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Becoming a millionaire is the quintessential American dream. While seemingly lofty, it is an achievable goal (there are about 11 million millionaires in the US as of 2011) and it is accomplished in a variety of ways: most people save it, many invest it, some start successful businesses, some buy the right scratch-off, Bernie Madoff steals it, etc., but we’re going to briefly discuss the most reliable, least labor-intensive, and most boring way of becoming one of the 2.5-Percenters: owning a home.
The reason that homeownership is such a beautifully simple and inexpensive way to wealth is because housing costs are required living expenses (unless you are happy living in mom’s basement and she’s nice enough to let you stay there for free). You have to eat, you have to sleep and wear clothes (please), and you have to have a roof over your head.
You’ve got 2 housing options: rent or own. Renting provides no return on investment. The rent you pay is like credit card interest: aside from giving you a month’s reprieve from the landlord, there is nothing to show for it in the end. Owning (assuming you pay a mortgage instead of a rent payment) leaves you with something: a house. Add to that the predictable nature of housing prices to rise and you have the recipe for millionaire-ship.
Example:
Homeowner Joe buys a modest house for $254,000 in Salt Lake City (the average home price these days). He puts down 5% and his total mortgage payment is about $1300 (which is significantly less than rent for that same home in Salt Lake). It’s a 30-yr mortgage and he doesn’t refinance (for simplicity’s sake) for the life of the loan (the next 30 years).
Joe has a relatively hard life for the next 30 years. His income is limited and he is never able to set aside anything for retirement (like an IRA). Nor does he work for a company that offers a 401K. In short, Joe has nothing to expect in the way of retirement income (except Social Security).
But, Joe is a millionaire.
Over the last 30 years, Joe has slowly chipped away at his mortgage. Bit by bit each month, the home becomes “his”. Also, the price of his home increases by an average of 4.00% each year (100-yr average and a modest estimate for Salt Lake). When Joe finally does retire at age 65, his mortgage balance is “0” and his home is worth $1,002,000.
And because math hasn’t changed since you’ve been in 1st grade: $1,002,000 - $0 = $1,002,000!
Joe can keep his home (his housing expenses will be cheap since he has no mortgage), rent it out, or sell it and rent a condo in Florida (just as rest stop for his constant travels). That $1,000,000 could equate to $6000/month in income for the next 20 years (if put in a conservative annuity).
Or he could convert it to nickels, buy an old empty swimming pool, and go swimming in his own “Money Bin”. Every day.
Notes/Disclaimers
We are huge proponents of diversification, especially IRAs and 401Ks. If Joe did have a 401K and they matched his contributions, putting aside just $150/month would give him another $600,000 at retirement.
Also, poop happens, and Joe/you may have to refinance at some point to cover unexpected medical expenses, job losses, divorce, etc. You may find yourself approaching retirement and still having 15 years on your mortgage. The point is that if you are a homeowner, you at least have the option of doing those things! Renters can’t cash-out equity to pay for medical bills because there is no equity. Even if your home isn’t paid off at retirement, you still have the equity (the difference between the home’s value and the balance of your mortgage) which could be substantial.
Call Evergreen Mortgage today. We’ll come to you to discuss your home-buying options.
Or buy more scratch-offs.
