The $180,000 Mistake Americans Make Every Day

Back in 2001, Brian Burns bought a 3,500-square-foot home in Las Vegas for $250,000.

At the time, he and his wife thought it was their dream home.

But just three years later, he resold it for a cool $645,000. And he bought a new home in a brand-new development for $320,000 — and pocketed the difference.

Not a bad deal, huh?

With returns like that, you’d think Brian was some kind of savvy real estate investor… but he wasn’t.

In fact, he had no intention of “flipping” the house until a friend told him just how much it was actually worth.

He wasn’t alone in this.

Back in the early 2000s, the market was booming. And plenty of regular folks were “accidentally” making money like this, hand over fist.

And then the bubble burst.

Brian found it harder and harder to find work as a graphic designer.

And to add insult to injury, that house he bought for $320,000… was now valued at about $140,000.

“I think everybody’s dream, when you are a normal person — not super rich, not super poor — is that your home is kind of your biggest asset,” Brian told NPR in a 2016 interview.

“You feel like, ‘I’m going to play by the rules, I’m going to pay my mortgage, it’s just going to continue to increase in value.’ Maybe not by leaps and bounds, but by no means should it be worth a third of what you paid for it.”

Brian makes an excellent point here.

We all know that investing by its very nature is risky. You can just as easily lose money as make money.

But somewhere along the way, we’ve been educated to believe that investing in a house is somehow a sure thing. Which means that renting is the same as throwing money away.

Maybe it’s time to revisit the “renting versus buying” argument in a new light.

Earlier this week, I sat down with Currency Wars author Jim Rickards to get his thoughts on the subject.

Read on…

All the best,

Owen Sullivan
Editor, Money & Crisis

By Jim Rickards

Whether you rent or buy is always a personal decision. But personally, I am a big advocate of renting.

I’ve been a renter for 10 years and I haven’t missed a thing, because the real estate market hasn’t gone up much in 10 years.

Meanwhile, my other investments have. And in fact, my investments have made so much money that they pay the rent.

Buying a home is part of the American dream. Everybody has to own their own home, and if you don’t, you’re not living the American dream… But I tend to look at it much more clinically.

To me it’s a math problem. Separate out the emotion and just do whatever makes more sense from a pure dollars-and-cents perspective.

Depending on the area and type of home, a home could tie up anywhere from a couple hundred thousand of equity to $1 or $2 million of equity.

That’s money you can invest in other assets if you rent instead of buy.

The lost profits from not investing in another asset are the opportunity cost of owning the property. You have to factor in that opportunity cost to make a smart decision.

Everyone needs a place to live. That’s for sure.

But in my life, I’ve rented apartments, I’ve owned condos, I’ve owned houses, I’ve rented houses. I’ve done every variation. All I know is that every month, I keep writing checks.

Remember as soon as you buy, you’ve got to pay property taxes and maintain the place. It’s not like ownership is free.

Even if you’ve paid off your mortgage and your property taxes are low, you’re still paying maintenance costs. You’ve got to fix the roof, and things leak and things break.

One of the benefits of renting is that’s all on the owner or the management company.

The bottom line is you have to do the math.

Ask yourself how much equity do you have? How much of a mortgage would you need? What are the interest rates? What’s the market like? What are the tax benefits? What’s tax deductible? What tax bracket are you in? What’s the local real estate tax situation?

It’s not a daunting problem. You don’t need a supercomputer, but it does have a lot of inputs.

Even when people sit down and do this math, there are big variables that people tend to either overlook or get wrong. The major one is that they make some assumptions about the future value of the house.

I’m part of the baby boomer generation and as we were growing up, the real estate market did nothing but go up.

In the ’70s and ’80s, it exploded, and then it exploded again in the early 2000s. It did nothing but go up, so we just got used to a world where your home’s value increased dramatically over time.

If you have home equity today, you’re tying up money that could be used elsewhere. For example, if I’m making 1% a year on my house and I could be making 20% a year on gold or 25% a year on stocks or something else, is that smart?

On the other hand one of the benefits of home ownership is that when you own your house, there’s an implied rental value. You’re actually making the amount that you’re not paying in rent every month. That’s your return on the investment. And the IRS does not tax that because they can’t.

Approach the problem with an open mind. Think economically. And don’t get carried away with emotion.

Regards,

Jim Rickards

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