The 30-Year Mortgage Fallacy

Home ownership is a bedrock to the American Dream. Owning a home is capitalism and property rights practiced on a micro level. Immigrants came here and were able to carve out their slice of the great American pizza pie of land. One's equity in their home was, and still is today, a big portion of their net worth. But as home ownership rates continue to decline, and as the cost of a home as a percentage of income continues to rise, it may be time to reconsider the importance and the practice of owning a home in one's portfolio of investments.

"Rent where you live, and own what you rent," is a phrase I hear often from Grant Cardone, a Real Estate investor with more than half a billion in holdings.

"A house is a liability, not an asset," is a phrase I often hear from Robert Kiyosaki, the author of the most successful business book series in the world, "Rich Dad Poor Dad," and another incredible Real Estate investor. "If you have a house, paid for or not, that you live in, then it can't be an asset. Instead of putting money in your pocket, it takes money out of your pocket. That is the simple definition of a liability. This is doubly true if you don't own your home yet."

"A house can't buy a business, but a business can buy a house," is another phrase I heard growing up from a rich family member.

If these gentleman are preaching the same thing, there has to be something to it.

The 30-year mortgage can be a great thing, don't get me wrong. Baby boomers who bought a house where I live (in San Diego) during the 80's or 90's unintentionally created generational wealth. If they never pulled equity out or took a second mortgage, many of them have become millionaires. If they moved a few times in between, and held on to each home as a rental, they became multi-millionaires. I'm not sure how likely that outcome will be for us millennials who attempt that path (at least in this market).

The percentage of income that goes towards rent or a possible mortgage has increased. The ability to continue buying and holding single family homes in markets like San Diego has diminished as prices of homes have risen as a percentage of income. Putting years of savings towards securing debt on a mortgage that will significantly stretch your monthly expenses may not be the best place to stock your cash. It will be difficult to continue accumulating assets (the next home) unless your income rises significantly.

But there are ways that make more sense for millennials to be buying homes. If you plan on renting rooms to tenants, or if you plan to 'house-hack' and decrease your personal liability on the property (monthly expense), then buying a 30-year fixed mortgage can be a great move (I would do this if I didn't mind living with other people).

This past year, instead of buying a place to live in, I decided to continue renting in San Diego and to purchase out of state rental properties instead (more about how I do that in a future article). I decided to create income instead of creating a larger expense. My rent is now offset by my rental income and I have closed the gap between my monthly liability and my cash flow from assets. One opportunity cost of this strategy is that I still live in a small one-bedroom apartment with my fiance... Some people would rather spend more to live in a larger place. Thankfully my partner in crime is on the same page as me!

I suppose neither path is correct, it's just a matter of preference. I prefer to offset my expenses as much as possible to get to the point of financial freedom as quickly as I can. Increasing my monthly liability by buying a home and paying a high mortgage isn't a priority right now. Lifestyle design is most important to me, as time is the most valuable and non-renewable asset we have. I'm focused on buying time for my future family, and I am accomplishing this by buying rentals.

When my rental income is adequate, then I'll paint the picket fence white.