| Most homebuyers
don't pay all cash for a home. They usually invest some of their own cash (often 10 to 20
percent of the purchase price) and borrow the balance from a lender. When you use someone else's money to buy an investment, it's called
leverage.
The example below show your return on a real estate
investment when you put 3.5% down (FHA owner occupant minimum down requirement), 10% down,
20% down, finally with 40% down.
| Purchase Price |
Down payment |
Value of home at
end of year five with 7% annual appreciation |
Gain plus
invest- ment |
Total Rate of
Return on Investment per year |
| 100000 |
3500 |
140255 |
43755 |
87.10 |
| 100000 |
10000 |
140255 |
50255 |
38.11 |
| 100000 |
20000 |
140255 |
60255 |
24.68 |
| 100000 |
40000
|
140255 |
80255 |
14.94 |
The higher the leverage the quicker your real estate
investments will create wealth. The philosophy behind these zero down tv real estate
evangelists is one hundred percent true. Except I have been there, and it isn't all
a bed of roses. I remember my ten year old son vomiting as he helped me clean out
the garbage left by a tenant. I particularly remember a dinner time visit to a non
paying tenant whose table was set with extras I couldn't afford for my family because I
was paying his house payment and mine. |
The Veterans
administration underwrites loans for veterans with zero down loans. Figuring that return
will put a veteran off this chart. When I
started selling real estate in 1974 you could have seven minimum down FHA loans in your
name at one time. Qualifying was the hard part.
Now FHA requires you to have 20% equity in one property to
be eligible for a second FHA loan.
Federal regulations require all federally insured loans
with less than 20% down to be accompanied by foreclosure insurance, called MIP or PMI.
Depending on the loan program PMI or MIP is the equivalent of 1/4% to 1% interest rate
hike.
With an 87% annual return I would pay a point more in
interest, wouldn't you? |
