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Are You Throwing Money Away by Owning Your Home?

toss_moneyWe all know that the three essentials for living are food, clothing, and shelter. We definitely rent our food. Do we rent or own our clothing? Hmmm.

Part of the American dream is to own your own home. And there are good reasons to do so. For instance, a Federal Reserve study[pdf] shows that the average family that owns a home has a net worth of nearly $625,000 while families who rent have a net worth of just a little over $54,000.

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Homeowners on the move

We’ve seen an interesting statistic bantered about, but we haven’t been able to pin down a reliable source. If this statistic is true, American homeowners move once every five years or so, on average.

So we thought we’d consider what that does to the buy vs. rent equation. We’ll use some averages and national statistics to create an example. However, what really matters is your own situation and your local real estate market. Only you, working with your financial advisors, can determine what’s in your best interest.

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marylynn When I was younger, one of my bosses in radio told me that I was just throwing away money by renting. I remember thinking that it made sense. I’d reached an age where maybe I should consider buying. So I did. As often happens in the radio business, less than a year later, I lost my gig. So I had to sell my house to move to a different market. I lost a lot of money by buying. If only I had had a crystal ball!

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Putting buy vs. rent to the test

We created a fictional purchase to see if we would be better off renting or owning a house for five years. We assumed that:

  • We put 20% down (approximately $63,000).
  • We financed the rest with a 30-year mortgage
  • The interest rate would be 6.50%, slightly above the current rate.
  • Our house would appreciate 4% per year, slightly below the recent average.
  • Property taxes would cost us 1% of the value of the home.
  • Insurance would run 0.50% of the value of the home. (Renters and homeowners have to insure the contents. We have the added burden of insuring the building.)
  • Repairs & maintenance would consume 1.50% of the value of the home.

Over the first five years, 83% of our total mortgage payments would go for interest. In other words, for the most part, we’ve traded renting property for renting money. If the interest rate is higher, the portion that would go to interest would also be higher. Of course, the reverse is also true.

During this period, we would pay $2,171 per month as “rental costs” for our home. We call them rental costs because they have no value once they’re paid. They only allow us to keep owning. So if we could rent a similar property for less than this, we would be better off renting instead of buying.

Of course, if we had made a down payment of less than $63,000, our cost would go up because we would be paying even more interest.

Where’s the break-even?

We also looked at how it would take before we would break-even. After all, it costs money to sell a house. We would have to pay commissions to our realtor, closing costs, and the like. We assumed these costs would total 8% of the selling price.

Given our assumptions, we looked at what would happen if we sold after one year. Our house would now be worth $326,560. From that, we would pay $26,125 in selling costs. After a year, our mortgage balance would be $248,392.

So we would be able to take out $52,043 in cash. But remember, we invested $63,000. So we lose about $11,000 if we sell after one year.

But that’s not the whole story …

We haven’t yet considered the opportunity cost of tying up that $63,000 in a house. Because if we didn’t invest it in this house, we could have invested in something else. We assumed we could have earned 6% by investing in some portfolio of financial assets.

That would have returned nearly $3,800. So by buying this house and selling it in a year, we would put ourselves in the hole nearly $15,000.

Even after 2 years, we’d still be about $3,500 behind, given our assumptions. Of course, one of those assumptions is that real estate prices are rising. It’s almost certain they will in the long run, but will they rise in the next year or two? They may not in some markets.

What’s the bottom-line?

We concluded that if we didn’t plan to own a house for at least two years, we’d rather rent. We also saw that the longer our holding period, the better we would do. For instance, in the last five years of the mortgage, only 15% of the mortgage payment would go to interest. It seems like buy-and-hold is rewarded in real estate investing.

How to get around it …

We have two friends who have been able to get around the short-term ownership problem. One of them is in the military, so he moves frequently. He only buys a house that he knows would make a good rental property. If he gets transferred, he hires a local property manager and rents it out. Until he decides where he wants to retire, he plans to hold a number of his houses.

Another friend doubled-down on this strategy. He moved quite frequently as he climbed the corporate ladder. Not only does he own houses in a number of cities, he bought additional rental properties, so he has a diversified portfolio across a number of cities. Now he’s retired living off the rents!

So you can get around the disadvantages of short-term ownership by having an alternative exit strategy!

Next time, we’ll discuss how a toy that you probably played with as a kid can help you manage your time. Until then, here’s to your bigg success!

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You Can Avoid the Mistakes that Brought this Business Down

quote There’s a great post by Roger Ehrenberg on his Information Arbitrage site. Roger was an investor, board member and leader in Monitor110, a company that planned to become the internet version of Bloomberg. The team had impressive credentials, but ultimately the business didn’t make it.

