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Buying a House: Investing in Real Estate

Throughout my entire life I've been told that buying a house was the best thing I could ever do. My parent's were living proof of it as they bought their house in San Francisco for $130,000 back in 1986 and now it's worth closer to $1 million. They don't have much in savings, so if it wasn't for their house, they would have nothing to have shown for all of their backbreaking work over these past 30 years. They would have retired with minimal savings, been forced to pay insane rent in San Francisco which they couldn't have afforded, and would have really been in trouble. The same goes for my sister who had her house grow to $1.3 million from the $800k her and her husband bought it for, partially with the rent they collected from his bachelor condo.

But on the other side of the exact same fence, I have two cousins who are trapped in houses they are more of a liability than an asset. One is forced to drive in traffic for an hour to work because his company changed locations, while the other is living in a house that is way too big and dealing with the headaches of that instead of traveling the world and doing what he loves now that he's retired. I've also had friends ruin their credit during the 2009 market crash, people deal with crazy tenants that ruin their houses, not pay rent and drag them through eviction court. So you can see why I really wanted to research both sides before investing into buying a house. The problem is, most information out there is biased. People that do well, or are incentivized to promote the good parts love talking about how great of an investment real estate is. People that do terrible with real estate and lose money, or are in a stalemate and have their money tied up, often stay quiet as they don't want to think about it. But here's all of the info, the truth behind both sides of investing in real estate and buying a house to live in or as an investment.





The Insider Info



Before you jump into this article, I want you to be aware of two things. The first is that real estate market changes quickly and massively, so depending on if you're reading this in 2017 or later, interest rates and house values could be drastically different. If anything, I picked a terrible time to write this as since house prices have been rising and interest rates have been artificially low, everyone seems to agree that buying a house is the best thing ever and everyone is making money. However, if you're reading this during a market downturn, or if the government stops artificially deflating interest rates, you might be thinking, "what idiot would buy real estate?" So with these two extremes in mind, realize that this is a complicated topic that is ever changing. I will do my best to keep this blog post updated as things change, so make sure you bookmark it for later.

Also realize that things like artificially low interest rates are great for you right now, they could come bite you in the ass down the road by increasing chances of market crashes, or even things like making it harder to find buyers in the future. So just the fact that you got locked in at 4% interest for 30 years, doesn't mean that someone looking to buy your house when you go to sell it can get the same. If interest rates are back up to 10% then, it may affect your ability to sell your house, find a buyer, or get the price you want. The point of this article isn't to sway you one way or the other, it's to give you all of the information that I wish someone would have taught me in school and when I first I looked into buying a house. This first video out of the series of five total explains the truth behind home ownership and explains if you should even buy a house at all.







What Type of House?



In the above video I answered the question if I should buy a house and if it's a good investment or not. A big take away the last video was the fact that everyone should be saving to buy a house or at least be able to put down payment. I also talked about how buying a house shouldn't be the biggest investment you ever make and why it's a myth. I also breakdown the pros and cons of owning a home, where I mention that even with all of the downsides, having a forced savings account and the stability/predictability of owning a house and having a fixed mortgage instead of paying rent that could rise at any time may be a great idea.

In this next video, I talk about the type of house you should be buying for your first home. What type of house is an investment and what types are liabilities.






Throwing Away Money?



In this section I explore the well known saying that paying rent is like throwing money down the toilet and that the best thing anyone can do is to pay a mortgage to start building equity to get rich yourself instead of paying your landlord's mortgage and making him rich instead. Before making this video I really wanted to sit down and do the math to see for sure and not let emotions get in the way. So here it is, the logic and financial math behind paying rent versus paying a mortgage.

This was super interesting to me as it's been the #1 reason why I've wanted to buy a house to live in as I hate the idea of wasting money when I could be investing it. But the numbers behind it may tell a different story, so watch the video to get the facts. 







Buying a House in Cash?



The next logical question in this series was, if paying interest for a mortgage is so bad, what about if we paid off the house in cash? Well, I'm glad I didn't just assume the answer like most people would, as when I really sat down to research this question, I realized that even though there are a ton of benefits to buying a house in cash, including a ton of savings, there are downsides that come along with it as well. 

This video also talks about how much money you'd actually need to save up to buy a house per month and the feasibility as well as action plans of doing so.






Real Estate Summary:



It turns out that the question of, "should you buy a house" is actually a very complicated one as well as an emotional one. Throughout these past few weeks of research and putting out videos, I've had dozens of people reach out to me including personal friends, family members as well as followers of my blog that have shared their personal experiences.

