A key to successful finances and a cornerstone to building wealth and creating financial security is Real Estate. There are several stages in life where making Smart decisions at those Pivot points will make the difference between success and something less. Managing your cash flow and equity related to your home is based in the fundamental understanding and following “The Four Steps to Financial Freedom”. 1) Emergency Fund 2) Eliminate all consumer debt 3) Build massive Liquidity 4) Reach the freedom point – where income from passive investment exceeds expenses. Having or Paying off a mortgage is not a step – that decision is a by-product of successful financial planning.
Smart Home Buying – Most people aspire to own a home and believe it is very important to their financial success, however being able to articulate why is more difficult, other than a belief. There are key concepts to understand when buying a home:
Since homes tend to consume the largest percentage of our income and the taxes related to real estate ownership reduce our wealth, it makes a lot of sense to spend some time focusing on improving those outcomes.
Will protect you – keeping “all your eggs in one basket” has never been a wise idea and yet a vast majority of Americans have more wealth inside their homes that all their other assets combined. We feel safe with lots of home equity, but we cannot send our kids to school or buy food with shutters. We need liquidity to be safe! You may have heard to idea of taking some “winnings off the table” when it comes to the stock market or even gambling. We do not want to gamble with our homes but successfully using home equity over time, as the value of our home increases, is simply a way of diversifying our assets and building wealth. When you sell or refinance a mortgage is the time to evaluate the opportunity to diversify the funds locked in your home.
Over the years I have heard of various strategies to pay for later retirement or education. I am going to pay off this mortgage quickly so I can borrow again to pay for college, or I am buying this rental property and will sell it to pay for school or it will become my income later in life. There is nothing wrong with these ideas other than they burn today’s cash flow to pay for a later need and it may not the most efficient way to build the assets needed to pay for retirement or education.
Making money in Real Estate seems simple from the outside, we have all heard the stories of building a mini-empire with multiple properties. However, for every successful investor there are hundreds that failed and lost money. Benefiting from Market appreciation is not making money in real estate and takes no skill. Finding, acquiring, and managing property is a learned skill – it takes time, funds, significant effort and a bit of luck! The decision process around a Primary or Vacation home are very different from Investment property.