Roger spells out the reasons why. We admire him for sharing these lessons because most of us don’t like to talk about our failures. These are mistakes that any of us could make, so he provides a great opportunity to learn from others. But even more than that, it’s the way he wrote about it that impressed us – he doesn’t cast blame; he just discusses the lessons he learned in the hopes that we may benefit. And we did!

That’s why we highly recommend that you read the whole post. We’ll hit his highlights here.
 

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7 mistakes that led to the demise of this business

#1 – No single leader
Monitor110 had two leaders – a technology person who was one of the founders and Roger, who was a business person. Roger said this structure just didn’t work.

This reminded us of the number of times we’ve seen two people start a business. It’s pretty common to split everything 50/50. But it’s a recipe for disaster. In almost all cases, there has to be someone who has the final say for a business to succeed.

#2 – The technology-side drove the business
This made us think of the number of entrepreneurs who start a business in their craft. They’re technically oriented. They love their product or service, but they ignore what the customer wants and needs.

#3 – Too much PR too early
Roger’s company was featured on the cover of the Financial Times. You wouldn’t think that would be a problem, would you? But Roger says this raised the bar with everyone – customers, themselves, and financiers … which led to the next problem.

#4 – Too much money
Too much PR. Which led to too much money. Sounds like a company that’s been blessed. But Roger says the blessing turned into a curse.

  • Because of the great PR, expectations went up significantly.
  • Within the financial community, so money flowed in
  • With their customers
  • And most importantly – with the people of Monitor110.

With all these high expectations, they didn’t push a product to market because it needed to be just right. And that didn’t matter because they had a cushion of cash.

#5 – Not enough customer feedback

By now, you see how all of these mistakes were interrelated. Because of the great publicity, they were afraid to show the customers what they had. They didn’t want to disappoint them and be disappointed. But it wasn’t a problem at the time because they had plenty of money. One mistake was feeding another which was feeding yet another.

#6 – Slow to adapt to the market
On a post not long ago, we talked about a military concept called OODA loops. OODA is an acronym for Observe, Orient, Decide, Act. The idea behind the concept is that by getting into the loop, you gain information. Then, by adapting to what you’ve learned, you gain a competitive advantage.

#7 – Disagreements about strategy
This stemmed from the technology side and the business side not being able to come to terms. It’s also an outflow of Mistake #1 – without a single leader, it’s hard to have a clear vision.

Just get started!

All of this made us think of the saying, “You don’t have to get it perfect; you just have to get it going. That’s one of the things that we did with Bigg Success. We talked to a lot of people who had all kinds of great ideas. Some diametrically opposed to each other! We could have easily just got caught in the quagmire.

Ultimately, we just launched. It wasn’t perfect – we knew that. We’ve learned a lot. There are things we would do differently if we had it all to do over again. But by launching, we were able to learn from the most important people of all – our community. We learned from you.

We’re happy to let you know that you’ll be seeing some bigg additions in the near future. So keep checking in and let us know what you think! We’re listening!

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The Action Faction … They Get Traction!

By Bigg Success Staff
01-09-08

Life Skills

car_speeding_along_jpg

Planning is certainly important to set your direction. Analysis is necessary, but a lot of people take it too far. At some point, you just have to do it.

A recent post, by the great Tom Peters, entitled Don’t Know Where You’re Going? So What?  deserves your attention.

In the post, he talks about O.O.D.A. loops – a concept developed by United States Air Force Colonel John Boyd. OODA is an acronym for:

 Observe
 Orient
 Decide
 Act

Boyd contends that a military advantage can be gained if you work through this loop faster than your adversary. In today’s rapidly changing world, this concept applies to you as well.

Get in the loop!
The four processes in Boyd’s model are overlapping and interacting. That’s why you gain an advantage by getting in the loop.

As you move through the loop, you constantly receive new information. Feedback that you don’t get if you never act. You’re able to use that feedback to adapt. And that’s what gives you an advantage – you know things that the “analyzers” haven’t discovered.

You can’t know everything before you make a decision. You can conduct surveys, interviews, focus groups, or any number of other things. But they’re all speculative … conjecture … hypothesis.

When you take action, you get real facts. Hard evidence. Things you only get by taking action.

Step up to the plate!
Spring training for the upcoming baseball season is just around the corner. So we couldn’t resist a baseball analogy!

Nothing happens until you step up to the plate. Now, when you’re at bat, you might strike out – or you might hit a home run! The greatest home run hitters in history were usually also the kings of strike outs.

That’s the point – by taking action, you won’t always succeed. However you will learn from your mistakes, won’t you? The most successful people have usually fallen flat on their face a time or two. That’s part of the process.

So get in the action faction and you’ll get traction!  Do something – even if it’s wrong. Fail forward; learn from your mistakes. Adapt. Then move on. You’re more likely to meet with bigg success!

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