To Buy or Not To Buy, That is The Question

Do you recognize this from William Shakespeare? Did he really say To Buy or Not to Buy, That is the Question? No, that comes from “To be or not to be”, which is the part of the opening soliloquy by Prince Hamlet in Shakespeare’s play, Hamlet, Act 3, Scene 1.

William Shakespeare, who died about 400 years ago knew a thing or two about plots. And not just plots for his plays; he was also good at picking out plots of land.  Shakespeare, it seems, not only had a way with words but a talent for investing in property. 

For example he understood about investing in areas he knew well: his birthplace, Stratford upon Avon, and his workplace, London.  Like a good investor, Shakespeare really appreciated location. Although he did not invent the phrase, “location, location, location,” he sure could have. He had a gift for finding the right place for a home or a theatre. Shakespeare understood that knowing one’s market is key to successful investment in property.

There were no real estate brokers in the early 17th century. They wouldn’t start to appear for another 250 years. So Shakespeare was on his own. Today you don’t have to.

A little history here from my past. In the late 1980s I had the opportunity to buy a 1 bedroom condominium in what was back then a wonderful sleepy town called Santa Monica. (it’s no longer sleepy, it’s a fabulous place!) . For a girl from cold New York City weather, this was a dream for me!

Did I mention that it was about 4-5 blocks to the water? The cost? A mere $142,500! I could have purchased it with a 10% downpayment. Now you’re asking, wait, you said you had the “chance”? What happened? Okay, I’ll tell you. I got cold feet.

Yes, me, the girl who travelled 13 countries by herself, lived and studied in a foreign country and then moved 3,000 miles away from home in a different state. To start her law career. Silly right?

What could I possibly be scared of? No excuses, but I was on my own here, single, and had just moved to California from New York about a year earlier. I had the eye of Shakespeare, but surprisingly, not his guts.

I was buying the property from the owner who was also an agent. I was representing myself (not yet knowledgeable in real estate) and so you can imagine how the negotiations went. Working directly with the seller can be very tricky. You have to be very careful as a buyer not to hurt their feelings. Anything you say can and will be held against you and taken for the worse.

I think I drove the poor man crazy with my questions. Of course, as an attorney, I had a fascination or should I say obsession, with striking out and changing huge portions of a standard sales agreement, asking for more items, etcetera., etcetera, etcetera. I’m surprised he did not suggest cancelling the agreement. He sure had patience.

Well, I’ve grown up since then but I’ll tell you the ending. I had a change of heart and cancelled the purchase. But why? One thing was that I thought I could buy a home- later in life. I was in no hurry.

I was a free spirit. Uh huh.

Nothing lost, right? There’s always time. Oh, no, no, no. Wrong! That is not the case at all. But there was no-one to tell me or show me otherwise. And this is the reason I want to share this with you. So you don’t make the same mistakes I did.

Why was it a mistake? Because today, that same condominium is now worth about $650,000. Yes, I could have made over half a million dollars doing nothing! $507,500 to be precise- no - actually - more. Bear with me and I’ll explain.

If I put down 10% of $142,500 that’s $14,250. The bank would have lent me $128,500. I would have only had to invest only $14,250 (To live 5 blocks to the water remember). That’s it. Period.

How could that be? Because the rest of the monthly payments were like paying rent. It would not have affected my spending or lifestyle.

Look - if you are going to make monthly payments, you can pay your landlord or you can pay yourself. (Except in the case of living with your parents, which I had already done for many years (all through law school too!)). So which do you prefer? Paying your landlord’s mortgage or paying your own?

Back to the money. So what would I have gained? Or rather, looking back, what did I lose? I lost $635,750. Now before it sounds like this does not make sense, look at it this way.

I’m paying rent. As I said, it goes to my landlord or to me. Typically, the cost of a mortgage is about the cost of paying rent for a similar property. So I don’t count that money as losing it. It’s going to be spent anyway.

The bank lent me money. Over time what they lent me would have been paid off. But you see, even with paying mortgage, insurance, taxes, and HOA, if the property was valued at $142,500 and today it’s valued at $650,000 l, but all I invested was $14,250 for about the same amount of money as paying rent, that leaves me with >>> $635,750!

RENT?

Where else could I have made money like that? Well, I figured out that between my husband and myself, by the time we purchased our own home, we spent nearly $100,000 in rent payments.

What else could I have done with that money? Well, knowing what I know now, and Monday morning quarterbacking, I would have purchased a property and given someone else an opportunity to rent from me.

Yes, I could have taken that money and bought another property and rented it out to someone willing to pay my mortgage, I mean rent. Renting is a fine place to start out until you figure out the system. It’s not the place one wants to or aspires to be after a while, if you want to make serious income.

So if I had purchased the condo, then bought a 2nd property and rented that out to someone, then, I would not only be making money on the first condo ( through increasing equity, and tax write offs) , but I’d be making money on the rental too.

How to build equity? If you buy a home, the bank gives you a loan. The sweet part: you are making money on the money lent to you by the bank. It’s like a gift. California averages about a 7.27% year over year increase in home values over about the last 50 years. It’s no wonder insurance companies and many very wealthy people have made their money on real estate.

How else do you make money on real estate? Every time you make a payment on your mortgage, you are paying part of the principle and part of it as interest. The principle that you pay is like a forced savings account. It just keeps building up and you don’t even notice it.

The interest that you pay, depending on the loan amount, can be deducted from your taxes. Also, the taxes that you pay every year, can also be deducted. Talk to your accountant about these benefits.

What if you decided instead of buying a property and putting in a down payment, to take that same money and put it into a bank account or perhaps buy stocks?

What would happen if I just took that $14,250 and put it in the bank? I would make money only on $14,250. But if I put that money into a down payment for a house or condo, and the house value goes up over time, then I will be making money on $142,500.. See the difference?

Even if we assume a very low 3% rate of return or interest on my $14,250, I would never make as much money as I could on the $142,500. Common sense but nobody ever explains it to us. So, that’s why I’m sharing now.

See how this works? Buy, hold, buy another one, buy more, exchange, keep collecting rent. Then, like Monopoly (I had a business card that looked like a Monopoly card), I could have kept buying little properties and then, exchange them for multi-unit buildings. (In Monolopoly, it would have been exchanging houses for hotels).

One of my very wealthy neighbors once told me that from buying more and more properties, he makes more money in 2 weeks than my husband makes in a year. My husband is an engineer. Let that sink in.

A lender and I put on a workshop to explain this to our clients. You should have seen the looks of amazement and understanding. But it’s not enough. A dream is a dream until you plan and take action, and then it’s a goal you can achieve.

So, To Buy or Not To Buy? If you’re thinking about whether to buy, just remember, every day you keep “thinking” about it, it’s costing you money, literally, and costing your current or future family money and a legacy.

There’s a reason for the saying: A good deal is whatever you buy today, in 5 years. Why? Because of the continuous growth in the value of real estate and ultimately, of wealth.

Here’s to your success!