Debt is an evil thing that no one really understands. It makes life so much easier, or so we’re told. But, I’m completely against it. Debt, and credit, to me, is the least capitalist thing you can do. And I mean that, wholeheartedly. Capitalism is about making a profit, and when you’re working on credit, you’re doing yourself a disservice. First, you’re starting in the negative, whereas if you spend cash for something you’re starting at 0. Second, there’s interest, so it’s actually costing you more than paying cash.
Why Are You Starting In The Negatives?
It’s very simple math. Say I want a $179,500 home, average for the United States. Say I then turn around and get a $200,000 loan, with a fixed rate of 3.75%. That mortgage will cost me $333,443. Effectively double the cost of the property. Which means, if I then went and sold the property for $179,500, I would be at a loss. This is why I say that credit causes you to start in the negatives.
But it’s so convenient!
No, it is not convenient. You are impatient. For that mortgage you will be paying $926 per month. Now, say you decided to save just half of that. You will be able to save the full purchase price for that home in 16 years. Now, that seems like a long time, and it is, but at the end of that 16 years you will own, outright, your home. You also have to take into account interest, and if you’re smart, investments. If you invest in a simple monthly paying dividend stock that pays out dividends of $0.18 per share, per month, how long would it take to save up the cost of a home? If you invested your money at $213.96 (roughly 1/4 of $926) per week, into a stock that cost $50 per share, and pays $0.18 per share, per month, after 88 weeks (roughly 1 and a half years) you should have enough value in that stock to purchase your home.
Math Of The Above Formula
But You Can’t Trust The STOCK MARKET IT JUST CRASHED!
No, genius, the mortgage industry just crashed. It sent ripples through the stock market, but it was bad credit that caused all the problems. If everyone had paid cash for their homes, they might have lost some money, but they wouldn’t have lost it all, like so many did. The trick is to invest in stocks that have a proven track record.
Here’s The Magic
Going back to the example above, I want to point something out to you. The amount of investment capital, actual out-of-pocket money you have to spend, compared to the dividend income, money that you earn for your investment. Investment capital on the example above is roughly $19,018.41, which you will notice is 10.5% of the cost of the house. Now, the dividend income? $189,318.10 which you will notice is nearly $10,000 more than the value of the property. So, what this means is you can cash out your entire stock portfolio, and not spend a dime of your own money on the house of your dreams.
Here’s the Rub
The above example is a very, very, simple example, and by no means realistic in it’s simplicity. That said, it is possible, and it is exactly what I’m doing for my investment strategy. This isn’t advice for you to follow, but it is advice for you to research, talk to your financial advisor, and realize that anyone can do this. Sure, the amounts might vary, and the timeframe might go up, but that doesn’t change the inherent benefit of using dividend paying stocks to fund your real estate purchases.
If you’ve done this, or know of why this would not work, could not work, or should not work, please, let me know. I’m always looking to learn, and get good advice out there. If I’m wrong, and you know it, I beg you, leave me a comment and let me know. As the saying goes, pride goeth before the fall. I put knowledge before pride in everything I do.