Do you ever wonder why some people have more money than others? It’s often not that they make more money; it’s because they make different choices with the money they have. Let us compare my gardener with my physical therapist, for instance.
Jay, my physical therapist, went to school for many years after high school to be a professional therapist. He has a good job with a high income, and his future is bright. He may still have low-interest student loans and a car loan to pay off. Jay also rents a home for $2,000 a month. None of that debt is good debt, meaning that after paying off his car and student loans, the only thing he’ll have to show for it is his depreciating car and his outdated education.
As a tenant, he has no control over his cost for rent. On average, rent goes up 10 percent per year. In the future, this may cause him to move out of town.
As time passes, he watches interest rates rise, and trying to buy any home he would like to live in seems to drift away slowly over time. We all know rent pays off the landlord’s mortgage, and he or she also gets the tax deduction. So although Jay is bright, good looking and has a bright future, his retirement years are likely to be lean if he continues to rent.
On the other hand, John, my gardener, has a high school diploma, owns his own business and drives an old, dependable truck to work. He also owns a triplex and rents out two of the units while living in the third. This is a good plan for the long term.
If you’ve ever played the game “Rich Dad, Poor Dad,” then you know John will come out ahead during retirement because of his real estate holdings. Real estate is a good hedge against inflationary. Over time, real estate appreciates and the owner enjoys the equity build-up, which helps him or her keep up with the cost of living as well as produces income from the rental units that continues to increase.
We don’t have to look back too far to see the effects of inflation. When I moved here in 1983, a Goleta tract home was selling for $150,000, and today they are listed in the $600,000s for the same home. I don’t know about you, but I wouldn’t be able to save that kind of money during the past 20-plus years.
There are other ways to own real estate we will talk about another time, such as owning real estate in your IRA. Remember: It’s not how much you make; it’s how much you keep that counts in the long run.
— Elaine Abercrombie, a broker with Abercrombie Fine Homes, is past president of the Santa Barbara Association of Realtors. She can be contacted at elaine@afhomes.net or at 805.450.0086.