"SHOW ME THE MONEY" VIEWS on HOW to make MONEY GR

[Scott Campbell]

That sounds like exactly what I want to do, but only build the second house myself.

This is a great way to build wealth. Any sweat equity you're able to build into the house drops completely to the bottom line of your personal balance sheet. As long as you live in the house 2 years, up to $500K of appreciation (profit) is tax exempt.

The more money you make at your job, the bigger the impact. Lets say your making alot of money and your marginal tax rate is nearly 50%. If you made $100K on your house in 2 years, you'd have to make $200K at your job to clear the same amount of money.

[woodbuck27]

That sounds like exactly what I want to do, but only build the second house myself.

This is a great way to build wealth. Any sweat equity you're able to build into the house drops completely to the bottom line of your personal balance sheet. As long as you live in the house 2 years, up to $500K of appreciation (profit) is tax exempt.

The more money you make at your job, the bigger the impact. Lets say your making alot of money and your marginal tax rate is nearly 50%. If you made $100K on your house in 2 years, you'd have to make $200K at your job to clear the same amount of money.

Yes. Yet... is it right to make that house work so hard?

[Partial]

How would a single-man making 40-50k pay off even a modest house in 5-6 years? I guess I am unaware of how much it costs to live. By modest, I mean like a 180,000 house so it's relatively easy to resell and likely to grow in value over that time.

What sort of tax benefits do you get when purchasing a house?

[Bretsky]

How would a single-man making 40-50k pay off even a modest house in 5-6 years? I guess I am unaware of how much it costs to live. By modest, I mean like a 180,000 house so it's relatively easy to resell and likely to grow in value over that time.

What sort of tax benefits do you get when purchasing a house?

I'm not sure if a single guy making 40G could pay off a house in 5 years; but RG would, I think say, that you should wait until you have a more substantial downpayment then or buy a smaller house.

In terms of tax benefits, every penny you pay on the interest for the year and the annual property taxes you pay are tax deductible....aka...taken off your annual income for tax purposes.

RG, let me know if I'm slightly wrong on this but I'll throw out this example.
You make 40G per year; your taxes are 3G per year and Annual Interest on that mortgage is 9000. That would bring your taxable income down to 28G instead of 40G and good chance you'll get money back at tax time because you overpaid based on the 40G figure.

[Partial]

How would a single-man making 40-50k pay off even a modest house in 5-6 years? I guess I am unaware of how much it costs to live. By modest, I mean like a 180,000 house so it's relatively easy to resell and likely to grow in value over that time.

What sort of tax benefits do you get when purchasing a house?

I'm not sure if a single guy making 40G could pay off a house in 5 years; but RG would, I think say, that you should wait until you have a more substantial downpayment then or buy a smaller house.

In terms of tax benefits, every penny you pay on the interest for the year and the annual property taxes you pay are tax deductible....aka...taken off your annual income for tax purposes.

RG, let me know if I'm slightly wrong on this but I'll throw out this example.
You make 40G per year; your taxes are 3G per year and Annual Interest on that mortgage is 9000. That would bring your taxable income down to 28G instead of 40G and good chance you'll get money back at tax time because you overpaid based on the 40G figure.

Do less valuable houses sell, though? It seems like everyone and there mother is selling there house in my area but no one is buying them.

Ideally, I would convince the GF (who I hope will be a long term GF, but eitehr way its good advice for her) to do the pay off house in 5 year thing, and if I did the same, we could put down like a monsterous payent on a house together someday if we're together then, or she would be able to afford a nice place of her own that way.

[retailguy]

How would a single-man making 40-50k pay off even a modest house in 5-6 years? I guess I am unaware of how much it costs to live. By modest, I mean like a 180,000 house so it's relatively easy to resell and likely to grow in value over that time.

What sort of tax benefits do you get when purchasing a house?

I'm not sure if a single guy making 40G could pay off a house in 5 years; but RG would, I think say, that you should wait until you have a more substantial downpayment then or buy a smaller house.

I don't think a single guy making 40K has any need to buy a 180,000 house, and I'm also not sure that you could qualify for that big of a house without a substantial downpayment.

3x your income is 120K, you could probably buy a small condo for that, and you could pay that off in 5 years, PROVIDED, you put 20% down and you didn't have any other payments (Auto, Furniture)

In terms of tax benefits, every penny you pay on the interest for the year and the annual property taxes you pay are tax deductible....aka...taken off your annual income for tax purposes.

RG, let me know if I'm slightly wrong on this but I'll throw out this example.
You make 40G per year; your taxes are 3G per year and Annual Interest on that mortgage is 9000. That would bring your taxable income down to 28G instead of 40G and good chance you'll get money back at tax time because you overpaid based on the 40G figure.

