Sam Lee is a marketing manager and property consultant at JML Property. JML was established in 1994 and offers Investment Property & Homes. It specializes

Why do some real estate investors not own their own home?

Practice what you preach… right?

Seems weird that someone who invests in real estate wouldn’t invest in their primary residence. What’s going on here?

Obviously this isn’t true in all cases, but it’s definitely true for me.

I believe real estate is one of the best investments you can make. However, when it comes to your primary residence there is really only one circumstance where you should own your own house if you plan on making money from it.

Other than this one circumstance, renting usually makes more sense. (I’ll reveal that at the very bottom.)

Let me break it down and show you how the numbers add up.

Let’s say I want to live in a million dollar home in Los Angeles. Believe it or not, this is not an outrageously priced home for the LA area.

So… let’s look at the numbers if I buy a million dollar home:

Purchase price = $1,000,000

Down payment = 20%, which is $200,000

Monthly mortgage payment on a 30 year fixed rate term at a 4% rate on $800,000 (remember this is a jumbo loan with higher rates) = $3,819

Annual property taxes (which is 1.25% of purchase price in LA County) = $12,500 (or $1,042 per month)

Annual upkeep expenses (I’m talking capital expenses that include everything from landscaping, paint, roof, driveway, termites, windows, carpets, etc.) about $1,000 per month. It costs a lot to upkeep a $1,000,000 house.

Annual property insurance (this depends on the region, but LA is known for wildfires, so insurance can be very high) about $500 per month.

HOA dues (which is not applicable for every home, but if you have a million dollar house, there is a strong chance you live in a community that has some type of dues) = $200 / month

So here are the costs you’re looking at that are required to simply ‘operate’ the house:

Mortgage = $3,819 / month

Property taxes = $1,042 / month

Upkeep expenses = $1,000 / month

Property insurance = $500/ month

HOA = $200 / month

Total = $6,561 / month

Remember, this does NOT include utilities like water, power, gas, sewer/septic, internet, cable/satellite, etc.

AND… you have to put down a minimum of $200,000 to make this all happen.

So, we’re looking at $6,561 in minimum monthly expenses (again, not including utilities).

You can rent many $1,000,000 homes in LA right now for less than $5,000.

Most people will say something like, “Yeah, but that money is going towards paying off your loan.”

Well, let’s look at how much money is actually going to pay off that loan…

Mortgage = $3,819 / month… BUT, the way mortgage payments work is that in the beginning of the term, you are paying almost all interest. That means a very small portion of the payment is actually paying off your principal. The banks do this to ensure that they are getting paid first.

Source: Mortgage Calculator

On a $1,000,000 loan, you only pay off a small portion of your principal for the first 5 years. Yes, that interest is tax deductible, but it isn’t building equity into your home.

Property tax = $12,500 / year. That doesn’t go to anything. You have to pay that every year no matter what, and it goes up every year.

Property maintenance = $12,000 / year. This doesn’t go away either. In fact, it can go up as your home gets older and needs more repair.

Property insurance = $6,000 / year. Guess what? This doesn’t go away either! No matter what, you need to insure your home if it’s financed. The bank requires it.

HOA = $2,400 / year. Again, not going into the home equity. It’s always required and usually goes up over time.

Check this out:

Source: MC

See the “Total Interest Paid,” the “Total Tax Paid,” the “Total HOA fees,” and the “Total Home Insurance?”

Those all add up to…. wait for it… $1,201,956 … that’s the total amount of money you will spend that does NOT go towards paying off that $800,000 loan.

In other words… look at the amount in the bottom right corner above… that’s over 2 MILLION dollars. That’s how much it would cost to buy a $1,000,000 house over 30 years.

You’re paying an extra million dollars to buy a million dollar house… AND when you’re done paying off the loan, you still have to pay property tax, property insurance, HOA dues, maintenance, etc.

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READ THE ABOVE PARAGRAPH AGAIN.

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Now, the traditional argument is that your house is increasing in value and will at least match inflation. This is absolutely true.

However, if you are serious about investing, there are other ways to increase your wealth much faster and efficiently.

And one of those methods is by buying real estate to rent out to others. Yes, you need to have tenants that pay off your debt for you.

Make your tenants build your equity. Then you get all the tax benefits, you get all the free equity built up, and you get a property portfolio that can grow and grow. That’s the key. Make your tenants pay.

Oh… and that one circumstance where buying a personal residence makes sense:

If you can buy a home at a significantly discounted price at the bottom of a real estate cycle, then you can sell it two years later for what I call “THE GREATEST TAX BREAK AVAILABLE TO THE AVERAGE US CITIZEN.”

And that is the capital gains tax break you get. If you live in your home for 2 or more years before selling, you can walk with $250k tax free for a single individual OR $500k if you’re married.

That is the one circumstance where buying your primary residence makes cents!

I guarantee that this idea will ruffle people’s feathers. It goes against traditional wealth building ideas. But guess what? I learned this first hand. I can tell you from my own mistakes that this is pretty damn accurate.

I write about this kind of stuff weekly. I definitely think there are some great real estate investments out there, but you really have to dig into the numbers and not blindly think that buying a house is a good idea.

That said, there are many MANY other investments (some which don’t have to do with real estate) that look very attractive right now. Let’s face it, real estate is expensive, so we need to look in other areas if we want to continue to be successful. You can go here to read all kinds of free stuff like this. Sign up to get free extras if you want… or don’t if you don’t want…