In an environment where mortgage interest rates are high, rate buydown strategies can be very helpful for homebuyers who are worried about being able to afford a new mortgage payment. One of the most widely used rate buydown strategies today is called a 2-1 buydown.

Here’s everything you need to know about using a 2-1 buydown strategy to lower your interest rate and make your monthly mortgage payment more manageable.

What is a 2-1 Buydown?

A 2-1 buydown is when a home buyer uses credits (also called concessions) from a home seller or builder to temporarily lower the interest rate for the first two years of their mortgage, consequently lowering their monthly mortgage payment. The ‘2-1’ signifies that the interest rate will be lowered by 2% for the first year of the mortgage and 1% for the second year.

For example, let’s say you are buying a home with a 30-year fixed rate mortgage at a 6.5% interest rate. If you chose to use a 2-1 buydown, you would subtract 2% from that interest rate for the first year of your mortgage. Your mortgage payment for that first year would be calculated at a 4.5% interest rate, which would lower your mortgage payment by hundreds of dollars every month.
After that first year, your mortgage payment would be recalculated at a 5.5% interest rate. Once those first two years are up, your mortgage payment would return to the original calculation at 6.5% and remain there for the rest of your loan term (years 3-30).

How Much Does a 2-1 Buydown Cost?

Determining the cost of a 2-1 buydown is very straightforward: it’s simply the total amount of money you will be saving during the years the buydown is in effect.

For example, let’s say you want to purchase a $500,000 home with a 5% down payment ($25,000). You apply for the loan and are approved for a 30-year fixed rate mortgage at 6.5%.
To find out how much a 2-1 buydown would cost in this scenario, you need to find out how much your mortgage payment would be at three different interest rates: 4.5%, 5.5%, and 6.5%.

Once you have the numbers, you just add up the total difference between each of those monthly payments over the first two years. Here’s an example of what that could look like for the above scenario:

The total savings realized by a reduced interest rate for the first two years of this loan would be $10,800, so this is how much the 2-1 buydown would cost.

Important note: You can use a mortgage calculator to estimate your monthly payments, but the only way you will know the exact figures is by obtaining a pre-approval from your mortgage advisor.

What is the Process of Getting a 2-1 Buydown?

Once you know how much the 2-1 buydown will cost for your purchase, you will then ask for that amount as a credit from the home seller or builder.

Depending on what loan program the buyer qualifies for, a seller can offer a certain amount in credits or concessions. This is common in a ‘buyer’s market’ when there are a lot of homes on the market and sellers have to make their properties more attractive by offering some incentives. It can be a bit more difficult to negotiate these credits in a ‘seller’s market’ when there are multiple offers on the home, but it is still possible if the owner is highly motivated to sell.

If the seller agrees to pay for the 2-1 buydown, the amount will be subtracted from their proceeds from the sale of the home at closing. That amount will then go into your escrow account, and a portion of it will go toward lowering your mortgage payment for two years until all the funds are used up.

What Happens When the 2-1 Buydown Period is Over?

After year 2, your interest rate adjusts back to its normal “note” rate. Your rate does not adjust according to market rates at that time; even if rates are higher, you would only pay the rate you initially qualified for.

However, if something happens that causes rates to decrease (like a recession, which we believe will happen sometime next year), you may be able to refinance and get a permanently low rate for the rest of your loan.

What Are the Benefits of a 2-1 Buydown?

A 2-1 buydown strategy reduces your interest rate and your monthly payment for the first few years of your mortgage, making the home more affordable. A lower monthly payment can also make the transition from renting to owning a bit easier and allow you to start building equity and investing in your future much sooner.

What many home buyers do not realize is that a 2-1 buydown is much more effective at lowering your monthly mortgage payment than a price reduction would be. This can be a great negotiating tool. Instead of asking for a larger amount off the purchase price, you can ask for a smaller amount as a credit to be used as a buydown. It makes no difference to the seller, and it can give you an advantage over other offers that are pushing for a heavily reduced price.

