Beware The BIG Property Mistake

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Property, property, property.

It feels like it’s property season in my world.

With the big build of my bush place going on, Nic and I deciding where to cohabit (yep that’s the next step for us) 😁 and what space we want to ensure both our needs are met, and some restructuring of my own investment property portfolio… 

… I’ve been thinking about the BIG PROPERTY MISTAKE so many people make.

The mistake is actually a HUGE lie which most of us are told and believe.

The lie is that your home is the biggest investment you’ll make!

The lie is that your home is an asset!

An investment is something that will contribute to your wealth.

An asset is something that grows in capital value and / or generates income.

An asset is something you can “feed” off.

An asset makes money flow into your life.

 

Here’s the truth bomb…

💣 YOUR HOME IS NOT AN ASSET 💣

Owning your own home can be a whole bunch of things, but an asset that contributes to your financial freedom is NOT one of them.

Mostly a home is a big liability. 

A liability is something that makes money flow out of your life.

Your home is NOT a wealth generating asset because…

  1. Income test – as long as you live in your home, you cannot earn income from it. 
  2. Capital growth test – as long as you need a roof over your head you cannot sell it to access any growth that may have accumulated in it.
  3. Capital growth test – assuming you want to maintain the lifestyle and level of home you live in when you achieve your financial freedom, any home equivalent to the one you are in will cost you the same or more.

 

Your home IS a liability because…

  1. If you have a mortgage on your home you are paying interest on the borrowing.
  2. It costs you every month in rates, taxes and maintenance.
  3. It costs you significant sums to buy and sell.

Unfortunately there is a big societal belief, mostly in Anglo Saxon influenced worlds, that owning your own home is a sign of success AND a path to wealth.

 

The trap of a bigger, better house

Even worse than just thinking your home is an asset, is being seduced by the idea that moving to a more expensive house as soon as there is some “extra” cash available to take on a bigger mortgage means you are securing a bigger asset. 

You keep moving “up”, from a one bedroom flat to a townhouse, to a free-standing home, to a better suburb… endlessly uplevelling. 

In most of the home ownership obsessed world, people move and purchase a new home on average every seven years, each time getting a new 20 to 25 year mortgage.  After seven years on a typical principle plus interest repayment mortgage,  you have barely reduced any of the capital owing on the mortgage debt. Mostly, you’ve just been paying off interest. This means, most people never actually ever get to own a home. Instead they spend their whole lives paying very expensive rent to the bank and being responsible for the maintenance of the place too. 

Buying into the endless uplevel lie just takes you further and further from your freedom.

Forget the endless expansion of lifestyle and home instead focus on accumulating real assets and expanding your wealth generating net worth.

Interest only mortgages on a home you live in is even worse. 

With interest only repayments people never pay off any of the capital. All repayments just cover the interest.

Many people with interest only mortgages also didn’t make any arrangement to build up real investments to repay the capital at the end of the mortgage period. 

Right now in the UK millions of interest-only mortgage holders are coming to the end of their mortgage period and are finding themselves in a situation where they can’t sell the property for what they bought it for and will be left with no home, no assets, and an outstanding debt they still have to pay off.

All they have done for 15 to 20 years is pay exceptionally expensive rent, while also being responsible for all costs on the house like maintenance and rates. The saddest part is that they naively thought they were buying an asset.

I’m not saying that you mustn’t buy a home, just understand what it is. 

Having the security of a roof over your head that nobody can take away is also a big component of many people’s idea of financial freedom. 

But don’t believe that your home is an asset that you should be including in your net worth calculation.

I’m also not saying that property / real estate isn’t a fantastic asset class. 

 

Investment Property 

Investment property is a very, very, very important asset class you need working for you.

I LOVE property. Property has contributed significantly to my financial freedom – but NOT the homes I’ve lived in.

Investment property is also the easiest asset class in which to use leverage.  In other words you use debt in a way that expands your wealth, rather than destroying it.

Leveraging and using debt to accelerate your wealth is not something that should be entered into lightly. You must know that what you are investing in is actually an asset and you must understand the numbers and ensure the return on the investment will exceed the cost of borrowing. 

The key with investment property is to understand that everything is in the numbers. Put aside all your beliefs and emotions around property and learn how to read the numbers. They will tell you whether something is an asset or a liability.

Many owners of investment property don’t understand the importance of running this asset like a business and this is because many become “property investors” by accident. For instance they start renting out the apartment they couldn’t sell when they got married or they inherited great aunty Mabel’s house when she died but they never really understood the numbers. 

Just owning a property doesn’t make you a property investor, let alone a good one.

The most important parts of being a good property investor are:

  • understanding what you are want from a specific investment and how it will contribute to your financial freedom plan, 
  • knowing how to achieve that requirement, and
  • Ensuring the financial rewards significantly outpace the risk of taking on debt to use leverage.

🔥🔥🔥🔥 Leverage is like fire 🔥🔥🔥🔥

It can burn you or it can warm and protect you.  You must understand how to direct it and manage it to ensure it is a positive force in your life.

I’ll be focusing on Investment Property this month, so look out for more articles on this topic over the next week. 

The December Wealth Builder masterclass – Real Estate Riches  is also on this topic and in it I’ll be teaching you all the tips and strategies on how to be a successful property investor. 

I hope you join me on it.

 

Big love

Ann

P.s. Remember, being wealthy and financially free is a learned skill. No-one popped out of the womb knowing this stuff.

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