Home Ownership – The Greatest Financial Scam of the Twentieth Century

Robert Kiyosaki was the first and has been the only financial pundit to suggest that your home is not an asset. As they so often do, Kiyosaki’s statements fly in the face of prevailing financial wisdom.

David Bach, author of Automatic Millionaire, not only says that your home is an asset, he asserts that home ownership is the first wrung on the ladder of wealth creation in America. He encourages everyone to buy a home as soon as possible to begin building their wealth.

CNN Money does their Millionaire in the Making profiles and I am shocked to find that in almost all cases 50-75% of the wealth of the families profiled is locked in their home. Given that people have to have a place to live, this is a problem.

Does home ownership produce wealth or are wealth and home ownership produced by sound wealth-producing financial habits?

The Economist, tracking real estate over the past decade, has concluded that the economics no longer support home ownership.

I bought my first home in 1991. The housing market in the North East had not recovered. The savings and loan collapse of the mid 1980’s depressed home prices and brought the condo market to a halt. Multiunit condominium properties were vacant. Many of the properties continued to sit vacant because banks had strict owner occupancy ratios for condominiums. Mortgage money was tight. First-time home buyer programs were coming on the market and the minimum down was ten percent. I was raised to think that a home was an investment. My mortgage broker sat me down and said, “it is best that you think of your house as a roof over your head, not as an investment.” That was incredible advice. Prices dropped another 10% after I moved into my home. After 3 years of living in my home and 2 years of renting it out, I sold it for what I paid for it. After closing costs and realtor fees, I received a check for 447 dollars, significantly less than the $14,000 dollars that my family gave me for closing costs and the down payment. I always intended to pay them back with the proceeds from the sale. All told the housing market was depressed in the North East for over 10 years.

Even in an appreciating market, home ownership is no bargain. And a home is not an asset.

Let’s tackle the issue of equity as a component of wealth. Let’s say you buy a $100,000 home and put money down. That down payment is 20%. In real terms at the time of closing you have 20% equity in your home. If you had $20,000 dollars in your bank account, you had $20,000 in wealth. If you move that money to your home in the form of a down payment, you may have $20,000 in wealth as long as the market at least stays flat. For this illustration, we will say that is the case. You have $20,000 wealth stored in your home. Now what can you do with that?

If you borrow against your home, you erode your equity and your wealth. If you sell your home and get your $20,000 back, then what? You have to live somewhere and living somewhere costs money. The equity in your home is essentially dead. You cannot do anything with it. Sell your house and you reinvest that money into a new home, borrow against your equity and you lose it.

In short, the equity in your home, once in your home, will remain there. Useless to you in real terms. That equity will do something that is quite dangerous, however. It will cause you to feel wealthy, wealthier in fact than you are and spend money, money that you, in reality don’t have.

It might be helpful if I defined an asset here. Kiyosaki calls an asset anything that retains or appreciates in value that pays you. For Kiyosaki a house does not fit that definition. I define an asset as anything that retains or appreciates in value that I can sell and dance around my house throwing the proceeds of the sale in the air and have a jolly good time. Can’t do that with a house because, once again, I need someplace to live.

Someone might say that they want to downsize. Sell their home, pick up something smaller and bank the rest of the profits.

The numbers don’t add up. One of the columnists for the WSJ wrote that he doubted that he had made much money on his home although it was valued at half a million dollars. He had lived in his home for 10 years and paid just under $300,000 dollars for it. When he factored in taxes, insurance and maintenance, he figured that he broke even. Broke even!

What that means is that he actually spent the $200,000 on his home in other ways and the sale of the home would just result in returning that money to him. Two hundred thousand dollars equity and wealth gone when you actually look at the numbers. So much for great profits! So much for down sizing and banking the difference.

Here is an example of what happens when you refinance or draw equity out. For the amount of time that I have actually lived in my home I have made $82,800 dollars in payments. These payments went primarily to interest so let’s deduct the top tax rate. The top tax rate is the best-case scenario, a lower tax rate means you deduct less and pay more. Deduct $27,324 and get $55,476. Taxes and insurance paid amount to $20,460. Now the total paid is $55,476 + $20,460 = $75,936. Maintenance, landscaping, updates, repairs total $29,779. Add the two, $75,936 + $29,779 and get $105,714. I refinanced the house in order to take money out and buy my first investment property. Add in the unpaid mortgage balance and the total owed, paid and put into the house is $188, 715.

Critical concept: Improvements on a home don’t necessarily increase the value of that home. Every neighborhood has a trading range. The trading range for an area is based on location, size of the homes in that area and amenities. Homes will trade at the high end or low end of a neighborhood based on those factors. If my home sold for $170, 000, the financial gurus would say that I have $87,000 dollars of wealth based on the difference between the unpaid mortgage balance and the sale price. Because you have seen the numbers, you know better. In fact I lost $18,715 dollars. When I take into account the money I borrowed out to buy my first investment property, I broke even. I am assuming that I sell my home myself. Using a realtor would increase my losses by 6% of the sale price.

How can I call home ownership the greatest financial scam of the 20th century? I call it a scam when you buy something (a house) expecting it to lead to something (wealth) when that purchase can in no way produce that result. I call it a scam when the brokers who sell you the house know it won’t.

Sound financial habits will lead to wealth but home ownership in and of itself will not. Home ownership can in fact lead to poverty as people struggle to make payments and find that they are unable to maintain their homes. Sell and they risk owing more than the home is worth. Stay and their standard of living is reduced to pay for the house. Sounds like a winning formula for wealth to me.

