Sitting on the Fence about Buying a Home?

By Dave McKean

Monday, January 7, 2019


 I want to start the year off with some food for thought, as we all have family and friends that are sitting on the fence waiting for I don't know what and they are just not pulling the trigger on buying a home.  So is this the year to do it?  Well, I can't answer that, but I am going to answer why you should! 
 
We have had a nice 7 year run in real estate and many people believe we are in for a soft landing while there are still some that believe the world is coming to an end.  Well, let's try to look at Real Estate as a long-term asset.  Let's take today's incredible interest rates and take advantage and look at our profits, 5 or 10 years down the line.  We are going to use a simple first-time buyer home at $550,000.00.  We will do 5% down on a conventional loan and assume that our client has great credit and enough income to qualify.  To rent this property, you would have to pay $2800.00 per month and to buy it with 5% down you would have to pay $3542.00 per month. 
Day 1 Rent = $2800                                                          
Day 1 Mortgage = $3542.00

Year 5 Rent = $3252.53 (3% annual increase)                       
Year 5 Mortgage = 3605.00 (taxes and insurance increase only) If you can get rid of PMI then you can save an additional $143.68 per month).  You now owe $478,000.00 and your value is $638,000 with 3% annual increases or $705,000.00 if prices go up by 5%.   So that is $160,000.00 or $227,000.00 TAX FREE!!!

Year 10 Rent = $3778.19 (3% annual increase)                     
Year 10 Mortgage = 3679.00 (taxes and insurance increase only) If you can get rid of PMI then you can save an additional $143.68 per month).  You now owe $421,800.00 and your value is $742,000 with 3% annual increases or $905,000.00 if prices go up by 5%.   So that is $320,200.00 or $483,200.00 TAX FREE if you are married!!!  If not married then only about $90,000.00 will be taxable at a $905,000.00 purchase price. 
 
So let's say you walk with $400,000.00 in 10 years tax-free!  What does that really mean?  It means you do not have to pay tax on that money #1!  It also means if you tried to save that amount of money and make it tax-free after 10 years that you would have had to make about $600,000.00 - $700,000.00 depending on your tax bracket just to save $400,000.00!  That is saving $60,000.00 - $70,000.00 per year and the interest will be taxed every year on top of your earnings. OK, so if you want to have something in retirement then buy a house or 3 or 4 or 10!  By the way, you can do the above as many times as you want.  I have had clients that did the above then pulled cash out, purchased rental properties and 10 years later they are doing well enough that they just manage their rentals.  I am not saying this is for everyone, but it may be a good way to a successful retirement. 
One more note off subject!  Our Business Planning and Accountability classes start next week and if you want to join and have not confirmed when your class meets then please contact me immediately!   
 
So the Federal Reserve raised interest rates last month and boom as John Madden used to say!  Interest rates dropped!  The stock market is still struggling and this looks like a great opportunity to buy or refinance as rates have not been this low since March of last year!   

All of the above are based on a 740 credit score.  Rates are subject to change without notice, your mileage may vary! 
Lower interest rates to start the year?  I smell opportunity! 

If you want to talk about your options give me a call!
Mike Meena
Augusta Financial
25129 The Old Road, Suite 350, Santa Clarita, CA 91381
Phone:  661-260-2970 Fax: 661-554-7121
Email - Mike@AugustaFinancial.com