© 2000 By Eddie Lee
This article is meant to make you think about the possibilities of using your own home to buy more properties. The lesson is that understanding financing and taxes can be very lucrative.
Most people cannot afford to buy an investment house because they don’t have enough cash for the down payment; or they are afraid they can’t keep up with larger monthly payments on a new loan; or they simply would rather spend what little extra money they have on a vacation or other luxuries.
There are, however, several ways to buy a second investment home without changing your life-style or greatly increasing your monthly mortgage payments. For example: You own a house worth $200,000 (sorry, I’m in California.). The first mortgage on this house is $100,000, the interest rate is 10%, and the monthly payment is $878.
You, who know the importance of making wise investments, want to buy this second home without spending any more per month than you currently do. Following this step by step method you can begin your investment program with no money down and no increase in your monthly payments:
1). Refinance your current home for $160,000.
a. Research and find the best loan program to give you an interest rate of 8.5% and a monthly payment of $1,230.
b. After paying off the $100,000 loan, and paying $5,000 for closing costs, you will net $55,000. ($160,000 minus $100,000 minus $5,000 closing costs).
2). Find a bargain home for $200,000.
a. Put 20% cash down: $40,000
♦ Closing Costs: $5,000
♦ Total Cost: $45,000
b. Put the remaining $10,000 into a money market account ($55,000 minus $45,000).
3). Rent the house for $1,000 per month.
You have now successfully purchased an investment house. However, can you make the monthly payments?
EXPENSES: Your own house: $1,230 per month
♦ Your new house: $1,230 per month
♦ Your expenses: $2,460
♦ INCOME: Rent: $1,000
♦ Payments still due: $1,460
The old mortgage payment for your old house was $878 per month. That means you have to come up with an extra $552 per month. ($1,460 minus $878 = $552). Where do you get the extra money? From the government through tax savings, as follows: The second house is a rental property you can depreciate it and deduct interest payments on both houses.
♦ DEPRECIATION: $606 per month
♦ Interest Deduction $552 per month
♦ TOTAL DEDUCTIONS: $1,158 PER MONTH
If you are in the $30% tax bracket you will save $348 per month in taxes that you would have to pay if you did not have the investment house. You can change your W9 forms to claim more dependents to get $348 extra per month to offset the tax savings, and withdraw money from the Market Rate Account to keep up with the remaining payments every month. After two years, even with moderate inflation, You will have made substantial profits at no extra cost to you.
In summary:
1). You have TWO houses instead of ONE House. If the market goes up 20%, You will make $80,000 instead of $40,00.
2). Your taxes could go down one bracket because of the tax deductions. This could mean considerable savings.
3). You do not have to sacrifice anything except some management time. You can still go on vacation and enjoy your life style because your monthly payments will remain the same.
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