How to Know if a 2-1 Buydown is Right For You?

In an environment where mortgage rates are rising, a 2-1 buydown can help you afford a larger mortgage payment and a more expensive home. This strategy can be especially helpful to first-time homebuyers who may be having trouble purchasing a home in the current market.

Understanding your different options will help you determine the right loan product for you. Whether a 2-1 buydown makes sense for you will depend on a variety of factors such as your current financial situation, the market you are buying a home in, and your financial and homeownership goals.

If you would like to learn more about the benefits of a 2-1 buydown strategy, or if you would like to see a loan comparison showing all the options available to you, fill out the form below to request a mortgage discovery consultation with one of our experienced mortgage advisors.

Should I Buy a Home This Summer?

Summer 2023 Edition

You’re probably wondering what recent changes in the housing market mean for
your homebuying plans this summer. Here are the top three things to keep
in mind.

Have a Lot of Equity, But Feel Stuck In Your Low Rate? You Need an Equity Transition Plan

Do you want to use your home equity to move to a better home, but feel like you’re stuck because you have a low interest rate on your current mortgage?

This is a story we hear all the time. According to Goldman Sachs, 99% of mortgage borrowers have a rate lower than the current market rate, with 70% of those having a rate below 4%!

But guess what else we hear about all the time? Homebuying regrets.

There are a lot of homeowners out there who bought during the market boom of the last few years and are just not happy with their home purchase. Here are some of the top regrets these homeowners have according to data from the Anytime Estimate American Home Buyer Survey:

Compromising priorities to get a lower rate – or to just get into ANY home in the wild market of the last few years – has led to regret among nearly three-fourths of home buyers, according to the survey.

But while these homeowners may be unhappy with their home, most of them are likely very happy with the equity they have accumulated.

According to CoreLogic’s latest home equity report, U.S. homeowners with mortgages saw their equity increase by a total of $1 trillion in 2022 alone – even with the market slowdown that happened at the end of the year.

And according to Black Knight’s February Mortgage Monitor Report, the average mortgage holder has $178K in tappable equity to borrow against while retaining a healthy 20% equity stake in the home.

Unfortunately, most homeowners are so focused on keeping their current mortgage rate that they neglect to analyze their overall debt picture. The amount of consumer debt out there is at an all-time high, and the cost of carrying that debt (aka interest payments) has increased dramatically:

• Average credit card rate: 24% (lendingtree.com)

• Average personal loan rate: 11% (bankrate.com)

• Average use car loan rate: 9% (marketwatch.com)

• Average HELOC rate: 8% (bankrate.com)

If you’re like most homeowners, you probably have monthly payments on debts like these that are draining your bank account and slowing down the progress on your financial goals. But what if sacrificing your low mortgage rate meant that you could not only eliminate all those debt payments and save money every month, but also move into a new home and put those homebuying regrets behind you?

It’s not just a pipe dream. We’ve seen it happen with the homeowners we work with time and time again. All it takes is to zoom out and look at your overall debt picture, rather than just focusing on how much your mortgage payment will increase with a higher interest rate.

Let’s take a look at how this works using a real-world example of a homeowner we recently worked with. By shifting the way they thought about their home equity and overall debt picture, we were able to help them create a plan to 1.) buy a more expensive home that better fit their lifestyle, 2.) eliminate all of their non-mortgage debt, and 3.) reduce their monthly expenses – all while increasing their interest rate by over 3.5%.

Case Study: Building an Equity Transition Plan

Every year, our mortgage advisors conduct an annual financial review with homeowners they have helped in the past. We do this to help you keep up-to-date on the market and the wealth in your home, and to make sure you are always in a mortgage with the lowest possible cost and potential to help you reach your financial goals.

During one particular meeting, a client told us they were unhappy with their home and wanted to move but could not justify giving up their 3.25% interest rate. Even though they had over $150,000 of equity in their home, they were convinced it would be impossible to afford the home they wanted at the current prices and interest rates.

