I bought my first house at 21 years old, at the height of the market, and was so pumped to be a home owner. All my life I had been told “one of the best ways to get ahead is to invest in real estate,” and now I was in a position to do that!

Though the advice was solid, my plan of action was not, because buying a house IS NOT how you invest in real estate.

However, if you ask a group of 100 people HOW to invest in real estate the results would look something like this…

Buy A House- 80%
Buy & Flip- 10%
Buy & Rent- 9%
Other- 1%

WHERE WOULD YOU FIT IN?

Until the flood of real estate themed reality TV shows, which made everyone want to “flip that house,” that “buy a house” stat would probably sit in the 90% range instead. Buying & Flipping is better than owning your own home. Buying a home and renting it out is too. But what about that 1%? Maybe it’s not even worth talking about because so few people are doing it, right?

Wrong

Let’s look at it this way, if we asked those same people if they’d like to be among the wealthiest “1%” in America, 100% of them would undoubtedly say, “YES!!” Yet, how they choose to invest would do just the opposite, follow the majority instead of the minority.

What about you, where would you fit in? Would you follow the 99% or the 1% you’re trying to be apart of? I blindly followed the majority for over a decade, but I didn’t course correct and become part of the 1% until I asked this question…

“If the MINORITY OF PEOPLE ARE WEALTHY, why do we take INVESTMENT ADVICE FROM THE MAJORITY??“

THE HOMEOWNERSHIP PITFALL

According to the US Census Bureau, the average American family stays in a home for about nine years. The average American family also keeps the bulk of their net worth in their home, under the assumption that a house is a good investment that always increases in value.

Historically, how much does that house actually increase in value though? Over the past 20 years, hold your coffee, about 3-5% annually. To put that into perspective, that means historically the average American home appreciates at the same rate as inflation.

Let’s breakdown the numbers

If a family purchases a house for $500,000, and that house appreciates 5% each year, 9 years later that property would be worth $725,000 for a total gain of $225,000! Awesome, right?

First, a 5% annual return is NOT a good return.

Second, owning a house costs money way beyond the purchase price. We know this logically but very few actually calculate the return before deciding to invest. Why? Because we were raised that buying a home is a good investment that always increases. Good hell.

Here is a breakdown of some of the expenses the family would need to take into account.

EXPENSES	COST	NOTES
Title Search	$100	Buyers have to pay for a title search at their land registry office, which costs an average of $100
Recording Fee	$150	To register the purchase, the buyer would have to pay a title recording fee, average is $150.
Lawyer Fees	$1,000 x 2 = $2,000	In some states, the buyer has to pay a lawyer to do this for them, which is about $1,000. They pay this again when they sell.
Insurance	$500,000 x .5% x 9 = $22,500	Insurance rates vary by state but the average cost is about .05% of the home value per year.
Maintenance	$500,000 x 1% x 9 = $45,000	It’s recommended to set aside 1% to 3% each year for maintenance.
Property Tax	$500,000 x 1% x 9 = $45,000	The average annual rate in the US is about 1%.
Broker Commission	$725,000 x 6% = $43,500	The typical commission is 6% of the sales price.
Land Transfer Tax	$725,000 x 1.2% = $8,700	These can vary from almost nothing (.01% in Colorado) to super high (4% in Pittsburgh) but the national average is 1.2%.

TOTAL COST: $166,950

THE RESULT

That whopping $225,000 profit just got cut down to $58,050. Which means, the REAL annual return is about 1.29%.

Be honest, how badly do you want to punch your parents in the face for advising you to buy a home as a way to get ahead. But, just in case anyone is still on the fence, I’ll keep rubbing salt in the wounds.

This is assuming the family paid cash for this house, which they probably didn’t. Start adding up what they paid in interest and you’ll want to puke.

“But Tyler, the interest is a write-off!!” As of 2018 the standard deduction got raised in the Tax Cuts and Jobs Act, so you get no tax break from loans of less than $600,000. Ouch.

TRUE INVESTMENTS

This is why the typical family who keeps the majority of their net worth in their property never accumulates much net worth. They think they’re getting ahead as they see its value go up, but they don’t realize that all the extra costs add up to the point where most of their profit has vanished.

Investment: “the action or process of investing money for a PROFIT.”

Therefore, any investment is ultimately judged by the profit it produces. If the investment doesn’t profit, it’s a bad investment.

So, can a house be a good investment?

Sure, a house can be a great investment—for real estate brokers, the government, insurance companies, and banks. Basically, for everyone except the owner. For the owner, a house is a terrible investment.

Now, to be clear, I’m talking about primary residences. In other words, a house you buy, move into, and live in. Housing can be a good investment if it’s purchased to rent out to a tenant. However, land-lording is a whole other topic and you still need to know the numbers.

For example, shortly after I bought that home at 21 years old, I started renting out the other rooms to friends of mine who were going to school close by. The income from the rents covered the expenses and all of a sudden I was a real estate investor. That being said, I was a bad real estate investor because I wasn’t making a profit!

BACK TO THE 1%

So, what do the 1% do? First, they know what they want and they make investments that will help them get there.

I fell into the homeownership trap listed above at 27 years old, when my wife and I moved to Austin, TX, because we had no idea what we really wanted out of life. It was shortly after that our eyes were opened, we figured out what we wanted, and we started investing like the 1%.

