Quote:
Originally Posted by I_H8_Crawford
Not sure if this has been posted already, but I'll leave this here:
http://www.millennial-revolution.com
My wife and i are of similar mindset to them, just we will be financially independent a bit older than they are  |
I understand what their idea is getting at, but IMO it's confusing a few things and comparing apples to oranges.
As stated earlier, IMO a primary residence is a consumptive good, not an investment. In a nutshell, I own a condo downtown which I rent out. This is an investment, but the numbers I get to see make it an easy comparative for me.
Total servicing of the condo (mortgage payments, property tax, condo fees etc.) are around $1400. Due to the current economic circumstances, I can rent the same unit for about $1100. This to me means that as a living consumptive good, it costs more to own than to rent. Cash flow wise, I am out $300 a month.
But as in investment rental property, things are a little different. In the video link, the couple said they made their portfolio work for them. They stated a 4% return (which is a good conservative number). Let's say you have $200k portfolio vs a $200k rental property. Assuming neither is leveraged to make their return, a 4% return on the portfolio is $8,000 a year or about $667 per month. If I assume I paid off my mortgage, I'm pretty close to that after expenses are deducted from the rents.
... Ouch.
Good thing I have a nice capital gain, or I'd cry myself to sleep thinking about how my rental property barely matches dividend payments of some stocks out there.
In the latter half of my schpiel above, I realized I'm holding on to a dud of an "investment". However, I have seen other properties (generally without condo fees) that actually make decent coin each year or around 6-8%.
Now, IMO, the million dollar portfolio vs the (presumably paid off) million dollar home comparison doesn't fully make sense because one is an investment and the other a consumptive good. But I get their point.
IMO debt is a huge factor
According to this site:
http://www.bankrate.com/calculators/...alculator.aspx
If someone borrowed $500k (house?) and took 25 years to pay at 3%, they'd pay a total of around $711,318 over the life of the mortgage, or $211,318 of your money that didn't help build equity.
As we all know the rent vs own is a convoluted mess when it comes to break even calculations. People taking on excessive debt to acquire homes is probably making that break even time longer and longer to the point that it's not worth it to own anymore.
I think a good focus word would be net worth. Many people struggle to build net worth because they don't live within their means and spend a life time enslaved to unnecessary debt. A home could fall into this category and there are plenty of other things that chip away at someone's net worth. You don't have a $500K net worth if you own a $500K home and have $400k debt against it. You have $100k net worth.
I think the couple in the video accidentally stumbled upon this idea. A modern day home is perhaps not a good place to build up net worth these days but that is not the only trick that the couple in the video used to build their net worth. A huge part of it was a conscious effort not to bleed away net worth on frivolous things (on top of home, they mentioned car in the video).
Rent or own, someone wasting money will have difficulties building net worth.