Some ranged from buying a house was the best financial decision I've ever made, while others said it was by far the worst. But when it comes down to it, it's actually quite simple and straightforward when we take the emotions away from the house buying and real estate investing process. In this final video, I share with you the summary of everything I learned and everything you need to get a good grasp at investing in real estate and buying a home. My final verdict is that saving up to buy a house is always a great idea. Buying a house in a good market and getting lucky rewards you handsomely, but buying a house during the wrong year, or in the wrong location such as Arizona or Las Vegas may leave you in debt for a long time and it's hard to predict this.

For me personally, I love investing real estate, but I hate having all of my eggs in one basket. Therefore I'm only investing in diversified real estate investments, and if I do buy a house, I'll be sure to rent the other room or get a duplex or bigger to cover part of my mortgage. If I ever buy a single family house, I'll know that it's not as an investment but just because I want the stability and comfort of owning a home.








My Lessons Learned:



It's been a long, complicated journey and the thought really started when I was sat down with a friend in San Francisco just over 5 years ago when he told me that he had bought a house and put $100,000 as a downpayment on it. At that moment I had been traveling the world for a few years, teaching scuba diving, training Muay Thai, and for a few moments, thought to myself, "wow, I am so far behind, my high school friends are buying houses and I'm a broke loser." But the crazy thing was, his very next sentence wasn't how proud he was to have had such a major accomplishment, it was how unhappy he was, and that he was envious of my freedom and being able to see so much of the world as I wrote about in my first book, 12 Weeks in Thailand: The Good Life on the Cheap

However, the truth of the matter is, the best life is actually somewhere between the two of us. We should have the freedom of travel, to follow our passions, but instead of just living as cheap as possible and getting by, we should all be saving up to buy a house. Thank goodness for the lessons I learned that allowed me to catch up and make enough money to have another shot, which I wrote about in my second book, Life Changes Quick. But now that I actually have enough money to buy a house either in cash, with a mortgage, or to invest, what am I actually investing in personally? 

My first big investment into apartment complexes and multifamily units without having to deal with being the landlord, collect rents, deal with unclogging toilets or maintenance but still having the upsides of commercial real estate investing has been to invest $20,000 into Fundrise




Listen to Invest Like a Boss Ep 12: Fund Rise


The other big investment I have in real estate is actually more to do with peer to peer lending that's backed with real estate than actual buying houses myself. I currently have $63k invested with PeerStreet where I'm giving real estate backed hard money loans to other investors. This allows me to get a guaranteed 7-10% interest while being the 1st lienholder for the property which allows me to hold their house as collateral in case they stop paying or default. 

So far it's been a great way to collect interest and have the money I made from running and selling my dropshipping stores make more money for me. It's like what Robert Kiyosaki said in Rich Dad, Poor Dad, the ultimate way to get rich is to have your money work for you, instead of the other way around. When I first read that book in college, I never thought I would ever make it to the Investor category and was happy to just aim for being Self-Employed, but my journey really shows what's possible. Here is my dashboard for my PeerStreet account. 




Listen to the PeerStreet Episode


Final Thoughts Summarized: 




The biggest take away everyone should get from this article is the fact that investing in real estate and buying a house to live in are two completely separate things that everyone seems to lump together. It took me close to three weeks to research, film, and write this article, so I really hope everyone got a lot out of it, and that you share it if you did. Here's the summary to really drive the message in. The final verdict is that buying a house to live in is always a liability, but gives you stability, comfort and a forced savings account.

Investing in property to rent out is almost always the better solution to buying a house to live in, and is usually what people who have been successful with real estate are actually referring to, even though the two get lumped together. Having multiple units is almost always better than owning a single family house even if it's rented out, as just like any investment, diversification is always good. Some people never have a problem with tenants or their one or two properties, those people get lucky and nothing bad ever happens. The way to force luck to be on your side is by having the odds in your favor. The way to have the odds is your favor is by having multiple investments instead of all of your eggs in one basket. When you own and rent out a single family home or condo and your tenant either doesn't pay, or moves out, you now have 0% occupancy and are 100% liable for the payments yourself. But if you have 10 units or more, you'll always have 90% occupancy rates even when a single unit is empty or troublesome.

My goal and plan is to never gamble with a single unit and to jump straight into either owning 4 units or more or using funds like I mentioned above to diversity my portfolio. We live in an amazing time where we have the option to invest in property all around the world from our laptops, as well as being able to invest in our home towns. I'm looking forward to updating this article with more lessons learned, as well as give updates on how the funds do. Leave a comment below and let me know what your thoughts and plans are for investing in real estate or buying a home.


