Category Archives: Real Estate

Do you own “Investment Grade” life insurance? Banks do, Corporations do, and now so can you

What is “Investment Grade” Life Insurance…

life insuranceJust a few short years ago, I was staunchly opposed to whole life insurance, because that’s what I was taught by national “gurus” 25 years ago. I wholeheartedly believed (as many people still do) that if you need life insurance, you should buy a term policy, then take the difference in premiums between whole life and term and invest it in mutual funds.

So when a good friend of mine sat me down and tried to show me a whole life insurance plan, I nearly refused to listen. Many of you reading this will feel the same way, and nothing I say will change your minds. That’s fine — you’re entitled to your opinion just as I was entitled to mine.

Thankfully, my friend told me about “Investment Grade” life insurance. I soon realized that the gurus in my early years and the gurus of today were correct — based on the information they’d been given. The problem was their information was incomplete.

Whenever I hear a financial consultant (or anyone, for that matter) talk about less expensive premiums for term, I know they really don’t understand how this animal of properly designed “Investment Grade” whole life insurance really works.

With a properly designed whole life insurance policy, you get:

1. Principal protection guarantees of your money. Your cash value isn’t subject to market losses, as it is with mutual funds and other programs. When the stock market tanks again (and it’s never a question of if but when), you won’t lose a dime.

2. Guaranteed growth of your money every year. This will be interest-rate-driven based on the economy, but your account will move forward every year regardless of what the market does. This is compound tax-free growth and not the “average rate of return” you get with mutual funds. To be fair, in our current low-interest-rate environment, the growth rates are only in the 2 percent to 4 percent range but as you study further you start to realize the real wealth is not in the growth rate even when rates go higher.

Many financial advisers will tell you that your money would do better in a good mutual fund. But remember: When someone shows you an “average rate of return,” they can start taking that average from any time that benefits their example. This is not compounded growth but rather a factor of timing as to when you enter and exit the market. The stock market has wild swings; if that is acceptable to you, you should have much of your money in stocks. If not, maybe it’s time to consider a different way to think about investing. (Remember the period from March 2000 to October 2002, when the Nasdaq lost 78 percent of its value? It’s been 16 years since the dot-com bubble started to pop, and the tech-heavy index still hasn’t quite recovered to that level. If you like guarantees and stability then you have no business putting most of your money in the stock market.)

3. Dividends paid to policy owners are not taxable. Dividends aren’t guaranteed, but many reputable life insurance companies have been in business for more than 100 years and they’ve paid out dividends every year. The amount of that dividend will depend on several factors, but it boils down to how much profit the insurance carrier made. When properly paid to the policy owner, those dividends are not taxable.

4. A high starting cash value amount, based on what you contribute to the policy. Whole life policies that aren’t properly designed will have very little cash value in the early years.

But a properly structured life insurance policy will have high cash value percentages, even in its first year, and they increase every year. This becomes an important fact when you realize that access to your cash will help you grow wealth systematically regardless of market conditions

5. Access to your cash value at any age, at any time, for any reason — without taxes or penalty. This is a huge benefit of whole life policies compared to 401(k)s and IRAs, which impose multiple obstacles if you want to access your cash before retirement, and penalize you if the funds you borrow from them are not paid back by a certain time and at a certain interest rate. No such obstacles exist with a whole-life policy. So leave your cash in the policy if you wish, or borrow it back out and use it, the choice is yours.

6. The ability to use your account’s cash value to recapture lost depreciation on major purchases and interest and fees paid to banks. If you treat this pool of money inside the life policy like your own personal bank, you can loan it out to yourself and others to create wealth. (More on this in future articles, but suffice it to say for now that banking has been around in some fashion for thousands of years. Any business model that lasts that long is worth understanding and using to your advantage.)

7. Guaranteed insurance. Once the policy is in place, your insurance is guaranteed for the rest of your life. Many people assume they’ll be able to buy new insurance at any point in their life. But nothing is further from the truth — especially for those who’ve been diagnosed with chronic or terminal diseases. If you become seriously ill, don’t expect to be able to buy a new policy.

