You know, a lot of us learn things when we are little that we don't realize the importance of until we get older. For me, this is especially true of lessons learned from both my grandfathers.
Over the next couple of blogs, I am going to talk about a couple of key things that my grandfathers taught me about real estate that have really impacted me as an adult. There are two main reasons for my focus. First, I think that their advice, or the way that they lived 50 years ago or more, contain lessons that people can still learn from today. Second, is that it's a nice way to be able to honor them, as we all should honor our grandparents.
Today, I want to touch on a very simple but effective way that my grandpa taught my mom how to budget.
We live in a society today that often glamorizes spending and borrowing to buy stuff and lifestyle. It has not always been that way. My grandfather was born in the heart of the Great Depression, and grew up with nothing. As he grew, he valued what things cost and how to save.
When my mom was preparing to get married and planning to start a family, she was worried about budgeting her money in each area. My grandpa's response was something that she always remembered and passed along to myself and my siblings when we got to the same stage of life.
It's a simple format. Spend 25% of what you make on your house. Spend 50% of what you make on your life. And spend 25% of what you make on your future.
He said that it didn't matter whether you made $30,000 a year or $300,000 a year, that this formula will always be successful.
So let's take this idea and apply it to real estate. Some people today assume that based on their income there isn't enough money to purchase property. However, applying my grandpa's rule of thumb, if you consider your house as your future investment as well as your current living arrangement, this assumption would be squashed.
Let's say your income says that you can spend $1,000/month on your mortgage based on an income of $4,000/month. You would then buy a property that would have a base payment of $1,000 a month. However, you could take $500 a month from your future investment section of your budget and apply it as extra payments onto your base mortgage. That extra payment guarantees you a return of at least the interest rate that you would have been paying otherwise on it compounded over the duration of your mortgage. It would also allow you to be finished your mortgage much quicker, allowing you to reinvest in a larger property or take your mortgage payment and invest it elsewhere.
Imagine if you no longer had a mortgage payment. What things would you do with the extra money? With this type of plan, they are definitely possible!
Stay tuned for my next blog. I will talk about how my grandpa taught me about the rules of supply and demand in real estate.