By building your own home, then repeating this process every few years, a first time home
owner can turn a $120,000 starter home into $1.5 Million Dollar mansion by building just six houses. This idea may seem far-fetched,
however the old saying "if it sounds too good to be true, it usually is," does not apply to this scenario. It doesn't
apply because this plan includes 4 powerful wealth-building principles working simultaneously in your favor. These are as
follows:
- 20% Equity built into each home
- Tax deductions as well as tax free gains
- Proven appreciation over time
- Reinvesting gains - compounding
Lets
discuss each of these principles in turn.
1. Equity Build Up
A Person
can save anywhere from 15-25% of the cost of a home by contracting the home themselves. The exact amount that can be saved
will depend on how well a person could educate and prepare themselves both prior to and during execution of this plan. Remember,
this is not a "get rich fast" scheme, but rather a long term investment plan that will require a certain amount
of continuing education and research to maximize its returns. After all, it takes a different level of skills to build a $500,000
home than it does to build a $100,000 starter home.
Also, since you would be selling these homes you would need to keep up with all the latest news in the home
building industry in order to make sure you are building something your buyers will find appealing. You will want to educate
yourself as to the various mortgages available, how they compare in costs, rates, etc. Other factors include location,
schools and accessibility. A good idea is to spend time visiting open houses in your area.
- The 5 year intervals between homes gives you plenty of time
to plan and research your next dream home. By educating yourself on all the new and exciting features and advances, you will
be able to maximize the value of each successive home. An example of this is building Green. According to a recent survey
of NAHB home builders, approximately 50% of all homes built in 2010 are expected to contain at least 3 of the 5 Green Building
Elements. NAHB's free Green Building Guidelines publication will show you how to phace these elements into your home.
Matt Belcher, of Belcher Homes in St. Louis states; "Lenders are raising the value of Green Homes by as much as 18%."
2. Tax Advantages
There are tremendous tax advantages
associated with owning your own home. The first and most obvious: Interest you pay on a mortgage is tax deductible. Since
you must live somewhere, why pay rent which neither qualifies nor builds up any equity over time? Lets say that your mortgage
payment is around $600.00 a month (or $7200 a year) . Since you will be living in these homes for only a few years, most of
this $7200.00 will be interest. Principle cannot be deducted. Say your deduction comes to $6,000.00. If you move into a 30%
tax bracket, that's a savings of $1800.00 each year or $150.00 each month. Why not allow Uncle Sam to pay $150.00 of your
mortgage payment for you every month?
- According to a recent report by the Federal Reserve, in 2003 the average
renter's net worth was barely greater than $5,000 - while the average home owner's net worth was $172,000
The other tax benefit comes when
you sell your house. There used to be a once in a liftetime exclusion where a person could sell their home and exclude the
gain from taxation. The catch was you were only allowed to do this once in a lifetime. Now this exclusion can be taken multiple
times, but only as often as every two years. In order to take the exclusion, you must have lived in the home for 2 of the
5 years preceding the sale. You can exclude up to $250,000 as a single person, and $500,000 as a married couple filing a joint
return. You do not have to report this gain on your tax return as long as you qualify. If you exceed the $250,000 limit ($500,000
if joint) then you can report the excess gain on Schedule D form 1040 See IRS publication 523 for a worksheet. If one spouse
dies, you can only exclude $250,000 unless you sell in the year the death occurs in which case you could exclude $500,000.
Any gain over the limit is then taxed as long term capital gains.
Property taxes are also deductible.
3. Appreciation
According
to the Federal Home Loan Mortgage Corp. (Freddie Mae) U.S. real estate values have risen 6.3% per year on average over the
last 40 years. Also, U.S. home prices have never declined for two years in a row nationally during that period.
Home Prices_ Up, Up, Up
Median Price of new homes sold
$18,000
40 yr $226,933
1963
→
2003
Source: U.S. Census Bureau (Oct. 27, 2005)
The Value of a typical home... Way Up!
In 1975, a home costing 100,000 was worth over 600,000 by 2005. It appreciated to more than
6 x its original worth in 30 years.
Source:
Office of Federal Housing Enterprise Oversight Sept. 1, 2005
Maybe
now you can begin to see why home ownership has traditionally been the best and biggest asset for the majority of Americans.
