Get a Mortgage for Goodness Sake
The “OPM” Strategy – using OTHER PEOPLE’S MONEY
This would be a great piece to cut and paste and send to all clients and sphere of influence.
An investment strategy being used by many people involves using banks 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.
Let’s look at a simplistic example of how the math works. 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 4.5%. Savvy took the proceeds and invested in the stock market, which yielded an 11% return in 2010. That 11% generated 2010 profits of $110,000. For all of 2010, Savvy paid $45,000 in mortgage interest and Savvy realized a profit of $65,000.
$1,000,000 x .11 = $110,000 Investment Profit
$1,000,000 x .045 =$45,000 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.
Although the market is expecting another 10-11% gain in 2011, Savvy is giving serious consideration to investing in distressed Real Estate because of the tremendous investment potential. Home owners with equity in their homes are strongly urged to give serious consideration to the OPM Strategy.