Self-made millionaire: 'Don't buy a home—unless you can afford to waste money'

I love investing in real estate, and it's a major reason why I was able to become a self-made millionaire. But I've learned that buying a single-family home to live in isn't always a great investment. 

I realized this in 2003, when I was a newlywed with a newborn, and bought my dream home in Los Angeles. But as time went by, I wasn't seeing a return on the money or time I put into my house. So I sold it and used the equity to purchase a few rental properties. Then my family became renters again.

Don't get me wrong: I still support homeownership. Today, I own three homes — two of which I rent out, and the third is my primary residence. But at the end of the day, for many people, owning a home takes money out of their pockets.

Here's why I believe buying a house isn't a wise investment, especially right now with rising inflation and high home prices:

Let's say you bought a home for $100,000 and put a $5,000 down payment. Then 10 years later you sell the house for $200,000.

It looks like you killed it: You turned $5,000 into $100,000, after you pay your mortgage. But you forgot to calculate the cost incurred to own that house:

Total cost before maintenance: $86,000

That leaves you with a net return of $14,000 (or 14%) of that $100,000. Over 10 years, your investment returned 1.4% per year, and we didn't even include the cost of roof, plumbing, paint and other maintenance fees.

A good general rule to keep in mind is that you will spend about 1% of your home's purchase price on maintenance each year, but those fees can be more expensive during times of high inflation.

Tip: Don't buy a house expecting to make a true profit. Instead, only buy when you have enough income, whether it is passive or active, to fund the cost of mortgage, property taxes and upkeep.

True real estate investments provide you with monthly passive income — or cash flow — after all the mortgage payments, property taxes and maintenance.

When your home doesn't provide monthly cash flow, its value is always tied to having a homebuyer who is qualified to buy and who likes your home. You pay to live in it while you wait to maybe make a profit. 

Tough times often benefit the value of rental properties and hurt single-family homeowners. When I go to sell a rental property, I only need to find someone who wants to make a profit, and that's not hard to do.

Tip: Only buy when you find a trophy property that's selling below its value, can afford to pay in cash, and are 99% certain there that there's a profitable exit due to the surrounding market.

For instance, you are limited to how much interest you can write off your home, and you are only allowed a tax exemption of one $250,000 gain on the sale of a single family home every two years.

But when you go from investing in your house to investing in income-producing real estate, the tax benefits skyrocket.

While rental income is taxed, there are certain expenses you may deduct on your tax return, including mortgage interest, property taxes, operating expenses, depreciation and repairs."

Tip: To make passive income off of real estate, invest in rental properties with favorable tax situations.