First, we sold our house and became renters. The money we had originally put as the down payment, which is about all we walked away with once those damn expenses kicked in, was invested into apartment syndications that provide passive income. The preferred return alone from those investments result in cash flow returns averaging 8-10% annually… all of which is tax free… another benefit of a true investment.

This became addicting because we started seeing money every quarter instead of hoping for money YEARS later. Remember, even if the house that family bought appreciated at 10% annually, they don’t see a dime of profit until they actually sell. We were seeing profit every quarter AND even more profit once we sold.

The addiction to acquire fancy things transformed into an addiction to acquire fancy assets that would cover liabilities. And, because we were renting, we didn’t worry about house upgrades, fancy decorations, expensive furniture, or the other pitfalls that come with homeownership. Because of that, and because we had direction, we had more money to put into passive investments.

CLARIFICATION

I need to make this abundantly clear, I AM NOT talking about being the “Millionaire Next Door” who doesn’t buy Starbucks and is obsessed with cutting expenses. I’m not interested in living like that. My family likes and deserves nice things, I just want my investments to pay for those nice things so that we can actually enjoy them.

We’re talking about small changes that lead to HUGE returns. Returns that ultimately lead to freedom.

SYNDICATION VS HOME OWNERSHIP

Let’s breakdown the numbers again. Let’s say we take that same $500,000 and invest into an apartment instead of buying a house, which is exactly what my wife Brittany and I decided to do. Each of the investments we made offered a preferred cash flow return of of at least 8%, but we did have one investment that only returned 6% cash flow for the year, so we’ll use 6% for sake of comparison.

An investment of $500,000 that produces 6% cash flow would return $30,000 in cash flow each year. If we use the same hold period of 9 years, that would equate to $270,000 of total cash flow returns. To be fair, we have to account for expenses and taxes just like we did with our single family home example.

Expenses: Seasoned investors understand that owning real estate comes with expenses. So, before we ever decide to invest in anything, we break those expenses down to make sure the returns justify the investment. If the cash flow returns after all the expenses associated with the property don’t exceed the preferred return, we don’t move forward. Period.

Which means, that 6% return calculation is actually the NET cash flow before taxes.

Taxes: “True American Capital assets benefit from depreciation, which is an income tax deduction. In short, while real estate values generally appreciate, the physical components of the property generally lose value during the hold as a result of wear and tear. The appliances, roof, and electrical all “depreciate” and will eventually need to be replaced. The Internal Revenue Service (IRS) understands and accounts for this by offering an income deduction for owning depreciating assets.” You can check out more of the tax benefit details HERE, but in most True American Capital investment deals, depreciation and other tax write-offs allow all cash flow during the hold period to be received tax-deferred.

Which means, that regardless of the amount of cash flow received, the annual taxable gain will usual be net negative, or very close to it. So, that $30,000 / year is NET NET PROFIT.

SYNDICATION EQUITY GAINS

True American Capital assets benefit from appreciation as well, and just like cash flow returns, all the expenses associated with selling the asset are taken into account before ever deciding to purchase. Though none of the properties we invested in have sold, the returns are on track to exceed 25% annually. That being said, to be ultra-conservative, let’s take the same rate of appreciation of 5% that we used for our single family home example.

An investment of $500,000 that appreciates 5% each year would be worth $725,000 9 years later. The difference once again, all exit costs have been accounted for before hand. Which means, excluding tax liabilities, that $225,000 is a highly conservative NET profit.

The Results… Before the cynics have a field day, let’s remember that if you decided NOT to buy a house in cash, you’ll still need to live somewhere. So, to be conservative with the difference again, we need to subtract the rent payment out of the profits. The mortgage on a $500,000 property with a down payment of 20%, a loan term of 30 years, and an interest rate of 3.5% would be $1,796. Assuming that the rent payment would be slightly higher than the mortgage payment, let’s calculate that at $2,000 / month. 9 years of rental payments at that amount would equate to $216,000.

BUYING A HOUSE

Cash Flow Returns: $0 Equity Return: $58,050 Rent Payment: – $0 TOTAL PROFIT: $58,050

APARTMENT SYNDICATION

Cash Flow Returns: $270,000 Equity Return: $225,000 Rent Payment: – $216,000 TOTAL PROFIT: $279,000

DIFFERENCE IN PROFIT….

THE CONCLUSION

Passively investing in apartment syndications opened my eyes to a lot and created a passion for the industry, a passion that I obviously dove into head first. Owning, operating, and investing in apartment syndications is my full time focus and something I am extremely grateful for.

Today, I live with my family in Hawaii on the beautiful island of Maui, something I once again couldn’t be more grateful for. Brittany (my wife) and I wanted freedom, time with family, the resources to enjoy life to the fullest, and the ability to give back and be a blessing to as many people as possible. The definition of that target is always moving upward, but our lives are very different today than they were when we moved to Austin.

We’re both 35 years old, and we are FAR from where we want to be, but we’re getting closer every day. I sincerely hope that you’re getting closer to where you want to be as well.

That’s what this post is all about! It’s not about knocking the majority or bragging about being part of the 1%. Not at all. The intent is to shed some light on WHY home ownership isn’t the way to wealth, just like someone did for me, in hopes that it helps you in your journey!!

There are many ways to acquire wealth but homeownership as an investment strategy IS NOT one of them.

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Buying a house IS NOT How you invest in real estate