With many whole-life policies, you can add an “accelerated death benefit rider” for little to no cost, which will give you access to a large portion of your death benefit during your lifetime if you have a terminal or chronic illness. I just had a colleague with a client who was diagnosed with Lou Gehrig’s disease, or ALS, and was sent a check from his insurer for more than 70 percent of the eventual death benefit. He’ll be able to enjoy his remaining time without worrying how he will pay his bills.

8. The ability to combine your life policy with the worlds of real estate, private lending and auto financing to accelerate your wealth, both inside and outside of the policy. Just remember that any funds inside the policy are tax-free for life.

9. Protection from long term care and chronic care expenses. Well written policies with the proper companies could provide the ability access a portion of your eventual death benefit during your lifetime to help pay for assisted living or long term care expenses. This will insulate and protect your other wealth so you don’t spend a lifetime building wealth only to give it all back before you pass away leaving nothing for your family.

10. Death benefit. In addition to all the benefits you can make use of while you’re still here, at heart, this investment is still a life insurance policy, so when you eventually die, there will be a sum of money left behind to your beneficiaries — tax-free.

There’s a reason family dynasties, banks, and big corporations have been using life insurance for generations to grow and protect their wealth. Even when subject to estate limits, these death payouts go a long way toward promoting the tax-free, inter-generational transfer of wealth.

Of course, insurance company policies and riders will vary by state due to state regulations and depending on the actual insurance carrier. But you won’t find another type of account or investment that has all these benefits in one investment — not 401(k)s, IRAs, mutual funds, stocks, bonds, precious metals, real estate, nor any other account.

To engage with me further on this kind of policy, please email me directly at john@wealthwithoutstocks.com and visit our site at www.wealthwithoutstocks.com for many free videos, articles, archived interviews and more!

The Secret IRA

Types of IRA's

Do you know which kind of IRA you have?

Most investors mistakenly believe they have a “self-directed IRA” when in fact they have one that limits their choices to a few investment types. Within your plan, you can choose stocks, mutual funds or bonds. And while you may have hundreds and even thousands of choices of where to put your money inside that account, chances are you won’t be able to invest in nontraditional retirement assets — especially if your IRA or 401(k) rollover is with a traditional brokerage house.

So just what is a true self-directed IRA? It’s an account allows you to invest in many other options with your IRA, including:

  • Rental real estate.
  • Fixer uppers to resell at a profit (flip).
  • Private loans made at higher interest rates to other investors.
  • Discounted private notes.
  • Tax liens or tax deeds.
  • Privately held companies and startups.
  • Precious metals.
  • Leases and lease options.
  • Straight options (real estate options, not stock options).
  • Partnerships.

Such investments receive the same tax treatment as more traditional IRA assets. Any tax due is deferred until withdrawal, typically at age 70½, when your are required to start drawing down your savings, or possibly sooner.

This is an account for hands-on active investors with unique knowledge of some of the asset classes in the approved list, not for a “set it and forget it” investor.

By using this type of account it is possible to make some sizable returns from a relatively small amount of money. Here’s an example:

You have an opportunity to buy a rundown house from an estate that would like a quick sale. You determine the house is worth $200,000 — after you have spent $40,000 in upgrades. You contract to purchase the property for $120,000. But lacking the $160,000 to proceed with the sale, you enlist a partner who agrees to provide the full amount, provided you handle all the details, including closing, rehabbing and reselling the home.

You further determine that you would like your share of the profits to go inside of your IRA for the obvious tax benefits. You only have $10,000 inside your IRA with which to invest. The proper play given these set of circumstances is to have your partner buy the property in his name or an entity he controls, such as a limited liability company. You enter into an option agreement to purchase half ownership in this property. You pay $100 from your self-directed IRA and fill out option paperwork and give all the papers to your plan administrator.

This deal now moves forward, and the property is rehabbed and ready for sale in 60 days and sells and closes quickly for $200,000. You have $10,000 worth of sales and holding expenses, netting a $30,000 profit on this deal in five months. The actual title owner to the property agrees to pay you $15,000 for you to close out your option. This $15,000 is a return on the $100 option investment and is deposited back inside your IRA tax-deferred or tax-free (for a Roth IRA).

