How not to become a millionaire with real estate

For those who have read "The Millionaire Next Door," you'll remember that very few people become millionaires because of real estate. Most millionaires budget and save (live below one's means), have little or no debt, buy always used, and invest either in their own business or in stocks. [We bought a new home and a new car so far in our marriage, so we already have two strikes!]

David Bach has an article titled: “Why Homeowners Get Rich and Renters Stay Poor” which touts getting into debt in any which way you can just own a home. How crazy can one get? Debt doesn't make you wealthy: OK, it may make feel wealthier because you spend now and pay later. But by signing the death pledge (mortgage), you turn into a slave to the banker. Why? Because if you miss your payment, guess you gets evicted? You, the supposed "owner."

I like how SoCalMtgGuy tears Bach's article in "My REBUTTAL to “the Automatic Millionaire”" but I want to point out other problems with Mr. Bach:

1. tax rates almost always go UP! If the home value goes up, so does the taxes. Not all states have Calif’s Prop. 13. It can even go the other way: Here in Austin, TX, we had our rates jacked up just to make up for lower appraisals right after the dotcom bust. Property tax can increase even if your home values go down. What a deal: More fed income tax deduction on your way for home owners! [Note I’m being sarcastic here: you’ll end up paying more local taxes.]
   
   
2. Down side to capital gains exclusion of primary residence is that losses cannot be deducted. There is a 250K cap on gains but no limit to the losses: all losses are eaten by the homeowner. I’m no CPA but here’s my understanding: if after living 2+ years in a home and I sell, say, in Jan for a profit of 300K, I only have to pay taxes on 50K (about 7K). However, if I buy another home in Jan, and then sell in Dec for 300K loss, I still end up with tax due of 7K (rather than 0) — since I can’t wipe out my earlier profit from the year since losses are on me:
   http://www.irs.gov/publications/p523/ar02.html#d0e684
   
   [I’d love to hear a CPA correct me on this.]
   
   How come my realtor never told me about this tax bomb!
   
   
3. If you have HOA (homeowners Association), chances are good that its fees will go up at least once or twice over the 30 years.
   
   
4. And when has hazard insurance not gone up yearly?
   
   
5. Plus all the normal maintenance as well as the deductibles you’ll have to pay for any insurance covered repairs. And don’t think that new homes are exempt: we bought a new home and our AC broke down at least twice in less than 3 years: the first time (or two) was covered under warranty by the builder but the last time it broke, we had to pay for the labor (since parts were still covered).
   
   
6. Also, if you have to sell, it takes more than just hiring a realtor to sell the home. You need to prep the house, remodel anything more than 10 years old, update all maintenance (painting and flooring), put in new plants. And then you'll have to pay anywhere from 6% to 10% in commissions and closing costs. Your million dollar home will cost you $100K to sell!
   
   If you rent that home, it's even worse: renters in general trash a home more than owners. We've looked at many homes to buy in Austin (while trying to sell our home) before we choose to rent and all rentals needed significant more work (money) to make it move in ready. We even lowballed such a place but the owner refused on what I thought was over inflated offer (my realtor and my wife thought I was too cheap). Anyway, few weeks later, the owner came back to renegotiate but by then we've decided to not buy any more in Austin! Last time I check the MLS, it was reduced to our lowball offer.
   

So there are a lot of negatives to consider before you buy a home. There is no such thing as easy road to riches: spend less and invest wisely and stay out of debt. Pretty simple ideas yet pretty hard to live it!