I’ve had the opportunity to make a lot of different investments in my life, but today we are going to talk about the one that I think is the easiest and most accessible for anyone in the world to make. We’re not going to talk about crypto, NFTs, or any promises that you will get rich quick. I’m going to share how I made over $350,000 in 4 years with an extremely low barrier to entry.
Before we get into it let’s talk a little bit about investing. Historically, nearly everything has gone up in value. If you look at the stock market, the S&P 500 over the last 50 years or so has returned a historic annualized average return of around 10.5% from 1957 to 2021. Anything over a 10% return is good, if you invest in the S&P 500. If you invested in crypto your money would have rapidly increased and then in the last few months we’ve seen it drop very quickly. Similarly with the stock market today, there are many investors who are distraught over how quickly it’s plummeted.
With that being said, the overall general trend is that everything goes up in value. This goes for food, rent, housing, all have consistently gone up in value. We could look at inflation, the role the government plays, and the myriad of other aspects that come into play. However, in general let’s just agree that with few exceptions, everything consistently gets more expensive. If you purchased food fifty years ago and then purchased the same food today, it’s going to be drastically more expensive because your dollar has consistently become worth less.
One thing that has gone up drastically, even more quickly than inflation, is rent. If you’re familiar with me already then you know that I’m a landlord. I own a lot of rental properties, and you might guess that I’m going to say rentals are the best investment. Now, I know a lot of people are triggered by hearing about landlords, it brings to mind the ideas of gouging tenants with high rents, fees, neglected properties, etc. I can understand why people are frustrated with landlords, one new report showed that rents went up 20% year over year at one point in 2021. 2022 is probably just as bad, if not worse.
People looking at that statistic assume that landlords can’t have expenses that high and must be taking advantage of tenants. But with more taxes, rules and restrictions, expenses going up, I can see it from both perspectives. Landlords have to take all the liability for a property, maintenance costs, dealing with crappy tenants, gnarly evictions, and following a myriad of rules and regulations. There is a long list of regulations you need to follow as a landlord. All this being said, I believe that being a landlord through real estate investing is the second best investment anyone can make.
Now that we’ve got some background about inflation, the pros and cons of being a landlord, let’s get down to the point of this article. What is the best investment a poor person can make? My honest answer is: the best investment for anyone, but especially a poor person, is investing in their own home. Let’s talk about why buying a house is a good investment.
Think about all the benefits that come from owning your own home and living in it. First off, you get way more beneficial loan terms. Instead of putting 25% down like you would for a commercial loan, you could put as little as 3.5% down to own a home you’re going to live in. You aren’t worrying about all the rules and regulations and everything else that comes with dealing with a tenant. You don’t have a tenant that’s going to destroy your property. You don’t have a tenant you might have to evict. You don’t have a tenant who could do who knows what to your property (or you!) out of frustration because you are that third party that’s involved. If you own the home and you’re not renting it, you cut out that third party that needs to make some form of return which means you’re going to save money.
When you own a home, you’ve got a monthly payment. If you owned that home as a landlord, not only would you have worse terms on the home loan, but you would also need to make some sort of profit above that monthly payment. Say you’re purchasing a home and your monthly payment is going to be $1500. If you’re a landlord and you are purchasing multiple units or that same home you will likely have a bigger payment and different liability. When it comes to paying additional insurance and additional taxes, you don’t get the homeowners’ exemption. You also have to make some form of profit above and beyond what you’re paying every month otherwise it doesn’t make sense as an investment. This means that as a homeowner, not only are you going to pay less every single month than a landlord would, but you’re not having to deal with all the negatives that a landlord has.
What’s crazy to me about complaining about landlords is thinking “they’re buying all the housing, they’re taking advantage of me, they’re screwing me over by increasing my rent.” If you buy a house yourself, you cut out that third party and you can do it at a much greater discount than the landlord can. For all of my properties, I’ve had to put at least 20-25% down to even get a loan on the property, whereas a homeowner who plans to live there could do it for 3.5% down. In some situations, depending on your circumstance, the government will even provide you with a lower down payment than that. You also don’t have to worry about a balloon payment or the rates changing every five years. You can get a 30-year fixed loan at the best interest rates possible because you’re living in the home. Homeowners also get an exemption on taxes. Compare that to the stock market, buying a car, getting into any other kind of debt, nowhere else will you get a 30-year fixed loan with fixed rates and terms.
Historically, appreciation on a home has averaged 3.8%. Because of inflation, it has been as high as 20% appreciation on properties in some areas. This means that every single year that rents have gone up, you could go and buy a home guaranteeing that instead of paying higher rents, your housing payment would be the same every month for 30 years. Taxes might adjust, but there’s no way taxes are going to go up faster than rents because of landlords. Landlords have to make more than their mortgages from their tenants and any rules and regulations add even more cost to the landlord.
I bought a house four years ago for $420,000. I was making my payment every month and getting principal pay down over the course of four years. I had over $50,000 of principal pay down that I was able to get back into my home. By paying off that loan, that’s equity. It’s like putting money into a bank account. After four years of living in the home and enjoying it, we moved out and sold the property. We never had to deal with a landlord, and we made $280,000 in profit on top of another $50,000 plus in principal. Our interest paid we got to take from our taxable income. Because the profit wasn’t over $500,000 and we are married, we didn’t have to pay any money on that profit. It was better than any investment you could make as a landlord.