Your investor put up $160,000 and received $15,000 for a five-month investment. This represents more than a 20 percent annualized return on his money, which is pleasing to almost every investor. If he used his IRA money for this investment, then his profit would be tax-deferred as well.

Rental Income

Here’s another example: An investor from New York became aware of the self-directed IRA and used some of his IRA to acquire four rental homes in Metro Detroit. Each home was purchased for around $55,000 and rents for about $900, and the cash flow goes back to the IRA on a tax-deferred basis. If he sells these for big gains years from now, that profit will also be tax-deferred.

Be warned: There are also some prohibited investments with your IRA (see IRS Publication 590):

  • No loaning of money to yourself, your spouse or any family member in your direct linear family chain.
  • No investing in collectibles.
  • Your IRA can’t personally guarantee any loans in which it borrows money. This means that any money borrowed by your IRA must be “non-recourse” funds, which means that only the asset can be put up for collateral and may be foreclosed upon for nonpayment. The creditor may not file suit against the IRA for any shortfall in the loan goes delinquent.

All Profit comes from 5% of the Sellers

 MonopolyHouses

This is a follow up article from the last 3 weeks on real estate investment. Please read the first in the series and the latest article from last week. To get killer deals on real estate you must understand one simple fact:

At any given time across America there are really two real estate markets. The first is the regular or retail marketplace. This is usually about 95% of the market and this world is inhabited mainly by Realtors™, builders, banks, mortgage brokers, home owners, home inspectors, mortgage originators, and any other group of people that focuses on helping “normal buyers and sellers” buy and sell properties.

There is also a secret sub culture of the real estate market. This second market is usually around 5% to 10% of where the total marketplace falls. This world is inhabited by investors, REO brokers and agents (bank foreclosure brokers and agents), private money lenders, hard money lenders, foreclosures, probate properties, highly motivated sellers, contractors, subprime buyers, and anyone else that’s geared toward the investor buyer/seller and subprime buyer.

The profit for the savvy investor is dealing only with the 5 to 10% of the marketplace that will allow you to make the profits you require for your business. So many beginning investors will waste the bulk of their time dealing in the 95% world and wonder why they don’t buy any properties or the properties that they buy are subpar deals.

Make a decision right now to only deal in the 5 to 10% world and your life and business will be far more enjoyable and profitable. You need to become an expert in dealing with the 5% world and all its players. There are great deals all around you but you must be the prospector and focus only on the gold and not the dust.

In my over two decades in real estate I have been through every kind of market imaginable from red hot multiple offers in hours kind of market to a free falling value market where it seemed you could not give properties away. I have found that unsuccessful investors will always find reasons why they are not doing well or finding good deals. See if any of these sound familiar:

“The market is too hot here to find any good deals”

“This market is so bad that nobody is buying”

“You can’t do those kinds of deals in this market”

None of these are true and I don’t care what cycle your target real estate market is currently experiencing. During red hot markets I bought properties and got great deals. During dead dog slow collapsing markets both I and my clients have bought killer properties at rock bottom pricing. During a red hot market you really need to stay tuned to the 5 to 10% of the market. When you buy in these markets most of the houses are never “officially on the market” but rather the properties were found by you or your ant farm using the marketing strategies above. They also might have been on the open market and did not sell. They had some kind of problem that the agent and owner did not know how to solve.   If the property hits the MLS and is a super bargain it will always be hard not to overpay for the property. The rule of thumb is the more people that know the property is for sale the more money you can expect to pay to acquire the property.

That’s the bad news; the good news is because that kind of market is so hot you don’t always need as big a discount to make the deal work. The hotter the market is when you go to resell the quicker sell you will have and less holding costs you will need to pay. When you are dealing with very slow markets, many times you can pick and choose the deals you want to buy right off the MLS and find solid deals that make sense.   You must customize your buying and selling machine based on the market conditions.