P.S. If after reading this article you plan on buying or selling a residential house, Duplex or 4-Plex in Southern California, you can do it through my cousin Jacob who is a great guy and highly recommended.





Summary



1. It's great if you "house hack" and have roommates or tenants to pay off most of your mortgage. 

2. It's great to force you to put money into savings if you otherwise wouldn't do it on your own, even if other ways to save might be better.

3. Real estate investment (not living in a house you own) can be a great way to build wealth.|


Warm Regards,


Johnny

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  1. Really awesome and helpful post Johnny, I think you're absolutely right in that people rarely differentiate between the types and goals of real estate investing. I'm in the process of searching for an investment property right now as well. We're definitely at the top of the market right now though, so I may have to hold off. Thanks for the article!

    Steven~

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    Replies
    1. Hey Steven, happy to share. It's good that you are taking the time to set proper goals and research before you jump into it!

      Delete
  2. Johnny... You are a bachelor with no children, correct? If and when you have children, your whole outlook on life will change. Children want a stable home, friends in the neighborhood they can grow up with, and more importantly, parents want the best school district they can afford so their children get the best education. Children want to bring their friends home, to play in a yard, etc.... Our children (we have 5 of them) begged us not to move from our current home. We will stay until the last is out of high school.
    I want to challenge some of your assumptions. About that "30 year mortgage" ugh...getting a 15 year mortgage, and paying a little bit more each month (forced savings) will save homeowners $100,000+++ over the life of the mortgage.
    Next, assuming that ANY investment, whether stock market, REIT's or fixed income funds will pay 8% (or whatever %) consistently over a period of 10, 20 or 30 years is just unrealistic. Markets go up and down, and many lost 50% of their money in the stock market in 2008 alone. So you can't really compare investing in anything versus buying a house. There is too much volatility.
    I agree with you, that investing in real estate for the tax benefits is unwise, the tax benefits, nevertheless, should still be calculated in order to compare apples to apples. When our children were young and we qualified for the tax credit, our effective income tax rate was
    3-4% because we had so many tax breaks..(deducted interest, property taxes, etc..). My husband makes $100,000+++ per year. I bring in the petty cash working part-time.
    I am so glad we live in Texas, with NO state income tax, and in a place where property values have slowly risen, so we don't have a huge property tax bill. I really don't know how people in California have paid all those taxes for years. I would be out of my mind.
    Thank you for sharing your thoughts on buying a house. I love how you keep an open mind about choosing the life you want to live. It is thought-provoking.

    ReplyDelete
    Replies
    1. Hey thanks for sharing your thoughts as a parent, it's valuable to hear the other side as well. I agree that home stability is a very valuable thing, maybe even priceless. I did mention in one of the videos though that I believe having parents be able to move closer to their work and being able to spend more time at home with their kids instead of commuting is more beneficial than having a fixed address. I grew up in the same house my entire life, since I could remember. But my dad's job moved 1.5 hours away, which meant that he would have to leave before I woke up, and didn't get home until just a few hours before I went to bed, so I hardly saw him. It would have been better for me to spend an extra 2-3 hours with him a day than have a stable home.

      I also think staying in once place is comfortable for kids which is why they want it as making new friends is daunting but moving has other benefits such as building character and forcing kids to learn to adapt and make new friends in new surroundings.

      As for the 7-8% gains, it was Warren Buffet that calculated that number (he said 7%) for the total stock market over time, which includes the 50% drops, as in good years the stock market gains over 10% to make up for it. There are also things like PeerStreet that guarantee 8% returns through their collateral backed hard money loans, that I mentioned in the videos as well.

      But you're right, there is so much to consider when choosing to buy, not to buy a house, which is why this is such a long and complicated topic that can vary by person to person and situation to situation. I think my goal was really to figure it out for my own personal situation, while sharing the thought process behind it all so people would have the info to decide for their own. Thanks again for this comment, I love discussions like this from readers!

      Delete
  3. Hey Johnny,
    It's Wallace from DSL. Great video! I just left a comment on this video on Youtube. Please let me know what you think of my ideas. I would love to talk to you more about it.

