America’s Best Offer
Filed under: Home Buying, Real Estate Investing
By now you can see that when I say you must buy property, I am not talking solely about market conditions. A lot of people who come to me for advice wouldn’t know a real estate bargain if it was presented to them as a gift. Their mental conditioning prevents them from seeing it. Some shake their heads and say it’s all too complicated; there is too much jargon and all that math when dealing with loans.
Almost all real estate purchases are leveraged investments, meaning that the buyer borrows to pay part of the purchase price. Typically a buyer makes a twenty percent down payment and borrows the rest with an arrangement to pay it back over thirty years. You can often make a ten percent down payment or, at times, put down no money at all. The following example shows why a leveraged investment in real estate is currently the best deal in America. I do not include the interest paid on the mortgage loan because that amount is more or less equivalent to the rent the buyer would have had to pay otherwise. For simplicity, I also do not include buying and selling fees.
Tom and Sue buy a $200,000 home, making the usual twenty percent down payment. Thus, they pay $40,000 in cash and owe $160,000 on a house worth $200,000. In a year, for whatever reason, Tom and Sue decide to sell the house. They find that in one year the house has appreciated ten percent in value, and is now worth $220,000. They sell the house. Their return is far more than the ten percent increase in house value, because they invested only $40,000. They made a profit of $20,000 on a $40,000 investment, which is a fifty percent return. When they compared that to the low single digit returns they could have expected from stocks or a savings account, they were astonished.
Even if Tom and Sue do not sell and the house value rises by much less than ten percent in a year, they still have found themselves a good deal. The house is always there as an investment. They have tax savings and, in the meantime, they can enjoy living in their own home.
