Why the Middle Class Should Buy a House Like Warren Buffett’s — And How They Can
Warren Buffett bought his house in 1958 for $31,500. In today’s dollars, that comes to $342,691.
In other words, Buffett bought a middle-class home and has lived in it ever since — despite being the eighth-richest person in the world. Buffett currently boasts a net worth of $141.1 billion, according to Forbes’ Real-Time Billionaires List.
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What can the rest of us learn from the Oracle of Omaha, if we hope to achieve even a fraction of his success?
Far too many homebuyers overspend on their home by justifying it as “an investment.”
Sure, your house technically counts as an asset on your personal financial statement. But whether you spend $25,000 a year on rent or on ownership-related costs such as mortgage interest, property taxes, insurance, maintenance, and repairs, housing falls under the “expense” column in your budget.
That leaves you with less savings to put toward actual investments, such as stocks or true real estate investments, that generate cash flow for you each month rather than draining it.
“A home is meant to serve your needs, not be a financial burden,” said real estate investor Jonathan Orcutt of Driven Cash Home Buyers. “Too often, middle-class buyers overstretch their budgets for homes they don’t need.”
While homes may appreciate a few percent per year, the S&P 500 has averaged an annual return over 10%, according to Business Insider. And as someone who manages an investment club for private equity real estate, I can tell you firsthand that we look for returns averaging 15% or higher.
Housing is an expense that prevents you from putting money into true investments — which illustrates the paradox of wealth.
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The more wealth you show off through spending it, the less true wealth you build through investments.
Investments are where your real wealth lies, where the magic of compounding happens. But they require delayed gratification, and they’re invisible to everyone but yourself.
When your stock portfolio or private equity real estate investments shoot up in value, no one sees it. When you buy an expensive “dream house,” you get the instant gratification of living in it and showing it off now.
“The middle class should prioritize financial stability over appearances,” continued Orcutt. “A home should be a stepping stone toward financial freedom rather than an anchor that keeps homeowners tied to debt.”
When the average homebuyer sets out to find a house, they start by asking, “What’s the most I can afford to spend on a house?”
That’s the wrong question. It focuses on the ceiling, which is why so many homebuyers end up spending just under the maximum they can afford.
Instead, reframe the question to focus on the floor. Ask: “What’s the least I can spend on housing and still meet my priorities?”
Kapil Singla, the lead real estate investor at Bright Future Homebuyers, urges homebuyers to think carefully about what truly adds value to their lives.
“A home is meant to serve your needs, not be a financial burden. Too often, middle-class buyers overstretch their budgets for homes they don’t need,” Singla remarked.
In fact, Buffett himself has emphasized this point, as reported by Fortune: “A house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender — often protected by a government guarantee — facilitates his fantasy.
“Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”
Today, Realtor.com estimates the value of Buffett’s home at around $1.4 million. It has, of course, outpaced inflation well.
But it takes time for properties to appreciate. Homeowners take two rounds of losses: Both initially on buyer’s side closing costs and later on the seller’s side. For a home to break even, it must appreciate enough to cover both rounds of closing costs.
“Buffett’s home is a testament to the value of holding onto real estate for the long term,” said Warner Quiroga, owner of I Buy L.I. “Your home doesn’t have to be flashy to appreciate well, especially over decades.”
As a general rule of thumb, it takes at least four years for a home to appreciate enough for the owner to break even on closing costs. That illustrates another point: sometimes it makes more sense to rent than buy.
Americans have bought into the narrative that everyone should own the home where they live. It has put many of them in homes they don’t belong.
I’ve worked in real estate investing and finance for over two decades, and today I own a fractional interest in over 3,000 units. And I also rent my own home.
Why? Because I value flexibility over control. I don’t need to paint my daughter’s bedroom bubble-gum pink. I do want to pick up and move whenever I feel like it.
Renters also enjoy easier budgeting, with single housing expense each month. They also get to outsource all home maintenance and repair headaches to someone else.
In fact, it’s sometimes cheaper to rent than to buy, as real estate veteran Austin Glanzer of 717 Homebuyers observed.
“Buffett runs the numbers before any acquisition, and that includes comparing the cost of the alternative,” Glanzer noted. “In some markets, it costs less to rent, even after accounting for appreciation and mortgage principal paydown.”
Take San Francisco — infamous for its sky-high rents. Renters still have the better bargain, with a median rent of $3,250 (Zillow) compared to a median home price of $1,256,316. Running that price through a quick mortgage calculator puts the estimated monthly payment at $8,778, and that doesn’t account for repairs and maintenance.
Homeownership isn’t for everyone, at every phase of their life. Consider whether renting might fit your life better after all, at least for the moment.
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This article originally appeared on GOBankingRates.com: Why the Middle Class Should Buy a House Like Warren Buffett’s — And How They Can