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 million!
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 thing.
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 routine expenses.
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 the loan.
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 that level.
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.
Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report and he's a regular contributor to US News Money and CreditCards.com. You can follow Gary on Twitter or visit Gary Foreman on Google+.
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