Buying The American Dream
No man acquires
property without acquiring with it a little arithmetic
also.
Ralph Waldo Emerson
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I have a question for you…and it’s
not a trick question. Here’s a hypothetical situation.
You have the opportunity to buy an investment
property. The property is perfectly located, well-priced,
in move-in condition. You have outstanding credit and you
have enough money to pay the down payment and pay the mortgage.
You already have several potential renters, all with excellent
credit and references. You can charge enough rent to cover
all of the expenses of the property and leave you with money
left over.
My question is, Do you buy the property?
If you are like many real estate investors,
especially beginning investors, you will probably jump at
the opportunity. Of course you will buy the property! And
you will celebrate your good fortune at finding such an outstanding
deal.
My next question is, Is buying this property
really the best investment strategy? Or to be more precise,
is buying ANY property the best investment strategy?
Sometimes
your best investments are the ones you don't make.
Donald Trump
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You might be saying, “How else
do I invest in real estate if I don’t buy property?
What other options are there?” The short answer is that
successful real estate investors know that controlling property
is often a far better option than buying it. But before considering
other ways of controlling property without buying it, let’s
go back to the compelling lure of buying real estate.
Property is
the fruit of labor; property is desirable; it is a positive
good in the world.
Abraham Lincoln
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The “American dream” always
includes owning your own home. One of the great divisions
in our society is the division between owners and renters.
When you apply for credit, you are faced with the inevitable
question: “Do you rent or own?” Credit agencies
give higher ranking to home owners than tenants. As a homeowner,
you also have tax advantages that renters do not have. You
can deduct mortgage interest on your income tax.
Home ownership also carries emotional
benefits. With your own home, you have the freedom to do what
you want with your property. You don’t have to ask a
landlord for permission to paint your house. You can hang
pictures on the wall anywhere you want. You don’t have
to worry about a nosy landlord snooping around. Your home
is your own.
According to the American dream ideal,
renters fall short of the American dream. You are paying to
live in someone else’s property. Your home is not your
own. Leaving aside all of the other limitations of renting
rather than owning, renters live with a subtle social stigma.
Even if no one ever says it out loud, the “American
Dream” teaches us that successful people own their own
homes and unsuccessful people rent.
The economy and hot real estate markets
of recent years have added two additional elements to this
formidable social urge toward homeownership as the ideal of
the American Dream.
In recent years, we have had two strong
and somewhat contradictory trends. One trend has made it easier
for renters to become homeowners. With low interest rate mortgages
available, banks have loaned money to people who would never
have qualified for mortgages in earlier years. With “no
document” loans and “stated income” loans
available, former renters have been transformed into homeowners.
We have all seen pictures and news clips
of smiling people standing in front of their own homes—homes
they would never have been able to afford without special
programs for first-time homebuyers. They now own their little
piece of the American Dream.
At the same time, in hot real estate
markets, prices have risen much faster than incomes. Owning
a home becomes a carrot on a stick for people who want to
buy but cannot afford the high costs associated with buying.
These frustrated want-to-be homeowners cannot make the magical
transition from renters to homeowners. We have also seen stories
and pictures of these people and seen their unsmiling faces
as they complain about how they cannot buy into the American
Dream.
My point is that we live in a society
that has taught us that buying a house is a goal worth almost
any amount of money and sacrifice.
Normal is
getting dressed in clothes that you buy for work and
driving through traffic in a car that you are still
paying for - in order to get to the job you need to
pay for the clothes and the car, and the house you leave
vacant all day so you can afford to live in it.
Ellen Goodman |
Now let’s say that you have done
it. You have bought your own home. You have achieved a major
goal of the American Dream. What comes next?
The same real estate market that has
turned some tenants into homeowners at the same time it has
prevented other tenants from buying homes, has also attracted
thousands and thousands of people into real estate investing.
Real estate investing offers the promise of the next step
in the American Dream. If buying your own home is Goal #1
of the American Dream, buying investment property is Goal
#2. If owning one house is good, buying more houses is even
better.
No man but
feels more of a man in the world if he have a bit of
ground that he can call his own. However small it is
on the surface, it is four thousand miles deep; and
that is a very handsome property.
Charles Dudley Warner |
This is real success. You know you have
“made it” when you not only own your own home,
you can own the homes of renters who have not managed to grab
their little piece of the American Dream. You are not only
a home owner, you are the owner of investment properties.
And this is the place where the American
Dream for homeowners can easily turn into the American nightmare
for real estate investors. It all comes down to the unexamined
assumption that buying real estate is the only way to invest
in real estate.
Too many beginning real estate investors
leave their real estate seminars and go out to buy investment
property as if they were buying their own homes. They use
their own money and their own credit, and scramble to buy
property they cannot really afford without understanding what
successful investors know about investing.
Few rich men
own their own property. The property owns them.
Robert Green Ingersoll
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For example, on Sunday, as I sat in yet
another real estate seminar, in a too-cold hotel meeting room,
I listened to a phone call to a woman who wanted to sell her
house. She had bought it last spring as investment property
with a 95% loan. She said she had overpaid for the property.
She had already put in thousands of dollars of repairs. And
her intended lease-optioner had backed out at the last minute.
Now the owner-investor was over the proverbial barrel, with
no rent to cover her expenses, a mortgage payment due, and
a real estate market that is softening. She has tried to sell
the property, but has no takers. At the same time, she insisted
that she has $30,000 of equity in the property and wants to
get all of her equity back in a sale. It was clear that she
has no idea of the costs involved in selling a property.
Without going into more details of her
situation and the solution that was being offered to her,
I want to make the point that she was in big trouble because
she had bought an overpriced investment property she could
not afford, with her own money and her own credit, without
counting the costs involved.
The root of her problem was her unexamined
assumption that the way to make money in real estate is to
BUY real estate the same way she would buy her own house.
What she didn’t know was that there are ways to control
investment real estate without buying it. Sometimes, buying
investment property makes sense. And sometimes, not buying
it makes more sense.
If your plans for creating abundance
include investing in real estate, you can increase your potential
for success by learning to think the way successful investors
think. This process includes examining various homeowner and
consumer assumptions about money and real estate. The first
assumption to examine is the belief that making money in real
estate requires you to buy real estate.
For Your Abundance,
Kalinda Rose Stevenson
PS. I have identified six other mindset differences between
consumers and real estate investors in my free 6-part ecourse,
“How To Lift the Consumer Money Mindset Lid off Your
Real Estate Investing.” The course is available www.nomoneylimits.com.
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