Is your home an investment?
I would like to pass on some advice from one of the smartest people I ever met.
He is an investment advisor who runs a company in Beverly Hills called Searchlight Financial. He also has a call-in radio program, discussing financial issues. His name is Ray Kay.
He has an interesting way to look at your home investment. He divides it into two parts.
The investment portion is the amount of your actual down payment, your equity. Let’s say you want to buy a $700,000 home with a down payment of $140,000 (20% down). He calls that $140,000 your investment. (This example is based on an 80% mortgage and 20% down payment.)
The remainder is the amount you pay for mortgage, real estate tax, and insurance. He calls that rent.
Yes, rent. If you did not own your home, you would still have to live somewhere. You would be paying rent. A $560,000 mortgage payment for interest and principle, taxes, and insurance would total $3,000 per month.
You have to pay that that same amount to rent a 2,000 square foot home in this our area. $3,000 rent to a landlord, and no tax deduction or equity appreciation. Just cancelled checks.
Now let’s go back to the investment portion. Where would you invest that $140,000 today? The stock market? Probably not. Gold? Certainly not oil futures. You could put it into the bank and get one tenth of one percent interest.
It’s a leveraged investment. Think about that $700,000 home. Is it reasonable to think it could go up 3% in value, on average, in a year? OK, how about 2%? Very conservative thinking, that over the next 10 years your home would increase 2% a year on average. Agreed?
Now, if a home increases 2% a year in value, on average, over 10 years, your $700,000 home would be worth $850,000 in 10 years. Over 10 years, your investment would earn $150,000, or $15,000 per year.
Consider now the yield on your investment. Your investment is $140,000. A $15,000 increase in the value of your home means you made $15,000 on a $140,000 investment, or 10.7% per year. Pretty good. That explains why real estate has been such a good investment.
Oh, and by the way, the majority of your rent will stay basically fixed for 30 years. Try to find a landlord willing to sign a 30-year lease for a fixed rent amount.
2,000 Square foot property, 3 bedroom 2 bath
Purchase Rent
Total Price $700,000
Down Payment (20%) $140,000 INVESTMENT
Mortgage $560,000
Principle, interest, tax, insurance $3,000 $3,000 RENT
Increase in property value per year 2%
Property value in 10 years $850,000
Increase in value each year $15,000
Investment $140,000 Doubles in 10 years
Annual return on investment 10.7% 0
And, with a purchase, your RENT stays basically fixed for 30 years.
Make you want to buy? I have an office full of excellent agents ready to help you.
Chuck