| An "All Cash" situation does happen quite often. | | | | person, you should be able to buy a house of this |
| For whatever personal reasons, some people | | | | value that you could rent for at least $100.00 |
| desire to own their home free and clear. The | | | | more than it takes to make the monthly |
| psychology of cash, or course, gives the buyer a | | | | payments which would be $1,200 profit per year. |
| negotiating advantage in the acquisition process; | | | | In addition to that, you would have the same |
| but like all other situations, it does have its Pros | | | | $9,000 appreciation or 6% of the $150,000 value |
| and Cons. Let's take a look at some of these. | | | | of the house. so, the appreciation plus the $1,200 |
| PRO - Benefits of Owning Your Home Free and | | | | from the rental would get you $10,200 per year. |
| Clear: | | | | You deduct the $8,400 interest you pay on the |
| 1. It does give people a sense of security. While | | | | $120,000 loan and find that you earned $1,800. |
| you can't put a dollar figure on this benefit, it is a | | | | that first year on the rental house. In addition, |
| motivating factor. | | | | your equity increase (loan balance reduction) |
| 2. It eliminates the necessity of making payments | | | | would be $1,219 making your total earnings for |
| on a mortgage. This, of course, means that there | | | | the first year $3,619. |
| is no reverse cash flow in owning the home with | | | | Remember, you only used $30,000 of the |
| the exception of maintenance, insurance and | | | | $160,000 that remained of your original capital. |
| taxes. | | | | Let's assume that you could buy five of these |
| These benefits have many side effects, but they | | | | rental houses with $30,000 down in addition to the |
| all seem to basically relate to security and cash | | | | home you bought for yourself. If you purchased |
| flow. Because it's people that really count, the | | | | five of these rental homes similar to the example, |
| above mentioned benefits may outweigh all of the | | | | each of them earning you $3,619 per year, you |
| economical benefits that point to a direction other | | | | would receive $18,095 in earnings per year from |
| than owning one's home free and clear. | | | | your rental houses. In addition to that, you had |
| CON - Basic Leverage in Owning Real Estate That | | | | $6,360 earnings from your own home that you |
| is Not Free and Clear: | | | | purchased which would deliver then a total of |
| In looking at this side of the picture, we are going | | | | $24,455 in earnings per year on the $190,000 |
| to compare to owning a house which is free & | | | | cash investment, or a return of 12.2% per year |
| clear of encumbrances. For purposes of our | | | | -vs- 2% you had on purchasing one home for |
| comparison let's assume that you are going to | | | | ALL CASH. * And you have $10,000 cash left |
| buy a $200,000 home in which to live. And let's | | | | over for reserve. |
| assume that you have the $200,000 and can pay | | | | In addition, you would have other benefits, such |
| ALL CASH - $200,000. | | | | as tax shelter on your investments, which can be |
| Let's also assume that we have appreciation | | | | expressed in dollars. We are not attempting here |
| taking place in your area which is a constant 6% | | | | to analyze this situation. Our purpose is to show |
| per year. So, your home would be worth | | | | the use of leverage in its simplest form. This is an |
| $212,000 at the end of one year. | | | | EXAMPLE of the use of the money in other than |
| If instead of buying the home for "All Cash", let's | | | | a cash sale. The above, of course, is merely a |
| say you purchase it with 20% down or $40,000 | | | | cursory exploration of the benefits of leverage |
| and you owe $160,000 on a 5% mortgage. The | | | | versus the ALL CASH purchase. The benefits in |
| interest would be 8,000 for the first year. If your | | | | each person's mind would dictate their choice. This |
| house increased in value $12,000 in the first year, | | | | comparison merely develops both sides of the |
| your earnings for the first year would be $4,000. | | | | question for your perusal. |
| If you paid $8,000 in interest and you house | | | | This is not to be considered to be investment |
| appreciated $12,000, the difference is $4,000. In | | | | advice. Any person considering investing should |
| addition, your equity (the Loan less Loan | | | | communicate with experienced investment advice |
| Reduction) increase the first year would be | | | | from competent people in their own geographical |
| $2,360. Your total earnings the first year would | | | | area. Some of the information for this article was |
| be $6,360. | | | | excerpted from Robert W. Steele's book "50 |
| Remember, of the original $200,000 in capital, you | | | | ways to Acquire Real Estate". |
| have only used $40,000. You can now take | | | | These posts are the opinion of the author who is |
| another $30,000 and buy a home valued at | | | | not engaged in rendering legal, accounting, or |
| $150,000 for rental purposes. Now you would | | | | investment advice. If such advice is required or |
| owe $120,000 at 7% (probably higher than 5% | | | | desired, the services of competent professional |
| for income property), which is $8,400 in interest | | | | persons should be sought. |
| per year. If you are a reasonably good business | | | | |