Quick and Dirty Tips Podcasts

Episode Transcript

Tips for Creating Long-Term Wealth With Real Estate
Episode 15: March 27, 2007

Hello and welcome to Money Girl’s Quick and Dirty Tips for a Richer Life hosted by Elizabeth Carlassare.

Today’s topic is tips for creating long-term wealth with real estate.

Several years ago, when my grandfather passed away, I saw the statement from the probate of his estate. By the end of his life at the ripe old age of nearly 90, most of his retirement savings had been spent. Where was his wealth when he died? In his Westport, Connecticut house, which he and my grandmother owned for more than 40 years. During his working life as a chemical engineer and later after he retired, his house was quietly working away too--chugging along and generating considerable equity over time.

The lesson to take away from this little story is simple and really important: Over time, real estate goes up in value and, over the long term, it can go up a lot! Although appreciation has slowed recently in the U.S., owning real estate for the long term can be a powerful wealth building strategy. As the old saying goes, “Don’t wait to buy real estate; buy real estate and wait.”

On average, homeowners have higher net worths than renters. According to the U.S. Federal Reserve’s Survey of Consumer Finances, the average net worth of renters is $54,000, but the average net worth of homeowners is $625,000!(1) More than 11 times more.

If you don’t already own your own home, consider making it a goal to buy one. It’s easier than you might think. There are many loan programs available that allow for low (and, in some cases, even no) down payment for home buyers.

And keep in mind, you don’t necessarily have to live in the home you buy. If you live in a pricey area and can’t afford or don’t want to buy there, consider buying a home in another city where the prices are lower, rents and the economy are strong, and the population is growing. Rent the house out using the services of a good property manager. Years down the road, after it's appreciated, you can sell it or refinance it using a cash-out refinance to free up funds that you could use as a down payment on another home.

If you already own your own home, consider setting a future goal of buying another one. You can move into it and rent out your first home. When repeated, this can be a solid wealth-building strategy, particularly if you live in an area where the rents are high enough to cover the mortgage and other costs of owning the property.

As always, everyone’s situation is different so it’s a good idea to consult a tax or financial advisor.

Today, I’m giving away another copy of Investing in Real Estate by Gary Eldred, an excellent book on real estate investing. If you’ve sent me an e-mail or posted to the blog, you were automatically entered in the giveaway. And the winner is Adam in Cambridge, Massachusetts. Congratulations, Adam! Check your email for instructions.

For next week’s book giveaway, I have a trivia question. The first person to call or e-mail me with the correct answer will win next week’s book. Here’s the question:

Which three states in the U.S. are growing the fastest?

E-mail your answer to money@quickanddirtytips.com.
Cha-ching! That's all for now, courtesy of Money Girl, your guide to a richer life.

If you have a moment, I’d really appreciate if you’d post a review at iTunes. And a big thank you to those of you who have already posted one! Money Girl is part of the Quick and Dirty Tips network. Check out the other helpful Quick and Dirty Tips podcasts like Mr. Manners, Legal Lad, and The Mighty Mommy. Thanks for listening!

References

1.“Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances”, Bucks, Kennickell, and Moore. Federal Reserve Bulletin, vol. 92 (February 2006). The average family net worth is $54,100 for renters and $624,900 for homeowners. The median (or middle) family net worth is $4,000 for renters and $184,400 for homeowners.

Comments (11) for Tips for Creating Long-Term Wealth With Real Estate | Subscribe to Comment

cjm Says:
10/25/2007 1:28:39 AM

I've just discovered these podcasts and they're great. In response to some of the negative comments posted, I think some people are missing the fact that there's only so much on a topic that can be covered in five minutes. These podcasts are designed to give you the shorthand version and get you thinking... then you have to go do your homework.

Kurt H Says:
5/19/2007 5:19:23 AM

While I agree that real estate can be an important part of a wealth building strategy, I think your advice to buy a house in a different market with better economics than your area is truly bad advice. I would not recommend that anyone own investment real estate out of town unless they are a seasoned investor.

Finding a good property manager is much more than looking in the Yellow Pages. You want to be able to inspect your property periodically with your property manager to see that things are going well. There are many poor property managers, and if you only have one house and limited experience, you most likely will fall down pretty low on the priorities of even the best of property managers. Additionally, management fees and maintenance costs will significantly cut into the profits.

If the rental property is local, one can opt either for a management company or to do it themselves. If they choose a management company, they will be able to keep an eye on the property to see that it is being well managed. If there are problems that are not getting resolved with a phone call or two, they can show up at the manager's office or even hire a new manager without arranging a trip out of town, probably requiring the use of vacation days to do it. Best to find out you have a problem before the bad tenants that your manager selected do $20,000 damage to your property.

Rental property has the greatest potential for those with an entrepreneurial spirit who manage it themselves, do much of their own maintenance, find their own tenants, collect the rent, etc. The next best thing is a good management company who can be watched. A bad management company who gets paid a commission for each new tenant they rent to and marks up the maintenance work they do has little incentive to take the effort to get good tenants but instead will rent to the first live body. If the tenants damage the property and move or are evicted in a few months, they will make money on the repairs that the owner pays for and they will make a commission again on the next looser tenant they rent to.

If one is not prepared to be actively involved in an investment, they should select a mutual fund where one can get by with doing nothing more than looking a the year end statement.