This was understandable because while they had accumulated a lot of equity in their home, they had also accumulated a lot of other consumer debt over the years. Their monthly mortgage payment was $1,848, but they were also paying $1,800 every month on credit cards and two car loans – bringing their total debt payment to $3,649.

The problem? They were so focused on their mortgage payment that they were not considering their overall debt profile.

They thought, like many homeowners do, that the most effective and cost-friendly strategy for purchasing a new home is to use ALL of the equity you have in your current home as a down payment – because a higher down payment means a lower principal balance and consequently a lower mortgage payment.

They did not realize that by putting forth a smaller down payment on the new home and using some of their equity to pay off their other debts, they could buy a $150,000 more expensive home – with a 3.5% higher interest rate – and their mortgage payment would only increase by a couple hundred dollars.

The image below is taken directly from the Total Cost Analysis their mortgage advisor prepared for them comparing their current mortgage and monthly payment to three other scenarios.

Scenario #1: $600K Purchase, 25% Down, No Debt Payoff

The first scenario details what their payment would look like if they used all of their home equity as a down payment on a new home.

The home they wanted was listed for $600,000 and the new rate they qualified for was 6.875%. Even by using all of their current equity as a 25% down payment, buying the new home would increase their monthly payment by $1,557 (the amount shown in the PAYMENT line includes both their mortgage payment and their other debt payments).

Scenario #2: $600K Purchase, 10% Down, Payoff All Other Debt

The second scenario uses some of their equity to pay off all their consumer debt.

They owed a total of $90,000 on car loans and credit cards. Using their equity to pay off those debts meant they could only put 10% down on the new home and would have to pay mortgage insurance for a few years, but their monthly payment would go up by only $438 compared to the $1,557 increase had they gone with scenario #1.

While an extra $438 a month is still a substantial increase, this strategy would allow them to pay off ALL their other debt, purchase their dream home, and own a higher value asset that will continue appreciating.

Scenario #3: Potential Future Refinance

Scenarios 1 and 2 show what the immediate impact on their monthly payment would be – but what about in the future when mortgage rates drop?

Scenario #3 shows what could happen if they implement scenario #2 now, and then refinance when rates drop to an anticipated 5%.

If they did not take on any other debt, doing this would decrease their monthly payment to $3,438 – over $200 less than the current payment on their 3.25% mortgage!

The Bottom Line

By changing how they use their home equity, considering their overall debt picture, and focusing on total monthly payment rather than just rate, this homeowner was able to find an affordable way to purchase their dream home – even while increasing their interest rate by over 3.5%.

What sounds like the better financial strategy to you: keeping a low mortgage rate for as long as possible, or paying off all your other debt AND living in a home you love?

With a long-term plan for your home equity that considers your overall financial picture – not just how low your mortgage rate can be – you can put your money to work for you, purchase your dream home, and set yourself up for financial success.

If you would like to see a Total Cost Analysis like the images above that compares your current mortgage with other strategies, lets talk!

The Benefits of Selling Now, According to Experts

If you’re trying to decide if now’s the time to sell your house, here’s what you should know. The limited number of homes available right now gives you a big advantage. That’s because there are more buyers out there than there are homes for sale. And, with so few homes on the market, buyers will have fewer options, so you set yourself up to get the most eyes possible on your house.

Here’s what industry experts are saying about why selling now has its benefits:

Lawrence Yun, Chief Economist at the National Association of Realtors (NAR):

“Inventory levels are still at historic lows. Consequently, multiple offers are returning on a good number of properties.”

Selma Hepp, Chief Economist at CoreLogic:

“We have not seen the traditional uptick in new listings from existing homeowners, so undersupply of housing will continue to heighten market competition and put pressure on prices in most regions. Some markets are already heating up considerably, but price premiums that we saw last spring and summer are unlikely.”

Clare Trapasso, Executive News Editor at Realtor.com:

“Well-priced, move-in ready homes with curb appeal in desirable areas are still receiving multiple offers and selling for over the asking price in many parts of the country . . .”

