Two Equals One and One Equals None
If you're new to the concept of owning real estate as a way to build wealth, the title of this article might seem confusing to you. If you're a homeowner, you may be unsure why you would need to own two homes when you can only live in one. If you're an investor who wants to build wealth, you may already know exactly what I'm about to say.
One of the big perks of owning real estate is taking advantage of appreciation when the market goes up. Another perk is being able to buy when the market is low. With real estate, you have control over when you buy and when you sell. Big money can be made when you buy a home low then sell it high. Most people only think about this in terms of flipping houses in the short term, but even more money can be made waiting for the perfect point in the market to sell a rental property. Just like buying stocks, money can be made when you take advantage of market cycles and play them right.
The difference between real estate and stocks however, is the fact that you can't live in a stock. If you are like most homeowners, you DO live in your home.
This makes things a little tricky. When you sell the place you live in, you have to find somewhere else to live. There are several ways to do this of course, including selling your home and renting somewhere until prices go down, finding an apartment complex to live in, moving in with a friend or relative, etc. The trick to making money is "buy low, sell high". I'd like to talk a little about how to actually pull that off.
The problem is, in my experience, most people don't want to be inconvenienced. We are American's, and we like to be comfortable. The thought of renting a home when you could own one is just too much for many people to swallow. The fact you may have gotten used to owning a home can make the idea of renting one that much harder to live with.
This leads to a big problem. If you want to sell your home when the market is up, you still need somewhere to live. That means you will have to buy when the market is high. That's no bueno. In addition to having to re-spend all the money you just made by selling your home, you also have to pay new, higher property taxes on the house you just bought. Not an enticing option.
Conversely, if you want to buy a home during a down turn, you have to either sell your current home when the market is low, or buy a new home and let your's go. This can have a negative impact on your credit and isn't a wise move to make in general (unless you're in a drastic situation without many options). This may not be an option for you at all during a downturn because you may own more than you can sell your home for while prices are low.
So lets sum this up-buy high, sell high=bad. Buy low, sell low=bad. I don't think I need to explain why buy high, sell low is bad-that one speaks for itself. So as you can see, we really want to put ourselves in a situation where we can buy low and sell high. Let's reverse engineer this concept and see if we can't come up with a good strategy to do just that.
A home is a place to live. It can also be an investment. It is very hard to make it operate as both at the same time. The reason is, an investment is something you make decisions on purely based on the numbers. By its nature, it's objective. A home is more than that. It's a place that provides shelter, access to certain schools, friends, neighbors, and memories. It's a building that houses feelings. By it's nature, it's subjective. Now I could sit here and pour my heart out to write you an article about all the reasons you should start looking at your home like an investment, but it wouldn't do much good. Emotions are typically stronger than logic to most. That's why I'm going to share a simple technique that will allow you to continue looking at your house like a home, but also gain all the financial advantages of using it like an investment.
Why Owning Two Homes Opens Doors Owning One Does Not
Home prices typically go up and down (at least on the East and West Coast markets). This is affected by many, many factors. The reality is, you may feel intimidated by all this and not confident in your economic knowledge base or your ability to time the market. I'm here to tell you-That's ok! If you follow this technique I'm about to share, you don't need to understand much of those things at all.
The secret to being able to sell when the market is high and buy when the market is low is in owning two homes. If you own one home, you're forced to buy into the same market you're selling into (buy high sell high or buy low sell low). However, if you own two homes you have flexibility others just don't.
Lets say you were wise and bought a home during a down turn. The market has risen and your home has gone up 150k in value. You think the market may crash soon and you want to sell. The problem is, you can't sell your spouse on taking the kids out of their school and putting them in a new one. You also can't really stomach the fact of renting a house after owning for the last 5 years. Looks like you're up that creek without a paddle. Would be nice take that 150k of tax free capital gains and wait for the market to crash so you can buy three more homes. Unfortunately that would just put a bigger strain on your family than you're comfortable with. Looks like you're out of luck.
Now, what if you had read this article and knew you needed to own at least two homes? You bought when the market was low. You were thrilled to get a home as affordable as you did. However, you didn't stop there. You put a low down payment on your first house and saved some of the cash you had intended as a down payment. Then, you rented that first house out, and kept saving for another year after you bought it. The money you saved on the down payment paired with the money you saved up after you bought the first one ended up being enough for a down payment on another house in the same nice neighborhood (this one slightly nicer as you plan on moving into it). You immediately move into the second house, establish residency, and make it your home.
