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Real Estate As a Tool - Article 7.
Real Estate - Things I Have Learned From Folks Smarter
Than I
Let me repeat, for this message bears repeating:
For middle class Americans, real estate is often as important to
a comfortable retirement as a fully-funded retirement plan. If you
do not "get" this principle, you must not have been reading my articles.
And just how does real estate work in overall financial
planning?
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It is easily the most tax-advantaged investing you can engage
in (deductibility of interest and property taxes AND capital
gains exclusion); |
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The use of a long-term mortgage - say, 20 or 30 years at a fixed
rate, acts as a tremendous hedge against inflation - the bank
simply cannot raise your interest rate, no matter what is going
on out there in the real world (and if rates decline, you can
simply refinance at the lower rate - talk about a win-win…);
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Another use of that mortgage is as leverage - you can parlay
your $20,000 into a $100,000 house; then, when that house appreciates
in value, you can parley your "profit" of perhaps $20,000 plus
your original $20,000 into a nicer $200,000 house; |
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The equity in your home can be used to finance college for the
kids or start a new business; |
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Then, when retirement time rolls around, you can take all the
profit out of your house - generally tax-free - and have a nice
little bump in your retirement funds available. |
Pretty simple, eh?
Well, in theory, it IS simple. In the real world,
there can be complications. Let's look at a few - and at possible
solutions.
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1. When one buys real estate,
the real money is made when buying, NOT when selling. By this
I mean that we have a lot more control over how much we pay
for a property than how much somebody else will pay us. The
market is pretty ruthless. Many factors outside of our influence
can negatively impact our sale price - things like current interest
rates, availability of similar properties, inflation, war, a
new expressway next to the house. So, rule number 1 is always:
get the very best price you can when you buy. |
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2. As you search for the right
property to buy, try very hard not to fall in love with any
particular one. If you become too desirous of a specific house,
you'll probably pay too much for it. Yes, you are going to be
living in this house, so you want it to be as "right" as possible;
however, you should try to attain an attitude of something like
"There will be other houses that meet my needs if I don't get
this one." Of course, if you try to negotiate the seller downward,
and another buyer enters the picture, you could lose the deal.
At the very least, try to be at least somewhat cold-eyed when
offering a particular price. |
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3. Put contingencies into
your offer - including at least one contingency that'll allow
you to back out of the deal if you change your mind or find
something wrong with the property that had eluded your previous
scrutiny. And ALWAYS have someone of your own choosing perform
a physical inspection of the property before your lock yourself
in. |
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4. Have someone who does
not have any conflict of interest look at your contract before
it becomes binding. Then, if you have any doubts at all, have
the transaction documentation reviewed by an expert before you
sign, including making certain that the property is titled to
you and your partner in the best manner for your circumstance.
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5. When buying, work as
hard on getting the best mortgage terms as you did finding the
right property - there are thousands of dollars at stake here
if you make a mistake, thousands of dollars you might never
have again. And get the right amount of insurance and assure
yourself that the property is not over assessed by the assessor.
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I learned all this stuff from people who knew what
they were doing - and I am grateful to them for their teaching.
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Taxation With Representation
Credit
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