Is a House really an investment?

Lets get this clear. An investment doesn't eat money every month, it generates money.

If you invest in a dividend paying stock or bond it will generate cash for you every month/quarter/year. You don't need to pay the stock or bond to produce. If you send money to a fund every month it goes to buying additional shares of that fund.

If you have an income producing residential rental property your net of your rent minus mortgage, taxes, insurance, etc. will hopefully be a positive cash flow to your pocket every month.

Now lets look at your house. After paying mortgage, insurance, taxes, etc. does it pay you back every month? Not a chance. To add insult to injury that house eats up a lot in decorations, furnishings, upgrades, etc.

The fact that your house may go up in value after a few years does not make it an investment. That's speculation. It's just like buying bare land holding it for years and hoping it goes up one day.

A year ago you might have argued that house prices are going up, up, up. It was tough to sit in the sidelines in Houston while homeowners in the East and West coast were getting 'rich'. Well now that we're back to normal we can assume a historical average of 4% annual appreciation.

With 4% appreciation and after deducting all the expenses associated with a house it can hardly be considered an investment per se.

Does that mean you shouldn't buy a house? Not at all. I believe in the long run homeowners will always come out ahead financially vs renters albeit for different reasons.

So yes, even after all I said go out and buy a house. I'll explain why in the next post :-)

This one belief is probably keeping you from being rich

Do you find it hard to save $$?  

Why is that?  Well on the surface the answer is pretty easy “I don’t have enough money left after my expenses”.  I hear you.  However, I think deep down your subconscious beliefs are what really keeps you from saving.

So here you are staring at that nice new golf club/TV/killer purse/Wii/etc and $500 are just burning a hole in your pocket.  You know you should save that money but your subconscious is telling you that if you stash away that $500 they will just go in a black hole never to be seen again.  

You then talk yourself into it by thinking “pleasure now, or pleasure later when you retire and are too old to enjoy it anyway…”    Sound familiar?

Most of us have been conditioned to think that saving means stashing away money and never seeing it again.  I think most of you know it by the name of 401k. We know our savings are growing (hopefully) but somehow it just doesn’t feel like real money.

Here’s an idea: Invest in vehicles that pay you now.   Huh?

If you had a $25,000 investment making you a 10% dividend you’d be pocketing $2,500 a year, every year.  Think about that.  It’s like getting a $2,500 bonus check year after year for not doing anything.

If you know that every $500 you invest will pay you $50 back every year would you be more inclined to invest?  That golf club doesn’t look that attractive any more does it?

What's Better, to Save a Dollar or Earn a Dollar?

Would you rather earn a dollar for your products or services, or save a dollar when buying or not buying something?  Sure this seems silly but the implications and ramifications of this question extend beyond just one dollar.  

Lets say you save a dollar.  Ok that's one dollar less I would've spent. Simple. 1$ = 1$.

Now lets look at earning a dollar.  I have one more dollar in my pocket right?  Well, actually no.  That dollar you earned is actually taxable.  You'll have to pay income taxes, social insecurity taxes, fica, etc.  Your dollar earned is actually worth only $0.80 or so.

Now instead of a dollar make it $10,000 or $100,000.  It makes a big difference eh?

ps. The trick here is earned.  There are some ways you can make a dollar without paying taxes or at least deferring them indefenitely.

Nothing is Purchased in Isolation

Everything costs more than it seems. Well that’s a general statement but what I mean is that anytime you budget for something you’re going to purchase be assured that it will invariably cost more than that original amount. You see, there is a universal law that says:

“Nothing is purchased in isolation”

Take for instance something as simple as an ipod. Lets say you budget $150 and then you go buy it. Well now that you have an ipod you might be compelled to buy some music to listen. So you say download music for free. Fine, but what about storage. Now with so many songs and video you downloaded you need a new usb drive to store it, or a whole new computer. You’ll at least buy a new skin for it, or a replacement set of earphones.

The point is that your one purchase will most probably beget more purchases. As items get more expensive so do the correlated items that go with it. A car begets gas, oil changes, tires, car washes and air fresheners. A house begets furniture, home improvements, etc.

So my friends, remember that if you’re ready to spend on that new item realistically budget for twice that amount over its useful lifespan.

Never ever ever finance a car

Lets get straight to the point. Cars should only be bought with cash. Financing is for wimps. Ok I’m glad I got that off my chest. Now let’s elaborate.

I can hear you now “But I only have $5,000 in savings and that nice BMW I want is $35,000…” Well my friend in that case look for a nice $5,000 used Corolla. That’s what I did. Actually I bought it from my sister but still I’ve paid cash for my last two cars.

So whats the harm in financing? That if have to finance it then YOU CANNOT AFFORD IT! First of all simple math will show you that you end up paying almost double financing than if you paid it cash. However, that is not even then real damage. The real damage is the opportunity cost. You cannot afford to eat that cash flow now and sacrifice future returns.

Lets do some simple math. $3,000 down on a $35,000 car financed at 6% for 5 years yields a $618.65 a month payment (ignoring insurance, registration, etc). Instead, lets invest that $618 a month and lets say it earns 8% return, at the end of five years you’d have $45,408.69! Lets say you keep that up for another 20 years and you’d have a nice $364,014.61 in your bank account.

That nice $35,0000 car actually cost you $360,000 in the future. And that’s why my friends you cannot afford it!