Ep. 208: Navigating the Affordability Index, Ownership vs. Renting, and Strategic Decision Making

[00:00:00] Good day. This is Gabriel Shahin, certified financial planner and your host of more knowledge, more wealth here on every weekend talking about all important topics of personal finance. My goal is to go over the knowledge you need to increase your wealth. Now, to the listener, you can always reach out to myself or any one of my colleagues here at Falcon Wealth Planning.

[00:00:54] Our phone number is 855 963 2525. 26. That's 8 5 5 96 Falcon like the bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short where you can get this episode or any one of our previous episodes as well. And you have a link to the knowledge center where you can get a video cast of this episode and a fantastic resource of complex strategies.

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[00:02:18] Like the bird. Folks, lots to talk about today. I just recently saw the affordability index and there was some commentary talking about literally it doesn't make sense to almost buy right now versus rent. Where the same type of home in the same area in the same square footage has a cost of just the mortgage.

[00:02:39] Assuming, uh. 3. 5 percent down of 2, 900 a month versus renting for 1, 900 a month. So it's kind of crazy when you look at the affordable affordability index. Of course, when you're renting, you can get up and leave anytime you want. Quite frankly, not have to care, worry about any major repairs like air conditioning or gas leaks or whatever the case is.

[00:03:01] Versus owning. So there is a cost of ownership as well. And so you got really look at property. Cause I've been talking to a lot of people that are frustrated with the stock market right now and are looking for alternatives. Now, by the way, the stock market, the way it works guys. Hey, there was an expansion period, goes to a peak, and then it drops down and goes through a trough.

[00:03:23] We can argue that was maybe last year. And then it goes yet again to the expansion period. Now, it doesn't go like that beautiful, like a sound wave, right? It doesn't look like that. It just doesn't go smoothly. For example, the ups really go ups and go ups. Fast examples, nine, 2019, 2020, 2021. And what happens in 2022?

[00:03:46] Well, it's fast drops. What happens in 2008 and going into bottoming in 2009, March of 2009, it bottoms pretty fast. And so you have to understand where, and then from there, the recovery is choppy. Right? Sometimes it looks good, but then it falls back down. So it's, it's choppy. We're in the choppy state right now, right?

[00:04:07] The looks of it. So a lot of people are getting fed up. They're thinking maybe I should start investing in real estate. Now I'm going to discuss if that makes sense, because when you look, yes, from an income point of view, on average, an unleveraged property, okay, an unleveled property has about. A five and a half percent payout.

[00:04:28] That's a normal amount for real estate. The bond market, historically speaking, is four and a half percent and the stock market is quite frankly, less than 2%. So from an income point of view, I get it. But what people don't talk about is the vacancies, the repairs. The costs of that ownership, for example, if it's vacant, it's one of the few investments that can cost you money.

[00:04:47] What do I mean? You got property tax, you got association, you got the pool, man, potentially, and then you got the insurance. So there, it still costs you, even if the home is paid off. So these yet again are just factors to think about. And then some people are so heavy and bullish on real estate. Right. But then you start focusing, like, let's say our headquarters here in Southern California and you best mostly in Southern California.

[00:05:09] What if the big earthquake comes that can really affect you and there's multiple different types of real estate. Let's talk about resent residential. You have single family homes, you have townhouses, you have condos, you have tenants in common, you have co ops, you have below market properties, you have 55 plus communities, you have put homes, just normal plan unit development homes.

[00:05:29] So there are different ways to also invest in different regions, whether it's in Southern California, whether it's Texas or Tennessee. It's just interesting how people get so fixated. Like, Nope, I want real estate. Well, sometimes I'm like, keep it simple. What do you want? Residential or commercial? You almost catch them off guard by the way.

[00:05:48] Uh, residential. Then go ahead and list through those properties that I just mentioned. What type? Well, whatever I can afford. Well, where, what type single family condo duplex triplex. It's funny that people just don't know. They just kind of feel like what I'm doing right now. I'm not happy with. Oh, okay.

