Monday, January 11, 2016

Housing Prices, The Unemployment Rate, Rental Prices, And Income: What You Need To Know Before Investing In Real Estate

Summary
Purchasing a house is one of largest and most important transitions in your lifetime.
Macroeconomic factors are favorable for purchasing real estate.
High asset prices are fueling capital into alternatives assets such as real estate.
Microeconomics
Purchasing a house is one of largest and most important transitions in your lifetime. It can also be one of the best investments you ever make. Peter Lynch is famous for saying: "Before you do invest anything in stocks, you ought to consider buying a house… in 99 cases out of 100, a house will be a money-maker".
Before you stop reading, citing the sub-prime mortgage crisis as the greatest financial crisis since the Great Depression, take a moment to review these figures.
  1. You get to leverage yourself 500% by putting only 20% down on a mortgage.
  2. No margin call on your levered bet.
  3. Interest payments on your mortgage are tax deductible.
  4. Local tax payments are deductible from federal income tax.
  5. Tax credit programs for households under certain income levels (surprisingly generous levels, up to $90,000 in many areas).
  6. Non-taxable capital gains on your investment (certain rules apply).
  7. The price of your house will NEVER go down!!!
Yes, number 7 was said in jest, but all other reasons are very real, very beneficial reasons to purchase a home. The federal government is practically begging you to buy a house with the gigantic tax loopholes that they parading around your feet for you to jump through. Let's do a quick hypothetical:
Let's assume your household makes $65,000 a year and assume a worst case scenario, meaning you live in California and have to pay a 12.3% state income tax. After all taxes, federal withholding, social security tax, Medicare tax, SDI (don't ask), your monthly take home pay is $3,710.32.
With this income, given a 30-year fixed rate mortgage at 3.92%, you can afford a $300,000 house/condo making monthly payments at 40% rate of your monthly take-home pay. Your down payment (initial investment) of 20% would be $60,000.



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