SECRET
How you choose your property and arrange financing can add (or subtract) tens (or even hundreds) of thousands of dollars to (from) your net worth.
Do you think you want to own a single-family house, a condo, or coop? Before you decide for sure, answer this question: Would you instead be willing to live in a fourplex for three to five years if that choice plumped up your wealth by $100,000 or more?
Own a Rental Property; Boost Your Affordability and Wealth-Building
For purposes of loan “preapproval,” most loan reps assume that you’re buying a single-family house or condo. The loan rep might say that, based on your income and monthly payments, the bank would loan you $200,000. If you’ve got $50,000 for a down payment, you could look at houses (or condos) in the $250,000 price range.
Now see how much more you could afford to borrow if you bought a fourplex, lived in one unit, and rented out the other three. Since your rental income from three units will expand your borrowing power, you could buy a property worth say $600,000 (instead of $250,000). If each of these potential properties appreciates at 4 percent per year, and if after five years the mortgage balance on each falls to 92.5 percent of the original balance, you can see in Table 1.1 how your equity would build with each property.
The part home, part rental fourplex expands your affordability and boosts your net worth by $173,250 (vs. $70,000 for the house). The fourplex more than triples your original cash investment. Although specific property results vary, this example shows the powerful wealth-building effects of leverage (OPM). With the fourplex, you employed other people’s money to create your productive money.
Don’t concern yourself with the specific dollar amounts used in this or other examples. Focus on the idea or technique. Naturally, your finances and the property prices in your area may run higher or lower than the numbers used as examples throughout Mortgage Secrets. Mortgage Secrets discusses the exact numbers in Chapter 2.
Other Wealth-Building Ideas
Later chapters further show how your property purchase and financing decisions will impact your net worth 5 to 20 years in the future. You will learn to evaluate mortgage prepayments, short-term mortgages, fix-up properties, bargain-priced properties, foreclosures, real estate owned (REOs), and low-interest-rate financing.
Few homebuyers or investors compare thoroughly. Most people figure that their property will appreciate. Eventually they’ll make a fair amount of money. No doubt, history proves them correct; however, history also shows that buyers who weigh and consider a range of property and loan choices can build much larger investment gains.
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