[00:06:12] Let's say they say commercial. Are they going to do office, retail, industrial, multifamily, hotel, agriculture, special purpose? Like seriously, what are you going to do? And yet again, that's also regionally focused, right? If it's a distribution center might make sense somewhere in the Midwest, maybe Nevada, maybe even California, depending on where they're looking to do because of the ports, what you're looking for.

[00:06:37] Is it fresh? Is it something that needs to be refrigerated? Are you just transporting goods like Amazon? I mean, seriously, what are you looking for in this investment? How diversified is it? Because it doesn't just say I want real estate. Why? Because I don't want stocks. And bonds, you don't want to be exposed.

[00:07:00] That is the number one asset class out there. Some people just, just don't just, they want to do something different, right? Because they're getting frustrated. Some would argue that's the best time to invest is when everybody's wanting to get out. All I'm telling you is don't listen to those who has here saying real estate is the best thing to do.

[00:07:24] Or get out of the stock market or a crash is coming. The housing is the leading indicator of this. And right now we have a supply issue in this country. Why? Because the interest rates, are you going to want to sell your house right now? Even if you want it to upgrade, sell your house with a two and a half percent mortgage to go get a seven and a half percent mortgage, like really.

[00:07:46] By the way, folks, if you're just joining me, you're listening to Gabriel Shaheed, Certified Financial Planner and President of Software Wealth Planning. And I'm your host of More Knowledge, More Wealth. And we're here talking about all important topics of personal finance. Today, we're just talking about real estate because it's, it's, it's a normal thing to be just focusing on right now.

[00:08:03] It's crazy to see where rates are. This is why you shouldn't pay off your home. Because why would you rush to have paid off your 2. 5 percent when now a treasury is paying you 5 percent plus, a savings account is paying you 5%. And our feds are saying, and most people are saying, and our interest rates, the treasury is going on its way up, where interest rates are only going to go higher.

[00:08:22] Now it's eventually going to come back down. It's a natural occurrence. Our feds are saying so. But my point is, is why would you rush to pay off your home? Well, I'm saving my $2,500 a month mortgage payment. Is that, is that what you're saying? Well, do you know already you're paying principal on that and that two and a half percent mortgage is already a write off for you?

[00:08:42] Like seriously, do you think your money by investing it can earn more than that two and a half percent? And by the way after taxes might be one and a half percent. Don't you think you can earn more than that? Well, absolutely. I just told you there's a risk free investment called the United States Treasury.

[00:08:57] Why is it risk free you ask? Because if the government needed to pay you back, they just print money in the back room. Like guys, seriously, you want to know why you need a financial planner? Because these are the things that, with your biased point of view of your upbringing, from, by the way, your parents or maybe you during your first home, you were so worried about that 13 percent mortgage that you got when you first bought it in the late 80s.

[00:09:25] I mean, yes, it made sense to pay it off then. But not now you wonder why you're struggling for retirement and how it's going to work because you're so fixated on debt and not focused on your future, which is income. Where are you going to generate income? Not trying to remove debt. You get what I'm saying?

[00:09:42] Debt is part of your expenses. Even if. You removed all debt. You still have expenses. Forget the property tax insurance. Let's focus, just focus away from the property. Forget the utilities and all that. Just focus. How about food? How about gas? How about cell phones? How about travel? Restaurants? You get what I'm saying?

[00:10:04] There's no matter what, there's going to be expenses. How about you just figure out a solution of, and here's the best part about a mortgage, by the way, you want to know the best part? It's a locked payment. It doesn't change. Your mortgage payment never changes for 30 years. That's why it's great. It's so predictable.

[00:10:23] The problem is you're going to redistribute capital probably somewhere else because you're so used to always spending 10, 000 a month, 15, 000 a month, even if you pay off that mortgage. So it doesn't save you money because you're so used to spending it. But people are like, no. And then on the top of that, to double it up, they're saying, you know what, I want to buy real estate.

