Invest in Assets

The reason most people do not do what they need to do to be successful is because of the belief that it is too simple and therefore cannot work.  Invest in assets; three very powerful words.  I thought about them this morning on my way into work and I wondered about how best to describe using money to build an income producing portfolio.  In a theoretical situation let’s say that you qualify for a $700,000 loan to buy a house.  And let’s say that you want to use all that money to buy one house.  You pick a nice neighborhood and a comfortable house, 3 bedrooms, 2 baths and it has about 2,000 square feet.  You have decent credit and you get a 30 year fixed loan for 4.5%.  You have the 20% to put down and that is what you do.  You now are buying a home for $700,000 with $140,000 down payment you get a loan for $560,000 at 4.5% and your monthly payment is about $2840 per month principal and interest only.  (We will keep it at principal and interest only to keep things simple.)
Now let’s choose a home that is a little smaller, still a nice neighborhood, maybe a little older without all the bells and whistles.  You instead buy a house that is in the $400,000 range, maybe it’s only 1,500 square feet.  Still comfortable, 3 bedrooms, 2 baths, big yard, room for your stuff. You put your 20% down payment, you get a loan for $320,000 your monthly payment is about $1,625. 
Now let’s take the remaining $60,000 that you did not spend on buying a bigger, fancier house and instead let’s buy an income producing asset.  Let’s choose a house to buy as a rental in the $300,000 range.  You have 20% to put down and because you are not going to be living in the house your interest rate is 5.5%.  The payment on this house will be about $1,775; this is principal, interest, taxes and insurance.   Let’s say the house will rent for $1,850 per month.  This scenario will give you a whopping $75* per month income.  But wait, there’s more!  On top of that you will have tax deductions that will reduce your taxable income and you can depreciate the building itself giving you an even bigger tax break.  Currently the housing market is not appreciating but that will not always be the case.  Housing will begin to appreciate and if I had a crystal ball I would tell you when this will happen – but sense I don’t have a crystal ball you will have to look at history and know that history repeats itself.
Now you have a property that is paying for itself – if not totally, pretty close and equity is building every month providing you with the capital to buy another asset.  You are also saving $1,215 a month in your own house payment.  That money will go into a savings account while you look for other assets to purchase.  Your payments will remain the same because you have acquired fixed mortgages and the rents will go up as the years go by.  By the time you are ready to retire you will have an income you can depend on.

For help with finding a home and investment property please contact me – Kathy Fortenberry at 760-468-5642.

*Please remember too that you will not always have a renter in the house and you will have periodic maintenance that you will have to do.