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Is buying your home really ”Investing”?
Banks and media have twisted peoples understanding of finances around for the worse. It´s often mentioned in bank and real estate broker ads that your house is an asset, they trick people into believing that they are in fact investing when they buy a home. Looking at it on the money side of the deal, do you think that most people buy their house or condo to live in it or because they want to make money from it?
It´s pretty clear that most people buy a home because they want to live in it, right?
The thing here is that most people think that when they bought their house (or condo) they made the biggest investment of their life, right?
But what is investing?
Putting time or money into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit.
So if you buy a home and believe what the banks and real estate brokers have been telling us for years, that it´s your life’s biggest investment. That must mean you are expecting to make a profit from your home?
I don´t know about you but when was the last time your home filled your pockets with cash?
Your home will never ever be an investment. Even if you are debt free, a home will always take money from your pockets, period.
I spoke to a friend of mine about this just a couple of weeks ago and got to an interesting insight. She and her family moved into their house a few years ago, usually “home owners” are very protective of the fact that their home really is an investment. We were talking about investing in general and I said that most people think that their house is an investment.
– Well, it´s not an investment like that, it´s more of a social investment, we bought the house to feel better as a family with more freedom for the kids and so on.
This is (in my opinion) a very good way to look at it, you take the higher risk (that is included in home owning) and you get better living standards. So in that way it really is an investment, just not the kind that banks and brokers are telling us.
But doesn´t real estate always go up in value?
The answer here is no. like every other market, the real estate market also goes in cycles. It goes up and it goes down, and there are measures against other variables to figure out if it´s over-valued, under-valued or fair valued.
One indicator is the rent vs. real estate price-increase, if the prices are rising faster than rent increases the market is moving towards an overvalued state. Let’s take the city where I’m from for example. In the past 12 months the real estate prices rose 11% while rents only rose 2,56 % on average. The real estate owners here are making a lot of money now due to crazy low interest rates even though the rent increase isn´t very high.
This first indicator signals that the market is moving to an overvalued state.
Another indicator is the housing debt to income ratio, where you divide your total debt in the household with your total incomes after tax. If the ratio is 3 (300%) or higher, it´s a high chance that people won’t ever will be able to pay off their debt and the mentality becomes to not even bother and instead just pay the interest on the loans. Right now about 60% of all the new household owners in Sweden have a housing debt to income ratio of over 300%.
At some point either the incomes have to rise quicker than they have in the past years or the real estate prices have to drop, a lot!
How can I turn my house into an investment then?
Ok, so now we understand that your house is not in an investment, because you don’t buy it for the reason to put money in your pocket.
But how about those real estate investors, they are “investing” in real estate, what´s the difference?
They invest in a totally different way, they acquire assets. Your home is a liability.
Ok, what´s the difference?
Assets put money in your pocket and liabilities take money from your pockets.
For example. Let’s say you rented an apartment for 500€/ month and decided to buy one instead, so you saved up the cash for the down payment, got the loan from the bank and then bought your new apartment. Maybe this would increase your living standards a bit and you live cheaper at the same time, this is because now there is a lot more risk involved. It should be cheaper to buy than to rent, for the first, you already put in the down payment. There is also all the things within the apartment that you have to take care of on your own instead of just calling your landlord, things that break etc.
Now just imagine that you do all the same things but instead of moving to the apartment yourself you take someone in to rent the place. For this apartment, you might get the money to cover the costs for both your old apartment and the new one. This way you will have 500€/ month of “passive income”, your apartment is now an income producing asset.
This can also be done the other way around if you already have bought a house or apartment. It is possibe to rent a home instead and then rent out the one that you already live in.
This is just about thinking a little bit different, if you want to have financial security and financial independence, creating and buying income producing assets is how to get there. Some people think this is a good and easy way to start making passive income, others don’t like it at all.
I like everything that can help to give me more financial security in life.
What I have done and where I have invested my time/money
Since there has been a lot of questions about this I decided to make a quick walkthrough of where I have invested money and time in the past 7 years. Then maybe I´ll take the longer story later on sometime.
These are some of the places I have been “investing”:
- Houses and apartments
- Gold and silver
- Index funds, stocks and options
- Fruit and hardwood trees
- Mixed currencies
Houses and apartments
My first “investment” that I bought at the age of 20 was an apartment in Thailand, I bought it 50/50 with my mom. Back then I thought like everyone else that I had bought my first investment but later I discovered that it in fact was a liability, every year it cost me a couple hundred Euros. Even though I today understand that it wasn´t the good investment I thought it would be, I can still be happy because that is now my home in Thailand.