While 20% of the homes in this most recent real estate bubble went to investors who were speculating in the markets, 80% of the homes went to people who believed that home ownership, not sound financial habits, were the first wrung on the ladder to wealth creation. They just believed what the gurus, the realtor, the mortgage broker and the banker told them. In a consumer society where everything is reduced to the lowest common denominator, they believed that a home could be purchased for little more than a moderately-priced flat screen TV and that down payments were a nuisance. They did not understand that as a worse case scenario, down payments are actually insurance against downside fluctuations in the housing market. Many people are finding that instead of the wealth they expected, they have a financial nightmare.

Perhaps moving forward into the 21st century, we will decide that sound financial habits and financial education are the first steps on the road to wealth. Maybe we will decide that wealth is created through work and due diligence and not by betting on the financial product of the day.

Why Not Try a Little Known Underused Battle Plan in the War For Work From Home Money?

For those who work from home making money on the internet is an all out war. Ask anyone who has tried and failed in their bid to win.

The statistics say that around 95 out of every one hundred fail to make any money at all. So finding someone to ask should be quite easy to do.

The online battle field is strewn with the beat up corpses of those who didn’t get the job done. The battle field is not just in the U.S. but every country where someone can get online. That means there are at least millions now or at some point billions of individual soldiers sure of their ability to beat the internet and win their share of the gold.

There are big armies comprised of battle tested and well trained and thoroughly equipped soldiers fighting the war and winning the biggest and most lucrative battles. Individual soldiers with great battle plans do on occasion manage to win their share of battle field riches too. However the average everyday soldier is constantly taking a beating. The internet war for work from home money just is not kind to those who fight with no plan, no training, underfunded and poorly equipped.

Sure there are those single soldiers fighting with one hand behind their back who somehow manage to sneak into the online money camp and take a prisoner or two. However in the overall scheme of things the individual soldier far to often is nothing but a sacrificial lamb spilling his green blood for the large tested and proven armies.

The work at home battle fields promise of easy work from home money is nothing less than a trap for the over zealous under schooled and under equipped soldier. Almost anyone who has tried to find their way across it will testify to that.

Those who comprise the armies understand soldiers must have a plan and goals. They must have the knowledge and tools to put the battle plan into action or they are doomed before they start. The armies do not jump onto the internet battle field hoping for good luck they leave that to the individual and hopeful single soldiers.

They define their own battle fields, then plan and execute accordingly. If the plan is properly executed luck and hope are unimportant.

Having been an individual soldier and after being kicked around the battlefield more than once because I had no plan knowledge or internet marketing skills. Knowing I was ill prepared to do battle for my share of the work at home money. I finally learned a lesson. I needed a plan.

So I formulated a plan I believed I could execute. It made sense to pick battles that did not require knowledge or any particular skills when I didn’t have either the knowledge or skills needed.

The object was to skirt the edges of the battle field and engage those that didn’t require skill and knowledge to defeat. That was and is my plan.

Executing the plan wasn’t difficult. It just took sitting down and doing the executing. I was no longer overpowered or over matched. I had the needed skills. I had found my niche.

I found Incentivized Freebie Websites. They hardly even fight back. They just sit there and let you shoot. You can walk into their camp unafraid virtually risk free. The IFWs are in the white flag of surrender mode at all times.

Mostly they only exist to be beaten. Oh, sure they fight a little its pride you know and they do want you to feel good about yourself and not like some bully.

Don’t take this wrong IFWs don’t just roll over and play dead. They do make you do something. There are right ways to defeat them. Choose the wrong way and the devils will make you work real hard to do it.

Are you an individual soldier? Do you have a plan. Are you educationally equipped to fight the internet war for the work at home dollar?

Celebrities and Their Homes

Celebrities are big spenders in the fashion industry, motor industry and real estate as well. It is not always a success for all of them. Some have created their wealth and have maintained it for a good period, while others have shot to fame and lost the wealth that comes with it within a very short period.

Celebrities and their homes

Zillow, a company that performs rankings on real estate for celebrities, stated that Windermere listed a home in a neighborhood called Leschi for sale. It is to be sold for slightly over one million U.S dollars. Jimi Hendrix is said to have lived in this house.

Katherine Heigl, a star in the Grey’s Anatomy series, plans to sell her home which is in Los Angeles for a total sum of about 1.7 million U.S dollars. She had bought this lavish house in the year 2006 for about 1.5 million U.S dollars.

Oprah Winfrey estimated her condo in Fisher Island, Florida, to be two million U.S dollars. Her condominium is not as lavish as would be expected of a house that costs that much, though location also counts when determining its worth.

Kiefer Sutherland’s Silver Lake house cost him 4.895 million U.S dollars. He transformed the warehouse and made it his home. His taste and superiority in the Real Estate industry clearly indicates his status in society. Kiefer does his recording in his high quality studio from the comfort of his home.

Sylvester Stallone, a Beverly Hills inhabitant, purchased two mansions in an area called Thousand Oaks. One was estimated at 5.5 million U.S dollars while the other was projected to be 1.7 million U.S dollars.

Cary Grant’s Daughter, Jennifer Grant, has her home estimated at 2.195 million U.S dollars. Another celebrity, Angela Bassett put up her French home for sale at a price of 3.8 million U.S dollars. By the time of the sale, the house had depreciated by 1.1 million. Chris O’Donnell, an actor, had his home sold for about 5.3 million U.S dollars. Rachel Zoe also had her house sold for 2.5 million U.S dollars. It was a two-bed roomed apartment situated in the Hollywood Hills.

There are quite a number of celebrities in the entertainment industry who made it big at some point in their lives but ended up bankrupt. Gary Coleman is such an example. This leads to demonstrate the importance of managing ones finances however small or large the income.