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Diversify into real estate

At one time more years ago than I like to think about I was a NYSE Stock Broker. I was always trying to get my clients to spread out their risk by investing in different sectors of the market. Healthcare, software, manufacturing, retail, energy and even real estate were areas I had my clients buying. Diversifying an investment portfolio was a way to spread the risk and protect the value of the account.

Being diversified the account might not double or triple in value if that one stock pick was to rocket upwards, but I was able to keep the account value from dropping like a rock if bad news was announced.

As to real estate as an investment I was using both Limited Partnerships as a way to diversify a clients portfolio and I also utilized real estate investments called collateralized mortgage obligations. CMO’s are nothing more than home mortgages grouped into a large multimillion-dollar basket in which an individual investor can invest. Depending on which way mortgage rates are going the CMO’s can be very profitable.



So how does one invest in real estate and get the same return as a CMO? Buy a home in the High Country. This sounds over simple but let me explain. And to do so we need a subject to study.

Let us look at Ms. Eileen Forward and her purchase of a second home here in the High Country. Ms. Forward has decided to purchase a Town home with a purchase price of $480,000.00. She has also decided to borrow $400,000.00, so she will obtain a mortgage 80 percent of the purchase price.



Being that Ms. Forward is thinking that she may decide to sell in four to six years she obtains a 5/1 ARM with a six percent interest rate. Her monthly payment for the mortgage is $2,387.00. Her taxes and Insurance will run another $275.00 a month. So her out of pocket monthly expense is $2,662.00.

Eileen will have a deduction for mortgage interest in the first twelve months of $24,000.00 and if she rents the property out to family and friends she will be able to reduce her out of pocket expense. Now add to the equation a conservative annual appreciation factor of just four percent. The first year alone a $480,000.00 home will increase in value $19,200.00.

So we now need to see the advantages of owing her home for only five short years. Ms. Eileen Forward will get $120,000.00 in Federal tax benefits. The home, at four percent per year, will appreciate $103,000.00. Add those figures to the fact that Ms. Forward invested only $80,000.00 up front and she really sees a great return. In fact her original investment has gone up 128 percent over a five-year period. And this does not include the Federal tax benefits and the pleasure she receives from being able to spend quality time in the High Country.

Another advantage is the fact that Ms. Eileen Forward has diversified the investment portfolio by investing in real estate and owning a home in the High Country is much more fun than reviewing the monthly statement sent to her by her stockbroker.

For answers to your mortgage related questions call Bob Kieber at (970) 262-1199 or e-mail him at rkieber@comcast.net. Bob is a local mortgage lender and principal of Resort Lending. He has 30-plus years of professional experience in real estate, finance and investments, and is a longtime resident of the High Country.


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