We’ll never run out of complex financial questions for Philip Michael to detangle. On this edition of Ask Philip, we learn about why there are vacant properties, budgeting for leisure and buying your first home. Check out his expert advice.
Q. In TX, I hear people talk about land they buy – they never use it. What is the benefit of having land and never using it?
A. That’s a good question, really. People have many, many reasons for buying land. I bought a piece of land in Philadelphia, personally, that was just grass for probably two years. But the reason is because I went to the city with my plans on what I wanted to build there. That’s a process. Once you get that, you can start building. Now, we actually built a building.
Others just have stuff that they inherited. There’s a lot of assets that go unclaimed if someone passes away. Some may use it for people to rent parking spaces. And a lot of times, some people just don’t care and rack up taxes; sometimes the city takes it back because the owner didn’t pay their taxes. So there are many reasons.
But a reason to buy land, if you’re an investor, is that they don’t make any more of it. So if you have that, you have a really, really strong asset. Then you can hold on to it and wait for the neighborhood to get some activity. A good way to get a good return on a piece of land is to take a piece of land that is cheap from an auction, for instance. And then go to the city, hire an architect, get some building rights on it. Now the value of that land is more because it comes, as we call it, “shovel ready.” Somebody can just start building and then six months/a year from now, they have an asset that’s generating cash flow, or they can sell it at an increased profit.
Q. What percentage of someone’s budget should be for fun stuff?
A. Now, that’s actually a really good question because I’m someone who’s not really that good at spoiling myself. But the rule of thumb that I use (and I go way below this) is to take 10% of the money you make and put it into a separate account that you just blow every month. You literally use it for the single solitary purpose of spoiling yourself.
Let’s say that number comes out to $700 or $1,000. Then you just discipline yourself into spending that. And if you get to day 29/day 30, just go somewhere and blow it. Go out, take your friends out and just splurge. It gives you a good feeling. It makes you feel less restricted. And you know that you’re taking care of yourself, but you also know not to go beyond that.
So I like to say 10% and put it into a separate account. And once that one is out, well then you’re party broke for that month. The way I look at it is I put a certain amount of money into investments. And I just put the rest of my personal overhead (which is how I view my personal expenses), and I use it that way. I just don’t really spoil myself like that, but it’s the same principle.
Q. When should you buy a house? How much money should you have, and how old should you be?
A. These aren’t rules. These are just ideas, but it’s really up to you. When should you buy a house? I feel as though that you should buy an income-producing property as soon as you can. In terms of how old you have to be, there’s no age really.
But in terms of how much money you should have, with an FHA loan, you can buy a property with 3.5% percent down. If you’re not good at percentages, this means if a property costs $100,000 and you bring $3,500 to the equation, you actually can have a property. Let’s say you buy a duplex in Atlanta. You live in one, and you rent the other one out. One covers your mortgage and your bills, and the other one you live rent-free, or you may even make a buck or two.
Say, for the next six months, I’m going to save up. I’m going to beef up my credit. I’m going to get ready. I’m going to start looking at properties. And then you just buy one. And actually, that’s the one thing that I recommend for anybody starting out is going in that direction. You get disciplined, you start to understand money and you understand how an asset works.
If it turns out you don’t want to deal with tenants, now you know that. But you also have the extra equity that has built up. Let’s say you bought it for $100,000. If it goes to 120, that $20,000 goes to your net worth balance. So the net outcome is that you gain experience and some wealth. And if it turns out you don’t like to do that, you take your wealth and you give your money to somebody who likes to invest in real estate. Or you put it in the stock market. Either way, you put yourself in a position to build wealth down the road.
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