[00:10:44] Then you've been, you've been managing wrong this whole time. It's nuts. It's bonkers. It's what people do. Part of the reason, quite frankly, I think people should work with a financial professional. And oh, by the way, I'm a financial professional. So call this biased if you want. I don't care. I just know our clients do very, very well.

[00:11:08] And they wish they met us and worked with us five to ten years ago. Say what you want, but the point of this is simple. How many people out there can you devote all of your financial information to and get advice for? I always wonder, you feel like you're on an island, you have nobody to share with, nobody to help you, but you don't think you can afford it.

[00:11:29] You don't think you have enough. That's why you should work with a financial professional. That's like saying, you know what? I'm overweight. I don't want to go to the gym because I'm embarrassed to go to the gym. Like seriously? You need to go to the gym to work out or I'm weak, right? I remember freshman in high school, I was embarrassed to go to the gym cause I, I was too embarrassed to lift small weights.

[00:11:53] Okay. Well, you need to learn how to do the small weights so you can get the higher weights and not be embarrassed anymore. Like it's, it's, it's just wild. Right. I mean, but. Hey, I'm just telling you this could be a perfect time to do it, folks. We're offering a free financial assessment. Take a look at your situation.

[00:12:10] Tell you what you should be doing. How can you increase your overall net worth? How you can make sure you don't fall into the mistakes that people do time and time again. Folks, we've got offices all over. We're offering one to two meetings, one to two hours of our time at no cost. We can help relate the show to your specific situation.

[00:12:28] Our phone number is 855 963 2525. 26. That's 8 5 5 96 Falcon like the bird, or visit our website@falconwealthplanning.com. That's falcon wb.com for short. Folks, we're gonna go on a quick, quick break and we're gonna come back. We're gonna talk about real estate as an investment and people, what they have to look at the Ford five years after buying real estate at the bottom.

[00:12:54] And also how people are gonna try to tell you this is the best time to buy real estate. And I'm here to tell you that is not the best part for capital. Growth and opportunity. So we're going to talk about this. But we're going to take a break and we'll be right back after a few words.

[00:13:10] This is Gabriel Shaheen, certified financial Planner, your host of More Knowledge, more Wealth. That's on every weekend. We're going over all important topics of personal finance. We're going over retirement planning, making sure you're prepared for retirement, social security and strategies, real estate taxes, avoiding them now and in the future, investments reducing.

[00:13:29] Fees, commissions, and so on. Insurance and estate planning. Folks, we are offering a free financial assessment that you could take advantage of. We have offices all across Southern California, including the Inland Empire. Give us a call to take advantage. Our phone number is (855) 963-2526. That's 8 5 5 9 6.

[00:13:47] Falcon like the bird, or visit our website, falcon wealth planning.com. That's falcon wp.com for short. Enjoy the show. We look forward to serving you.

[00:13:57] Welcome back folks. This is Gabriel Sheen certified financial planner and your host, the more knowledge, more wealth here on every weekend, talking about all important topics of personal finance that goes to go over the knowledge you need to increase your wealth and folks, what better way to talk about real estate?

[00:14:11] And I got a little excited there. Previous. A session there, but I wanted to just focus on just real estate in general because you got people out there trying to tell you It's the greatest thing since sliced bread and this is the time to do it My point to you is there is a supply and demand chain here and there's a and when you look at the fact that Supply is low naturally demand goes up and that is the case But when you look at the affordable index, when you take a look at where interest rates are today, it's not going to last forever.

[00:14:42] Naturally, it won't, it can't. And one of the biggest issues that's happening with people that locked in those low rates for such a long time ago is that they're not wanting to sell. They're not wanting to upgrade their homes. Naturally, there is going to be a demand decrease. And in addition to that, as I talked about previous segment, renting a home at 1900 a month.

[00:15:04] Versus owning a home at 2, 900 a month makes very little sense as well. So the opportunity costs where you're thinking you're just throwing your money away, isn't as accurate as it was before. Now I still am a big component in owning real estate, especially if you can afford it. Cause number one, that 2, 900, part of your mortgage payment is to principal buy down.