Jeff Tucker, Senior Economist at Zillow:

“. . . sellers who price and market their home competitively shouldn’t have a problem finding a buyer.”

Bottom Line

If you’re thinking about selling your house, let’s connect so you have the expert insights you need to make the best possible move today.

Why Buying a Vacation Home Beats Renting One This Summer

For many of us, visiting the same vacation spot every year is a summer tradition that’s fun, relaxing, and restful. If that sounds like you, now’s the time to think about your plans and determine if buying a vacation home this year makes more sense than renting one again. According to Forbes:

“. . . if the idea of vacationing at the same place every year makes you feel instantaneously relaxed, buying a vacation home might be a wise move.”

To help you decide if making a move like this is right for you, let’s explore why you may want to consider purchasing a second home today.

Benefits of Owning Your Vacation Home

You don’t have to worry about finding a place to stay. It can be a challenge to find a rental where you want, when you want. Some summer vacation destinations are more popular than others, meaning your favorite place may be booked up in advance. Bankrate explains why owning your vacation home means you don’t have to worry about that sort of inconvenience:

“. . . a second home can offer a place to have quality time with your family and ensures that you always have a vacation destination.”

It’s an investment. Home values typically appreciate over the long haul. That holds true for your vacation home as well, especially if it’s in an area with growing market demand. This can help grow your net worth with time.

Vacation homes may provide tax benefits. If you own a vacation home, you may be eligible for tax deductions based on where it is. However, before buying, you’ll want to consult with a tax professional to discuss first as taxes can vary by location.

It could potentially turn into a retirement location. If you love the location of your vacation home, you could potentially sell your primary residence and retire there in the future.

How a Pro Can Help You Find Your Perfect Match

As you’re preparing for summer vacation, remember, you could potentially visit your second home instead of another rental unit or hotel. If that sounds appealing to you, a local real estate agent is your best resource. They have the knowledge and resources to help you understand the area and what vacation homes are available in your budget. Plus, these agents can explain the perks of how owning a second home can benefit you.

Bottom Line

If any of these reasons for owning a vacation home resonate with you, let’s connect. You still have time to enjoy spending the summer in your new home.

Looking Back at the Savings and Loan Crisis to Predict Future Changes in Home Values

In light of the multiple large regional banks recent failures and sustained pressure on the banking industry, many are worried about buying a home in fear that the turmoil could cause home prices to fall.

This is understandable – most people have their vision clouded by the memory of Great Recession that was caused by the housing market meltdown. But in reality, today’s economic uncertainty is much more reminiscent of a financial disaster that began two decades before.

The effects that have spread through the banking system after the recent turmoil are very similar to the Savings and Loan (S&L) Crisis of the 1980s and early 1990s. Both then and now, the Federal Reserve was rapidly hiking interest rates to fight inflation, but doing so at the cost of devaluing interest rate-sensitive assets, like the U.S Treasuries and mortgage-backed securities that make up a large portion of many banks’ balance sheets.

The Savings and Loan Crisis: A Brief Overview

The S&L Crisis was a major financial event in the United States that unfolded between 1986 and 1995. This slow-moving crisis was characterized by the collapse of many savings and loan associations (S&Ls), which were financial institutions that primarily focused on mortgage lending.

More than one thousand S&Ls failed during this period, it was unquestionably the largest banking crisis since the Great Depression.  The crisis was triggered by a combination of factors, including deregulation, poor lending practices, and an economic downturn.

Case-Shiller Home Price Index: The Gold Standard of Home Values

The Case-Shiller Home Price Index (CSHPI) is a widely recognized measure of home values in the United States. Created by economists Karl Case and Robert Shiller, the CSHPI is based on a methodology that tracks changes in the value of residential real estate by analyzing repeat sales of single-family homes.

By measuring home price fluctuations over time, the CSHPI provides valuable insights into the health and value of the housing market.

Impact of the Savings and Loan Crisis on National Home Values

During the S&L Crisis, the housing market experienced a slowing of appreciation that turned to minor deprecation in home values in 1990 and 1991.

