David Bach Day at Free Money Finance, Interview Part 2

Here's part two of my three-part interview with David Bach about his book The Automatic Millionaire Homeowner (which I rated as 7 stars) followed by a few comments from me (BTW, I've added in links to what he said where appropriate):

Free Money Finance (FMF): Why should someone buy this book? What will it do for them?

David Bach (DB): If you are currently a renter it will show you how to become a homeowner and help you understand why moving from renter to home-owner is such a life-transforming step. If you are already a homeowner, it will show you how to leverage your home to become a millionaire. I show people how to buy a second home or investment property, how to become a landlord, and how, by owning just a few homes over the course of your lifetime, you can become a millionaire.  Real estate is the only investment people can make that results in tax-free profits, and, as the tax laws are currently structured, they can do this again and again.

FMF: There were a few parts of the book that I wasn't clear on -- maybe you can clarify: Are you saying everyone should own a house?

DB: The first thing people have to understand is that as long as they are alive they are going to have to live somewhere.  Given that simple fact, people can either buy a home, build equity, and reap the benefits that come from that, or they can pay a landlord tens – or even hundreds – of thousands of dollars in rent over the course of their lifetime and have absolutely nothing to show for it.  Obviously, people need to understand their current situation and assess the current state of their local market when making a decision, but nine time out of ten I would argue it makes sense to own a home.

FMF: Are you saying that once their initial house is purchased, everyone should work on buying another one?

DB: In general, yes.  Owning one house is good, owning two is better, and owning three is great – provided you’re ready to become a landlord.  I call this adopting the “Automatic Millionaire Mindset,” which involves seeing your home not just as a place you live in but also as a source for building additional wealth.  However, I do not advocate trying to “time the market” by buying properties you hope to “flip” for a quick profit.  That’s a risky and inadvisable approach and I warn people of the dangers of trying to do that.  I recommend a long-term approach, one that comes down to time in the market instead of timing the market.

FMF: What sort of debt/borrowing arrangement do you recommend? I know you discuss several alternatives, but what do you RECOMMEND? – especially in light of today’s zero interest/no-money-down loans.

DB: For most people, I would recommend a conventional fixed-rate 30 year mortgage. That kind of mortgage offers stability over the life of the loan and enables people to “lock in” today’s interest rates, which are still close to historical lows.  I discuss in the book the pros and cons of alternative kinds of mortgages such as zero interest/mo-money-down loans, and while I think these kinds of products can be helpful to some people, they are inherently more risky and are not for everyone. The most important is for people to get what I call the “right fit” mortgage, meaning a mortgage that takes into account their individual financial situation and that they can really afford.

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I feel MUCH better about the book now that David's position on mortgages has been clarified. I'm in 100% agreement with his philosophy.

While I own my house, I'm not going to look at owning another one -- I'm not ready to be a landlord -- it's just too much hassle. I prefer to fully fund my 401k and invest what's left over in index funds.

Click here to read part 3 of this interview.

Comments

[James]

It is very irresponsible for David to tell people to buy a home now given the real estate bubble. While you may be OK ("may" be) in ten years if you buy at these levels-- you will likely be in a whole lot better shape if you wait for the prices to decline and then consider the house purchase.

[FMF]

James -- I thing you need to do it within the guidelines he gives. You can see them here:

http://www.freemoneyfinance.com/2006/03/how_to_bubblepr.html

[The Dividend Guy]

James, I think you are making a way to general statement about being in a real estate "bubble". The papers seem to have latched on to this idea of being in a bubble, but at the end of the day, people need a place to live and buying is (usually) much better than renting. It also depends on what part of the country you live in. So, my view is, go ahead and buy that primary residence and wait until you are more comfortable with the market to purchase that second investment in the housing market.