Spoken like a true mortgage guy..... Not entirely true however. Now before you beat me, or call me a liar, hear me out. A single guy at 40K does NOT pay taxes on 40K if he doesn't own a house. Don't forget about the standard deduction, or the personal exemption! Those get factored out as well. In 2005, the standard Deduction was 5,000, personal exemption is 3200, so you pay taxes on 31800.... So, in this example, the mortgage interest gives you a $4k deduction over what you'd get as single. (9000-5000) 4k yield is about 800 net (see below) Whoopeee!!! Now before you bash me and "remind" me that you also get a deduction for taxes & charitible contributions, I KNOW THAT, however, you spent $9000 dollars to save $800 on your taxes. You'll spend more on those taxes & contributions to save as well.

Complete numbers - 40000 gross w2 income, yields 31800 taxable income after all deductions (std & pers exemption) - yields a tax bill of $4621.

For simplicity sake, here it is with just the mortgage - 40000 gross w2 income, 9000 itemized, 3200 exempt - yields 27,800 in taxable income and generates a $3809 tax bill.

4621 - 3809 = 812 savings IS IT WORTH IT? The home buyer has to make that call.

So, for a single guy, the mortgage interest doe give you a deduction. Now, do the same calculation for a married couple with 2 kids under the age of 17 making 40-60K. If you crank the numbers there is ZERO benefit of mortgage interest because that family is NOT paying taxes, but are more likely to be making a house payment than a single guy.

Why is this relevant? Simple - you have to look at your UNIQUE situation to see if you are benefiting from the mortgage deduction.

Personally, I don't really give a shit if the IRS has my money or Bank of America has it. If I can't keep it, it really doesn't matter. In the early years of buying a home, appreciation does not offset the amount of interest you pay, and typically the tax benefit is not very great.

As to the refund, Lord, where do I start. Yes, you will get a refund. BUT WHY? Uncle Sam offers the poorest interest rate in the history of the world ZERO PERCENT. You'd do better with a passbook. You should pay $499 each year, EVERY year. That is the way you MAXIMIZE your money related to the IRS.

In summary, I don't want to sound too negative related to the purchase of a home. I love owning a home. There are MANY MANY MANY reasons to do so that have NOTHING to do with money. It is a wonderful experience that I want EVERYONE to have the ability to do. BUT, and a big BUT, circumstances HAVE TO BE RIGHT.

Monetarily, appreciation cannot be ignored. It does work, and it does create wealth. But the home has to be in the right neighborhood, of the righs size, with the right amenities, and it takes TIME.

Please, please, please, NEVER buy a home to "save money" on the interest deduction. Buy it for all the other reasons, and then use the tax benefit as a "freebie"....

[retailguy]

after re-reading what I wrote above, I want to emphasize one more thing.

Home buying is not evil. Being undercapitalized and paying too much interest on a 30 year mortgage without the proper down payment makes the home purchase evil. It totally destroys the investment. Totally.

You have to properly capitalize your purchase. You owe that to yourself.

That's why I stress a MINIMUM of 20% down and a MAXIMUM of a 15 year loan.

If you do it any other way, I can stick money in a mutual fund and blow the doors off of any home you can purchase.... investment wise

[RashanGary]

after re-reading what I wrote above, I want to emphasize one more thing.

Home buying is not evil. Being undercapitalized and paying too much interest on a 30 year mortgage without the proper down payment makes the home purchase evil. It totally destroys the investment. Totally.

You have to properly capitalize your purchase. You owe that to yourself.

That's why I stress a MINIMUM of 20% down and a MAXIMUM of a 15 year loan.

If you do it any other way, I can stick money in a mutual fund and blow the doors off of any home you can purchase.... investment wise

Yeah, but your living in the home so it gains value as well as serves a purpose.

[Partial]

after re-reading what I wrote above, I want to emphasize one more thing.

Home buying is not evil. Being undercapitalized and paying too much interest on a 30 year mortgage without the proper down payment makes the home purchase evil. It totally destroys the investment. Totally.

You have to properly capitalize your purchase. You owe that to yourself.

That's why I stress a MINIMUM of 20% down and a MAXIMUM of a 15 year loan.

If you do it any other way, I can stick money in a mutual fund and blow the doors off of any home you can purchase.... investment wise

So what does one do if they don't have that 20% down payment? Rent? I was told that renting is just throwing money away.

I mean is it worth it to buy a 120,000 condo? Do people still buy those? I guess problem is I live in a fairly wealthy area where taxes are high and property values are even higher. A 150,000 is MODEST, as my 3 bedroom 2 bathroom ranch house with a crappy yard and landscaping is worth like 290,000 evidentally. That's unfortunate.

[retailguy]

Yeah, but your living in the home so it gains value as well as serves a purpose.

Greg, appreciation happens. But typically not very much in the first few years. Plus, you have to add on closing costs, and the various other expenses it takes to move into a home. Even at a 3% appreciation rate, you don't accumulate equity very quickly while making the minimum payment.

Second, you can lease the same home typically cheaper than you can buy, due to all the associated costs that go along with owning a home.

Partial, this example will answer your renting vs. owning statement as well. It is not throwing your money away to rent, provided, you don't "piss away" what you save in the process. You have to, as Greg stated, spend a certain amount of money to live. You can, pay a landlord, or pay a bank, in terms of interest, but you're going to pay someone to have a roof over your head.

