Investment Property Mortgage

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Investment Mortgage

Using a mortgage to invest in real estate can be the path to wealth. This page shows figures that describe how you can use borrowed money to make yourself rich over time and also why investing in houses can actually out perform investing in the stock market.

Lets start with a fact that seems to contradict what I just said:

The stock market outperforms the real estate market. On average, in the long term, the stock market gets about 10% a year and real estate 8.5%. Bank interest rates come in about 6% long term.

So why is it the real estate is a better investment for you?

The answer is just one word …. Leverage.

The amount you can borrow on a house is up to 95% of the value of the property. For every $1 you put in the lender will put in up to $19. In the stock market you can also borrow money to invest and this is called a margin loan. They will lend you up to 70% of the values of the stocks that you own. Your $3 plus their $7.

But there are major problems with margin loans that just don’t exist with a mortgage or home loan. If at the end of a day the stock market says that your shares have decreased in value and the amount you have borrowed is now greater than that 70% of their value, they make you sell the shares, at a loss, at the worst time to sell, even if you can easily afford the interest payments! If the value of your house drops and you can make the payments, nothing happens to your mortgage. The other problem is that margin loans have higher interest rates. This is because shares are considered risker. Houses are considered safe as err … houses. Their interest rates are lower.

To show you why this all makes investing in houses so good I’ll give you a one year average example with some nice round numbers:

Lets say you can bring $30,000 to the investment.

For a home loan you can borrow (95%) $570,000. A margin lender will lend you $70,000 for shares.

The profit from Shares in 1 year is $100,000 (your $30,000 plus the lenders $70,000) times 10% (about average performance), which is $10,000 increase. Interest cost is $70,000 times 7% (margin loans have higher rates) is $4900.

$5100 profit for shares.

With a mortgage the investment is $600,000 (your $30,000 plus $570,000 loan) times 8.5% (about average performance) which gives an increase of $51,000! Interest cost is $570000 times 6% (long term average) is $34,200.

$16,800 profit for houses. Thats 3 times shares with the same $30,000 investment.

And this result just keeps getting bigger year after year due to compound interest.

Knowing this, why do people still invest in managed funds and margin loans? The answer is simple, people are lazy and other people are greedy.

The lazy part is easy to understand. It is very easy to walk into a financial institution and ask for a managed fund or online share trading account. It is very hard to drive around the neighborhood on your weekends looking at properties. The greed part comes from the share brokers and fund managers. They cant make any money from you when you buy a house once but when all your money is in a fund they can take a percentage of it every year. Ever noticed that stock brokers give new stock recommendations every week. They get a cut every time you buy or sell. No wonder shares and managed funds are what they recommend.

It comes down to this. Do you want to be richer. All it takes is to do a little work of our own.

Start by working out how much you can afford to borrow. Go to E-LOAN  and apply for a loan, see how much you can get and then start looking at houses.

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