The CSHPI can help us better understand the effects of the crisis on national home values:

1. Slowdown in Home Price Appreciation:

In the ten years leading up to the crisis (1976 to 1985), the CSHPI revealed that national home prices appreciated a cumulative 112%.  Home prices were running very hot with three double-digit appreciation years in a row in 1977, 1978, and 1979.

In the ten years DURING the crisis (1986 to 1995) home prices nationwide appreciated a cumulative 40%. This slowdown can be attributed to several factors, including rising interest rates (which increased from roughly 9% to their peak of 18.63% in 1981), economic stagnation, and the fallout from the S&L failures.

2. Rebound of Appreciation:

The CSHPI data also indicates that the housing market rebounded in the decade AFTER the S&L crisis (1996 to 2005) with cumulative appreciation of 124%. The appreciation rebound can be linked to several factors, including the resolution of the S&L Crisis, the easing of monetary policy, and a general improvement in economic conditions.

Below is a chart of national home appreciation going back to 1942.  Out of the last 81 years, home values have been up 73 years (green boxes), down seven years (red boxes), and flat one year (white box).  This long-term perspective teaches us two powerful lessons.

1. Residential real estate has a 90%-win rate. This is better than just about any other asset class over a very long time horizon.
2. Coming out of tumultuous economic times, like after the Great Depression, the S&L Crisis, and after the Great Recession, home prices rebound and do very well.

The Bottom Line

As we watch the 2023 banking crisis unfold, nobody knows for sure how contagious it will be.  But as the saying goes, “History doesn’t repeat…but it often rhymes.” 

With a significant housing shortage, lowering inflation and mortgage rates moving down, we don’t expect home prices nationally to decrease during the fallout. We expect low single-digit appreciation similar to the early 1990s.

According to the most recent batch of housing data, home prices are already moving higher (numbers below show increases compared to the previous month):

• CoreLogic: prices up 1.6% in March 2023

• Black Knight: prices up 0.5% in March 2023

• Zillow: prices up 0.9% in March 2023

• FHFA: prices up 0.5% in February 2023

• Case-Shiller: prices up 0.2% in February 2023

All of this goes to say, you should not be worried about buying a home in this market. If history tells us anything, it’s that housing does very well in times of economic turmoil – especially compared to other asset classes.

If you are ready to purchase a home but you have been waiting for prices to fall, now is the time to get moving. Remember, wealth is not created by timing the market – it’s created by time IN the market. The sooner you buy a home, the sooner you will start building equity and be one step closer to financial freedom.

New Home Price Reports Show Why the Housing Market Correction is Over

In case we haven’t said it enough, it’s time to stop waiting for home prices to drop!
This week, we got even more indication that the housing market correction is behind us. The Case-Shiller National Home Price Index, which is one of the leading measures of U.S. residential real estate prices, rose 0.2% in February 2023 compared to January. This is the first time the index has shown an increase in the average home price since June 2022.
As of February (the latest index that is available), seasonally adjusted home prices are only down 2.8% from their peak in June 2022. And on a year-over-year basis (compared to February 2022), prices are up 2% nationwide.

Need more proof? The Federal Housing Finance Agency (FHFA) also recently released it’s house price index for February, and it shows that house prices increased by 0.5% in February compared to January. Year-over-year the index is up 4.0% (both numbers non-seasonally adjusted). Compared to the June 2022 peak, FHFA’s numbers are only down .2%.
What does this mean? The moderation in home prices we’ve been experiencing thanks to high interest rates is losing steam. Earlier this year we started to see see new-home sales rise and mortgage applications bottom out, and this rise in prices is the next step toward a healthy housing market with continued appreciation.

Why Are Prices Rising?

