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Why
You Should Stop Paying Rent and Own Your Own Home
Renting has two big problems
1. The rent can go
up
2. You pay
hundreds of dollars every month and you never have anything
to show for it except a pile of rent receipts.
Me, I like knowing that every month I'm
$50 or $100 richer, no matter what. That doesn't sound like
much, but if you saw a $100 bill lying on the ground, you'd
sure as heck pick it up, wouldn't you? Owning a home is like
that - Uncle Sam gives you such incredible incentives,
they're just lying there on the ground, and yet some people
step right over them, and never scoop them up.
In this article, I will show you in
real dollars how you can benefit by owning a home. Maybe no
one's ever explained it to you in detail before, or you
didn't "get it". Well, if you stick with me though this
discussion, I think the light will go on for you.
One of the facts of life is that if you
want to have a roof over your head, you have to pay somebody
for that roof. In real estate we have a saying, "Whether you
rent or whether you buy, you pay for the space you occupy."
You might be thinking, "I can barely
make the rent, how in the world can I afford to buy?"
There's an answer to that, and I'll get to it later on. But
first, let's start with why it's to your advantage to own
your own home, then we'll figure out how to make it happen.
Gaining
Control
Renting is being out of control - the
rent can go up, or the owner can tell you that you have to
move. Owning your own home is a rock of stability that can't
be taken from you. It gives you a stake in the community, a
sense of belonging. And for most people, it is the majority
of their net worth.
Look at it this way - in 30 years, if
you rented at $1000 a month, you would have paid out
$360,000 and have nothing to show for it. But if you bought
a home today for $250,000, at the end of 30 years you would
have paid it off and you would own it free and clear.
Obviously this example is way too
simple, because we all know that rents go up, so you would
have paid much more than $360,000. And we all know that home
prices go up too, so the house would be worth much more than
$250,000. How much more? How does a million dollars sound?
The Rule
Of 72
Now might be a good time to bring up
the "rule of 72". This rule tells you how long it takes your
money to double at a given interest rate. For example, if
the interest rate were 5%, it would take 72/5, or 14.4 years
for your money to double.
Did you know that home prices have gone
up 7% a year on average for the last 30 years? In good times
and bad, the average was 7% a year, according to the
National Association of Realtors. This means that if we see
only average appreciation, home prices will double in 72/7
or 10.3 years!
Yes, in fact it was about 10.3 years
ago when I remember seeing a news report that stated "We've
just sold the last house under $100,000 in Escondido, Ca."
And just this last week I read in the paper a similar
article declaring, "Homes under $200,000 are just about
extinct in Escondido, Ca."
Become A
Millionaire
So how do you become a millionaire? Buy
a house for $250,000 and pay it off in 20.6 years and you'll
be one. How? In 10.3 years the house will be worth $500,000
and in another 10.3 years it'll be a million. Oh, you
haven't paid off the loan yet? That's right, you still owe
around $100,000 on it, so really you have $900,000 in
equity, which is what we call the difference between what
the house is worth and what you owe on it. OK, so you have 9
more years to go, but in any event, at the end of the 30
years you'll own the house free and clear if you don’t
refinance and the home may actually be worth closer to $2
million by then.
I know this sounds ridiculously hard to
believe, but consider that 30 years ago the average home
purchase price was $40,000. In October of 2004 the Federal
Finance Housing Board reported that the national average
purchase price for a single family home was $264,540. Now is
it so ridiculous to imagine that today’s $250,000 home will
be worth 1 million in the next 20 years?
But I
Can't Afford A Home!
Let's say you'd like to buy a home of
your own, but think you can't afford to do it. I would say
just the opposite - that you can't afford not to do it.
Let's see if I can make it easier for you to swallow.
The government doesn't want you to pay
rent your whole life and end up being dependent on the
state, and so Uncle Sam is willing to subsidize your home
purchase! Your mortgage interest and real estate taxes are
tax-deductible. I'll explain.
Before you get your paycheck, your
employer takes out the taxes, and then you get what's left
to pay your rent, put gas in your car, whatever. But when
you buy a house, you take your house payment out of your
salary first, and then pay tax on what's left.
This is such a huge, critical, and
important difference that I need to repeat it. As a renter,
you're used to the idea of the government getting their
share first and you living on what's left. As a homeowner,
you use your salary to pay for your home first, and then let
the government have a share of what's left. This is how the
wealthy think. They think "how much tax do I want to pay?"
not "gee, I wonder how much I'll have left after taxes are
taken out." And owning your own home is a key step in
starting to think like the wealthy.
Look At
These Numbers!
In practice, it works like this. Let's
say your family income is $70,000 and you pay $1200 in rent.
If you buy a home for $240,000 with 20% down, your payment
might be $1558 a month. Don't get upset about the 20% for
now, just follow me here for the sake of discussion.
The $1558 comes from a home loan at 7%,
real estate taxes, and insurance.
I know $1558 per month is more than
$1200, but wait! $1479 of that is a tax deduction, meaning
in the first full year of homeownership, you would pay taxes
on an income of $52,255 instead of $70,000. Since you are in
the 28% tax bracket, you would save $4969 a year in taxes,
or $414.05 a month!
(Disclaimer! I'm not a CPA, so I'm not
qualified to give tax advice. The numbers I used assume you
are already itemizing deductions on Schedule A. Consult your
tax professional to see how the numbers work out on your
specific tax return.)
So let's recap. Your rent was $1200,
and now your mortgage payment is $1558, but Uncle Sam is
giving you $414.05 of it! So your new cost to have that roof
over your head is really $1143.95. This is less than you
were paying in rent!
