Quote:
Originally Posted by dbarrett5381
I don't understand how paying interest on a mortgage results in a much higher return on investment. Seems to me you would be losing money by paying interest, no? I guess the point is that you are telling someone to go deeply into debt, pay interest that is more than the entire amount of the mortgage to the bank, and assume substantial risk for a "Tax writeoff" for the perceived higher return on investment....... no wonder we are in a credit crisis right now.
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You have 100 thousand dollars. You can buy a house for 100,000 cash. Or you can buy four houses for 100,000 each, 25,000 down and a 75,000 mortgage on each. You live in one and rent the other three. For this discussion let us presume the rent for the three is sufficient to pay the mortgage on the fourth. (Not far off on low end houses...but actually not a big issue)
So in both cases you live comfprtably in your home with no dollar outlay.
After five years though the situation is pretty interesting. With normal performance the value of the houses is up 10 or 15% in most areas. Some of it may only be inflation but so what? If you went the single home you now have an $115,000 asset. If you went the four you now have a $460K asset.
On top of that the pecuilarities of the tas law provide certain benefits. Not only did you get to deduct the interest...but you got to deprecaite the value of the three homes you rent.
All up all in you likely picked up 100,000 over the five years. And note that a large part of this growth has not been taxed and can be leveraged into further properties.
Now this example is a bit cooked. What happens if you don't get enogh cash flow to pay the mortgage on your own place? Well so it pays a bit less and you only get a bit rich instead of a lot rich. Or all the rentals go away. Well now you end up potentially losing some money. Then again if there are no renters there is no work and you can't stay in your house either.
Bascially though there is a reasonable case for leveraging money. If you are old or otherwise disadvantaged it may not be a smart thing to do. But if you are not old or hurting you probably should try it to one degree or another.