• Zack Gutches

Don't Be House Poor Millennial; Cash is King!

In a previous post, I looked at the numbers of buying a house and selling it 5 years later vs renting. Therein, I used data to support the proposition that a primary home is NOT an investment, but rather a forced savings plan. I want to emphasize the fact that I believe owning a primary home is often a smart decision over long periods of time. However, I fully believe that many people buy a home prematurely without considering the full ramifications of their decision on their holistic financial life.

In today's post, I'm going to piggy back off of my previous post while focusing attention slightly more to something only subtly discussed in the previous post: The idea of cash flow with buying vs renting. As I have pointed out before (and will show below), if viewed as a " project", the buy "project" will usually result in a higher rate of return overall than will the renting "project". But remember, cash is king!

Owning a home without sufficient monthly cash flow to also be investing in other assets makes you what they call "house poor". It simply means that all or a majority of your wealth is tied up in your home, and it's difficult to get the cash out. A primary home is generally an "illiquid asset". Although I am not a big fan of many of the ideologies in Rich Dad Poor Dad (surprising right?), the author makes an interesting point about defining what an Asset is. He defines an Asset by what is produces. An asset produces income (or positive cash flow), while a liability produces expenses (or negative cash flow).

A primary home is an asset that requires expenses (or negative cash flow) to retain the asset. In fact, as I'll show below, it takes a lot of negative cash flow to keep a house! This becomes an issue for people who don't generate well above what they would need to pay to keep their home (because it makes them house poor, and unable to buy positive cash flow assets). Let's look at some numbers with 3 graphs -- and the assumptions below them if you are interested.

Graph 1: Expenses by year (not including initial closing costs and down payment for buy project).

Graph 2: Expenses by year (including Time Period 0 -- which shows the outflow for closing costs and down payment on the buy project)

Graph 3: Cumulative expenses over 30 years -- assumes down payment and closing costs from buy project could be invested in the rent scenario. Also assumes the sale of property after 30 years in buy project and sale of investments after 30 years in rent scenario.

Assumptions Used to Generate above 3 graphs:

Interpretations of Graphs:

Notice in Graph 1 how the monthly negative cash flow of owning a home exceeds that of renting, especially in the earlier years (the reason it becomes more expensive to rent over long periods of time is because rent prices are increasing due to inflation -- while your mortgage payment stays the same over the life of the loan).

Below (this is the last graph I promise), I have mapped out how much more cash flow buying necessitates in comparison with renting on a monthly basis. When you are only making say $4,000 a month and your mortgage and other home ownership costs (maintenance, property taxes, etc.) are over $2,000, it can feel like you are hardly staying afloat on a month to month basis if also trying to enjoy other areas of life that cost money (traveling, food, utilities, entertainment -- the works). That's where having an extra $200 - $300 a month can really make a huge difference for you and free you up from a lot of the headache and anxiety that oftentimes comes with monthly finances.

Graph 3 (Cumulative Expenses graph) shows that over a long-period of time, buying is superior to renting (because a portion of each mortgage payment is going towards paying down principal, which is equity for you). But the main point I want to make today is just because you could qualify for a loan, doesn't mean that you should.

Evaluating the purchase of a home is a major life decision and financial decision -- one that needs to be viewed in conjunction with the rest of your financial situation and goals.

If you would like help seeing how purchasing a home fits in with your monthly [and projected] cash flow (including all your other areas such as student debt, car loans, savings, income, etc.), I would love to help you evaluate your goals and desires and everything else that comes with financial coaching with you. Please do not be afraid to reach out with a free, no-sales pitch 25-minute consultation call at https://www.financiallyforgotten.com/contact.

If you enjoyed this article, I would love if you would share the link with anybody who you think would benefit from engaging with it.

Until next time!


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