This is for those who’ve saved just enough to get themselves into a heepa trouble, but don’t wish to try out any of the plethora of no-down techniques for investing in real estate. (Not that there’s anything wrong with that. 🙂 ) The rewards can be magnificent…or not. The vast majority who first venture into real estate without anywhere near sufficient capital, much less cash reserves, end up without their original stake, potentially dinged credit, phone calls from creditors, and sometimes, one less spouse. Why is that? They think they know far more than they really do. Duh.
Allow me an alternative path for those itchin’ to head out on the real estate investment highway.
Wanna know what, in my opinion is the best thing about this giant boiling cauldron of ‘new normal’ in all things real estate? The fact that complex, sophisticated techniques aren’t necessary now. Not by a long shot. Don’t get me wrong, I bring multiple strategies into play for many clients on a regular basis. But relatively speaking, though they may appear complex or sophisticated, they’re really not, at least when compared to past recessions. So if you’ve saved up roughly $10-15,000, have I got an opportunity for you.
Buy a duplex with FHA financing.
The interest rate is about 4%. There’s some mortgage insurance added on, I think to the tune of .9%. But the actual interest rate charged on the loan is about 4%. If you can buy a duplex in your area for $250,000 or so, the down payment would be just under $9,000. Then there are the closing costs, which will depend upon your lender, and how much you can shift to the seller. Let’s say it takes $13,000 to close, including everything.
Let’s also assume with the money you’ll be saving in month to month housing costs, combined with what economists like to call ‘disposable income’, you’ll be able to add $1,000 a month to your loan payment.
Over the first five years of ownership, adding the extra grand to your payment will result in a gross equity of about $98,000 — not bad, considering you started with less than $9,000 in gross equity. In other words, with an initial investment of $13,000 + $1,000 monthly for five years, you’ve increased your close of escrow equity position of $8,750 (3.5% down payment) into over 11 times that amount. That’s an annual return of 9.73% — without counting any tax savings whatsoever, which is not a small factor by anyone’s measurement.
This assumes the duplex will be worth the same in five years as you originally paid for it. Might it be worth more? It’s possible, but I wouldn’t bet the ranch on it. Could it be worth less? Sure it could — I don’t know where you are, or what the future holds. My crystal ball has been on the fritz since I predicted the Padres would sweep the Yanks in the ’98 Series. 🙂
A lot can happen in five years. You and your spouse could be making a ton more at work. Or not. Interest rates could be 3% — or 11.5%. However, if you follow the plan religiously, we know one thing for sure. Your equity will have increased by over 11 times what it was to start — and that’s assuming no appreciation whatsoever.
Compare that to possibly squandering your $13,000 on something for which you have zip, zero, nada experience. Been doin’ this since Ford was in office, and I can tell ya that for every nothin’ down success story you read about, there are a buncha folks who got their spirits crushed. On the other hand, you will have ‘created’ almost $100,000 in real equity dollars knowing exactly how much you were gonna owe at the end of five years.
Most probable worst case scenario? The economy goes to hell in a hand basket and you find yourself with a 4% fixed rate loan for 30 years, with a tenant helping you make it through. Compare that with the wretched souls who lost the money it took them so long to save, who would then find themselves so far behind the 8-ball they can’t even see Square-1.
Tell me again — how long did it take you to save that $13,000?