A Common Millennial Dilemma
Everyone wants to buy a house...
Q: Should I own a house or own a business?
*Answers in Dwight Schrute voice*
A: Easy, both. Next question.
Q: But what if I don’t have a steady stream of income coming from my multigenerational family beet farm and have to choose?
A: Answer is still “Easy, both. Business now, house later.”
Q: But isn’t owning a business super risky compared to a house? And wouldn’t I need to have a good product that people would actually buy? And don’t I need to raise a lot of money to get it off the ground?
*End Dwight Schrute voice*
A: Yes, yes, and yes.
Q: That sounds pretty time consuming and I don’t know if I can do my day job and run a business at the same time.
A: You’re right, you probably can’t. So you should just buy someone else’s business.
Q: Sounds expensive. Also what? Can you…just do that?
A: Let me ask you something…is water wet?
Q: What?
A: Stocks. Buy stocks.
A stock, in its purest form, is just a certificate that says “I own a slice of this business”. Imagine you and your two friends, Jeff and Andy, start a company to sell books online using the internet. You decide to split the profits equally, so you each own 1/3rd of the business. To formalize things, you write it all down and create three stock certificates that each represent a right to 1/3rd of the profits. The business is doing very well, and you decide to start selling electronics online to complement your book offerings. But you need more funding to get this project going. You decide to raise money from 3 new outside investors who will simply provide the cash and have no part in the operations. And since things are going so swimmingly, you are ok with splitting the profit 6 ways now vs 3 ways before since you are making more money overall. So you create and sell 3 new certificates to outside investors.
Q: Ok. So I can be an outside investor and earn a piece of the profit without having to do any work at all?
A: Well you have to do some work to make sure the business you are buying into isn’t a dud. But yeah, it’s pretty simple, and there are even people out there whose only job is to guide you into buying the best businesses.
Q: Ok, what about the house though. I thought you said I could have my cake and eat it too?
A: Right. But not all at once. You don’t want to get fat. Business now, house later. Unless you want to live in a van down by the river, you’re going to have to fork over at least $100,000 in straight cash to buy a tiny run-down shack with a back door leading into a grimy alley. And then you’re going to owe the bank money for the next 30 years because they loaned you the extra $400,000 you needed to pay the full $500,000 sticker price.* Not to mention you’ll be paying yearly property taxes, home insurance, dealing with the inevitable water heater explosion, leaky sink, the list goes on…
Q: Yeah, guess I never thought of all the other stuff that comes with owning a house. But it seems like paying rent is such a waste of money.
A: It is. Owning stuff is almost always better than renting stuff. But unless you can truly afford home ownership, you’re actually better off spending less now by renting and using the savings to buy stocks, which if you make good investments, will be worth more in the future than what you paid for them today.
Q: Ok. So buy a business today that will help me buy a house tomorrow.
A: If by tomorrow you mean in 5 or 6 years, then sure.
Q: So that’s it?
A: No. But that’s it for today.
Stocks are risky. Everyone knows that. Over a longer time frame, they become less risky. Over a lifetime, stocks are actually safe when compared to cash. Holding cash in a savings account is the safest thing you can do today, tomorrow, or next year because you can’t lose. If you need the money, you know it’s there. But on a long enough time frame, the survival rate for everyone (read: everything) drops to zero. That includes cash. Yeah, yeah, inflation right? But a quality business, or a financial interest in a quality business expressed by owning stock, can buck the trend. A quality stock can potentially produce so much more cash in the future that you don’t care that each individual dollar is worth less because you have so many more of them.
Trying to literally save your way into a down payment 5 or 6 years down the road is counterproductive. The price of the house you want is probably increasing by 5% each year and your savings account is probably earning less than 0.5% in interest.** This is what you would call lazy money. Stocks are risky, yes, but they aren’t lazy. Unless you’re 100% serious about buying that house in the next 6 months, have begun vetting realtors, checking school districts, and searched “Sushi near me” on Google Maps while standing in your potential future kitchen, you should have most of that “house money” in some investment other than cash. There’s an expression in the investment world that cash is trash. That’s mostly true, except for the few times when cash is king, but that’s for another letter. In this instance, for the sake of building wealth via investments and home ownership, cash is indeed trash.
*Southern California bias
**I’ll actually venmo you $5 if you show me you’re earning over 0.5% in a savings account.