Let’s dive into the numbers and see what kind of returns you can expect. The median home price is currently $428,000. If you’re buying and living in the home you can get an FHA loan which allows you to put down just 3.5% on the home. So I’m going to run the numbers on a 5.8% interest rate on a 30 year arm. This is a way higher interest rate than we’ve had the last couple of years, but that’s the going rate. I want you to understand that even at the going rate right now it is an incredible investment for you to purchase your own home rather than renting. It’s a better investment than anywhere else you could put money. Not only do you get a home out of the deal, but also because of the numbers behind it.
With the numbers above, your payment will be $2,600. This is for a nicer house in a nicer neighborhood for three or four bedrooms. If you’re looking to match what you pay in rent, you can find that in a home. You can find a home of the same or greater quality for less than what you’re paying in rent.
If you’re looking at these numbers, you’ll start off with a principal of $614 every single month. Over a five year period, that goes to $815 so if we go between the two you’re making just over $700 in principal every single month. That means in just principal paydown on your home, you’re getting upwards of $45,000 to $50,000 that you would have been paying for rent. Instead of leaving your bank account, that money will be creating equity in your home. So you’ve got $50,000 over a five year period with your principal pay down. At 3.8% appreciation over five years this will put you at $86,000 dollars plus the increase in your home value over that time.
If you’ve been following the market, you know that some years have not been 3.8% appreciation. It’s been upwards of 10, 15, or 20% appreciation. That’s how by owning my home over four years I absolutely crushed it because home values went up so quickly. What if you happened to buy a home right before the market crashed in 2007? Median home prices in 2006 were at their all time highest. Now in 2022, the median home price is more than double what the all-time high was in 2006. If you’re buying at the very top of what the market is doing and it crashes, at the end of the day it doesn’t matter as long as you’re on a 30-year fixed loan. If you can make your payment every month, you know it’s going to come back. I looked into this and I wanted to know how long it took for the median home price to get back to its absolute all time high after 2006. It didn’t happen until March 2016.
So a homebuyer who bought in 2006 paid the tippy top price and then was stuck in that home for 10 years before the home value got back to where it was. That’s after a huge drop in home values. Of course you don’t want to be someone who bought in 2006 and then sold while home values were at their lowest. If you sold then, you’d have to rent and rent prices have gone up that whole time too. If you stayed in your home, the mortgage would stay the same. So just plan to buy and stay in your house at least until the market goes back up after a drop. Worst case scenario you just live in the home for 10 years. You’re still going to win by getting principal pay down, tax benefits, owning the home instead of dealing with a landlord, and within 10 years it will be back to its value. Now the people who held on for another 10 years crushed it by an absurd amount. They doubled their property value! Here’s the craziest part: you’ve got someone who made this purchase with 3.5% down. Let’s look at their actual return, keeping in mind that the S&P 500 was getting over 10% on average. With stocks you’re still dealing with the up and down risks of investing in the stock market or S&P 500. You might still have to cash in where your money is way down. The only difference is with this scenario you get a home you love, in a neighborhood you love, you don’t have to deal with a landlord and all the negatives that come with renting.
So let’s talk about the worst case scenario, if you’re holding the home for 10 years and just getting the average 3.8 for 5-10 years. If you bought the home at $420,000 with 3.5% down, you only needed $21,000. You’re in the perfect home, it’s right at the median home price, it has multiple bedrooms and you’re loving it. At 3.8% appreciation that means year one you’re getting $15,960 added to your home value, bringing it up to $435,960. Next year it goes up to $452,000, the year after that $469,000, followed by $487,000 because again that’s 3.8% percent on the home value. It’s exponential on how your property value increases but keep in mind you also don’t have $420,000 tied up. You only have $21,000 tied up from your down payment. You’re getting more than $86,000 in appreciation, $42,000 in principal pay down. That gives you a total of $128,519 over the course of a five year period. That is a 600% return! You can 6x your money! That’s a 120% return every single year.
When you look at the S&P 500 charts, you’ll see it goes up and down. On average, you’re hoping to get above 10%. Instead of the market, if you look at not renting but owning a home with that $20,000 investment and getting a 120% return while living in a place you actually want to live in while getting the tax benefits, the appreciation, the principal pay down, getting all those benefits of not living with a landlord, not having to pay property taxes like a landlord does. Where else can you get 120% return plus all those other perks?!
Now we could dive into higher than normal interest rates, or any of the other risks and potential downsides of home ownership. But no matter what, it’s never going to be better to rent from a landlord. You may hear Grant Cardone or other investing influencers telling you it’s not a good idea to invest in your own home, I’m telling you it is the best investment in any market and any situation.
Follow me here on my website and on YouTube to learn how to buy your home at a discount. It just doesn’t make sense to keep renting. I’ll show you how to know if a house is a good investment, and everything else you need to know to optimize the home buying process. It doesn’t matter who you are, rich or poor, the best investment you can ever make is investing in your own home on a 30 year fixed loan!