Housing is one of the BEST leveraged investment available---What is leverage? Ever heard of the term “other’s people’s money”? It’s what every investor strives for—low risk and exposure with the promise of higher rates of return. In today’s market homeowners can get into a home with as little as 3-5% down. The less money or “skin in the game” you have when purchasing any investment is considered leverage. The less money in the higher the leverage and the greater the possible return. We had many clients who purchased homes or rentals during the great recession during our “bottom” which occurred in 2009. Investors and Homeowners purchased homes in the $250,000 to $300,000 range. Aggressive investors bought rentals in the sub $200,000 range. Most investors paid cash but due to escalating rents realized returns in the 7-8% range. Very good for that time. But our homeowners purchased with anywhere from 3.5 to 20% down. This coincided with the comeback of our market seeing the median home price roaring back. Over the past three years we’ve seen the median home price go up 29%. Here’s an example of leverage and return on investment:
We just sold a home for one of our clients. He purchased the home 5 years ago and paid $345,000. We just closed it last month for $570,000 with multiple offers. Most folks would state, “I did great! I made $225,000 on my investment or roughly 65%. Yeah, not bad. But our client “Leveraged his investment” by putting down $50,000. Now that return is in the 222% range! Now of course we have costs of the sale both in and out of this deal but it still is a striking number.
REMEMBER: You’re paying for housing one way or another: IF you rent or buy you most likely will incur a monthly expense for your housing. Renters it is a given and with rents out of control it could be more next month at the whim of a landlord. But, if you own you are paying back the loan in real cheap dollars as interest rates are near historic lows—mid 3% range. Renters pay the landlord’s mortgage payments. Homeowners are building equity by paying off their loan at very low interest rates making equity build up happen a lot faster. Plus the homeowner deducts the interest on the loan plus property taxes (always consult with your local tax professional to verify all deductions and computations). And when they go to sell the property they get, if a married couple, up to $500,000 in capital gains forgiveness. Or conversely, they can rent the home out and purchase another home using some of the equity built up to buy the next property. (Consult with your local mortgage professional for rates and terms).
Money is SO cheap nowadays: Yes, we’ve all heard of the incredibly low rates for home purchases. But did you realize you can further “leverage” your way into a home with bank products as low as 3% down and VA buyers ZERO down? A poll of Millennials, 65%, felt they need a down payment of 20-50% down. If you are single don’t despair. Programs exist for you. If you have partnered up then consider a purchase. Caveat—always consult with an attorney about joint ownership of property and how to dispose of said property should your relationship go south. Take advantage of these super low rates and low down payments.
Appreciation and Equity Build-up: As I stated in the first paragraph our properties here in the “Wine Country” of Sonoma County, California have come back tremendously. We are exceeding our pre-crash prices in some of the higher priced areas within our MLS (Multiple Listing Service) with overall pricing down about 10% from the high. This means we have had a tremendous pattern of growth. And with these almost historically low interest rates, you are spending much less on interest and way more in principle which means you are lowering the amount owed thus giving you Equity buildup. If you couple “leverage” (using low down loan programs), a recovering market place in appreciation and equity build-up due to low interest payments you have a formulae for success in any real estate market.