[00:15:22] You're paying down your principal. That's a benefit. Plus the interest that you're paying, no matter how high it may be is being able to be written off depending on your tax situation. Most people can write it off. So I still like it. And, by the way, those payments are locked. Arguably forever. They don't go up.

[00:15:40] Now, obviously, you refinance to a lower rate, you make a lower payment, which is better. So you have a hedge there when rates come down. Which they will. They will come down. I don't know if that's in five months from now, or five years from now, or five decades from now. But I do know they will come down.

[00:15:57] It's natural evolution of economics and markets. It's normal. But the idea where people are saying real estate, this is a great time to invest because the stock market is risky. Who's telling you that people that are selling you real estate or people that own a bunch of real estate, ask them, how did it do in 2008?

[00:16:17] Ooh, did very bad. How about 2009? Didn't do good either. How about 2010? Real estate bottomed in 2011 and by that time the stock market already came back to where it was prior to the recession. It's funny because people will talk about real estate and they will talk about the benefits of it. For example, they'll say real estate 2001 and 2009, when you look at the forward five year, the average return is 14%.

[00:16:47] Yeah, that's an unlevered. Unlevered. No mortgage on it. Unlevered. Return. Now, the COVID, right? You're probably doing well if you bought during COVID. Also when it dropped that 30 40 percent back in March of 2020. But we don't have the 5 years. You get what I'm saying? But here's what they're not factoring.

[00:17:08] What if you invested in the stock market at that time? In that 2000? And one in 2002 crisis in the 2009, 2010 crisis in 2020 when the market was down 40% when the do was at 15,000. Oh, by the way, now it's. Over 30. So your rate of return is in the 20s and 30 percents. There is no greater asset class than the stock market folks.

[00:17:40] So, I mean, I hear what people are saying. I respect it. I own real estate. I love real estate as an investment, 10 to 20 percent of your overall portfolio? Should it be the core way for retirement? I mean, it's considered passive investments. Real estate, but so is the stock market passive. Let me ask you this.

[00:18:02] What's more passive? Does the stock market call you at midnight saying there's an issue with plumbing or leaks? Do you really want to be a landlord in retirement? That becomes your full time job, and if you delegate it out, you're given 10 percent of the gross income that comes in. I mean, taking a look at your situation is crucial in the success of your overall situation.

[00:18:28] And yet again, real estate I love for multiple reasons I love it, but to assume this is the time to do it is crazy to me. When you look yet again at income, yes, real estate is good at that. On average, it pays five and a half percent bond market, four and a half stock market. Let's just say two, but it's not what you think.

[00:18:53] And a lot of this information that I'm getting from you, I know Invesco kind of puts this together. They got real estate funds and stuff like that by no way I'm recommending them at all. And so, but at the point is, is there is also liquidity issues you have to run into with real estate as well. So you just have to please see what makes sense for your situation.

[00:19:17] By the way, folks, if you're just joining me, you're listening to Gabriel Sheen, certified financial planner and your host for more knowledge, more wealth here on every weekend. Talk about all important topics of personal finance. Because real estate, there's two sides to it. There is income. Are you buying it for income or capital appreciation?

[00:19:35] California is fantastic at capital appreciation. It's really good. But in regards to income, is it a good income property? You have to look regionally. And what do people do normally? They have a home biased of their home state. And sometimes it's not good for income. They're buying something for income in the state of California.

[00:19:56] That's not a good idea. Majority of the regions out here are not good because of the way their property tax structures are. It's not fruitful. And so you have to look, and by the way, you also should be looking at the state of how the landlord laws are. Is it more for the leasee or the leaseor? The state of California is all for the leasee.

[00:20:19] The person that's renting from you, the laws are heavy. Versus other states, where they protect the landlord, where you can evict faster. I've had people stuck for six to nine months not being able to get a renter that they know is destroying the property and not paying them rent. It's sad, but these are the things you don't know.

