Thursday, November 5, 2009

Easy Money: The 10 Second Formula to Get Rich

The Simple 10 Second Formula to Get Rich



Last time, I promised to provide you a simple 10-second formula for getting rich, and here it is (drum roll please)...


Buy low and sell high.


Honestly it really is just that simple. Unfortunately although it is simple, it is not easy. If it were easy, everyone would be filthy rich.


Whether you are dealing in real estate, cars, services, stocks, or what ever, the formula for wealth is the same. Buy it at a low price and sell it at a higher price. It is because of this simple truth that many say that money is made in real estate when it is bought.


If you buy real estate the right way, you will make money on it if the values go up, down, or sideways. If you are buying a home to live in, the calculation is a little different, but it still holds true.


There are four universal keys to buying right that apply to home buyers and investors. They have slightly different applications for each, but the keys are the same. The first universal key is to avoid falling in love with the home before you buy. The second is to avoid paying too much, always buy below market value. The third universal key is to avoid overleveraging (don't borrow too much). The fourth is to avoid paying too much for your loan.


In this post, I will break this down for those who are buying a home where they want to live. In another post I will do this for investors.


I. Don't fall in love with the house. When buying a home, don't get your heart set on just one house. Pick out two or three that would all be great for you. Then, if you cannot get one, you have two fall back positions. This is one secret why investors get great deals and retail buyers often don't. Investors don't fall in love with the house. They have three more just like it waiting in the wings.


II. Don't overpay for the house. Never offer retail value. Never make an offer that is more than 91% of the retail value of the home (savvy investors offer much less). Even if the market is hot. If you buy the home at retail value you stand an 80% chance that two years later the home will not be worth what you paid for it. This is one of the problems plagueing the housing market today. Many folks bought high and are having to sell low.


III. Don't over borrow. I cannot count the times I have heard people talk about stretching to make a mortgage payment because it would pay off in the future. Many of those folks are facing foreclosure today. Never borrow more than 80% of the purchase price of your new home, including any fees financed. As soon as you pass the magic threshold of 80% your mortgage payment shoots up. This is because of private mortgage insurance (PMI) that is tacked on as well as a higher interest rate, it can also increase your insurance premiums in some cases. This double and triple witching occurs when you cross the 80% mark.


IV. Don't over pay for the loan. Make sure your all-in payments are never more than 30% of your gross monthly income. If it is more than that, you can be four car tires away from foreclosure. Pay attention to your credit score and learn how to keep it high. A good credit rating will get you lower interest rates that will make a huge difference in the monthly payments you make - and that high credit score may even help you get the job you want.


Summary for Home Buyers

The 20% safety cushion on your loan, added to the 10% discount on the price you pay gives you 30% of the home value to protect yourself against declining home values, or discounts you might have to take if you need to sell fast.


That same 30% cushion means that when you walk in the door of your new home you have 30% of its value in equity. With a $100,000 home, that means you just increased your net worth by $30,000 by buying right.


Now, if the housing market goes down or sideways, you can still do fine. And, if it goes up, you can make a killing when you sell high, because you bought low.


At http://www.buyahousebelowmarket.com/, we sell beautiful homes at below market prices. These are not fixer-uppers (once in a while we have those, but we let you know that up front). We carefully examine the market and figure out what is the retail value of each home we sell. Then we deliberately discount the price at least 10% below retail, sometimes more.


Further, our team will teach you what you need to know to get the lowest loan rate and best terms you can so that you won't overborrow.


Tom ~



Why Pay Retail?

1 comment:

Lafe Wade said...

You can NEVER go broke taking profits! Good blog.