The third type of property is pretty homes and those are homes that require a whole different approach than the ugly and semi ugly homes. These will be covered in a future article.

Analyze Deals Quickly

The next step once you have found a deal you think might be a good deal is to run your fast turn numbers.
Here is a simple formula to use every time.

After Repaired Value (what you believe it will sell for after repairs are made based on comps)
Repairs to be made (more on figuring these in a future article)
Holding costs (utilities, taxes, insurance, lawn, snow) (budget 5 months minimum)
Interest on funds (interest paid to outside lenders or your own bank (remember being the bank?)
Buying closing costs such as points on money, insurance, title company fees etc (check with local investors and title companies to get an idea)
Selling costs such as real estate commissions, transfer taxes, title insurance (check with local investors and title companies to get an idea)
Cost over runs and oops factor
Your minimum acceptable profit


Maximum offer allowed by you

Tune in next week when we continue our discussion on finding killer real estate deals!

Sellers Sell for Just Two Reasons

Home-for-Sale-300x225

This is another article in a series of how to invest in solid real estate deals. Please read the previous article before proceeding with this new article. These are more ways to find killer real estate investments in addition to the ones already mentioned in the previous articles:

  1. Put up a website and get a decent domain. Many sites do this but I get my domains and some of my sites through GoDaddy®. The website does not have to be fancy or expensive but make it solid and clean and keep it current. So many sites get put up and forgotten about it blows their credibility. I suggest a 4 minute video every month to post to the site. Keep the site relevant and use the domain in all your marketing
  2. Make up your wedding list. Imagine you are getting married and going to have a huge wedding.   Who would you invite? Get that list together and get all their contact information and let them know periodically (at least every quarter) that you are looking for real estate investments
  3. Find out who in your area handles bank foreclosures (otherwise known as REO’s or real estate owned by a bank) and send those agents a letter introducing yourself. Follow up these letters with calls and ask for a one on one appointment and buy these agents and brokers lunch. If there is a good sized foreclosure market in your area this one strategy can be a gold mine for your business
  4. The internet is loaded with properties but depending on the site the information can be very old so nothing will replace building relationships with real human beings who are in the world of real estate
  5. Estate properties sometimes can offer a great opportunity at a bargain. I have bought dozens of properties from my local probate court lists. When people pass away many times they leave a will that will have to go through probate court. These probates are public information and usually posted in a county legal news and/or website. These notices will have the person who passed away and the person who is the personal representative for the estate. These are the people in charge of opening and closing of probate and the estate. A well placed letter and follow up phone call have provided me with some great deals and large profits. I always got more excited when the personal representative is located out of town because they are sometimes more motivated to get the estate closed as quickly as possible. I would never send letters to spouses who just lost their mate; they have enough on their minds without me seeing if they want to sell. Most of the time you can tell by the address of the decedent and the address of the personal representative. If Ken Jones passed away and Lisa Jones is the personal representative and both live at 1234 Maple Street it means that Lisa is probably Ken’s wife. If the representative lives at a different address they are more than likely a child and that property will more than likely be sold in the next 30 to 90 days. I also got better deals when there were several siblings which meant the money was being split by several people. A $40,000 price reduction might only be $10,000 per person and easier to accept

When you receive leads from the above and some of the other 100 ways on the downloadable list they will come in 3 basic categories of properties:

  • Ugly
  • Semi Ugly
  • Pretty

When you are looking to buy and sell for a profit most (but certainly not all) of those deals will be ugly (they need a lot of TLC and money to bring them up to snuff) or semi-ugly (needs work for sure but more simple cosmetics than real contractor television stuff)

Before you even go to the next step of analyzing the lead, first pay attention to why the seller is selling the property. What is their true motivation for selling? All sellers sell for only two reasons. The need for cash or the need for debt relief are those two reasons. Yes, there are dozens of sub reasons such as divorce, pending foreclosure, settle estate, relocation, getting non performing loan off the books (REO’s aka bank foreclosures) and many others. All of those sub reasons go back to the two main reasons above.