[00:20:40] How about you talk to people that do this on a daily basis? How about you talk about people truly that are unbiased, that want you to increase your net worth? Why should you work with a financial professional? Because of a simple fact. You cannot just disclose everything to everybody. You can't do that with your friends.

[00:20:59] You can't do that with your family. And I got a saying, when you work with a financial professional, it's okay to complain, but when you complain to somebody. That you don't have a relationship with, that doesn't understand your situation, quite frankly, 90 percent of the people you know don't care. And the 10 percent are happier going through it.

[00:21:16] I'm sorry, but that's what it is. Financial professionals here at Falcon Wealth, we care. It's important. And, majority of the people, there's, excuse me, family, friends, whatever the case is, everybody wants you to be successful, but nobody wants you to be more successful than them. Yet again, we're one of the few financial partners, few people out there as financial partners that want you to do well, that wants you to do better than everybody at the possible capacity that's for you, that's eligible, that's allowed, that's reasonable.

[00:21:53] But the industry just isn't like that. In regards to explaining that to you, to have you see that we can do more than just invest your money. We can help in that emotional side of it. Being that financial therapist, being that financial coach is crucial in the success. Making sure you are doing the right things and not making the mistakes.

[00:22:14] Some people give you a recommendation and some of it might be malice. It might not be good. Some of it might be self serving on the recommendation. My point is, is from where we stand here at Falconwood Planning being fee only, non commissioned, and true fiduciaries, we guide, we advise, we help facilitate buying real estate.

[00:22:36] Because sometimes that could make sense, but it has to work. And it's a two way street. Because it's a partnership, it has to jointly make sense. Which means we have to make sure the financials work on your end. You have to make sure it works as well. You cannot be emotionally tied to it where you buy it unnecessarily because there are many different categories of real estate, whether it's residential, as we talked about before, or commercial, you have to make sure you are making the right decisions and depending on the region, depending on the use, business owners are different.

[00:23:11] If they're owner user, it can make a lot more sense. This is something that you're going to house kids in that are going to college. It could make sense. And then you have co op opportunity where maybe there's friends that are roommates with your child. That could also make sense. Plus the tax benefits, so on and so forth.

[00:23:34] My point is, is you also have to look at liquidity, your income, your risk tolerance, and your overall portfolio and your financial strength. This is where we add value, folks. It's not just give us your money and watch it grow. It's increasing your overall net worth. And sometimes it's in the form of real estate, but on the extreme, as I talked about in the first segment, you can't just say, go buy real estate.

[00:24:00] It's great. Now it's great purchase. You have to look at the economics behind it. You have to look at the financial relevance to you. You can't just hear somebody on tv. That says go buy real estate or start selling your real estate because they don't know number one, what type of real estate, what region it is, and the purpose of you holding it.

[00:24:20] Is it appreciation or income? Is there debt on it or is there not debt on it? There is so much more to it. And what is your overall goal? Folks, this is where we can help. This is where we're offering one or two meetings, one to two hours of our time, folks at no cost. So we can help relate this show to your specific situation, folks.

[00:24:40] Give us a call. We would love to help. Our phone number is 855 963 2526. That's 855 963 2526. 96 falcon like the bird, be happy to put a personal confidential assessment to help answer those questions that you may have. Folks. This was a fast fast show. I want to thank you for tuning in with us this weekend.

[00:25:02] You could always reach out to myself or any one of my colleagues here at falcon law planning. Our phone number is 855 855 8255. 9 6 3 25 26 that's 8 5 5 96 falcon like the bird or visit our website at falconwealthplanning. com that's falconwp. com for short and visit our website and our knowledge center as well where you get this episode, any one of our previous episodes, whether it's on podcasts, whether it's on the video cast through YouTube.

[00:25:33] Or on Spotify and we have that YouTube channel. It's had almost a million views. Now. We're excited about it And we have a lot of momentum on there with just a lot of people getting answers to some financial planning Topics that they may have folks. We want to thank you again for tuning in. We want you to enjoy your weekend Call us if you have any questions and god bless