If I could share just one real estate tip, it would be to pay off your mortgage early. I’ll show you how through biweekly payments. It’s a simple and easy trick that your bank doesn’t want you to know about and it will save you tens of thousands of dollars.
I bought my first house during the height of the real estate boom thinking I would have it for a few years and make a huge profit because prices were rising dramatically every year. Was I ever wrong? In 2 years my property value spiraled downward and to this day I owe much more than it is worth. But this doesn’t bother me because I have a long-term plan where my house will earn me money every month. Let me show you how.
For those of you who bought a home, chances are there was a document you signed called the Truth in Loan Disclosure. He showed how if he made all payments on time for the next 30 years, he would pay almost double what he bought. This is how bankers calculate compound interest loans. Let me show you a different set of rules that will literally save you tens of thousands of dollars. It’s called biweekly payments and it will help you get home equity at a fast rate.
Now, the way the bank calculates the interest is based on paying the loan payment once a month with compound interest. With a biweekly mortgage payment plan, the loan payment is divided into half of the monthly amount paid every 2 weeks. You would make 26 half payments which equals 13 monthly payments. He is the equivalent of making 13 mortgage payments in 1 year instead of 12 and taking a 30 year mortgage that pays it off in 25 years. Let me show you what this looks like in real dollars.
As you can see, the bi-weekly payment plan speeds up the principal payment, so you finish 5 years early and save $30,000 in interest payments. The key principle is that you pay the same amount each month as a normal mortgage, but it is divided into two equal payments. Now, who wouldn’t want to save that kind of money, get a quick equity in their home, and finish making payments 5 years early?
The following abbreviated chart shows the principal remaining per year for a $250,000 mortgage at 4% interest.
Year #
standard mortgage
biweekly mortgage
Year 1 Year 5 Year 10 Year 15 Year 20 Year 25 Year 26 Year 28 Year 30
$245,597 $226,118 $196,959 $161,357 $117,885 $64,808 $52,860 $27,485 $0
$244,342 $219,315 $181,869 $136,171 $80,401 $12,058 $0 $0 $0
Notice how after year 25 the balance is fully paid. In this example, you would save $29,000 in interest over the life of the loan.
Standard monthly payment of $1,193 and total interest paid $179,673. Biweekly mortgage payments of $596 and total interest paid $150,450. The bi-weekly option builds equity faster by paying off the principle faster.
A detail that I want to explain. Not all mortgages have a bi-weekly option and some charge a service fee. When you ask, be sure to choose the loan acceleration option. If your mortgage doesn’t have a biweekly loan acceleration option, you can do it on your own by taking the principal payments you make each month and dividing by 12. Add this amount to your mortgage payments each month as additional principal. 25 the balance is fully paid. In this example, you would save $30,000 in interest over the life of the loan.
Now, most people would say, “I don’t plan on owning the same house for 30 years.” In many cases this is extremely legitimate. Jobs change, families grow or shrink, all kinds of life changes happen, causing Americans to move every 5 to 10 years. But let me show you something first and I will use the same data from the figures above. The same house that was mortgaged for $250,000 had a 5% down payment and a purchase price of $262,500. If that house were to appreciate at a modest 1% (the Illinois average over the past 30 years was 4.8%), 5 years later it would be worth $275,890, after 10 years $289,963, and after 30 years $353,810. we use a 4% appreciation, that same house would be worth $851,391 in 30 years. That is absolutely amazing.
If you are satisfied with this advice, there is no need to read any further. But if you want to know how to build wealth in real estate without gimmicks, risky schemes or speculation, just honest work and smart decisions, then read on.
An overwhelming number of Americans aren’t super rich or have a lot of money, but over time, through a steady job, they can save a little out of every paycheck. Let me give you an example of how you can tap into your personal savings account, buy another house, and “move up.”
When the average American moves in that fifth year, what if they rented their current home and bought another? The passive income opportunities could be absolutely stunning in the years to come. I’m going to stick to the figures above and estimate that the same house would rent for around $2000 per month. The following table will explain the cash flow per year.
Principal and interest $1,193
Tax $479
Insurance $50
Monthly Rent $2,000
Monthly profit $278
Annual Earning $3,336
Down Payment Rate of Return 25%
This table does not take into account fees for lawn care, snow removal, or maintenance, as these items vary dramatically.
Rate of return:
Annual profit divided by the initial investment
3,336 / 13,125 = 25%
Let’s turn this into terms of investment and return on investment (ROI). Let’s remember the down payment of 5% or $13,125. Divide the annual earnings of $3,336 by $13,125 and your rate of return is 25% per year with your initial investment paid back in just 4 years. That’s outstanding considering only the riskiest stocks pay 15%-18%. Taking this scenario to its logical conclusion, the tenants pay the full mortgage, after which $1193 per month is all the profit in today’s dollars. This does not take into account inflation, rental price increases and tax increases as we have no idea what will happen in the future.
So there you are earning $14,000 a year, the house is paid for and appreciated to over $850,000. How does that sound? What if you did this more than once and bought a house every 5 years as a “move-in property” or investment? Given the same scenario above, buying 6 homes worth $262,000, the total appreciated value of owning each for 30 years is $5.1 million (4% appreciation), and the potential rental income in dollars of today it would be $90,000 a year, earned simply by cashing rent checks.
That is why I am a strong advocate of buying and holding real estate for the long term. Regardless of the type of market you buy in, rental income can pay your monthly bills and over time the asset or home pays off, allowing you to pick the perfect time to sell when the market is up.
The four main benefits of real estate are:
1. Cash flow
2. Appreciation
3. Amortization of the loan
4. Tax haven.
I have explained the first three and this is how real estate works as a tax shelter. The IRS has a mortgage interest deduction. In the same example above with the $250,000 mortgage, the tax deduction would be approximately $9,800 per year at the beginning of the loan and would slowly decrease until it is paid off. The second benefit comes into play with rental properties and it’s called depreciation. The basic principle is that the IRS degrades the value of a property to zero over 27.5 which is considered its useful life. In this same example, you would average $9,000 per year in additional tax deductions. This combines for a total tax haven of $18,800. Combining both tax deductions can even land you at a lower taxable rate from paying 25% in taxes to 15%. On this subject I would definitely contact your accountant to see how it would affect your personal finances.
Annual loan interest paid $9,800
Mortgage interest deduction $9,800
Depreciation deduction $9,000
Total $18,800
Rental Income $3,336
Additional Tax Shelter from Other Income -$15,464
$15,464 is just a paper loss and can house some of your full-time income. Talk to an accountant about your specific tax return.
I hope you enjoyed this and it helps give direction to your financial future. For these reasons, the real estate market outperforms all other asset classes year after year, decade after decade. It builds long-term wealth, it generates monthly income, long-term appreciation, it has tax benefits, you can manage it yourself, it can be financed, your money can be put to good use, and most importantly, everyone needs a place to live.