Buying your own home is the most serious mistake you can possibly make from a financial point of view.
If you don’t understand exactly why this is such a bad mistake, read this article and I will explain why with a concrete example.
Let’s look at the example of a man called Simon who buys a house. If Simon were to sit in front of me and ask me what I would do, my advice to him would be to sell his house.
If you know anything real estate, this is something that Simon could do very quickly even without having any particular skills from a financial point of view. This decision, I can assure you, is very revealing.
This decision would affect Simon only in an emotional sense. But let’s try to be rational and evaluate what could happen.
Let’s look at his example in detail
Imagine that our friend Simon sells his house for 200,000€, and eliminates a mortgage of 120,000€. Simon would then find himself with 80,000€ to add to his bank account. The equity, therefore, doesn’t change. It is always 120,000€.
Now let’s suppose that Simon decides to go and live in a rented property and that he manages to find a flat that has a monthly rent that is about 100€ higher than what he paid before for his mortgage.
Always keep in mind that people who are the owners of real estate don’t take into consideration the taxes that are incurred in owning a property.
Looking at those calculations again, by selling his house, Simon would see that his equity and cash flow do not change.
This choice might seem like a stupid decision. But try to evaluate the aspects of this operation. I will tell you why.
With this scenario, Simon has reduced his bad debt to a minimum and removed a bad habit (owning your own house is a bad habit). This has enabled him, finally, with sufficient liquidity to generate other income.
But be careful! Simon now has two key things at his disposal. Two things that he couldn’t count on before:
- sufficient liquidity
- not being indebted to the bank (before his money was totally tied up in his mortgage payments)
Imagine that Simon now starts looking for a real estate property as an investment. He finds a one bedroom flat that was restructured 20 years earlier and is in quite good condition.
In order to flip this flat, there are no serious big jobs to be completed. All it needs is a very light fixing up to make it more appealing. The price that the seller asks is 180,000€ but Simon manages to get the price reduced to 160,000€.
Simon spends about 7,000€ to re-paint and make some minor improvements to the flat. Then only 6 months later, he is able to re-sell the flat for 190,000€.
The breakdown of an operation like this is the following:
€190,000 – (€160,000 + €7000) = €23,000
This operation has a ROI of 27,5% (it was done in 6 months) and it was possible because Simon was able to free himself from indebtedness.
By completing a simple real estate operation, Simon has increased his equity by nearly 20% in less than a year! If Simon had tried to make this amount of money and was able to set aside € 23,000 from his salary alone, it would have taken him 8 whole years!
Read the e-book “The rules for earning with real estate” right away and discover information that few people know.
To your financial freedom