Example. - You purchase a 180,000 home with no down at 6.75% and capitalize the 4500 closing costs. Your loan (or loans) are 184500. You take out a 30 year mortgage (or mortgages, one here for simplicity) which costs you 1196.66 or 1200 in round numbers. Unless you live on the west coast, property taxes will probably run you in the area of 4000 per year. Insurance 1000 and the dreaded PMI about 80. a month. These three things tack on another 496 or 500 in round numbers. This puts your house payment including taxes and insurance at 1700 a month.

You can probably lease the same house in most communities from 900 - 1200 a month, saving you a minimum of 5000 per year, not including the cost of upkeep/repairs/remodeling. Homeowners assessments can increase the prices even more, and are becoming very common as most people don't want to live next to Mike Tice's green/gold house....

Now look at the same home with 20% down plus you pay closing. Your loan is now 160000. payment is 1037, or 1040 in round numbers. Other costs are the same, but PMI is gone, so those costs are 416, or 420 in round numbers. Now your "payment" is 1460. Now your "loaded" cost of buying vs. renting is only 250 per month at the minimum. If you take the difference in the payment from 1700 vs. 1460 or $240 per month and apply that to the mortgage (I'd suggest much more) but just with that, you pay off the home in 24 years, saving you almost 6 years of payments or $50.729 in costs over the life of the loan.

So, when you look at how these numbers can change your life, and we're not even talking about moving the mortgage down to a 15 year term, or even less, you are talking about real dollars here. If you got 1400 a month back out of your budget 10 years sooner, that's 168,000 in principal alone over that 10 years.... So, even if you screwed up EVERYTHING ELSE in your life, you could still accumulate a $250000 pension before you retire.

Greg, I'd rather see that money in YOUR pocket, INSTEAD of Bank of America's.... You see it HOWEVER YOU'D LIKE TO....

Partial, what determines a good rental/purchase decision is what you do with the $500 differential in renting vs. buying the house. If you piss it away on wine and women, buy the house, if you can save it, do so, and make a smart purchasing decision.

The only true way to financial independence is to live on less than you make. No one has ever "borrowed their way to riches". Financing is the biggest reason that the "middle class" stays "middle class". You give the MAJORITY of your money to someone else. That 180000 home, purchased with no money down costs you, the homeowner $430798 over the life of the loan, JUST IN INTEREST AND PRINCIPAL. Doesn't include taxes and insurance. You are paying more in interest than you paid for the home... $250.798... That's a "lotta cash" to have the "privilege" of owning a home.

[Partial]

RG, as always, your knowledge and insight you offer on these matters is priceless. Same can be said for SC and B. This stuff is truly gold and I sincerely appreciate it more than my words could ever convey. It's all very, very informative!!

[Scott Campbell]

I quickly read through RG's post and have to say I think I agree with all of it. Solid advice. But I want to re-read it again to think about the finer points. The mortgage interest deduction is an often over emphasized benefit of buying a home.

What I would take away from the discussion is that you need to generate enough excess cash flow to get to your 20% downpayment. And 20% of $150K is going to be less than 20% of $180K, so you can get their quicker. Your ability to generate that excess cash flow also bodes well for your ability to pay down the loan quicker once you do buy the house.

[Scott Campbell]

So what does one do if they don't have that 20% down payment? Rent? I was told that renting is just throwing money away.

Renting is throwing money away. It's just less money than you'd be throwing away if your were under-capatized in your home.

[Scott Campbell]

Ok, here's a variation on the theme that RG threw out there. You buy a house that is somewhat discounted because the yard looks awful and it needs paint and other cheap repairs. But buy in a good location. You can't fix a crappy location.

You put 10% down, and pay your PMI for 3 or 4 months while you're fixing it up. Then you get it re-appraised making sure the appraisor knows exactly where he has to come in so that you meet your 20% threshold. With that appraisal showing 20% equity, you can ask (force) the mortgage company to then drop the PMI. So yeah, you pay the PMI for a few months, but not long enough to screw up the investment return from RG's example.

I bought my first house in a location where prices were going up 10% a year. So in less than 2 years we had our 20% equity and forced the mortgage company to drop the PMI charge. You can't count on being as lucky as I was with appreciation. But you can reduce the luck requirement by buying the right fixer upper.

Work for you RG? Or am I missing something?

[Scott Campbell]

Example. - You purchase a 180,000 home with no down at 6.75% and capitalize the 4500 closing costs. Your loan (or loans) are 184500. You take out a 30 year mortgage (or mortgages, one here for simplicity) which costs you 1196.66 or 1200 in round numbers. Unless you live on the west coast, property taxes will probably run you in the area of 4000 per year.

$4K property taxes on a $180K house is highway robbery. Replace your entire state government immediately.

People in states like Wisconsin have been conditioned to pay these investment crippling property tax amounts. It's absurd. $4K is what you'd expect pay on a $600K home in Utah.