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The Forever Home is a TRAP!

The forever home is a trap because it keeps you from creating real wealth in your life.

It has become my passion in life to get the message out that every American has the opportunity to make one million dollars.  I hear a lot of people from my generation say “the system is rigged against them”, “that the boomers screwed everything up”, and “that there is no real opportunity for them to live comfortably”.

NOT TRUE.  

Anyone can make one million dollars in real estate.

I know because I’ve done it and MORE IMPORTANTLY I have watched & helped my friends change their lives through real estate.   The best part is you can too!

Now you are probably thinking “I’m not a real estate investor this is a load of crap” or “Easy for you to say you work in real estate” or my favorite “Not everyone has the money to buy a house”.

Well the good news is you do not have to be a real estate investor at all and in order to understand real estate I’d prescribe 3-4 episodes of Flip or Flop, Fixer Upper, or Property Brothers.   As I’ve said for years, real estate is not hard and the people who make it seem hard do it to make themselves feel important because they are losers.

If you are one of the people who does not have the money to buy a house.   There is still time.   Now is the time to start saving, work on fixing your credit score, do whatever it is you need and start saving.  “If you don’t get serious about your money you will never have serious money.”Grant Cardone

Ok so how does it work.  

I am going to use national averages to breakdown the sample further.

Right now you can receive a 96.5% loan.  It is called an FHA loan.   Now as a result of the limited downpayment your monthly payment will be higher.   However, in my experience 90% of first time home buyers get an FHA loan so I will start there to show the math still works.

The Mortgagereport.com says that the average closing costs nationally is between 2% and 5%.  Closing costs are the amount a buyer needs to bring to closing outside of the downpayment, they vary state to state.  So for this example I will use 3.5%.

 

Home #1

Purchase Price: $200,000 (The Median Price for a Home in the US)

Loan Amount: $193,000 (96.5%)

Down Payment: $7,000 (3.5%)

Closing Costs: $7,000 (3.5%)

Total Cash to Purchase: $14,000

Home prices are very localized but for consistency I will continue to use national averages. In 2018 prices in the US went up 7.4%, in 2019 they went up 5.7%,  and in general with few exceptions, the average sale price of homes sold in the U.S. climbed steadily each year from 1963 to 2007—when the housing bubble burst and the financial crisis of 2008 ensued.  Since 2008 housing prices have again continued to steadily rise.

So on our houses we will use 5% each year as a price increase.   You live in house #1 for 7 years.   The home value at the end of year the house would be worth $281,420.   You will owe the bank $163,122.

Minus commissions of 5% to real estate agents you the seller would get back $104,227.  Oh and by the way this money is free from capital gains taxes since this was your personal residence and you lived there for 24 of the last 60 months.

For profits on your main home to be considered long-term capital gains, the IRS says you have to own the home AND live in it for two of the five years leading up to the sale. You can exempt up to $250,000 in profits from capital gains taxes if you sold the house as an individual, or up to $500,000 in profits if you sold it as a married couple filing jointly.  https://www.bankrate.com/investing/long-term-capital-gains-tax/

 

House #2

So we just turned $14,000 into $104,227 but we are going to roll ALL OF THE money into the next house and get better loan terms.

Purchase: $443,500

Loan Amount: $354,800 (80%)

Down Payment: $88,700 (20%)

Closing Costs: $15,523 (3.5%)

Total Cash to Purchase: 104,227

You live in house #2 for 7 years.   The home value at the end of year the house would be worth $624,049.   You will owe the bank $308,505.

Minus commissions of 5% to real estate agents you the seller would get back $284,341.60.Oh and by the way this money is free from capital gains taxes since this was your personal residence and you lived there for 24 of the last 60 months.

 

House #3

So we just turned $14,000 into $284,341.  Depending on what market you live in and how you feel about managing a rental property at this point you might consider buying two houses.   For this example I will continue with the one house model.

Purchase: $848,780

Loan Amount: $594,146 (70%)

Down Payment: $254,634 (30%)

Closing Costs: $29,707 (3.5%)

Total Cash to Purchase: $284,341

You live in house #3 for 7 years.   The home value at the end of year the house would be worth $1,194,318.   You will owe the bank $502,168.

Minus commissions of 5% to real estate agents you the seller would get back $632,434. This could be where things with the capital gains get interesting.  You can exempt up to $250,000 in profits from capital gains taxes if you sold the house as an individual, or up to $500,000 in profits if you sold it as a married couple filing jointly.  On this property the seller would make more than $250,000.  So the seller if unmarried could owe capital gains taxes.   You should to consult an accountant.

House #4

So we just turned $14,000 into $632,434 (depending on capital gains taxes).  Now we start to get into the area of Jumbo Loans.  A jumbo loan (or jumbo mortgage) is a type of financing where the loan amount is higher than the conforming loan limits set by the Federal Housing Finance Agency (FHFA). The 2020 loan limit on conforming loans is $510,400 in most areas and $765,600 in high-cost areas. https://www.quickenloans.com/learn/jumbo-loan

If you’re buying a one-unit primary property with a loan amount of up to $1.5 million, you’ll need to have a minimum median FICO® Score of 720 and a minimum down payment of 10%. If you’re a first-time home buyer, the minimum down payment for a jumbo loan is 15%. If the property exceeds 20 acres, the minimum down payment is 20%. The maximum debt-to-income ratio – which compares your minimum monthly installment and revolving debt payments to monthly income – must be no higher than 40%. Finally, if you have a down payment of 20% or more, you can get a jumbo loan with a DTI of 43% and a median FICO®Score of 680 or better.    https://www.quickenloans.com/learn/jumbo-loan

At this point you have bought and sold 3 homes over the last 20 year you should likely be able to qualify for a jumbo loan. However, to prove it is possible even if you do not qualify I will assume you do not.   I will also use the high-cost jumbo cap of $765,600.

Purchase: $1,303,985

Loan Amount: $717,192 (55%)

Down Payment: $586,793 (45%)

Closing Costs: $45,639 (3.5%)

Total Cash to Purchase: $632,433

You live in house #3 for 7 years.   The home value at the end of year the house would be worth $1,834,837.   You will owe the bank $606,166.

Minus commissions of 5% to real estate agents you the seller would get back $1,136,930.

 

CONGRATS!  You just turned $14,000 into $1,136,930.   All you had to do was move 4 times.  You did not have to buy any investment properties or even get a real estate license to sell the houses yourself.

 

 

**Please note I am not a licensed financial advisor or accountant.   This Content is for informational purposes.   Feel free to contact me with questions.   I am happy to help anyone in anyway that I can.  Good luck**

 

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