The beginning investor often misses this opportunity. What would you start with as a beginner?
Transcript: Hi this is Jeff Brown the “BawldGuy”. Today we’re going to talk about the beginning investor and how they might approach what they’re going to do in real estate. FHA allows you to buy a home you’re going to live in even if it’s a duplex, a triplex or a four-plex. This means for a 3.5% down plus closing cost, you can get yourself into say a duplex. Now, let’s say in your market it cost you $250,000. Counting taxes and insurance that payment is probably going to be give or take 1800 bucks. Now, you take the 1800 bucks, and maybe the other side that you don’t live in is renting for $1200. So now you’re down to $600 out of pocket. Add maintenance and repair maybe you’ve got pay the water bill because it’s a duplex and there’s just one meter those kind of things. So by the time you’re done let’s say it’s costing you somewhere around a 1000-$1200 to live. Now when that comes down totally to the bottom-line, you say, “We can do this easy.” Well, if you can do it easy and you’ve got the money, add a $1000 a month to the payment. Here’s what’s going to happen. In five years, you’re going to drop a whole bunch of money off of that loan. By the time you’re done, you’re going to get somewhere around 95 to $100,000 drop in your loan value. That means when you sell it in five years you’ve created, by adding $60,000 to the payment, a 100,000 in equity maybe a little less. Now here’s what you do: you sell the property, and by the way we’re assuming it didn’t go up in value a dime. Sell the property. Take your net cash out of it. You’re making more money probably. You can afford a little bigger loan maybe. You buy a house. You take the rest and you buy another duplex. Now you’re not living in it. You get the benefit of both sides been rented. It pays for itself, and now you’ve separated your life. You’ve got your primary residence, and you’ve got an investment portfolio started. Now, one thing that most people don’t take into account is when you own that duplex and you’re living in it, half of that duplex you get to take interest dollar-per-dollar, so if you live in half of it 50% of the interest is deductible on your income tax. On the other half, although that interest isn’t deductible dollar-for-dollar, you get to take it along with other things against the income you’re getting from that tenant, and then there’s depreciation. I’m not going to give a talk on depreciation today, but when it gets down to it, all you need to know is depreciation is a paper loss. You get to take against your job income and you didn’t incur the loss, but you still get to take it. It’s a tax savings. Now in the end, the takeaway is this. No appreciation, 95 to a $100,000 in equity gain starting with 3.5% down. You’re living at the same or lower payment level per month for your housing as you would have if you’d have bought a lesser property, a small condo, little house, or whatever. Understand you’re creating a better future. This is Jeff Brown, the BawldGuy, I’ll catch you next time.