The reason home prices fell last year is not complicated – higher interest rates made monthly mortgage payments a lot more expensive. This, combined with the Pandemic Housing Boom that resulted in a 41% increase in home prices from summer 2020 to summer 2022, reduced housing affordability to the lowest it had been since the housing bubble that preceded the Great Recession.
So why are prices rising again? Improvements in housing affordability and a continued undersupply of homes.
Home prices are determined by two things: supply and demand. Yes, there are few buyers in an inflation-heavy economy with high interest rates, but in order for home prices to go down there needs to be fewer buyers than sellers – and that is just not within the realm of possibility today.
There is a lot of pent-up demand in the housing market right now that has been kept at bay because of the affordability problem. But as affordability improves, we are going to continue to see more people move forward with their homebuying plans.
And affordability has been consistently improving this year as rates have fallen and prices have moderated. As we move into the busy summer buying season, you can expect prices to continue to climb as the warmer weather and lower interest rates bring even more buyers into the market.

Getting pre-approved is an important first step when you’re buying a home.

To understand why it’s such an important step, you need to know what pre-approval is. As part of the process, a lender looks at your finances to determine what they’d be willing to loan you. From there, your lender will give you a pre-approval letter to help you understand how much money you can borrow.

Freddie Mac explains it like this:

“A pre-approval is an indication from your lender that they are willing to lend you a certain amount of money to buy your future home. . . . Keep in mind that the loan amount in the pre-approval letter is the lender’s maximum offer. Ultimately, you should only borrow an amount you are comfortable repaying.”

Basically, pre-approval gives you critical information about the homebuying process that’ll help you understand how much you may be able to borrow so you have a stronger grasp of your options. And with higher mortgage rates impacting affordability for many buyers today, a solid understanding of your numbers is even more important.

Pre-Approval Helps Show You’re a Serious Buyer

That’s not the only thing pre-approval can do. Another added benefit is it can help a seller feel more confident in your offer because it shows you’re serious about buying their house. And, with sellers seeing a slight increase in the number of offers again this spring, making a strong offer when you find the perfect house is key.

As a recent article from the Wall Street Journal (WSJ) says:

“If you plan to use a mortgage for your home purchase, preapproval should be among the first steps in your search process. Not only can getting preapproved help you zero in on the right price range, but it can give you a leg up on other buyers, too.”

Bottom Line

Getting pre-approved is an important first step when you’re buying a home. It lets you know what you can borrow for your loan and shows sellers you’re serious. Connect with a local real estate professional and the Oddo Group so you have the tools you need to purchase a home in today’s market.

Real Estate: The Most Effective Path to an Early and Wealthy Retirement

How confident are you that you’ll be able to retire comfortably?

There’s a lot of discourse out there about whether the United States is heading for a retirement crisis. This conversation has been kicked to the forefront again in recent weeks with the news of France announcing reforms of their pension system that will push the retirement age from 62 to 64.

Unfortunately, Americans just do not have enough saved for retirement. A recent report by PWC analyzing US Federal Reserve data shows that one in four Americans (including 27% who consider themselves retired) have absolutely NOTHING saved.

Anyone who has not been able to save much for retirement will depend solely on Social Security – and that typically replaces only about 40% of pre-retirement income. However, it’s highly likely that we will see major reforms in social security. The Congressional Budget Office estimates that social security reserves will be depleted by 2033.

With inflation rising, the stock market growing increasingly volatile, and social security drying up, you need to take matters into your own hands when it comes to your financial future! And the best way to do that is through real estate – specifically, building a portfolio of rental properties.

Building a Safe and Early Retirement with Real Estate Investing

Real estate investing for retirement comes with a plethora of upsides. Whether you are hoping to retire young or catch up on your retirement savings later in life, capitalizing on these unique benefits of real estate investing will allow you to build your retirement income quickly and safely.

Rental Income and Rising Equity

Real estate appreciates over time at a greater rate than inflation. Combined with the rental income over the years, the actual rate of return can be staggering.

If you’re worried about home prices falling, take a look at the chart below. Real estate values have gone up 73 out of the last 80 years – that’s a pretty good indicator of future performance.

