How many times have you heard it? Go to school and get good grades. Obtain a high GPA and do well on the SAT, thus getting accepted to a prestigious college. Then graduate (likely with loads of student loan debt) and land the job you’ve always dreamed of. Then, just then, you can finally afford to buy a home. The AMERICAN DREAM!
Pshhh! Let’s think about that for a second. The majority of students graduating high school will not be accepted into a prestigious university. Even if they are, the chances of that education being “free” through a sports or high academic achievement scholarship are slim to none. Per 2018 statistics, the average student loan debt is $38, 390 in the United States. So let’s assume that you graduate from a decent school and obtain a good job in a growing field. The next step in becoming a proud contributing member of society, or as some refer to it as “adulting,” is to buy your first home. Wow, you’ve made it. You survived college, you got a good job, you’re in a good position to grow into this vast world. But, are you really?
Do you know who wants you to take loans for a good education and then follow that up with a mortgage on your starter home? The rich, the banks, the 1%. The truth is this – the moment you take loans for education and then get a mortgage on a house, you’ve just loaded up your liabilities. Assets, liabilities, cash flow, ugh borrriiiiiinnggg! I get it, so let’s chop it up and make it easy, given the above topics of student loans and a mortgage on a home.
- Student Loan Liability
- When you graduate college and get a job, eventually you’ll have to make a monthly payment to the lender (NAVIENT is the most common).
- This is a liability because YOU are responsible for repaying this debt, no one else.
- Typically that loan is stretched out over many years, with interest (added fee for banks lending you the funds in the first place), meaning it’ll continue to suck your hard earned money for up to 30 years.
- Home Mortgage Liability
- Many will tell you (possibly even your parents) that purchasing a home will be your first solid investment, a great first asset! -WRONG-
- When you take a loan to buy a home, once again YOU are the one responsible for making that payment.
- If you lose your job and don’t have the savings to continue making your mortgage payment, trust me, the bank will be more than happy to take that “asset” right away from you (straight back into the portfolio of the rich, the banks, the 1%).
Simplified, a liability is anything you borrow money to purchase or pay cash for, which does not produce any revenue and that you are responsible for paying for. That means that new shiny boat, that fancy car, that Harley-Davidson motorcycle, the big dream home, and those student loans all fall into the liabilities category. Putting you in a much riskier situation.
Then what is an asset you may ask. Let’s use the house as an example. A house can become an asset with the right approach. You’re young, you have a good job and a steady stream of income. I need you to change everything you’ve heard from your parents, teachers, banks, or anyone else who told you buying a home or condo just for you to live in is a good idea. Real estate (property) purchases are always a good idea, IF DONE CORRECTLY. Instead of looking for a property you’d like to live in, sacrifice that idea only for a few years while you’re getting started in the world and look for a property others would like to live in. I want you to buy an asset. A property which produces cash flow. What’s cash flow? It’s literally just an asset (property, business, stocks) that makes cash flow TO YOU, not away from you. And the most beautiful part, cash that is from others pockets and not yours. So, what are some good examples of assets which a young person starting out in the world could take on cheaply? A duplex is a wonderful example. Find a duplex (a single home broken into two living parts) in a growing part of town where home prices are not at their peak. Then you can crash at your parents for a while and rent both sides out until you get some financial cushion, or, you can live in one side while your renter covers most or all of the amount you owe to the bank. You have benefits as a first time home buyer which can also be applied to this property purchase ( https://www.nerdwallet.com/blog/mortgages/qualify-first-time-home-buyer-benefits/ ). So let’s run through an example of what buying a duplex or small single family home to rent out can add up to:
- You find a 2,000 sq. ft. duplex in a decent part of town with a price tag of $200,000.
- You walk into your bank with the 3.5% ($7,000) down payment you’ve saved which you’ll use to buy the duplex to get the pre-approval letter.
- You meet with a real estate agent and tell them you’d like to make an offer and you get the deal done.
- The bank guides you through all the steps and after 60 days, this beautiful duplex is yours. Your first asset! (HINT: after you have an accepted offer ask the seller’s permission to go ahead and list the property for rent to get a head start on things)
- The mortgage payment won’t kick in for around 90 days, so you have plenty of time to get a good tenant (renter) in the house.
Now you have your asset, congratulations. Now let’s talk about the fun stuff. Money, moolah, dinero, cash flow!! Your mortgage payment to the bank will total around $1,300 based on a purchase price of $200,000. This includes property taxes, insurance, interest, all that stuff. You decide you’re ready to see how much you can maximize this asset, so you rent out both sides of the duplex. Each side contains 1,000 sq. ft. which includes two bedrooms and two bathrooms and in your neck of the woods, that means a rent price of $950 per side. Now, your new asset is bringing you in $1900 each month and you owe the bank $1300 each month, $600 extra for you. But you’re smart and you realize there will be future repairs that creep up, and you have a good job so you don’t need that extra income and you decide to leave it in the account at the bank. Good decision! Let’s think about how great of a situation you’re now in for a moment. First, someone else is paying your mortgage each month which reduces the debt you owe to the bank and increases your net worth. On top of that, you have an extra $600 a month you’re stocking away for future needs. After two years of that $600 extra each month, minus some general repairs and expenses on the property, it’s safe to assume you’ll have $10,800 in your account with the bank. Sounds like it’s time to buy another rental property!
So to put this in a long-term scenario let’s assume that you get your first couple of properties after only two years and decide you’d like to purchase one rental property a year for the next 8 years, for a total of 10 rental properties. Given the same scenario above (which is extremely realistic – because I do it and will continue to the rest of my life) let’s fast forward to your 35th birthday. You now have 10 rental properties generating $19,000 per month, not taking into account inflation (higher rent rates after 10 years). You owe the bank $13,000 per month so you have an extra $6,000 per month coming straight to you. Plenty of additional funds to handle any emergency repairs or maintenance that might come up. Welcome to the big leagues! You now have 10 assets which other people are paying for and you’re quickly becoming wealthy. Now for the best part…
Real estate typically doubles or triples in value over the course of 30 years. That means that by the time you hit retirement age, those 10 properties you own are now worth a combined total of $4,000,000 (doubling the original value of $200,000 to $400,000). Not only that, you’re now 60 years old and the bank loans are paid off. Rent rates have increased over the past few decades and you’re now getting $3,000 per property which brings you a monthly income of $30,000. Hallelujah!
You’re rich (you were actually fairly wealthy around 40 years old given the scenario above) and you can live any where in the world you want to live. You can make all those stupid purchases you’ve always wanted to and buy whatever boat or car you’d like to buy and you can eat the nicest meals with the best champagne every night. Possibly the best part, your biggest satisfaction will come from knowing your family and children won’t have to make the sacrifices you did. FINANCIAL FREEDOM! All because you steered away from what you were always told by society, and made the right decision to buy your first rental property at 23 years old and used a $7,000 down payment to do it. Let me say that again. The $7,000 you saved turned into $4,000,000 in assets which produce $30,000 a month in income for you. Oh, and you let other people pay for all of it.
Assets vs. liabilities, get your mind in the right place and take the leap! You won’t regret it.
With All Kinds of Love,
Michael Teso
From Dirt to Diamonds 