It’s time to stop paying the bank and to start being the bank. That’s especially true when it comes to home ownership. Buying may not always be the right thing to do. Sometimes it’s better to rent. And there are many ways to structure the deal in your favor.
Question: is it better to rent or own your home? Most people would say that it’s obviously better to own your own home. After all, that’s part of the American dream. But when you analyze the transaction from a financial point of view • which one must do, regardless of the emotional impact of either the idea of home ownership or the property itself • buying a home is not always the best move.
For one thing, the down payment ties up an enormous amount of your working capital, capital that perhaps could be better invested in other ways. For another thing, the mortgage represents an enormous debt that frequently takes up to three decades to pay off. Finally, there are the issues of expenses and market timing. The cost of owning a home goes far beyond the mortgage payments and the risk that property values will take a nosedive. It’s not impossible to lose tons of money on your home • just ask people who bought homes in the late 1980s and early 1990s and who had to sell before 1995.
Question: is your home an asset or a liability? Most people view their home as an asset. After all, we talk about it as “our” home. But who really owns it? Robert Kiyosaki points out in his book The Cashflow Quadrant (Click) that unless you really own your own home free and clear • with no mortgage — your home is on the bank’s balance sheet as an asset. They think they own your home, and they have the papers, dollars, and lawyers to prove it. Chances are, your home is your biggest liability • enslaving you to 30 years of hard labor to pay off.
What’s a person to do? First, it may be better to rent than to buy. The Wall Street Journal’s Lifetime Guide to Money (Click) suggests seven situations when it may be better to rent:
- When the housing market in general or a home in particular is overpriced,
- When mortgage rates are high,
- When you expect to move in a few years,
- When you are not yet established in a career,
- When you buy on emotion rather than a careful analysis of the property and the deal,
- When the down payment will wipe out all your cash reserves, or
- When the monthly payments (interest, principal, real estate taxes, and insurance) exceed 25% of your monthly income before taxes.
Having once purchased a property myself without following the above checklist, I can attest first hand to how much money one can lose through home ownership. Someone once defined being human as the ability to learn from the mistakes of others. Unfortunately, we all too often fail to use that ability. So let me be very clear at this point: do not buy a home unless it passes all seven of the above tests. Any single exception could be setting you up for a financial nightmare.
Robert Kiyosaki goes so far as to suggest that we should never buy a home in the traditional sense, with a large mortgage to be paid off over a long period of time. This, he believes, is not the road to financial freedom but to financial slavery. At the same time, Kiyosaki does not believe in renting either. Instead of paying the bank, Kiyosaki and others suggest a variety of homeownership strategies for being the bank.
- The traditional approach is to buy more property than you need and to rent out the extra space. This works well in an area with multiunit properties. The owner lives essentially rent-free in one unit, while the other units pay enough rent to make the mortgage payments and cover the expenses. There are many twists to putting such deals together; just remember to apply the seven-point checklist before taking the plunge.
- The traditional approach has the downside of being a landlord, and that takes work. It can also become a nightmare if tenants fail to pay or if they damage the property. Kiyosaki suggests a different, although related approach. It still begins with buying more property than you need, at a bargain price. You then immediately subdivide the property, fix up what you have to, and sell off what you don’t want with owner financing, at a higher interest rate than the bank’s. This secondary transaction can more than cover the costs of the primary transaction • and you have the paperwork to get the property back in the event of problems.
Commercial as well as residential developers do the second transaction all the time. It’s how they make money. But it is not beyond the average person, once they understand the concept and get beyond the fear. We have to move from “can’t do” to “can do” thinking. Do it once and it will be easier to do it again. The more experience you have, the bigger deals will come your way. Sometimes you don’t even need money to do the deals. You just need to know how to put them together.
Not ready yet? Lower your housing costs immediately and start saving money for your first real estate deal. That can get you ready quick. I know one person who lives in an RV, with no address other than a post office box. I know another person who paid cash for a large home, along with four other families. I know a third person who house sits when people go away for extended periods of time. I know a fourth person who serves as a companion for the elderly.
Bottom line: there are many ways to start banking the money that you would otherwise be paying on your home. Get creative and do not be afraid. It will pay off in the end.
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May you be filled with goodness, peace, and joy.
Bob Tschannen-Moran, MCC, BCC
President, LifeTrek Coaching International, www.LifeTrekCoaching.com
CEO & Co-Founder, Center for School Transformation, www.SchoolTransformation.com
Immediate Past President, International Association of Coaching, www.CertifiedCoach.org
Author, Evocative Coaching: Transforming Schools One Conversation at a Time, Online Retailers
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