LEVERAGING YOUR PROPERTY

In order to understand why you'd want to borrow as much as possible for your Home purchase, you must first grasp the concept that Equity has a Zero Rate of Return.

Here's an example:

If Consumer "A" buys a Home for $300,000, and puts 20 percent down, then they have $60,000 in Equity. Over the next five years, the property appreciates $100,000 in value. Consumer "A" now has $160,000 in equity.

Consumer "B" buys a home for $300,000, and puts no money down. At the end of five years, that same Home is now worth $400,000. Consumer "B" has $100,000 in equity, which is the same appreciation as Consumer "A", a net $100,000.

As you can see, your Down Payment has nothing to do with your Rate of Return. What becomes important is how you choose to manage the $60,000 you didn't use as a down payment. If you use it for frivolous activities, such as buying Toys or going to Las Vegas, it would be more prudent for you to use that money as a Down Payment. Especially since this will enable you to obtain a lower interest rate.

However, if you were to invest the $60,000 in a Vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why I suggest putting as little down as you possibly can, maximizing your Tax Deductions, and investing the rest.

Paying Your Home Down Rapidly

There are very few times I have seen a Client with Zero Debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year Home Loan or a Bi-weekly payment strategy provides structure. It can also put you on track to have your Home Loan paid off within a set timeframe. Simply put, it contains built-in discipline that controls YOU.

Regardless of how rapidly you pay your Home off, you're not getting any greater Rate of Return on your investment than if you paid it off slowly.

So how does one determine which scenario is best?

The choice depends entirely upon the individual. Over the course of time, it's been proven that your Rate of Return over the long-haul will be far greater than the rate you'd pay for a Home Loan in today's rate environment.

You know, the concepts that I teach in all of my books focus on the need to optimize assets. And as we look at most Americans, they accumulate most of their money into places, their Qualified Retirement Plans and also their home. And we find that a lot of people just simply don't do a very good job managing their, their credit nor do they do a very good job managing the Equity in their Home.

And so one of the goals of writing these books is to help people understand that when you borrow, you should borrow to conserve rather than to consume.

And so the purpose of, of forming strategic alliances or building partnerships with other financial planners is to create a change in the industry where the consumer can begin to understand how important that mortgage decision is, that there really should be a, a financial planner working in harmony with or in conjunction with the financial planner, the mortgage planner, the debt manager, the asset manager and that this is such a critical part of accumulating a substantially greater net worth and also the assets to, to enjoy a extremely comfortable retirement instead of just an average retirement.

Because as I, as I prove in the book - and you've read it, Roger - if you understand how to manage Equity properly to increase Liquidity, Safety, Rate of Return and Maximize those Tax Deductionswe have, it makes a difference on just a 150 thousand home 30 years down the road of an extra 1.3 million or, or even 2.3 million dollars of extra money you could accumulate just by managing Equity.

And, and if that's true on a 150 thousand dollar Home and if you refinanced it or, or reviewed it every five years, what if you are in a high appreciating real estate area and you, and it behooved you to refinance maybe every three years?

Or if your Home is worth 300 thousand or if it's worth a million? Because you deduct interest on up to a million dollar mortgage.

If people understand these concepts, they're going to want to have a review once a year with their asset manager or their debt manager, in other words, the Real Estate Asset Manager in conjunction with the Financial Planner, because it will make a significant difference in the assets that they will have for their, their entire life and especially for those golden years. And so that's our goal, is to form a great alliance between these two critical parties in the financial services industry.

The above was taken from an interview with Doug Andrew. I recommend that you read, "Missed Fortune 101," by Douglas Andrew. It's very simplistic and goes into far greater detail than I can cover in this column.

Click here to request  a FREE copy of "Missed Fortune 101," by Douglas Andrew. 
 

 

Missed Fortune explained Part 1

Missed Fortune explained Part 2