Money Saving Advice
There's more than one way to get most for your money. For more than 20 years, Gary Foreman has worked to manage money effectively. He's been a Certified Financial Planner and Purchasing Manager. He currently edits The Dollar Stretcher Web site and several newsletters. His mission is to help people "Live Better for Less."
The Dollar Stretcher: Pay Me First
Question: Dear Gary,
I see a guy on TV all the time. He says that you can buy a home with no
money down and then come from closing with money in your pocket. Supposedly
people buy homes and make millions a year. Do you know about this? How
this could be done? Is it worth the 3 payments of $59.99? Or is it a scam?
Sure sounds tempting. You walk in with nothing, sign some papers and walk
out with cash and the keys to a house. And, you can do it over and over
until you make a million!
Much as we'd all like to believe that the road to riches was that easy,
it's not. Yes, you can make a million in real estate. And some people have
started with nothing and built an empire. But, it's not easy and certainly
not a sure thing.
A quick disclaimer: I have not seen this specific course. But similar
courses pop up anytime that the housing market is hot for awhile. And
unless this guy has discovered something that no one else has tried before,
you don't need his course. Here's the $180 secret. It's called leverage.
Borrowing money to invest isn't new. People who buy stocks on margin or
play the commodities markets do it every day. It is interesting to note
that there are limits as to how much they can borrow. The regulators know
that if you borrow too much it's dangerous.
I'm not saying that this strategy hasn't worked for anyone. It has. Given
the right set of circumstances you can borrow money to buy an asset, have
that asset appreciate and sell it for a profit.
Here's how it's done. Suppose you buy a home for $100,000 and pay cash.
Three years pass and the house is now worth $150,000. You sell it and make
$50,000 on your original $100,000 investment. That's a 50% return in just
What happens if you had taken out a mortgage. Suppose that you put $10,000
down. Again, three years later you sell it for a $50,000 profit. But this
time that's a 500% return on your original $10,000 investment. The reason
is that you were making money on borrowed money. That's called leverage.
Could you go in with 0% down and make that profit without putting any of
your money up? Yes, if you could find someone willing to lend you 100% of
the purchase and the house appreciated 50% over three years you could
indeed make $50,000 without putting up your own money.
So if it's so easy why shouldn't Kevin jump right in? There are a couple of
The first problem is higher payments because Kevin is financing more than
the value of the house. He'll probably also pay a higher interest rate
because he didn't have a down payment. That means less money for food,
health, auto and other routine expenses.
The second problem is that he's locked into the home. Unless he's willing
to write a check at closing, he won't be able to sell until the house is
worth more than the loan.
Suppose he takes out a 7%, 30 year mortgage for $103,000. His regular
monthly payments won't reduce the principal to under $100,000 for nearly 3
years. So he's literally trapped in the house until it appreciates.
And, contrary to popular belief, home prices can go down. If home prices
drop by 10% Kevin's house will be worth $90,000. It will be 9 years before
Kevin's mortgage drops to that level.
Another potential problem is that Kevin's lender will be quicker to
foreclose. They count on the value of the house guaranteeing the loan. They
can't afford to let Kevin miss payments if the loan is bigger than the
Finally, can he use this strategy to buy more properties? Typically you
want income property to pay for itself and leave some extra income for you.
Using this method the higher mortgage payments will make it hard to build
equity or have a positive cash flow. And, landlord Kevin can expect some
repairs, late rental payments and the occasional vacancy. Unless he has
cash to ride out these storms, any problem could make him late with his
mortgage payment. And that's when things start to unravel.
Kevin could consider other alternatives. There are some safe, predictable
strategies that have worked for years. One possibility is to start with a
duplex. Live in one side and rent out the other. It's a good way to live
inexpensively and build equity at the same time.
Or buy a fixer-upper. Quite often a few dollars in cleaning, paint and
repairs can add thousands to the value of a home. And a cheaper home means
a smaller mortgage. Kevin will enjoy the lower payments and build equity
more quickly. He'll also be able to sell and move any time he wants.
One final thought. Have you ever wondered about guys who claim to have made
millions and go on TV? Why would someone so wealthy charge so much for
workbooks, tapes and cassettes? Call me skeptical, but I think they know
that it's easier to take your $180 than to make money in real estate.
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Gary Foreman is a former purchasing manager who currently edits The Dollar Stretcher Web site www.stretcher.com. Contact Gary at email@example.com. You'll find hundreds of free articles to save you time and money. Visit today!