If you invested in just one rental property today, you would immediately see your wealth grow from two directions at once. Your property value would appreciate over the years, and at the same time your tenant would be paying down your mortgage for you – your debt would be shrinking as your property value rises!

Rents also rise alongside inflation, and in many cases rise faster. That’s because rents are a primary driver of inflation.
Your property rents for $2,500 the year you buy it. The next year, you raise the rent by a conservative 3%. And then you do the same next year, and the year after that. Your real returns stay the same, or even improve over time.

Eventually, your tenant would pay off your mortgage entirely, leaving you with a free and clear asset and even greater cash flow for retirement income.

The Power of Leverage and Rental Income

Imagine you have $250,000 cash that you would like to invest in real estate. You could buy a small rental property and earn a modest return on your investment through rental income, but it likely would not be much more than you would see if you invested in other assets over the long term.

Using the common 1% rule (monthly rental income should be 1% of the purchase price), you would charge $2,500 rent for the $250,000 property. The 1% rule is also commonly applied to maintenance and operating costs, meaning it would cost you 1% of the property value to maintain the property each year. For this example, that would be $208 per month. Subtract that from the rent and you have a monthly cash flow of $2,292.

Now let’s break this down by looking at cash-on-cash returns (the annual cash income earned on the cash you invested).

By purchasing just the one rental property with cash, your annual rental income would be $27,504. This means your cash-on-cash return would be 11% ($27,504 annual rent / $250,000 investment = 11%). Not a bad return on investment at all.

But the real returns come with leverage. Instead of buying just one property for cash, you could use the power of leverage and buy five properties for $250,000 each, financing 80% of the purchase price and putting down the other 20% with your cash. Beyond helping you scale five times as fast, this strategy would also dramatically improve your cash returns.
Say that for each of those $250,000 properties, you borrow $200,000 for a 30-year mortgage at a fixed rate of 6.5%. Your monthly mortgage payment for each property would be approximately $1,500 with principal, interest, taxes, and insurance. This means your monthly cash flow would be $792 per property, or $3,960 total.

That increases your annual cash-on-cash return from 11% to 19%!

And those returns actually improve even more over time. That mortgage payment stays fixed as the years and decades pass, even as rents rise to keep up with inflation. That means that the spread between your mortgage payment and your rent actually grows much faster than the rise in rent alone.

If you raised the rent on one of the properties above by a modest 3%, it would be a $75 total increase. But a $75 increase in the spread between your mortgage payment and your rent ($1,000 in our scenario) would mean a 7.5% increase in your margin.

And that’s just in the first year alone! Over time, your rent increases would build upon each other even as your mortgage payment stays fixed.

The Power of Leverage and Appreciation

Using leverage to purchase multiple properties can dramatically increase the cash return on your investment and provide you with a consistent income, but it gets even better – the returns we’ve already discussed don’t even take into account the wealth you would be building through appreciation alone.

In 2022, home prices appreciated an average of 6% nationally. If you had purchased just one $250,000 home with cash last year, your return on that investment would have been 6% over 12 months.

But appreciation is not realized just on the amount you invested…it’s realized on the entire value of the home (you can probably see where this is going).

If you owned five properties each worth $250,000 last year, with 80% leverage your return on investment would jump to a staggering 30% in just one year!

Add this “leveraged appreciation” to the return you would be getting on rental income, and you have a rapid increase in your net worth that is unmatched by any other investment out there.

The Bottom Line

While purchasing and owning rental properties does require more knowledge and more labor than stocks, the returns are unmatched. It’s that same barrier of entry that keeps everyone from investing in them, which keeps the returns strong.

Investing in real estate is a great step towards achieving financial freedom, and it is one of the most effective ways to build a safe and early retirement. Take advantage of the perks above to scale your passive income and grow your net worth faster, so you can escape the rat race and be confident you will have a comfortable nest egg in your later years.

Take the time to learn how to find good deals and how to calculate rental cash flow. Once you know how to do that, you can create ongoing sources of passive cash flow that only rise in value and income with every year that goes by.