7 Rules to Homeownership

Up until now, you have read my other blog posts discussing how a home was a “money pit.” There is no definite age or income to make that large home jump, but my recommendation is to buy a home using these rules.  Follow these guidelines before jumping into that next home purchase. 

Rule 1

As a smart, successful investor, you should only build a home when you have established your net worth goal. That’s right; build not buy! Coincidentally, you will probably reach your goal around the same time as retirement. The reason for this rule is that a home is not only a “money pit” with unknown expenses that will detour your path to financial independence, but it can lock up large amounts of capital (i.e., down payments, equity) that can make the compounding formula invalid. Remember, my home only yielded average 2.0-2.5 percent returns yearly since 1993, whereas the S&P 500 has yielded 10 percent yearly returns.   

Rule 2

Only buy a home when it’s cheaper to buy vs. rent. It will always be cheaper buying in some location in America, but maybe not in your area. If this is the case, continue to rent until you can retire. Move then build! 

Remember to use the 20x rule to determine if renting is cheaper than buying. 

Take your Annual rent and multiply by 20. Suppose your rent is 1000 dollars a month or 12000 dollars per year. Take 12000 dollars and multiply by 20. If you cannot buy a home for $240,000, then renting will be cheaper (most of the time). We all know that buying is always cheaper than renting in some areas, but maybe not your area. This is why rule #1 is so important. Gain your wealth first, then pick that cheaper area to build that small energy efficient home away from those expensive city cess-pools. 

Rule 3

Only build a home when you are ready to retire (settle down). Unfortunately, in today’s society, jobs and relationships come and go. No job is set in stone or guaranteed tomorrow. This should be clearly evident after the pandemic and the massive lay-offs. No employee knows if their job is 100 percent certain or if they will be living in the same location in 1 year. So remember, until you are completely in control of your financial independence, you are at someone else’s mercy, and you should be renting as cheap as possible and stowing that extra cash away in high yielding funds (not real estate markets). The real estate market is a slow-growing sector (in most areas) that will slow your progression to financial independence. 

Rule 4

Design and build your own home instead of buying a used home. That’s right. Don’t buy someone else’s aging “money pit.” People sell for many reasons…What was the reason they sold it to you?  Designing your own home is not only satisfying, but it allows you to select energy-efficient plans, location of rooms (master bedroom on the ground floor), and easy accessibility for repairs. This process also allows you to select quality materials that may have lifetime warranties (i.e., metal roofs or brick facades) 

The home I sold was a money pit designed and built in the 1990s when windows were wood, the siding was masonite, and plumbing was polybutylene. These old materials were ticking time bombs ready to explode my bank account. 

Rule 5

Since you will be retired when building this home, a commute will no longer matter to and from a workplace. Select an area with cheaper property taxes (not within the city limits) and lower cost of living expenses. Why not check out South Dakota?!  This state is one of the most retirement friendly states due to income tax rates, subsidies on prescription drugs, etc. 

Rule 6

Consider modern conveniences. Design and build your home within driving distance to healthcare facilities, grocery stores, etc. 

Rule 7

This rule is probably one of the most important rules of the list. Do not build a home larger than what you will need. According to the engineering toolbox, an average person only needs 100sq-400sq in an apartment to feel comfortable. I repeatedly see a husband and a wife and (2 children) in a 3,000 square foot home, or empty nesters in a large two-story home. 

You can decide what makes you happy, but for me, A 1400 square foot cabin tucked away in the woods would make me grin from ear to ear! 

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