Is the seller’s reason for selling strong enough that might allow you to buy this property under its current market value? The stronger the reason the bigger the discount on the price you could expect to receive. If a seller wants to sell because they are upgrading their home and need more space will that usually allow you a chance for a deal? No it will not! On the other hand if the seller has inherited the property and lives out of state and has just been informed the property is a beat up old mess does that sound like you might have a better chance at the kind of property we are trying to secure?You have a much higher chance of success based on that need to sell.

Tune in next week for more information on making successful real estate investments.

Finding Killer Real Estate Deals

If you missed last weeks article on real estate investing,I recommend you read it before you move on to this week’s follow up article. All good real estate investments start out at the same place and that is where you must:

Search_Detect

Find a Good Deal

The term good is such a broad term and is in the eye of the beholder. My definition of good and yours might be totally different. From the perspective of a guy who has bought and sold tens of millions of dollars of real estate let’s talk about what’s a good deal. This assumes you want to buy a fixer upper cheap and rehab the property for immediate resale. This also assumes you are going to cash out of the transaction by selling to a retail buyer who wants to live in the property. You will see in upcoming articles that is not even close to the only way to sell properties but for this article, that will be the discussion.

You must buy your property at a big enough discount off its retail or repaired value to allow you to make repairs, pay holding costs, pay sales costs, and make a nice profit. The first thing needed is to know what the value of the home is after you put it in nice shape. One of my first mentors, Mr. Nick Koon, told me this “son, until you know value, you know nothing!”

We need to know what similar homes in the same area are selling for and are currently on the market for offered by other sellers. You are looking for as close to your style, size, lot size, school district, age, bedrooms and baths as possible. Does the subject property have a basement? Does it have a garage? These are the biggest factors in pulling the comparables (or comps as they are referred to in the trade).

There are many sites on the internet that will allow you to gather comparables but none will be as good as the local multiple listing service (MLS for short) that Realtors™ have at their disposal to conduct their business. Working with a real estate agent will be a huge asset to your business but make sure you don’t waste their time. I would use these other sites (Zillow, Real Estate abc, Trulia) to get a ball park and then ask my agent for their “comps”. By the way, real estate agents and brokers pay big money every month to have the best information in the marketplace so they should have the best and most up to date information.

If my prospective investment home is a 3 bedroom 2 bath 1,500 sq ft ranch than that is the kind of home I am looking for to compare against my home. On the same street or in the same subdivision would be great but at least as close as you can get. You are looking for a range of value because no two homes, however similar, are rarely exactly the same. If I see similar homes in nice shape selling for $240,000 to $260,000 then my value will be about $250,000. You would like sold comparables to be within 60 days or sooner when possible for the most accurate snapshot of current market value.

A Simple Formula to Keep You Profitable

Determine the After Repaired Value and multiply that amount by 70% to 75% maximum. Then back out your estimated repairs. This figure will give you your maximum offer on a fixer upper. It would be nice to buy it for less than this figure but this figure is the maximum you can pay.   Deviate from this formula at your own risk. This will allow you to make a nice profit on the deal. By paying more you put your profitability at risk. The “After Repaired Value” is what your property would sell for assuming it was fixed up nicely to compare with or even be better than the other properties that have sold in the last 60 days.

We need to be buying this $250,000 home (depending on repairs) in the $170,000 to $190,000 range.  We will first focus on bringing good prospects and leads to us so we can find a good deal as described above. We will focus on a few key ways to find good deals in this and subsequent articles but we can only scratch the surface. I would like to give you 100 best sources to consistently find good investment prospects. Please visit www.wealthwithoutstocks.com for a free download of the 100 ways to find great deals.

