making a cool grand a month for the next thirty years… In the end I think of home ownership as a gamble…maybe you will buy a house in perfect condition that needs almost no maintenance.
Maybe you have a handy neighbor or friend who can perform maintenance for a fraction of the price…on the other hand maybe you will get stuck with a house where the roof caves in after 6 months and the foundation shifts and you have no insurance to cover it incidentally…try buying flood insurance in Florida : p. I purchased my 1st home when I needed to rent a house, for my family of four, and realized that most of the 2 bedroom houses I was looking at were filthy and inadequate.
It cost me approx. Yes, there are other homeowner costs, but, if you factor them in from the beginning you should have no problems. I agree that you have to be truthful with youself as to why you want to own. The amenities of homeownership. Never buy a house as an investment. Never, ever, ever buy over your head. I think most people that get into trouble buy based on impulse and emotion. Seems nobody today wants to buy less than what they can afford which, I believe, is the prudent thing to do. They are unwilling to wait and work for it or they get in way over their head.
Anyway, sometime after I bought that home which is worth approx. I started buying apartment buildings. Of course, you need to study the market and buying below actual value. Besides working full time, I did most of the repairs and managed the properties myself. And, that investment money was the cash I made from a previous investment. But, Real Estate is not for everybody. By the way, I bought the home I live in today in Today it is worth over a million dollars.
Sounds good, right? The same compound interest formula gives me an APY of 6. We also would not pay taxes until we sold out, unlike property taxes which come every year and in addition to the cap gains on the sale of the house unless we buy another one quickly. Any thoughts? I was just out of college and the DC real estate market was taking off. My mindset was instead of renting, I thought I could buy a property live in it for years, make a profit, buy a bigger and better house and repeat over and over.
Thanks for writing this up. How about giving me specific numbers on how much you saved? I love how well you handle haters giving you crap over this. I have a lot of respect for you. I have from my mom, whom I still live with. I never really took it seriously. All in all, depending on how large a mortgage I took out I would wind up paying a very similar dollar amount in the end. The difference is that after that yrs, I want to sell whatever I buy and move to the SF Bay area. I have been working as a real estate buyers agent for a little under a year now, and feel real estate can be a great investment if you know what you are doing.
That being said I am being pressured into buying my first house by my father who I work for. His main point being that I need to support the product that I sell, and that it is the best time to buy. The problem is that being so new to the business I do not feel financially stable enough to buy. So, first and foremost, thanks for that Ramit. Second, I was in a continuing ed class last week where the presenter asked who owned houses and why those people had bought houses.
I responded …. I pay someone else to worry about the hot water heater, the roof, the shower head, the garbage disposal. I told him yes, that is exactly what I am doing. Without owning anything I do not see any other solution but to buy. I am under the impression you are saying that the money we are not putting towards a mortgage, needs to be invested index funds, etc …. As a married person with two kids, I have felt enormous pressure to buy a house. This pressure usually comes from friends who seem willing to risk everything to purchase property.
Anyway I could go on and on about this. I think a lot of this is meaningless social pressure. Several years ago during the housing bubble I thought everyone was smoking crack because the obsession with property was completely out of control. One dream my husband and I are trying to realize is living abroad with our kids for at least a few years, something we most likely could not do if we were tied down to one location through home ownership.
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