This isn’t an abnormal scenario for young home builders/buyers today. The details will vary of course. However the common themes are these:
- Stretching financially to build or buy the right home
- Justifying the “investment” for health, happiness, and visions of family bliss
- Shackling yourself financially to one housing decision for MANY years
As you might imagine from my title, I don’t see this as a dream scenario. In fact, especially for home buyers in their twenties and thirties, I see it as a nightmare.
It’s a nightmare because this couple/people will miss out financially on much smarter housing opportunities. With a little patience, creativity and forward thinking, they could have used smarter housing choices to build enormous wealth. And this wealth would have created incredible life options for them. But instead, they will miss out. They will be stuck with their dream house. And while they may enjoy the home their finances and careers will be fixed on a one-way path.
Freedom or a Rut—It’s Your (Housing) Choice
What does the typical path look like after that big home is purchase/built? It is a cycle of work, loan payment, work, loan payment, work, loan payment. Forget those youthful dreams of freedom, excitement, flexibility, travel, and doing work that matters. Practicality rules the day for the next few decades. Yes, you may be comfortable. But “comfortability” over a long period of time is another word for a rut.
One of my favorite financial books, Your Money or Your Life, calls it “making a dying.”
The rut makes your choices for you. You work a job because it earns the most money. Your bills get paid. You enjoy your Netflix subscription on the weekends. And you save that 10% in a SSNIT so that you can retire someday.
Not awful, right? But is it excellent? Does it make you excited to get up in the morning? Are you actually doing what matters in your life? Or does your work-loan rut consume all of your precious time? My mission as a writer and the purpose of this is to help you avoid big financial ruts. Money may not be the most important thing in life, but it sure does keep us from the things that matter.
So it makes sense to learn to win with your finances. And your housing choice is the best place to start.
In the rest of this post, I’ll share several smarter, investment-oriented housing choices you can make:
- Live-in flips
- House hacking
- Live-in then rent
Along the way, I’ll also show you the enormous positive difference these choices could make in your life.
But first, let’s look at the true costs of purchasing or building a dream home.
The Real Cost of Your Dream House
One of the most popular articles ever on a blog was called “How to Get Rich With Embarrassing Old Cars and Ugly Old Houses.” The main point was to pay attention to your big expenses like housing and automobiles. But the real lesson of the article was something called opportunity cost.
Opportunity cost simply means:
One Cedi spent today loses its earning ability forever. So the variables of opportunity cost tells you to spend less today and invest more—at least if you want to build wealth. And it turns out housing is one of our biggest expenses. It leaks more of our personal Cedis than almost any other source.
This means if you’re serious about winning with your money, you should focus a lot of energy on either reducing expenses or optimising the return on your housing expense. And this is especially true during the first 10-15 years of your working career.
The question of course, is HOW? Which housing choices will waste the least money and build the most wealth?
I’m glad you following! Let’s see.
Treat Your Home Like an Investment
Unfortunately, most people make the goal of their housing choice to find well, a home. They either build or buy their dream home, but it is not a good investment compared to other alternatives. It’s not that they can’t EVER have their dream home. They just will try to get it too soon. Remember, it’s about timing and opportunity cost! Most often they won’t realize that a home where they sleep at night could also be an investment that makes them money.
And I know what you’re thinking: your home is important. It’s the first choice of place to relax when you return from work. It’s a haven. Your kids need a safe, comfortable place. It contributes to your happiness.
Come on, Chad! Do I really have to sacrifice my happiness by turning my housing into an investment?
But this is where thinking different comes in. You don’t have to make your home an investment for your entire life. Even 5-10 years of prioritising investment instead of finding the perfect dream home can make all the financial difference in the world.
Just like budgeting, saving, and other forms of investing, the so-called “sacrifice” you make with housing pays enormous dividends for the rest of your life. And if you make it a game, turning your home into an investment can also be a lot of fun! I know firsthand. I’ve been having fun with it for 5 years!
Now, let’s move on to the first of five smart home ownership strategies.
1. Get Rich With Live-In Flips
What is a live-in flip?
It’s simply buying and moving into a house that needs work, living there for at least 2 years (I’ll explain why in a minute), and selling at a higher price for a tax-free profit.
2. Live for Free & Build Wealth With House Hacking
House hacking is a strategy where you use your residence to generate extra rental income. Typically this means living in a duplex, triplex, or 4-plex building, and then renting out the spare units. But creative house hackers also rent out spare bedrooms in houses, garage apartments, basement apartments, small guest. If you can dream it and your local government will allow it, you can rent it. And that extra income can cover some or all of your housing expense.
3. Live-In–Then-Rent—Turn Your Home Into a Rental
You’re probably beginning to get my pattern now: Don’t just live in a house because it’s beautiful, comfortable, and has nice neighbours (although those are fine). Build/Buy your housing based on its potential investment qualities. Save your traditional dream of home ownership for later in life when you’re wealthy (or never).
The previous two strategies are my go-to recommendations. Live-in flips and house hacks are probably the most profitable ways to own a home. But sometimes neither make sense, either because of personal or market limitations.
So, a third alternative is to build/buy a house, move into it, and later convert it into a rental. I call this a “live-in-then-rent.”
This is different than a typical housing purchase because it must meet strict financial criteria. No longer is the house affordable because your lender tells you it is. The house is affordable if you could move out, rent it, and still have positive (or reasonable) cash flow.
Rethink Your Dream Housing
I’ve tried to make a case in this post to turn your housing into an investment instead of simply buying/building the first “dream house” that comes your way. This is a way to turn your biggest expense (housing) into an asset that makes a profit (or at least reduces expenses).
Is this path for everyone? Of course not. The three strategies I’ve shared require some work to find, fix up, and then cash in on your housing profits.
But these aren’t the only possibilities for smart housing. There are many more variations I couldn’t cover here. In some markets, it might even make sense to simply become a renter for your primary residence and use your down payment and monthly savings to invest in real estate or other assets somewhere else.
The point is to think outside the box. Don’t let society’s pressure to get a “dream house” early in your career trap you. Instead, think smarter and invest in a dream life instead!
I hope you’ll choose to make financially smarter housing choices. And I hope you’ll help spread the word! I’m trying to make this concept a movement. Let’s take the message to as many people as possible!
Best of luck!
Source: Togbui Dorbu
Via: Abraham Sedoame