Making Money in Real Estate

Making Money in Real Estate

Good and Better Investment Plans: Alternatives to Conventional Thinking

This is a well seasoned (old) story but still true today.

This is a simple story but one you might find very interesting. It's the story of two lifelong friends, Jack and John who were remarkable because they always did absolutely everything the same. The two friends thought nothing of it. Others found it fascinating.

For example, Jack had married at age 26 and had twin sons. John had also married at age 26 but had had twin daughters. Both men married their college sweethearts, both men graduated with honors with identical degrees and both men earned $70,000 per year with $40,000 in savings.

One day however something very different happened between the two friends. Jack, realizing he had been renting his entire adult life, called John and said," I'm going to buy a house for my family, this renting is a waste of money and I'm not getting any younger or richer."

John immediately agreed with Jack and told him that he too would buy a home for the same reasons. But here is where the two lifelong friends began making critically different decisions regarding their newly purchased homes that would change their lives and fortunes forever.

Jack, being a conservative fellow was raised to believe that debt was bad and that paying off the mortgage was the only sound and prudent thing to do. So when Jack purchased his home for $200,000 he bit the bullet and secured a fifteen-year mortgage at 6.38% APR and poured his entire $40,000 savings as a 20% down payment, leaving him with no savings.

Jack had monthly payments of $1,383.00. Since he also had a combined federal and state income tax rate of 33%, he was left with an average monthly net after-tax cost of $1,227.00. Jack was so eager to get his mortgage paid off early; he even sent an additional $100 per month to his lender.

Conversely, John also bought a home for $200,000 but believed that the old way of purchasing a home and paying off the mortgage as soon as possible wasn't the financially savviest route. He chose instead to conserve most of his cash and carry a larger, long-term mortgage interest-only loan at 7.42% APR with a small down payment of 5% ( $10,000) and invest the remaining $30,000 in a safe money-making account.

John's monthly payments were $1,175.00. That meant that 100% was tax deductible over the first 15 years and 64% over the life of the loan, leaving him a monthly net after-tax cost of only $799.00.

John also decided to add $100 every month to his savings, (the same $100 that Jack was sending to his lender), plus the additional $428 he was saving from his lower mortgage payment. His investment account was earning him an average 8% rate of return (very possible in a normal market, and it will be normal again someday).

So which of the two lifelong friends made the better decision? The answer will surprise you. Let's take a peek into the future.

After just five years, Jack had received $14,216.00 in tax savings, but had received ZERO dollars in savings and investments.

John however, had received $22,557.00 in tax savings and his savings and investment account had grown to $83,513.00. That's a huge difference, wouldn't you agree?

Now let's say that BOTH Jack and John suddenly lost their jobs. How would each of them manage to get through this financial hardship?

Jack, who had not saved any money whatsoever, did have $74,320.00 of equity in his home, but wasn't able to get a loan, because he had no job or savings. Unable to make his monthly payments, he had no choice but to sell his property in order to avoid foreclosure. Unfortunately due to the urgency of his financial crisis, Jack sold his home at a deep discount PLUS had to pay real estate commissions and closing costs.

John, while not thrilled about having to search for a new job, wasn't really very worried because he was able to save $83,513.00. He doesn't need a loan and continues to make his monthly payments even if he stays unemployed for years. He doesn't panic or stress because he's got a great CASH cushion.

Now let's look at a slightly different version of this story and say that neither friend had lost their job. It's now been fifteen years since Jack and John purchased their homes. Let's take a look at which investment strategy worked better.

Jack has now received just over $25,080.00 in income tax savings, and he has about $30,421 in his savings/investments (once his home was paid off, he put the equivalent of his mortgage payment each month in savings), and he now owns his home free and clear. Not too bad, right?

On the other hand, John has received $67,670.00 in tax benefits and has $282,019.00 in savings and investments. He could choose to pay off his remaining mortgage balance of $190,000 and STILL have $92,019.00 left over in his savings.

Let's assume that John decides he would rather keep his mortgage for a full thirty years rather than pay it off early in fifteen years. Conversely, Jack has only received $25,080.00 in tax savings, but his savings and investments have grown to $613,858.00 and he owns his home free and clear.

John, on the other hand, has received a whopping $107,826.00 in tax savings and now has an amazing $1,115,425.000 in savings and investments and he too owns his home outright. If John chooses to start over again and purchase another home or two, he easily can.

Unfortunately, the mass majority of Americans today still follow in the footsteps of Jack because it's all they know and are comfortable doing. What they don't realize is that having a true mastery about this kind of information can enable homeowners to pay off their homes sooner, while significantly increasing their net worth and future financial security.

We can help you do exactly what John did by refinancing your current mortgage(s) and repositioning your trapped equity into appropriate investment accounts.

Check for comparable neighborhood prices at www.foustonline.com, Home searches will help you to see what the market is saying. Also review neighborhoods to get a comparison of the areas.