Here is a great clip from Josh’s interview with Steve Harney of Keeping Current Matters where Josh talks about the real Return on Investment and tax advantages of real estate.
Josh Mettle: I want to point out just one thing, Steve, because we talked about appreciation in real estate and there’s a wrinkle in there that I just want to bring the light, make sure our listeners realize. So we talk about 3 to 4 percent appreciation rates as kind of the economist’s consensus over the next 5 years and compounded over a 5-year period 21.6 percent appreciation. Now let’s call it 20. What’s interesting and what I want to bring to light is let’s say you buy a $100,000 home and like most people, you don’t pay cash. Let’s say that you put down 10 percent or $10,000. If that $100,000 home appreciates by 4 percent or $4,000, your return on your investment is not 4 percent because your return on investment is $4,000. That’s your appreciation and you only invested $10,000. So if you have a 4 percent appreciation rate, then you’re putting 10 percent down on a home, then you made a 40 percent return on investment. You made a $4,000 gain on a $10,000 investment.
Now I know there’s other things to consider because you might have maintenance costs or this, that, or the other but I think it is an important piece to think through when you look at a piece of real estate appreciating from let’s say $100,000 to $120,000 over the next 5 years. If you put $10,000 down, that means you have a 200 percent return on investment and that’s when you talk about stocks or bonds, usually you’re talking about return on investment but that’s a little nuance in real estate that some people don’t realize.
Steve Harney: You are 100 percent right, Josh. As a matter of fact, Eric Belsky from The Joint Center of Housing Studies at Harvard University put out a paper, I guess it was 18 months ago, maybe now 2 years ago, that he talked about that exact situation. You have multipliers, very few people buy stock on launching, meaning they put up a small amount now as a down payment toward that stock. Most people can’t even get that option and most financial planners will tell you don’t do that. It’s risky. Well, in the housing market, that automatically happens. You still have a place to live in or a place to rent out because more and more smarter investors will and that’s already happening in investing in real estate. It’s second, third, fourth homes, all right.
But Eric Belsky himself from Harvard said, “Listen, there’s a multiplier there.” He explained it almost as well as you just did where he talked about you have to look at the return on your investment based on the cash in to that investment not the total investment and that’s exactly what you’re talking about, the down payment. As far as like you there’s maintenance costs definitely just those things occur. There’s also some great tax reductions.
Josh Mettle: That’s right.
Steve Harney: Tax advantages that far outweigh any maintenance issues and vacancy issues that you have.
Josh Mettle: That’s particularly relevant for our demographic of listeners. Anybody who’s outside of their initial training years, tax advantages are huge especially if you live someplace like California where you got a state tax on top of it.
If you’d like to see an analysis of what impact different financing scenarios would have on your bottom line, call Josh Mettle at (855) 260-9932 or Contact Us here. Be sure an ask for a Total Cost Analysis.