An investment strategy being used by many people involves using bank loans to finance investments. With mortgage rates at their historically low rates, this strategy can lead to significant profit for the savvy investor.
The strategy allows the well-qualified home owner to take out a maximum mortgage at the lowest possible interest rates and place the proceeds in an investment that offers a higher rate of return.
Most experts are predicting strong recovery in both the stock market and in the real estate industry in 2013. With the Fed committing to $85 Billion a month in additional stimulus this year, it’s likely that the Feds Trillion Dollar spending spree will go a long way towards stimulating growth in investments. Given these conditions a 10% return on investments in real estate or the stock market is likely if not probable. That is why it makes sense to borrow money from the bank to get a mortgage as opposed to paying cash. After all, it’s what the banks have been aggressively doing for the past couple of years to shore up their week balance sheets. It may be time for us to think about using the same strategy and consider the following example.
On January 1, John Investor (nick-named ‘Savvy’) had a home worth $1.25 million. Savvy went to his lender and obtained a $1 million mortgage with minimal closing costs and interest at 3.5%. Savvy took the proceeds and invested in the stock market, which yielded an 10% return in 2013 and beyond. That 10% generated 2013 profits of $100,000. For all of 2013, Savvy paid $35,000 in mortgage interest and Savvy realized a profit of $65,000.
$1,000,000 x .10 = $100,000 Investment Profit
$1,000,000 x .045 =$35,000 Mortgage Interest
$65,000 GROSS PROFIT
In other words, Savvy used the same strategy financial institutions are using — he used Other People’s Money – the bank’s – to make a nice profit. Savvy is comfortable with the risk because he knows he can sell his short term investment and pay off the mortgage.
Home owners with equity in their homes are strongly urged to give serious consideration to the OPM Strategy.