Updated on 6/17/2020
“You never actually own a Patek Philippe. You merely take care of it for the next generation.“
The above quote is one of the best marketing lines today by a company that regularly produces $30,000+ timepieces. The line targets the aspirational generation. It also begs the question whether we really own anything in this world due to impositions by the government.
If we accumulate more than $5.43 million per person upon death, the government will tax us 40% – 50% for every dollar over that amount. Hoarding much more than $5.43 million per person seems like a waste.
If we don’t pay ongoing income taxes, property taxes, sales taxes, business taxes, and/or FICA taxes, we may get fined, lose what’s ours, or even go to prison. That doesn’t sound like true ownership.
WE DON’T REALLY OWN ANYTHING
Check out this fantastic killjoy comment from Joe after I paid off my mortgage for one of my rental properties.
“I find this site entertaining and have read every post. This is my first time commenting in a while because the idea of owning a home “Free and clear” is a bit of a pet peeve of mine.
You don’t own your home “free & clear” because if you stop paying your property taxes, you will lose your home. In a perfect world, we would all own our homes “free & clear.” But this is not possible. Unless you have an allodial title to your property (which is practically nonexistent in the US), you don’t really own your home, even if you don’t have a mortgage since you have to pay property taxes. Semantics & legal verbiage aside, do you truly own something if another entity will take that something away from you unless you pay an annual tax?
I believe the concept of mortgage freedom does not exist and is a false sense of security and ownership. I know this is an unconventional way to think about home ownership which is why I felt compelled to comment on here for the first time in a while. I’d be curious what other people think.
To me, ownership is something that you own outright, and you are indebted to nobody in order to maintain ownership of that something. So when you have a home, you are indebted. Call it a mortgage payment, call it taxes, but you owe money and if you don’t pay you lose your property. I don’t consider that ownership but maybe I’m missing something.
People have said to me, “Well, what about your car? You need to pay insurance, and have it registered, and in some states emission inspections.” But the difference between a car & a house is that a car can sit inert in your driveway, unregistered and without insurance. Sure, it can’t legally be driven but you still own it, could sell it, get it registered, inspected, etc. Most importantly, it won’t be confiscated. The same cannot be said for a home. So it’s not just semantics. This is a key difference.
Other “well-followed” personal finance bloggers have said to me, “That’s like saying, “You can never really own your home because you still have to buy food. If you stop buying food, you’ll die and dead people lose all their property. So really, in the face of the fact that humans require nutritional sustenance, home ownership is an illusion.”” (Yes, a well-respected blogger actually wrote that!)
Of course the educated and above average net worth readers of this blog I’m sure know that dead people (at least in the US) do not lose their property when they die! If they did, I (and many others) would be out of business.
Very wealthy people whose wealth will outlive them spend a lot of time and a lot of money planning with lawyers, accountants, and financial advisors to figure out where they want their property to go when they die. So if you own something, you own it even if you stop buying food and die because it is part of your estate.
So I’m going to stick to my guns and say you don’t really own your home. If you were to pass and leave your child a t-shirt, that t-shirt is your childs’. If you were to leave your child your house, the house is your child’s so long as he “rents” it from the city/state (i.e. property taxes).”
Joe has a good point. Ongoing property taxes is the biggest downside to owning property. But then again, taxes is the biggest ongoing expense for everyone, except for a significant portion of the population that doesn’t pay any Federal income taxes.
The older I get, the more I enjoy investing in income producing stocks over real estate. But that’s because I’m also just growing lazier. If I look at which asset class did the most to boost my net worth over the past 15 years, that asset class is real estate due to leverage in a bull market. Now I’m trying to outstrip my real estate returns by building an online business.
THE DIFFERENCE BETWEEN AN OWNER & A RENTER
If we never truly own our home, how are homeowners different from renters? The answer lies in the ability to sell a home to someone else for potential profit. After 30 years of paying either the landlord or the bank for the privilege of living in your home, the person with the title to the property has a call option to potentially make a return. Heck, the homeowner has the option to sell as soon as he takes title.
For example, according to RealtyTrac, in Q32015, nationwide, home sellers on average sold their homes for 17% more than they paid for them. If the average home price is $250,000, we’re talking about a $42,500 gain vs. $0 for the renter.
In San Francisco, the results are even more striking, with the average seller seeing a 58% higher selling price than purchase price, equivalent to roughly $350,000.
CUSTODIANS OF WEALTH
We don’t really own anything. All we really have are our experiences, and even those can fade over time due to old age. I’m hopeful that by documenting my journey for as long as possible on Financial Samurai, I can look back when my fingers are too arthritic to type and remember all the funny things that happened.
In a box on the top shelf of my sanctuary is a bundle of pen-pal letters I received as a kid while living in Malaysia. I still revisit them from time to time. I still smile at all those little love notes I saved which were passed around during intermediate school class, or those mixed tapes made for high school girlfriends. Nostalgia is wonderful.
Perhaps it’s really time to sell some property and convert the proceeds into something that doesn’t have ongoing property taxes, maintenance expenses, and people to deal with. A simpler life sounds good to me.
In fact, that’s what I did in 2017. I sold one San Francisco rental property for 30X annual gross income, and reinvested $550,000 of the proceeds in real estate crowdfunding to take advantage of lower valuations and higher net rental yields in the heartland of America. Fundrise is the leading real estate crowdfunding platform today. It’s free to sign up and explore.
I feel great earning higher passive income with no maintenance or tenant issues now in 2020 and beyond.
Track Your Net Worth Easily For Free: In order to optimize your finances, you’ve first got to track your finances. I recommend signing up for Personal Capital’s free financial tools so you can track your net worth, analyze your investment portfolios for excessive fees, and run your financials through their amazing Retirement Planning Calculator. Those who come up with a financial plan build much greater wealth over the longer term than those who don’t!
Updated for 2020 and beyond.