Page 23 - BusinessWest June 13, 2022

Dispelling a Popular Money Myth
The Equity on Your Home Does Not Earn an Investment Return
By Charlie Epstein
When I ask the average investor, “what does the equity in your home earn,” I usually get a perplexed look. If they are with their significant other, one will look at the other with that, ‘hey, you know the answer to this question, right?’ look.
next door to you. Our two houses are identical. Only difference is, I don’t want to use my money to buy the house, so I go to the bank and get
a $500,000 mortgage. I’m using other people’s money (OPM) instead.
The mortgage is 4% interest rate for 30 years. Forget about taxes and utilities in
What is the net cost for me to borrow that money? Let’s look at the math: $2,387.08 times 40% equals $954.83. Uncle Sam is paying this amount of my monthly mortgage, by letting me deduct the $954.83. Going further, $2,387.08 minus $954.83 equals $1,432.25, which is my
net monthly cost times 12 months, totaling $27,690.12. In the first 12 months it has only cost me $27,690.12 to buy the same house you paid $500,000 for. I sell my house for $600,000, pay the bank back the $500,000 I borrowed and have $100,000 gross minus $27,690.12 net mortgage payments equal $72,310 net profit. What’s my ROR? 261% vs. your 20%.
But wait, there is even more magic. You see, I didn’t use my $500,000 cash like you did to buy this property. I used only $27,690.12 of my sav- ings. I still have $472,309.88 left to invest some- where else. Let’s say I’m conservative. I put my money in a tax-exempt bond fund earning 3% federally tax free. At the end of the first year, I have $14,169.29 of additional tax-free interest earnings.
Now I have earned the net profit on the sale of the house of $72,310 plus $14,169 tax free inter- est equals $86,479 total profit. Now what is my
Money
Continued on page 48
“A home mortgage is what I call good debt. Good debt is the kind you get someone else to pay a percentage. That someone else is Uncle Sam.”
this equation because we both need to pay those costs; my monthly mortgage payment is $2,387.08.
One year from now our houses have appreciated to $600,000. We both sell our homes for $600,000. What is the rate of return (ROR) on your investment? It’s 20%; $100,000 profit divided by $500,000 equals 20%. You made 20% ROR, not bad, you proudly think.
Now I sell my house for $600,000 at the end of one year, what’s my
So, what does the equity in your home earn every day? Let’s do a brief experiment and find out.
Let’s say you buy a house, in Longmeadow
for $500,000 on Captain Road where I grew up, (I know ... good luck with that, Charlie. Humor me). You don’t want a mortgage, so you pay $500,000 cash. How much will that equity earn every day? Before you answer, let’s say I move into the house
ROR? Remember, I put no money down and used OPM. I make 12 monthly payments of $2,387.08. A home mortgage is what I call good debt. Good debt is the kind you get someone else to pay a percentage. That someone else is Uncle Sam. The first 15 years of my mortgage payment is mostly interest. I itemize my taxes, so I’m able to deduct 40% (lucky me, I’m in the highest marginal tax bracket).
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