This seems so simple. Could it really be that big of a deal? I mean, anyone can do this right?
Why is this so monumentally huge from a financial perspective? Because now you have options. And options are how you build wealth.
You now own two homes. The down market eventually turns, and prices have gone up 150k on each house. Wanting to take full advantage of the options you gave yourself, you can move into your rental property and sell your primary residence you have now lived in for two years. The USA tax code allows you to collect that profit tax free. That is 150k of tax free money (good luck finding that on the stock market), plus you still own the home you moved into.
Lets break this down for a minute:
- Your kids don't have to move schools
- Your commute doesn't change
- You don't have to rent a home
- Your house payment doesn't go up because you didn't have to buy a more expensive house or pay higher property taxes
- AND you can still capitalize on that 150k in appreciation the house has made you.
You have just avoided almost all the negative points of selling high and moving.
You have also just capitalized on all the benefits of selling high.
The Best Is Yet To Come
Seems like a pretty sweet deal right now right? It is! You just took the down payment ont he first house you bought and increased it to 150k, and cashed out with zero capital gains taxes. That alone is a major accomplishment. You should be on cloud 9, BUT the most amazing part is yet to come.
You may be thinking you just made 150k. You would be wrong. You didn't just make 150k. You actually made much, much more. Probably more than you ever thought you'd have in your life.
You are an investor. You have played your cards right. Now, you are going to supercharge this plan and take it into the stratosphere.
Look at this long term. What goes up must come down. Not only did you make 150k when your house went up in value, you now have 150k to spend when home prices drop again. Lets say home prices drop three years after you sold. The primary residence you've been living in for 3 years now has lost value. 150k of value. This has left everyone else in your neighborhood sad. You, however, are thrilled. You still have your 150k to invest now that the market has dumped. You take that 150k and buy 4 homes, all with 35k down. You keep 10k for savings. You now own 4 rentals, plus your primary residence. That's five homes when you once had two.
Now when the market goes up again and you make 150k on each home, you have 5 homes that just appreciated 150k. That's 750k. 600k came from those 4 rentals. You thought you had made 150k when you sold your first house. In reality, you turned that 150k into 750k (600k in appreciation plus your initial 140k you used for down payments and the 10k you kept for savings). This is three quarters of a million dollars that you didn't even have to earn. Real estate earned it for you, all because you were wise enough to own two homes instead of one.
Oh, and remember that house you've been living in? Don't forget about your equity in that one. It went up 150k too, not including your original down payment plus what you've paid off the mortgage. If you include the equity in your primary residence, your net worth would now be upwards of 900k (750k in rentals + 150k in primary residence). You are damn near a millionaire based on real estate alone, a mind blowing fact. Even more mind blowing is the fact you have only gone through two "up" markets.
Imagine if you continue like this. The returns become exponential.
If you're mind isn't blown yet, consider the fact that these cycles will likely keep happening. Next time you will turn your 4 rentals into 16. Then those 16 into 64. When you have 64 rentals that all appreciate 150k, that is 9.6 million. No, this isn't magic. This is real estate.
And we haven't even taken into consideration all the rent you've collected. This is nothing more than the appreciation of the homes and you're taking advantage of buying low and selling high.
At this point, you can retire and never have to work a day again in your life. Pretty cool right?
Now this example is just that. It's an example. It's oversimplified for the sake of making a point. However, it's not dishonest. The first batch of homes I bought during my first down market in CA have performed even better than the examples I provided. This stuff is real.
Imagine you missed out on this opportunity because you just couldn't stomach the fact that owning two homes gives you the opportunity to take advantage of market cycles that you just can't when you only one own. Isn't that just tragic. That's why I'm doing all I can to share this great news with anyone who will listen! Owning two homes gives you options.
Options are what create wealth my friends. The ability to have flexibility to make sound financial decisions when opportunity strikes is absolutely crucial to growing your wealth.
I hope you see how one small good decision at the right time can put you in a situation to make incredibly powerful financial decisions later in life. Be smart. Save up and always have at least two homes. It may be worth 9.6 million to you some day!