  1. The local Multiple Listing Service- This is usually only a good strategy when the overall market is very slow and there are large numbers of unsold inventory on the market. During those markets there is usually enough inventories in any good sized market to keep you busy.   Most local MLS’s download to realtor.com where you can access millions of listings from all over the country. When your market is hot you can expect to find very few deals on the MLS and the rare times there is a great deal listed it will most likely have multiple offers.
  2. Getting the word out that you are a serious investor and are looking for good deals in any condition.
    1. Get business cards made stating that you buy houses, in any condition, any area, and close quickly. Buy 1,000 and leave them all over and pass them out as often as possible
    2. Over-sized flyers stating the above as well as domain name for a website. May consider passing these out (services do it for cheap) or mailing to a certain geographic location if you really want to own properties in that area
    3. Good old fashioned bandit signs still work. These are usually yellow signs with permanent marker hand written on them and placed all over town. Get a service to put them up for you but check with local zoning ordinances so you don’t get fined. Add a 21st century technique to the sign and put something like text to “webuyhouses123” for a quicker response. This will get you cell phone numbers from prospects instead of just bad email addresses
    4. Pay an ant farm to bring you deals. After you download your 100 ways to find deals find all the people on there that are around houses all day every day and make connections with as many as possible. Tell them if they bring you a lead that ends up as a successful investment you will play them $300.00 or some figure that makes sense to both of you. You also might just pay them $10.00 per each lead sheet they bring you back filled out with the information you need to make a decision. Think of having 20 or 50 “ants” in the field bringing you solid leads. This is leverage at its finest!

Tune in next week to find out more killer ways to find great real estate investment prospects.

Intro to Real Estate Investing

In upcoming articles we are going to look at how to profitably invest in real estate of many kinds, starting with the old fix and flip. Stay tuned in coming weeks if you would like to enter that business or simply add some solid real estate holdings to your wealth portfolio.
My first love is real estate investment because it took me to levels that I could not have achieved without getting to be an expert in that arena. Before I bought my first property I was in college for two years and before that I was a juvenile delinquent and high school failure.

sold house

Your life can change in 30 minutes

My second year in college my grades were respectable. I was not winning any awards but I was doing far better than I had ever done in high school. The main reason was a reality check from my mom who told me in no uncertain terms that if I received the same grades in college as I received in high school that she would be cutting me off from my education funding. I couldn’t blame her as who wants to waste big money on someone who is not taking it seriously? Even though my grades were fine I hated every second of my two year college career.

Then late one night I watched an infomercial (brand new marketing strategy in the late 80’s that has now become common place) and it was talking about buying properties with no money, no job, or no credit. I had all of those so I figured I could make it happen. After some research and investing in that home study program I decided my second year at college would be my last. I jumped into the real estate investment business full time and eventually would also be a loan originator and real estate agent, in addition to an investor.

I found out that you could indeed buy properties starting with nothing if you had some cutting edge knowledge. I spent years and tens of thousands of dollars acquiring that education through books, tapes, and live seminars plus the real life education I learned on the streets.  I want to pass that real world information to you as much as possible in these next articles and in my book Wealth Without Stocks or Mutual Funds.

I then went on to train people all over the country in multi-day seminars where people spent thousands of dollars to attend these weekend events. I really love teaching people the power of real estate and how it changed my life. I obviously don’t have time or room to put all of those trainings into this article or the upcoming articles but I am going to load them with top notch real world information that you can put to use right away in your own life.

Who knew there were TV shows in flipping houses?

My young son loves to torture me with Real Estate “Reality Shows” because for some reason he is fascinated by the housing business. This will likely change as he gets older but if he wants to go into that field he sure was born into the right house! I am going to write these articles as if I was gone and trying to teach my sons the down and dirty of how to make money by fast turning or “flipping” houses. If they do what they learn on those “reality” shows they will certainly go bankrupt quickly.

Reality shows meet true Reality

I rarely watch these shows but when I do it becomes obvious they have little to do with the actual business of real estate investing and much more to do with drama and before and after photos. By the way, there is nothing wrong with this drama because people are tuning in to be entertained and not to be educated. The only problem is when people don’t know the difference and believe the televisions show is actual how to education. So let’s cut out the drama and get down to making real money.