Money Girl Says:
4/24/2007 4:31:58 PM

Hi Will,

You may be thinking of a tax exclusion for homeowners (owner occupants). If you have lived in your home for two of the previous five years (the two years don't have to be consecutive), up to $250,000 (if you're single) or up to $500,000 (if you're married) of the gain on sale is not subject to capital gains tax.

You may also be thinking of a cash-out refinance. It's possible to take equity out of your home or a rental property you own through a cash-out refinance. Some people use a cash-out refinance as a way to raise the money they need for a down payment to purchase their next home, a second home, or rental property. When thoughtfully and carefully repeated in a way that keeps you living with in your means, this strategy can help you build a portfolio of rental properties over time.

If you're interested in reading more, I'd recommend reading "Investing for Real Estate" by Gary Eldred, which is available through the Amazon links on this website. Another good book is Schumacher's "Buy and Hold".

Hope that helps to clarify! :-)

To Your Success!
-Money Girl

Money Girl Says:
4/24/2007 6:21:01 AM

Hi Kev,

Thanks for sharing your thoughts. I appreciate your comments because they’re important points. People should understand the plusses and minuses before buying their own home or investing in real estate. With any investment, it’s important to do your homework and understand the potential risks. When borrowing money for a home purchase, you don’t want to stretch too much and inadvertently get in over your head. You might want to own your home, but you don’t want your home to own you!

To Your Success!
-Money Girl

Money Girl Says:
4/24/2007 6:01:44 AM

Hi there,

The stat about homeowners having higher net worths than renters doesn’t mean that the higher net worth is solely a result of homeownership. Correlation, yes; sole causation, no.

The point I was hoping to make is that real estate can be a silent wealth builder. Over the long term, homeownership can certainly boost net worth considerably! :-) Many people spend their working lives saving and investing in stocks, bonds, and mutual funds in 401(k)s and retirement accounts, and, when they retire, they find that their housing wealth is often just as significant a component of their net worth.

Unlike stocks and bonds, real estate is usually purchased with a high degree of leverage, which magnifies the return as the property’s value rises. Even a small percentage gain in home value can be large relative to the down payment invested.

There are many types of loans available today that allow for low (and sometimes even no) down payments, which puts homeownership within reach for more people.

If you want to learn more about the wealth effect of owning a home, here’s an interesting study:
http://www.jchs.harvard.edu/publications/finance/w04-13.pdf

Hope this helps to clarify.

To Your Success!
-Money Girl

brainscan Says:
4/24/2007 1:23:10 AM

I agree... this podcast is misleading. For example, the bit about homeowners having greater net worth than renters. This doesn't mean that owning a home gives you higher net worth than renting. In fact, it's very likely that homeowners are older, and have had more time to do other things that improve their net worth, like save for retirement, get promotions at work, and receive inheritances from their relatives.

It's sad that this podcast thinks its listeners are too stupid to understand all of the details of an issue.

Kev T Says:
4/4/2007 10:32:23 PM

I have enjoyed the podcasts, but I worry about real estate wealth building content.

Buying a home is a great idea. I know people who have made serious wealth buying homes and selling them. I have also run across people who have struggled and lost money. I hate renting, but as easy as buying home sounds, it is not. Default rates are high and one reason is people get loans they cannot truly afford.

I should hope no one in media trying to help people would ever get people to hyped up on buying a home. The rush to buy a home makes some people take on loans they should have never done or buy homes way over market value.

My point is, go out of your way to remind people to do lots of homework on the subject. Buying a home with no savings to deal with unexpected costs or without considering the costs of selling is foolish. The person across the street from me bought his home two years ago and now he is getting a divorce. The home might sell for nearly what he paid for it, but the Realtor fees are going to take nearly $50,000 from him.

For the few users who may read this, real estate is awesome, but only when done with lots of knowledge. Know the history of homes in the area you want to buy. Find out what developments maybe created over the next few years in the area. Know the tax costs and benefits before buying. Improve your handyman skills. The work you can do on a home, the lower labor costs are and the better you will become and judging the project a home will be to repair before you buy it.

I am looking forward to more podcasts from Money Girl's

William Says:
4/3/2007 9:19:36 PM

First of all, great podcast, Money Girl!

I seem to remember hearing somewhere that you can take the cash value of your current home and put it towards a second home tax-free. This way you can continue to buy more expensive property, and only have to put enough cash up front to purchase the first home. You can then end up living in a house far more expensive than you could normally afford, and rent out each of the less-expensive homes to cover your collective mortgage payments.

Is this true?

- Will from Reston

Money Girl Says:
4/3/2007 12:33:55 AM

Glad to hear you're finding the tips useful. :-)

-Money Girl

Mark P Says:
4/1/2007 10:26:21 PM

I believe this podcast is severely misleading.

First, buying a house traditionally requires a substantial down payment. That means the people who can afford to buy a house tend to be wealthier. It's not, as you imply, that buying the house made these people wealthier. They were wealthier anyway.

Further, you seem to imply investing in real estate is nearly a fool-proof wealth building strategy. Does real estate over the long term (30+ years) really do better than a diversified portfolio of stocks and bonds, which will earn around 8% on average over the long term?

chatca Says:
3/28/2007 2:11:31 PM

this tips are very useful for us.