But it's actually better than that,
because I haven't figured any state income tax savings. Oh,
and remember that $50-100 a month I talked about back at the
beginning of this article? That's the part of the loan that
goes towards paying it back, called "principle reduction". I
didn't figure that into the calculation either, but that's
like putting that money every month right into the bank, the
bank of your own home.
But you say, "getting money back from
Uncle Sam is great, but how can I possibly make the $1558
payment with my current take home pay?" Well, you don't have
to, you can take the extra money out of your check now, and
let Uncle Sam tax what's left, remember? You do this by
telling your employer to take less taxes out of your check
using a W-4 form. This way, you get the extra $414 a month
now to make the mortgage payment with, rather than getting a
huge tax refund at the end of the year!
"But I still have a big problem",
you're thinking, "Where do I get the 20% down, that's
$48,000!" Yes, it is. Now we get to where the rubber meets
the road. You have to really want your own home, really
believe that this is what you have to do for yourself or for
your family. You can of course, buy with 10% down, 5% down,
or even zero down, but in those cases, your monthly housing
expense may be higher than rent, even after figuring the tax
savings. If you can handle the payment, it still works out
in your favor, because remember the 7% a year? That $240,000
house will be worth $256,800 next year, an increase of
$16,800! So you might have to spend $200 a month more than
you did in rent, but look - you paid $2400 a year more, but
you gained $16,800. That's an amazing return, way better
than a 401K, even a company matched 401K! If it were me, I'd
put less in the stock market and buy my own home instead.
The
Amazing Power Of Leverage
That reminds me of one of the best
advantages to buying real estate, the benefit of leverage.
As I said, if you buy a house for $300,000 in ten years
it'll be worth $600,000 so you doubled your money in 10
years.
But here's my point - you didn't have
to come up with the whole $300,000 for the house, if you got
a “no down payment” mortgage then you did not put any money
down. You invested $0! So when your $0 becomes $300,000,
that isn't a double, it's a complete windfall!
More
Benefits Down The Road
Oh, and there's more - once the value
of your home increases, you can borrow against it and use
the money for whatever you want. The money is tax-free, and
the interest on this money is tax deductible. So while your
renting buddies are paying 11% on their car loans with after
tax money, you're deducting the interest on your car payment
because you're a homeowner.
I know people who have used this method
to pay for college for their kids, get the down payment to
buy a second home or an investment property, or just
borrowing against the house for tax-free retirement income.
And here's the best one - when you sell that $600,000 house
that you paid $300,000 for, you can pocket the gain
tax-free, up to $500,000 for a married couple. The money in
your 401K may grow tax-deferred, but when you take out the
money to spend in your retirement, you must pay taxes on it.
With your personal residence that you've lived in for 2
years, you just put the gains in your pocket and pay no tax.
This is incredible advantage that no other investment can
offer! In fact, there are some interesting ways to retire
using these tax-free gains, but that's another subject.
I challenge you to find me an
investment other than real estate that gives you
appreciation, leverage, tax deductions and tax-free capital
gain.
Until you can do that, I think I'll
keep my money in real estate.
How To
Get That First House
So if you're convinced that you should
own a home, how do you actually go about it? What if it's
just too darn expensive? Well, there are a number of no down
payment and special first time buyer programs to make it
easier, and we'll definitely explore those together. But
what if it's still too expensive?
In that case, "you gotta do what you
gotta do". Do you really need that Lexus with the $700
monthly car payment? I know it's hard, and it wasn't easy
for me to get my first place either. You just have to grit
your teeth and do it. The hardships are temporary, but the
benefits last a lifetime.
My advice to you is to just go for it.
Even if the first house isn't your dream house, you have to
start somewhere. Face your fears and get it done. It's not
just me saying this. In the book, "The Millionaire Next
Door", the author says that more millionaires were made
through real estate that any other method. Robert Kiyosaki
in his "Rich Dad-Poor Dad" series talks about the "3
mountains" of financial security - your own business,
stocks, and real estate.
Why Now
Is The Perfect Time?
Are you afraid it's the top of the
market? With interest rates the lowest in 30 years, I think
the risk is greater that the interest rates will go up, not
that home prices will go down. But even if prices do go down
a little, if interest rates tick up, the monthly payment on
that house will be higher, even if the price is less. So
your risk in trying to "pick the bottom" is that you'll miss
out on today's very low interest rates. And besides, I don't
believe that prices will fall in the entry-level price
range, for a number of reasons that I'd be happy to share
with you personally.
The next step is up to you. I'd suggest
giving me a call and we'll see what can be done. Even if
your lease isn't up yet, we should still get the ball
rolling, because we may have some credit work to do, and
that could take 3 months or more. If you're not ready to
talk yet, but would like to be kept up to date with the real
estate market, then sign up for my email newsletter.
Either way, do something. Get something
to show for your efforts. Don't be like the old saying,
"Work your fingers to the bone, and what do you get? Bony
fingers." You know, next year at this time you could still
be renting, or you could be in your own home building
equity. You might even discover you're handy at doing home
improvements, as some of my clients have done, and they've
really increased the value of their properties quickly.
Who knows what you'll accomplish once
you have this big unfinished business of not owning your
home out of the way? You know you need to do it - it's like
a big weight holding you back until you get it done. Today's
a good a day as any. Apply For
Your Free Loan Quote Today so that you can stop making your landlord rich and
start building a nest egg for yourself instead.
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