Do the math | SummitDaily.com

# Do the math

Daily Staff Writer

Welcome Home!BY THETEAM@ELICH.COMShould I use cash or credit to purchase real estate? ARM loan or fixed rate? Ten percent down or 20 percent? Should I pay down debt or keep a cash reserve? These are all good questions, and here are some of the answers, according to Attorney William Bronchick.

Cash or Credit? Because of inflation, a dollar today is generally worth less in the future. So, while real estate values may increase, an all-cash purchase may not be economically feasible, since the investor’s cash may be utilized in more effective ways. Leverage is the concept of using borrowed money to make a return on an investment. Let’s say you bought a house using all of your cash for \$100,000. If the property were to increase in value 10 percent over 12 months, it would now be worth \$110,000. Your return on investment would be 10 percent annually (of course, you would actually net less, since you would incur costs in selling the property). If you purchased a property using \$10,000 of your own cash and \$90,000 in borrowed money, a 10 percent increase in value would still result in \$10,000 of increased equity, but your return on cash is 100 percent (\$10,000 investment yielding \$20,000 in equity). Of course, the borrowed money isn’t free; you would have to incur loan costs and interest payments in borrowing money. However, you could also rent the property in the meantime, which would offset the interest expense of the loan. Finally, consider the tax implications – if you have cash flow, you have taxable income; if you have increase in equity, there’s no tax until you sell. Cash Flow vs. Cash Reserve: The size of your down payment will affect your cash flow on rental properties. Let’s consider two examples:Example 1: \$100,000 property with \$20,000 down. An \$80,000 loan at 6 percent interest, including taxes and insurance is about \$600/month. Assuming you could rent the property for \$800/month, you have \$200/month cash flow or \$2,400/year. Not bad.Example 2: \$100,000 with NO money down. A \$100,000 loan at 8 percent (higher rate is generally common for zero-down loans) would make your payments closer to \$900/month. With zero down, you have \$100/month NEGATIVE cash flow.

On the other hand, paying down debt may make sense if you can’t get a higher return elsewhere in the market. Also, if paying down debt can have other rewards, such as bringing a loan below 80 percent LTV, you may be able to cancel private mortgage insurance and save additional money.In short, don’t rely on assumptions … do the math!WELCOME HOME! is compiled each week by the TheTeam@ELICH.COM. Butch Elich has been helping customers with their real estate needs in Summit County for over 20 years, and is the current president of the Colorado Association of Realtors Housing Opportunity Foundation (CARHOF). His team includes office assistant Claire Albers and associate broker Paula Parker. Find the ELICH.COM Team at RE/MAX Properties of the Summit in Frisco. They can be reached at (800) 806-9518 or at butch@elich.com.

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