Making Money in Single Family Residences and Homes
Principal Residence
Home Sweet Home
The old phrase “charity begins at home”; has never
been more true than it is today – especially for people who own
their own homes.
When you own a home you can make adjustments to your
W-2 with-holdings to reflect the tax deductions you can take as
a home owner, thus resulting in fatter paychecks! You will be
able to then save this additional money to use as investments.
When I purchased my first home I was shocked to
learn the house next door sold for $109,500 just 15 months after
I purchased my home for only $50,000! I immeadiately realized
the home I purchased was 700 square feet larger than the home
next door, I realized right away I had more than $60,000 in
equity in my home owning it only a short period of time. When
purchasing a home you should think LOCATION, LOCATION,
LOCATION…real estate (your home) appreciates steadily; in fact
all real estate has consistently appreciated throughout history,
so as long as you purchased the home in the right location.
When you build equity in your principal residence
you are able to then access this equity without much trouble at
all. You can take out a Home Equity Line of Credit (HELOC)
loan, with this money you can then pay off high interest credit
cards, go on a vacation, add an addition to your home, may be a
pool, landscaping, or as I will show you, use this equity to
leverage additional properties which can be used to generate
further tax deductions, diversified investments and residual
monthly income through renting of the properties.
HOME OWNERSHIP – MOST PEOPLE’S BEST INVESTMENT
Home ownership is still the best investment most
people can make. It is also the safest investment most people
can make. Home ownership is so safe, you can build equity in
your home and protect up-to $125,000 of this equity from
everyone! This means if you ever get a judgment against you or
meet with unexpected expenses (like medical expenses), the first
$125,000 in equity is protected 100% from your creditors. In
fact as you will learn later on in this book your home and it’s
equity is even protected if you have to file bankruptcy! Yes,
it really is true. I know from first hand experience. In 2000,
I lost my Internet Company and had to file bankruptcy, I was
able to keep my home and protect its’ equity while discharging
all my other debts. You will learn more about this in a later
chapter.
Under the current tax law, mortgage interest on you
first and second homes is usually deductible on your federal and
state income (if your state has income tax, some states do not
you will learn which states these are in a later chapter on
taxation) tax returns. Your real estate taxes are deductible,
too.
If you already own a home, as mentioned earlier, you
can borrow against the equity and appreciation with a home
equity loan or a home equity line of credit (heloc). The
interest on such loans is fully deductible up-to $100,000.
Home ownership gives you better control over your
future housing costs. If you get a fixed-rate mortgage, the
only major housing costs that can increase are insurance,
utility costs and the most dreaded TAXES.
Best of all, home ownership means you can kiss your
landlord goodbye. The check you write to the bank each month
helps you build equity. Of course you can build equity even
faster through, using an accelerated payoff using one of several
techniques. Most mortgages are created so you make monthly
payments (12 level payments annually). There are amazing
advantages, which can be achieved by making just one more
payment per year, usually thought of as bi-weekly payments. We
will discuss these techniques in a later chapter, which will
dive deep into the loan method referred to commonly as
amortization.
Another important reason to say goodbye to your
landlord is that the tax deductions for interest and real estate
(property) taxes go on your return – not your landlord’s.
Ownership also positions you to benefit from future
appreciation of your property and gives you a hedge against
inflation.
The high cost of procrastination:
Many people delay buying a house because they hope
rices will come down. That’s usually wishful thinking.
Prices sometimes level off for a few years,
especially during periods of high interest rates or during
recessionary times.
Sometimes people put off buying a home because
they’re waiting until they can afford their dream house. Most
people cannot afford the ultimate home when they start out. But
many people have eventually owned homes that were beautiful
beyond their original dreams by “trading up” as each home they
bought appreciated. Or sometimes people do not think they can
afford a home at present, how can you NOT afford a home given
all the benefits of home ownership, especially if you are
employed by someone else (not self-employed); home ownership
forces you into creating the largest bank account you can (your
home is a bank account in and of itself).
THE TRUE KEY IS TO GET STARTED NOW!
How to Find a House You Can Afford:
Before you start shopping for a home, you
need to figure out how much house you can afford to buy.
Lenders will generally allow about 28 percent of your gross
monthly income for mortgage payments.
How to Buy for Quick Appreciation:
If quick appreciation is your primary goal, buy a
“fixer upper”. That is, choose a home that needs cosmetic
improvements.
When a house needs work, it often sells for as much
as 20 percent to 25 percent less than its potential value. You
profit by investing additional dollars and perhaps some good-old
fashioned elbow grease, if you have the time.
Financing Your Home Purchase:
Today’s home buyer can choose from a wide range of
mortgages. There’s a lot of competition, so it’s important to
shop for the best rates.
To decide which mortgage is best for your over-all
needs, talk to your real estate broker or loan officer. They
can also help you assess the total cost of any mortgage you are
considering. This lets you compare your best loan quotes and
pick the one that is truly least expensive.
Here are the most popular types of home mortgages:
-
Seller
Financing: As you will see, this type of mortgage can be
the best and is worth spending some extra time to find and
negotiate. The current homeowner agrees to hold a first or
second mortgage. This kind of mortgage, given by the buyer to
the seller as part of the purchase price, is sometimes called
a “purchase money mortgage”. The bueyer and seller negotiate
the rate of interest and the terms.
Seller financing can save you thousands of dollars by
eliminating loan origination fees. When you finance your home
through a bank or mortgage lender, you generally pay a loan
origination fee of at least 1 percent (usually much more, some
people are charged as high as 5 percent) and “points” of 1
percent to 4 percent, depending on market conditions and your
credit. Typically with seller financing your traditional credit
history does not come into play. Each point equals 1 percent of
the total mortgage loan.
Another plus: There are normally no prepayment penalties on
seller-provided financing. That’s important if you get an
opportunity to refinance at a more favorable rate.
Many first-time buyers look for seller financing because they
cannot qualify for a bank loan. Although a prudent seller will
want some verification of your ability to pay the mortgage, the
seller’s standards are rarely as exacting as those of a
commercial lender.
Finally, seller financing is quick and convenient. You can
settle as soon as the title company or attorney can ensure clear
title (usually 45 days or less). When you apply for bank
financing, the loan approval process can take 60 to 90 days.
FHA/VA Mortgages:
These are 15 or 30 year fixed-rate loans. They are
characterized by low down payments. They are also fully
assumable by the next buyer. The latter characteristic is a big
plus when you are ready to sell.
FHA and VA loans also use more generous loan standards than do
conventional mortgages. They allow up to 35 percent of your
gross monthly income for mortgage payments, real estate taxes,
and hazard insurance. They also allow an additional 15 percent
of you income for other debts. These standards let you qualify
for a larger mortgage.
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