Big paychecks are very possible in this business and are even possible starting with nothing. You see “no money down” does not generally mean there is not money in the deal it just means that it does not have to be our money. My first property was bought as a rental when I was 21 years old and did not require one dime of my own money. I used two strategies combined that allowed me to use a partner and seller financing to accomplish this first deal. My second deal was also no money down and I received about a $7,000 paycheck on the resale. Now $7,000 isn’t all the money in the world but when you are starting from scratch with none of your own money at 21 years old $7,000 was a windfall! Thankfully the deals and checks got bigger but those first two deals were critical to my future success in real estate.

I want to take you through the 5 steps of any profitable fast turn on a single family home. The 5 essential steps are:

1) Find a good deal
2) Analyze deal quickly
3) Make offer and close on accepted deal (or follow up on deals that didn’t get done but were close)
4) Repair for maximum profit
5) Sell Quickly

Seems simple enough doesn’t it? Inside of each one of those 5 steps are the details that will make you be successful or struggle in this niche business. Tune in next week when we further examine each step in more depth.

To Rent or to Own… That is the Question

Rent_or_Own

In 2007 and 2008, property values nationwide dropped dramatically in sympathy with the banking crisis, mortgage crisis and the stock market crash. Never before had values of residential real estate fallen so far, so fast and in so many places. It seemed that one of the staples of American wealth was a lousy place to invest money.

During those brutal times, many investment advisers started suggesting renting a home was the way to wealth. Their theory was that if you invest your down payment money in equities, you would have piles of money in 20 years. Rubbish! These recommendations always come from people who broker your money into equities and are backed up by dubious math.

Some Simple Arithmetic

Let’s look at buying a $175,000 home — and renting one of comparable value. In most areas of the country, due to the down market (although values have had a nice rebound over the last seven years) and very low interest rates, your payment to own will be less than the rent for a comparable home.

If you bought a $175,000 home and put $8,750 down and negotiated the seller to pay most of your closing costs, you could get into this home for around $10,000 total investment. Your 30-year mortgage for $166,250, at 5 percent, would produce an $892 monthly payment. Taxes of $200 and insurance for $70 gives you subtotal payment of $1,162. Because you put less than 20 percent down, you will also pay mortgage insurance until you hit that 20 percent equity. This will give you a total payment of about $1,232.

Rental markets vary (look at www.rentometer.com), but in most areas of the country a $175,000 home will rent for $1,300 to $1,600. Let’s use $1,400 — or annual payments of $16,800 — with nothing to show for it but receipts. If you lease homes for 20 years and rents increase even a little, you will pay approximately $360,000 in rent and have nothing but rent receipts.

Consider These Variations

If you bought the home with the numbers described above, what might your situation look like? In 20 years you will have paid $295,680. You will owe $88,000 on your mortgage balance. But what if you had used the $1,400 that a home like that would rent for and paid down your mortgage balance by an extra $168 per month? In 20 years, your mortgage balance is only $18,500 — so your payments have created equity and wealth.

What about the increase in value of the home? I never try to predict the ups and downs of any market, but even with a modest appreciation rate of 4 percent, your $175,000 home is valued 20 years later at $389,000. The house is almost paid off (if you used that $1,400 rental payment) and is worth $389,000.

But what if the value increases less, stays the same or falls? Who cares? You had to pay to live somewhere. Whatever the value is, you own it free and clear and have only the taxes and insurance in your later years. Almost all successful retirees own their properties free and clear. If you are always renting, you create wealth for the landlord.

But Wait, There’s More

I didn’t forget the theory about putting your down payment money into equities. If that $10,000 grows at a strong 8 percent, it would grow to just under $50,000 in those same 20 years. This is a far cry from financial stability — or the equity in your home that you can access in several ways.

Even if you factor in the additional expenses of owning a home — say $50,000 for repairs and updates — most of that will be offset by your tax write-offs of your interest and property taxes.

According to the Federal Reserve, the average net worth of a homeowner is over $174,000 and average net worth of a tenant is $5,100. This is where financial theory collides with the realities of human nature. Home ownership is a natural forced savings and possible investment account that requires nothing but you to make your payment and enjoy your home. You also have the ability to alter the home as you see fit and are in charge of how long you stay. A home is where you will create memories for you and your family. The investment part is a bonus.