    ReplyDelete
    Replies
    1. Thanks Wallace, i'll check it out and reply there. =)

      Delete
  4. Your research is fantastic Johnny! As someone who has been investing in real estate for 10 years I've forgotten how difficult it can be for someone who is just starting out to decide what to invest in, how to get started and if real estate investing is right for them. I've had a lot of success in real estate building $1 million in net worth in under 5 years and now earn six figures in annual cash flow. However, there was a huge learning curve and it took a lot of time and effort. Like your research showed, multi-family is the best investment due to the multiple streams of income under one roof.

    Buying a home to live in is very different than investing in rental properties and I think it is more risky because you are the one paying the mortgage instead of tenants. My easy way of determining if it makes financial sense to rent or buy is if the mortgage payment would be within $200-$300 per month of what you would pay for rent. We all have to live somewhere, and if the rent you would pay is $1500 per month but you can own a home for $1700 the tax incentives would effectively make that mortgage payment $1500, so now you are paying what you would have to pay anyway but toward your own home. Where I think people go wrong is when they are thousands apart and now they lose all chance of ever keeping that house as a rental.

    Thanks again for sharing your research!

    ReplyDelete
    Replies
    1. Hey thanks for sharing your thoughts. I'm glad to be able to share this knowledge with people just starting out as I know most investors only talk about the high level aspects of investing.

      Delete
  5. Hey Johnny FD! Darren here...I've been checking out your site for the past couple of months now and I love what you are doing, keep up the great work!

    With regards to real estate, I've been on both sides of the fence too.
    When I was 19 I purchased a condo as my first dip into real estate. With my inexperience I was going into the red about $500 every month and had to sell the place less than 10 months later just to stay afloat. I had no idea how to calculate my bills and living expenses properly.
    Then I took my second stab at it years later. I saw an up and coming community with new townhouses going in. I begged my fiancée to put some of her savings into the purchase of a new house as an investment (even though it was our primary residence, I treated it as an investment).
    We purchased the home for $604,000 with 5% down and lived there for 19 months.
    The area developed nicely around us as the builders plan had shown and the value of our house went up an average of 10k a month.
    Last September I put the house up for sale by owner at $789,000. The house sold in less than 24 hours for full asking price with zero conditions.
    I ended up with a check for $178,193.81 after the sale...
    I then then purchased a 300k house away from the noise of the big city on 1.3 acres (which could sell today, a year later for about 400k).
    I put a large chunk of the rest of that money into a 16 unit apartment building with my brother as an investor as well.
    I totally agree with you about buying more units (4 or more) rather than 1 when dealing with rental properties. With 1 house, if someone moves out, you are immediately at 100% vacancy. Not a good way to go. Also with single houses as rental properties scattered around a town or city, that's more roofs to fix, furnaces, etc. Not to mention travelling like a ping pong ball around the city fixing issues at all these properties. I like the idea of 1 roof over multiple units (apartment buildings). But there are still tons of people out there killing it with single houses. It really all depends on preference. Buy and hold vs trading up etc etc etc. There are so many discussions that could be spawned off of this topic. Either way, real estate can make you rich, just ask the Donald (actually maybe don't ask him)...
    I fully believe that any type of real estate can be seen as an investment, it just depends on how you treat it.
    If you asked me 5 years ago I would have said to not ever worry about paying off a mortgage, so you can leverage the banks money to buy and live in your house. I've since changed that notion, I look forward to paying off my mortgage and owning my house free and clear. Because really, until your house is fully paid off, the bank owns the deed to your house, therefore it's their property, you just sleep there every night.
    Thanks for the great post Johnny!
    Darren (moneytrekker(dot)com)

    ReplyDelete
    Replies
    1. Hey Darren, thanks for sharing your experiences with real estate. It's good to hear from people who have both lost money and who have made money. With the townhouse, thinking back, do you think that it was your foresight of knowing the area around you would develop nicely being the key to that success, or was there also a chance that if it didn't go as planned with development it could have been another liability?

      Delete
  6. Hey Johnny! I think it was a little bit of knowing the area and research. Before I bought the townhouse my research found that a proposition had just been put into place to build a much needed highway near the new townhouse area that would greatly shorten the commute to the big city for people moving into that area. After I moved in, people caught onto the trend and started snatching up the rest of the real estate. The house prices rose quickly once demand was at a high and supply was shortening.

    So I guess it was a bit of research, luck and risk. Which is pretty much the way with any type of venture you could say (amongst other things).

    Anything could have gone wrong and I would have been stuck with a major liability for sure. I guess you could ultimately say - the bigger the risk, the bigger the reward (as cliche as it sounds).

    ReplyDelete

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