Macmillan Holdings, LLC. Money Girl, QDnow, and Quick and Dirty Tips are trademarks of Macmillan Holdings, LLC. Leverage can turn an ordinary income and savings into real wealth. yuu money I am Japanese.Englishis ver difficult! http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=12538#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=12538#Comments Wed, 07 May 2008 02:38:45 GMT Tony H money I quite happy with your article & reply to comment regarding investing leverage but I presumed it is only fundamental. I would like to know in detail calculation of leverage (assumed property is rented) by taking into account of all cost associated and interest/tax deduction. what is the expected or real return for a specified investment with a specific time frame? What is the tax implication?And the amount of tax can be recovered? what is the break-even return on investment.Your clear explanation to above question is appreciated. http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1088#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1088#Comments Tue, 01 May 2007 19:38:40 GMT Lily money When I bought my house, I put 20% down simply to avoid the additional cost of mortgage insurance that would have been required by the lender. I certainly understand the power of real estate as my father invested and retired at 50, lives solely on the rental income generated. However, it can be a tricky business in some markets and, now that I own a property management business, I know that the wrong renters can make it a very hard proposition. Thanks for the show! PS It looks like some of your commenters need to check out Mr. Manners! http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1087#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1087#Comments Thu, 29 Mar 2007 02:44:02 GMT Money Girl money Thanks, Grammar Girl! And thanks, everyone, for your patience while I was away. http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1085#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1085#Comments Sat, 17 Feb 2007 00:28:34 GMT Money Girl money Thanks for the question. Saving for a college education is definitely on my list of topics for upcoming episodes.To Your Success!-Money Girl http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1083#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1083#Comments Sat, 17 Feb 2007 00:26:30 GMT Money Girl money Hi Aseem, Missy, Sara, and John! Thanks for being so patient. The simple example in the episode is based solely on appreciation to illustrate the effects of leverage and doesn’t factor in the expenses of personally living in the property (such as mortgage interest, property taxes, insurance, and repairs, for example). The calculation was solely figuring your return on your initial down payment from appreciation alone. If you did want to factor your housing expenses into the calculation, you’re on the right track, Aseem. If you are living in the house yourself, the calculation tells you whether you are paying to live in your house or whether your house is paying you for the honor of your presence! The calculation is: Annual Return on Initial Down Payment = (Annual Net Expenses or Net Rental Income If Rented + Annual Appreciation)/Down Payment To “get paid” to live in your own house, the amount of the annual appreciation would need to be higher than your net expenses for the year. As John correctly points out, your mortgage interest is tax deductible. As a homeowner, your property taxes are deductible as well. If your house isn’t paying you to live there, don’t feel bad! The important thing to keep in mind is that if you weren’t living in a home of your own, you’d most likely be renting somewhere else. You’d still have a monthly housing expense, but wouldn’t get the long-term benefit of the appreciation. The table below shows how the return on the initial down payment changes with increasing leverage assuming 5% appreciation, a property value of $100,000, net annual rental income of $4,000, and a mortgage interest rate of 5%. This table takes into account the effect of having a higher mortgage interest expense if you leverage more. This isn’t exactly “Quick and Dirty,” but it’s still very simplistic. For more details on calculating return on investment for real estate, a really helpful book is "Investing in Real Estate" by McLean and Eldred (available in the sidebar of this webpage). Also, see my response to Adam below for some of the things to consider when thinking about making a larger versus a smaller down payment when purchasing real estate. To Your Success!-Money Girl http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1082#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1082#Comments Fri, 16 Feb 2007 22:15:08 GMT Money Girl money Hi Adam,The answer depends on your situation. There’s no one-size-fits-all answer to this question. Some people like to make a small down payment to keep more of their cash available for other uses, like investing or cash reserves. If you adopt a strategy of making a small down payment, it’s important to be disciplined and invest (rather than spend) the money that would have otherwise gone into making a larger down payment. Depending on how you invest the money, you might make more or less interest than the interest rate on your mortgage. Of course, the goal would be to make more!One thing to keep in mind is that the mortgage interest on your home is tax deductible, so if the interest rate were, say 8%, and you were in a 25% tax bracket, the effective interest rate would be 6% after factoring in the tax benefit.To Your Success!-Money Girl http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1079#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1079#Comments Fri, 16 Feb 2007 21:10:32 GMT Grammar Girl money I'll say it again: Money Girl has been out of town. (She recorded her last few episodes before she left.) I believe she's back now and will answer shortly. http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1077#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1077#Comments Fri, 16 Feb 2007 00:49:25 GMT John money Looks Like Money Girl doesn't care about the comments she gets on her blog. http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1076#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1076#Comments Fri, 16 Feb 2007 00:33:19 GMT aseem money This is strange. Apparently, no one can clarify or explain my post originally posted on 1/24/2007. http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1074#Comments http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx?commentid=1074#Comments Thu, 15 Feb 2007 19:20:40 GMT Wed, 07 May 2008 02:38:45 GMT http://moneygirl.quickanddirtytips.com/leveraged-investments.aspx feedback@quickanddirtytips.com (Managing Editor) feedback@quickanddirtytips.com (Webmaster) en-us