Your house is not an asset

It is crucial to end up with this non-sense idea that your house (primary residence) is an asset, probably the only one you will ever own and therefore all your savings shall go into that one asset. Work, ask for a mortgage, pay your house and then retire.

 

 

If a house is taking money out of your pocket (insurance, taxes, miscellaneous, etc.) then it is not an asset. Not only you are actually spending money but also you have to consider the opportunity costs of having our money invested into that house, which you wrongly perceive as an investment, whereas you could have invested the same amount of money in another house or investment that could actually yield at least 5%. In a hypothetical example of a 100k house with an average of 2000 per year on expenses, you are actually spending, per year, 7000 = 2000 + 5 000 (5% of 100k). You have to consider the money you actually spend plus the opportunity cost of not using the 100k in another more profitable investment. Here I have assumed that the other profitable investment would yield an average annual return of 5%, which is very conservative if we consider real estate investment.

In addition, there are also two (hidden) costs which I consider very relevant when you buy the house you live in:

1 – You loose flexibility. Either you assume it or not, it is more difficult to move into another city or country if you know you bought the house you are “supposed” to be living in, not only because you are emotionally attached to it and you probably end up more expensive things for your house, in particular furniture, but also because it is really not that simple to rent a house, get a property manager, etc. from one day to another.

2 – You end up of not making the most rational decisions when you invest in a house with the purpose of living in it. You take into account variables that are important to you and not to the market, like being near your family. Or you are willing to accept living in a area which is not as recognized by the market, like the fact that it is near a highway or a factory, because you prefer to pay a bit less. However, those decisions can make this house a very difficult one to sell or rent to a third party and therefore would not yield any cash flow, in case you decide to rent/sell. In sum, it is a very bad investment.

According to Frank Gallinelli there are 2 rules of real estate investing that we should follow: do not hold any sentimental attachment to any of the properties you invest in and if you think it will be difficult to sell/rent, then it is not worth buying.

 

Another sentence I loved in his book What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures which highly reflects my approach on real estate investing is the following:

You are not buying a properly, you are exchanging a fixed price for an income stream.

I create my own luck

Most of the people like to believe that external factors such as luck or being in the right place at the right time play a major role in other’s people successes. I believe those people, in general, are just lazy and it is just easier for them to continue being lazy and believing there is nothing you can do to improve your life than actually making efforts and having a plan.

You live next to your family and enjoy a perfect work-life balance. If I had that, I would also have kids right away. Have you ever thought that maybe the person though a lot before having kids and actually shaped his/her career based on where the grandparents live? That this decision actually required effort and it was not just a matter of luck but most likely the result of a well-thought plan?

You are so lucky, you have a high salary. If I had that salary I would also save more than 50% of my salary. This one actually applies to me. I have worked hard to be successful in the tests and interviews that have put me in this high paying salary. Not only I was rejected many times before and after going to interviews, but also I have spent weeks preparing for every interview, studying more than for an exam. Also, I have carefully planned, together with my husband, the places to live that could be more beneficial both in terms of salary, costs of living, safety, etc. and we have both focused our search in those countries. Plan + hard work + focus = success. Also, not many people would be willing to sell their car, like I did, to think thoroughly before spending your money, and rather focus on generating passive income consistently.

I believe some people just choose to be negative and unlucky. I strongly suggest reading this article from Richard Wiseman where he performed an experiment in two groups of people – lucky and unlucky – and where he shows that “lucky” people are not only more efficient in embracing new opportunities but also they pay more attention to the details that may help them thrive. Therefore, what is generally so-called luck is the result of personality factors, such as optimism, openness to new situations and less anxiety combined with the ability to notice and trust the unexpected. It is not an external factor that cannot be controlled by us.

All of us are lucky to some extent, we just need to work hard, take some risks and embrace the opportunities that come across our paths. Try to learn from the experiences of the lucky people that you meet instead of just assuming that they did nothing to achieve success. I am pretty sure that if you start changing your mindset and your behaviour you will also get lucky in the near future!

Financial Statement – December

Our savings in December.

Euros November December Gain
Mine 36,500 38,800 2,300
M 24,600 28,200 3,600
M Pension 27,000 30,000 3,000
My Pension 23,350 24,750 1,400
House guarantee 4,000 4,000 0
House paid 55,000 55,000 0
Total 170,450 180,750 10,300
Cash 61,100 67,000 5,900

Overall, I am satisfied. We managed to save, in terms of cash, 60% of our salary and our total equity has increased quite significantly, not only due to my pension fund, which is paid by my employee every month, but also because we have finally checked how M’s pension is worth and we have realized it has grown in value quite significantly.

According to Mr Money Mustache we would need around 12.5 years working until we reach financial independence. However, we need to bear in mind that: 1-we have already started this journey almost 2 years ago, and 2-if you plan to move to a low cost living country in the future the number of years you need to work actually decreases.

I am also very excited by the fact that, from this month onward, M’s salary will increase 15% and my salary will probably increase by 2% (still pending the final confirmation). Even though some extra expenses are expected, as we are having our first baby soon, they will certainly be lower than the salary increases.

Happy new 2017 and wish you all a quick and fun path towards financial independence!