Saturday, 18 November 2017

Why do some real estate investors not own their own home?

Cody Shirk, Surfer, Capitalist, Contrarian, Traveler, Entrepreneur, Investor

Practice what you preach… right?

Seems weird that someone who invests in real estate wouldn’t invest in their primary residence. What’s going on here?

Obviously this isn’t true in all cases, but it’s definitely true for me.

I believe real estate is one of the best investments you can make. However, when it comes to your primary residence there is really only one circumstance where you should own your own house if you plan on making money from it.

Other than this one circumstance, renting usually makes more sense. (I’ll reveal that at the very bottom.)

Let me break it down and show you how the numbers add up.

Let’s say I want to live in a million dollar home in Los Angeles. Believe it or not, this is not an outrageously priced home for the LA area.

So… let’s look at the numbers if I buy a million dollar home:

Purchase price = $1,000,000

Down payment = 20%, which is $200,000

Monthly mortgage payment on a 30 year fixed rate term at a 4% rate on $800,000 (remember this is a jumbo loan with higher rates) = $3,819

Annual property taxes (which is 1.25% of purchase price in LA County) = $12,500 (or $1,042 per month)

Annual upkeep expenses (I’m talking capital expenses that include everything from landscaping, paint, roof, driveway, termites, windows, carpets, etc.) about $1,000 per month. It costs a lot to upkeep a $1,000,000 house.

Annual property insurance (this depends on the region, but LA is known for wildfires, so insurance can be very high) about $500 per month.

HOA dues (which is not applicable for every home, but if you have a million dollar house, there is a strong chance you live in a community that has some type of dues) = $200 / month

So here are the costs you’re looking at that are required to simply ‘operate’ the house:

Mortgage = $3,819 / month

Property taxes = $1,042 / month

Upkeep expenses = $1,000 / month

Property insurance = $500/ month

HOA = $200 / month

Total = $6,561 / month

Remember, this does NOT include utilities like water, power, gas, sewer/septic, internet, cable/satellite, etc.

AND… you have to put down a minimum of $200,000 to make this all happen.

So, we’re looking at $6,561 in minimum monthly expenses (again, not including utilities).

You can rent many $1,000,000 homes in LA right now for less than $5,000.

Most people will say something like, “Yeah, but that money is going towards paying off your loan.”

Well, let’s look at how much money is actually going to pay off that loan…

Mortgage = $3,819 / month… BUT, the way mortgage payments work is that in the beginning of the term, you are paying almost all interest. That means a very small portion of the payment is actually paying off your principal. The banks do this to ensure that they are getting paid first.

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