1. Owning Real Estate is Critical to your Financial Success – by
Peter Mu
Does home ownership still mark a significant milestone in realizing the American
Dream? In my financial practice, I am beginning to notice a trend that more people are
electing to rent instead of buy a home. The most common reasons I hear include
housing prices are too high, payments are too expensive, or life is to be lived today
because you only live once. There is some truth in those reasons but I hope to make a
case for owning your own home that goes beyond common knowledge.
1. The economics of inflation is on your side. Inflation refers to the graduate
increase in prices and deteriorating buying power of money. There are variety of social,
economical and political reasons that cause inflation. The Bureau of Labor Statistics
publishes CPI, or Consumer Price Index, to keep track of inflation. This chart(1) below
indicates that inflation has been observed consistently in recent history. I am sure you
have all learned about the
story that a loaf of bread
cost some 25 cents back in
the day and that the first
Ford Mustang only cost
$2,368 in 1964 and a 2016
model will set you back
$25,000.
Bringing the focus
back to real estate.
Consider that the real cost
of borrowing is the
mortgage rate you pay
minus the rate of inflation.

2. The higher rate of inflation the lower the cost of borrowing. Suppose your mortgage
payment is $3000 each month. The buying power and the economic impact of that
money will be less and less each month through out the entire 30 year term of that
mortgage. In today’s prolonged low interest rate environment borrowing on a fixed
term for a long period of time means it’s very advantageous to own real estate.
2. Owning real estate diversities your overall portfolio. Educated
investors recognize the value in diversification among different asset classes to reduce
investment risks. Having the appropriate mix of asset classes improves the chance of
reaching your investment objectives while minimizing volatility. Today we are
observing a lot of uncertainties around the world. Russian’s involvement in the Syrian
war, sanctions and negotiations on its oil export, Greece’s continued requests for
bailout, UK’s election to exit the EU, the migrant crisis in Europe, the daily drama in the
Chinese equities market, the souring economy, Zika virus outbreak, and the looming
environmental challenges in Brazil leading up to the 2016 Olympic games…the list goes
on. As investors react to these worries plus the created volatilities in the equities
market, it sure feels pretty great that at least one asset you own, the home you live in or
your rental portfolio is seeing some consistent appreciation.
3. Diversification is also critically important when it comes to
retirement income. As a professional financial advisor I can’t emphasize enough that
saving in your 401(k)s alone isn’t enough and that you must create alternative sources of
income for retirement.
You might have heard about the “4% rule” used by many financial professionals
to calculate retirement income based on an asset value. The idea is that if your assets
can be invested in a safe place that produces a 4% rate of return, you can spend that
money without compromising the principle and next year there will be another 4%
earned and thus the model is perpetual. For example, if you have accumulated
$1,000,000 by the time of retirement, at 4% it will earn $40,000 each year for you in
retirement as depicted in the chart below.
Can you always get 4%?
I didn’t get 4% in 2008. Or 2011, or 2000, 2001, 2002…
You see your retirement expenses do not reduce accordingly just because the market has
a down year. For all those retirees whose portfolios suffer a setback during a market
correction, it is often not possible for them to maintain the integrity of the principle.
When that happens, there is less to capture the rebound in the market and the portfolio
inevitably begins to shrink.

3. Real estate properties can produce income and it is rather uncorrelated from the
equities market. Rent is a diversified source of income even if the market is down it can
still bring the owner a lot of reassurance during uncertain times.
Lets not forget the emotional reasons to own real estate, pride and joy of home
ownership, realizing the American dream, never have to pay rent again…and yes, there
is the interest payment tax deductions. Whatever reason it might be for you, I hope this
article makes the case that it is worth the effort to own a home. I know that it is not easy
and many other things demand our cash flow. Child care costs a ton, new iPhones we all
want, private schools and lets not even mention college. However, I hope you find the
courage and the discipline to save for your down payment and take actions toward
becoming a home owner. Start your journey by consulting with a real estate
professional and your financial advisor.
This article was written by Peter Mu
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), OSJ 20 Bicentennial Circle, Suite 100,
Sacramento, CA 95826, 1-916-379-0200. Securities products/services and advisory services are offered through PAS, member
FINRA, SIPC, Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an
indirect, wholly owned subsidiary of Guardian. Pacific Advisors, LLC. is not an affiliate or subsidiary of PAS or Guardian. Insurance
Products offered through One Pacific Financial & Insurance Solutions LLC, DBA of Pacific Advisors, LLC. Pacific Advisors, LLC. is
not a registered investment advisor. CA insurance license 0E19513

4. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions
are subject to change without notice. Material discussed is meant for general informational purposes only and is not to be construed
as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that
individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional
advice.
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Sources
1. Produced with The Living Balance Sheet, data source Bureau of Labor Statistics.
http://www.pacificadvisors.com/peter_mu/financial_balance
Image is public domain, free for commercial use. http://thestocks.im
#2016-19323 Exp. 3/18