Later I bought an old house 50/50 together with a friend with that we were going to fix up and then sell it at a higher price. Sometime along the way here I first learned about passive income and understood that instead of selling we should rent it out when the renovations were ready, that house became our first passive income stream.
Later I bought another house that is rented out for passive income.
I also got 1/3 of a condo in Spain that is rented out to tourists.
Gold and Silver
Here I like to quote one of my favorite investors Ray Dalio, the founder of Bridgewater associates.
“If you don´t own say 10% in gold, and then it depends on the world, then there is no sensible reason other than you don´t know history and you don’t know the economics of it. Gold is an alternative form of money.”
- Ray Dalio
So after maybe a hundred hours of research in the subject I decided to get 10% of my total portfolio split into gold (30%) and silver (70%). I look at this purely as insurance against problems in the financial markets.
If you live in the EU and want to buy gold or silver I can recommend buying physical silver from Liberty silver in Estonia. There you can buy VAT free silver and have it sent to your home with insurance, that’s where I bought all my silver.
Index funds, stocks and options
For the long term I have some index funds with low to no fees.
With stocks there are different ways to buy, buying with options is a cool way to do. Let me give you a quick example.
In April 1993, with Coca Cola stock hovering around $39 per share, Warren Buffett determined that he would be interested in buying more shares if the price fell below $35.
But instead of waiting for the price to fall, he simply sold 5 million ‘put’ options with a $35 strike price. If Coke stock were to fall below $35, the option buyers would sell their shares to him, which would have meant Mr. Buffett would be forced to buy the stock at $35. This was perfectly fine because he wanted to buy at that price anyway.
But if Coke rose instead, Mr. Buffett would be happy enough, since he collected a $1.50 option premium ($7.5 million). In other words, Mr. Buffett wins on both sides. If the price falls, he gets the stocks at the price he wanted. If it goes up, he makes $7.5 million.
In fact, Coke never did fall to the targeted price, so Mr. Buffett did not get to buy the stock at $35. But he did pocket the premium when the options expired, and ended the day $7.5 million richer.
The $1.50 per stock in premium is passive income, there are also other ways to get passive income from the stock market.
With this I´m still learning and only use about 10% of the total portfolio.
Fruit and hardwood trees
Some years back I learned that “you have to give to get”, I read this in many books and heard it in seminars and videos. So I started searching for a good project where I could give back some of my earnings and do some good.
I found a project with the goal to “end poverty in Africa”. The company is called Better Globe and people can buy trees that they plant in their plantations. The plantations are in semi-dessert areas and they prevent desertification (which is a big problem in Africa). For the trees to be planted Better Globe needs to hire people to work for them, so jobs are created. They also build schools because education is very important in the long run to help people take themselves out of poverty. On the school roofs they build water collecting systems that takes the water from the roof to water tanks during the few days when it actually rains. A bank is started where poor farmers can take micro finance loans to grow their business and take themselves out of poverty.
They have been doing a lot of research for the past 10 years on what trees are most suitable for the projects and the areas where they are planting them. Two of the most common trees that is used are Mukau (mahogany) and mango trees.
The mango trees are for short term returns and are fully producing mangos (200-400kilos/year) about 4 years after they are planted.
The Mukau tree is a hardwood tree for the long term return and will be cut down after 20 years. From this they will make furniture, hardwood floors etc.
The trees can be bought in two ways:
The donation package (53€) contains of 2 trees in your name that you will get profits from, 2 trees that are given to poor villages near the plantations, 500 liters of water, 1.5€ for school building/renovations and 1.5€ for micro financing to poor farmers.
The second way is to buy single trees (17€) for pure long term investment.
The trees gives a 15% annual return from the 5th year (when they are in full production) until the 19th year. On the 20th year, the Mukau tree is bought back at 10 times the initial investment price (170€). After this the trees will be cut down and sold as furniture, wood floor and on the open market etc.
I buy one donation packages per month and then add some extra trees when I feel like it, here I put about 10% of my total portfolio.
If you have any questions, just sent me an e-mail.
This is a very important part, probably the most important.
I spend a lot of time learning (2-5 hours per day), I read books, go to seminars, read blogs, meet with successful people and watch videos.
Some books that I can recommend:
I also recommend signing up for my newsletter so you can get your free copy of my E-book.
I have spread the risk off currency devaluations a little by keeping my currency positions in some different currencies including Euros, Thai Bath and Swedish Krona.
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Passive income together