Richest man in Babylon - Part 5 - Make of thy dwelling a profitable investment
Our biggest expense today in most countries is rent /mortgage for most of our lives. My parents got their first house in 1999. They paid it off in about 10 years(even though the mortgage was set to 30). I bought my about 9 years ago and have still a long way to go. Everyone living in Australia (and many other countries) know this too well. Its simply because the average house price to average earnings have gone up.
Most people consider buying a house as an investment. Truth is you have taxes that you pay all your life, maintenance and insurance. Dont forget the interest if youre getting a loan (someone else money working for them but now you work to make their money in other words opposite of part 3 -make thy gold multiply). So instead of following step 3 your gold (wealth) is dying and not reproducing; making it a great expense.
Some people consider this a status thing; that they have to buy a house to show that theyre successful in life to family/friends. Yet you have rich people like Peter Schiff of EuroPacific renting and clearly breaking down how much a huge villa costs to buy/rent. If he says its cheaper to rent and it is even though he is loaded and could afford it why would we; that have much less to spend -> become a slave to someone elses earnings(make someone elses gold multiply).
Some people go to the bank find out how much the bank lets them borrow and look for a house in that price range. They dont want to look at a house thats 100k lower in price (where debt will be easier repaid). Just because you can afford the repayments (and rest) doesnt make it a wise choice.
I know many people buy a house with a goal that later in life this will reduce their expenses when they are in their retirement. But from the money they had invested in it, had they gone to rent instead and followed our other steps and made their investment more than what they payed in interest, then their choice of buying the house would have been bad. Below are 2 scenarios:
Scenario 1: Bought a house for 500 K. By the time you paid it off you had another 500K interest(over 30 years), insurance of 30k (modest, considering inflation; over 30 years), maintenance 100k (over 30 years). Saved rent 600k (over 30 years). In the meantime house has gone up in price doubled 2x so 2million. Lets check the profit/loss.
2mil (the house you own now)- 1mil(house principal and interest) -30k(insurance) - 100k (maint.) + 600k (cause you saved the rent) = $1,570,000 (profit)
Scenario 2 : Rented for 30 years (-600k), which means you would have saved 400K (1mil-600k =400k). You also saved maintenance and insurance for house so total saving is 400k +30k + 100k= 530k(profit). Looks much less than the above scenario, right?
Scenario 1 looks better only if you had saved only and dint follow the Part 3 of the book "make thy gold multiply" in other words invest. Now lets look at Amazon shares. In 1997 they opened at a price of $17 and 20 years later (not 30 years like above example) they have increased ~48000% or 480 times. Obviously not all companies did this well some failed altogether(like ENRON) but remember invest in what you understand.
Now 2nd scenario looks a lot better. As for me even though I have this calculated proof in front of me I'm still choosing a mortgage so for me I have to look at decreasing the cost as much as possible, in other words pay of a house that I need not a house I want or bank says I can afford.
I know I assumed there is no inflation in my calculations and this is an error but I tried to make the comparison easier to understand.
Source of image: www.lulu.com
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