A few years ago, there was a housing meltdown. What had happened prior to the meltdown, was that people bought houses, on credit that they couldn’t afford. There was more demand than there was supply. Homebuilders can build the houses fast enough. Home values went through the roof. People began to buy up more than one house. They would buy them and rent them, and do it all on credit. Then 2007 – 2008 came, and the housing market collapsed. Eight years later, we are still climbing out of the housing debacle. The problem is a lot of people don’t remember that. In 2007 and 2008, the house he bought a few years before for $350,000, was only worth $250,000. And it didn’t stop there. A year later that same house would’ve probably been worth $150,000. The housing bubble burst. The problem is people are forgotten all of that. I answer questions, for a website called NerdWallet. They have something called “Ask an Advisor,” and I am one of the advisors. The price of houses has really come down, but for some reason, people have forgotten 2007 – 2008. Because what happened during that time, you should never, ever buy a home with cash. I know that goes against everything you are probably ever taught, but let me give you my reasons. To buy a decent house in my area, you would probably have to spend about $175,000. For that you could probably get a four bedroom, three bath house, maybe with a small pool. If you have $175,000 just lying around, don’t pay cash for your house.
A liquid asset, is an asset that you can readily access. It is either cash, or something that can be converted to cash within a very short period of time. A fixed asset, would be something like a home. In order to convert a fixed asset to a liquid asset, you would have to sell it, or take a loan against the equity of the home. It’s not very easy to sell a home today. I know, I had a rental property that was on the market for six months, and it took forever to sell it. If you want to access the equity in the home, good luck getting a loan. Because what happened in 2007 and 2008, banks began making it harder and harder for anyone to get a loan. You have to have stellar credit, income, and other things in order to pay that loan back. If you took the $175,000 you had, and bought a home with it, and then had an emergency, it will be very hard for you to get cash out of your home. But let’s look at something else. Let’s say your home is worth $175,000 today, and then tomorrow it’s worth $125,000. You’ve lost $50,000. Stop and think about that for a minute. When you hate to know that you had $175,000 one day, and then had $125,000 the next day. That would be a very good investment. Would it?
It doesn’t hurt to have a little bit of debt. Especially when we’re talking about mortgages. Mortgages are tax-deductible. Not that I’m saying, go out there and leverage yourself to the hilt. When I am saying is this; put a little bit of money down on the home, maybe 30% or 40%, and keep the additional 70% or 60% liquid. Just in case. This goes against everything you’ve ever been taught about money.