Trends suggest that this fact will not change anytime in the forseeable future.
4. Reinvested Compound Gains
Reinvesting gains_ compounding.
Visit www.finishrich.com/homeowner
Free & Clear (the plan)
The plan assumes a $100,000
mortgage throughout the entire time frame.
Reinvesting the tax-free gain on each subsequent house. Also based on a national appreciation average of 5% and a 20% builder's
equity built into each house.
Following this home building
program to create wealth has some other characteristics that make it superior to a lot of the other investment plans including
stocks & bonds. Market timing does not impact the
success of this plan. Yes, the housing market fluctuates, as we are now experiencing a serious downturn nationwide that is
now entering its 2nd year. Obviously these market fluctuations are not uniform across the nation, as some areas will
hardly notice a change. Idaho, for example is the fastest growing state in the nation and has been "booming" for
several years. It has not been affected by this correction in the housing market.
Suggested Article: "Which State
has the fastest-growing economy?" USA Today September 27, 2007.
Click here to view article.
Depending upon where you reside, as well as what stage of the plan you are in, will determine
how you react to a "booming" market vs. a depressed market. Lets say you built your first home and have lived in
it the required two years and you get a sense that things are beginning to go south, you might decide to sell sooner rather
than later. Corrections rarely last for two years so if you built during a downtime it will almost certainly be back up in
5 years before you were ready to sell again.
Also, depending on how depressed the area
is that you live in & how many unsold homes are on the market, you might be able to forego building your next home by
taking advantage of a buyers market and purchase a home that has already been discounted 15-20%. You would then be 20% ahead
of those who purchased their homes a few months earlier. Its back to the old axiom: Buy Low
- Sell High!
There are many variations to this plan_ which is another positive.
Not everyone has the same goals & ambitions. We all have different time constraints as well as temperments and abilities.
Assuming we allow 6 months for the contracting of the home & 6 months to sell, then this plan could realistically be repeated
every 3 years vs. every 5. You might be someone who skills related to building. Painting, carpentry, plumbing, electric, concrete
finishing, siding installation, roofing, tile & flooring, stone, etc. If you did happen to have some of these skills and
time is available to you - you could build in even more "sweat equity" & make the plan even more profitable.
Remember its all tax-free gains! The freedoms and variations offered by this plan make it one of the most opportune investment
plans I've found. Not only does it allow you the freedom to make choices, but it also gives you peace of mind at the same
time. There are other investments that have a good track record over the long haul besides homes. The stock market has done
well as an average over the past 50 years. However stocks can't match your home for comfort, safety & peace of
mind.
Again, I'd like to stress: You have to live somewhere,
so why not take advantage of the benefits associated with home ownership & turn a necessity into a vehicle to build
amazing wealth. Let me repeat! You get to live in each of these beautiful homes that you created!
Cost of the home: $200,000
Value of the home: $250,000
Worth
of your time: $50,000
Personal
Satisfaction: PRICELESS!
How much net worth
you accumulate by following this 6 x = $1.5 Million Dollar Program is mostly determined by two factors:
- The appreciation rate your homes experience during the 30 year period. Assuming you build homes that other people
will find appealing, the amount of appreciation you'll experience will be mostly beyond your control. Outside of choosing
an area with excellent growth prospect for the following several years; you are basically at the mercy of market conditions.
- Your ability to keep costs down and build equity into your homes. The original plan assumed 20% equity built into
each home plus the 5% appreciation rate throughout. In this case a $100,000 home would turn into the $1.5 Million Home at
the end of 30 years. If we were to assume 25% instead of 20% with the same 5% appreciation rate, then the same $100,000
home would turn into a $2.5 Million Home after 30 years. So you can easily see how much that extra effort that you expend
in comparing costs, shopping around and doing research can pay off in the long run.
Remember: Its the reinvesting and compounding effect of tax
free gains over time that makes the difference.
Just
for comparison, if you achieve only a 10% level of savings in each home at the same 5% appreciation level, this plan will
turn into $800,000 in 30 years instead of $1.5 Million. That should be enough to keep you focused on cutting costs. Much of
the information found in this website is designed to help you do achieve this goal.
