| When buying a home, most of us put down a down payment. This can be as low as 3.5% or maybe up to 50% of the value of the house – the mortgage company kicks in the rest. Over time the home appreciates based on its full value, not just your down payment. We call this real estate leverage.
Here’s how it works: if you put down 20% on a home, the appreciation you experience is based on the entire value of the home, not just your 20% investment. Let’s look at an example. Say you buy a $1,000,000 home and put 20% down. That’s $200,000. Now lets assume your home appreciates by 5% over the course of 1 year. Your net worth has increased by $50,000! ($1,000,000 x 5%). This appreciation could happen every year.
Compare that to choosing not buying a home and investing your would-be $200,000 in a stock portfolio that returned 5% in a year. That’s only a $10,000 increase in net worth ($200,000 x 5%). Would you rather have $50,000 or $10,000? Leverage is a major reason why real estate investing is so appealing. It’s a wealth builder.
Let’s take this one step further. Imagine if you used a down payment assistance program as I described above. With real estate leverage, the lower your down payment the bigger the potential long-term pay off. Using an assistance program you’ll have little to no out-of-pocket down payment, but you still reap appreciation benefits based on the full value of the property. Your investment is working even harder for you.
Tip for college students:
For college students graduating and starting jobs in their field of study, you don’t need a two-year work history to qualify for a loan! My broker recently helped a college graduate secure a condo just two months after graduation. This fast-track approval can provide a significant head start in homeownership.
If you or someone you know could benefit from learning more, have them reach out to me and I’m happy to walk them through their options. |
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