|Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
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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
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
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 three years.
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 reasons.
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
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
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
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 house's value.
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.