The Truth About Real Estate Investments

Harvey And Jane funded $100,000 for that down payment. The bank funded $400,000. If 80% was funded by the bank, 20% was funded by Harvey and Jane. Who ultimately owns the asset, you or the bank? When you own real estate or some other assets, you may be the manager for someone else's wealth, not your wealth. Okay, so maybe you understand financial markets is not where you want to put your money because it's risky. You know, it can go up. You know the flaws of it being locked, and you don like that. So the next best thing is you exchange the money that you've built up to put together for real estate. Perhaps you think you are exiting the banking system, but I just want you to be aware you. You probably are not. You need to borrow money from the bank to buy the real estate. And let's walk through a principal residence exemption. And I'll walk through using Harvey and James. Their principal residence that they initially bought was $500,000. All these two players who are going to fund that transaction, Harvey and Jane, funded $100,000 for that down payment. The bank funded $400,000 to fund the rest of the real estate. Who's doing all the work to generate the money to make the payments? The payments to their mortgage is 1,880. 24. Now, that payment is very, very deceptive because there's two components to that payment. There's principal and then there's interest. So who receives the payments and earns the profit, you or the bank? Exactly, the bank. Well, who ultimately owns the asset? If 80% was funded by the bank, 20% was funded by Harvey and Jane. Who ultimately owns the asset, you or the bank?

Exactly. The bank owns it. That's what I wanted to show with you. Who's getting wealthier when it comes to real estate. And let me kind of walk through something. It's called the mortgage, and in Latin, it's called the death pledge. So we're so encumbered by the object of what we bought, we lost sight on what we are paying to get it. And a mortgage is really a special form of a secured loan where the purpose of the loan has to be specified to the lender to purchase the asset. And it has to be a fixed and not a movable property. Let's go through what some items here. The truth in lending $400,000 was the mortgage. The term or the amortization period is 25 years. The interest rate, I mean, compared to now is a lot lower. It's 2.92%. We're so encumbered by focusing on the interest rate. And the payment is 1880.24. Well, let's take a look at their payment or their cash flow. Month one, they made a payment of 1880.24. But the principal component of that payment. Principal is $906.91. The interest is 973.33. When I look at the component of the cash that's being paid out of 1,880, I'm not sure I can find where 2.92% comes from. The dollars that Harvey and Jane have to work for is 52% of the payment. Let's look at month two. Month two. I mean, more money is being paid. The same payment, but that principal is $909. The interest has gone down slightly, but the weighting is still 52%. Well, let's take a look at that. After one year. Well, after one year, Harvey and Jane have made cash outflow of 22005. 62, which is 1880, 24 times 12. And they've made principal payments. The accumulation of these 900ish dollar payments is $11,000. Interest is 11,005. 33. So the balance only went down from 400,000 to 388,000. But they've paid, they've worked for paying 22005. 62. So they've ended up really, if we look at it after one year, 51% of their dollars went to interest. If we look at five years from now, still 51%. But if we look at five years total, they've paid, they've worked for five years on 150,000, $100,000. That money, they basically paid $112,000. Of that, the balance only went down $341, only went down $60,000. But the bank made $54,000. Now, after five years, what normally happens is, you know, the bank says it's time to renew your mortgage. And we're going to renew it at today's rate because things change. But to keep things simple, let's assume that it's been the same one all the way. So after 25 years, finally the death pledge has come to an end. You've made your payments all the way. The balance is zero. You've made an annual payment of 22,562. And the total interest that you've paid the mortgage is $400,000. The total mortgage money that you flow to them in the form of payments and interest is 164,073. I think the bank is very happy with knowing that when they put a mortgage on a home, they know that they're going to get paid in the future. And this all comes in terms of how they structure the loan. So when you borrow money from someone who sets the rules, you or the bank, do you get to decide when you pay that mortgage back? Do you get to decide how much per month you get to pay that back? Do you get to decide to skip the payment? Bank decides. Real estate only goes up, right? So going back to Jane and Harvey, 500,000 for 400,000 funded by the bank, 100,000 funded by them. Well, it goes up, right? So in their case, it did, it went up to 600,000. So they paid their mortgage for one year. So after one year, paid their mortgage $390,000, the value of their home has gone up and now Instead of the 100,000, it's grown to 210. So the split is 65, 35 now. But still the weight of who owns the home is still more based on the bank. But what do most real estate investors end up doing? What happens is I want to make more money. So they go through time to refinance. And of course, when it comes to refinancing and looking at the loans, banks are going to slam you with fees again and put together another loan fee, loan origination fee, any fee, legal fees, you name it. For that $80,000, well, in Harvey and Jane's case, they've taken that $80,000. Well, if they take in the $80,000, well, that has just bumped the loan back up to 80%. And now they now own 20% of the home again because they wanted to maximize, to get cash out of the real estate and take that money to use it again. What's really eye opening is after doing that, bank now owns the principal residence again of 80%. So they take the $80,000. And what happens is, well, if the mortgage is also larger, if you saw from last example, they've earned 164,000, they're now going to earn even more because the amount of money that's owed is even more than before, from 400,000 to 480, what happens is Harvey and Jane went through and put that money and redeployed it into a real estate investment, and they find a tenant, they go through things like maybe a brrrr strategy and puts together another real estate property. Well, either way, they still go through the real estate funding process, puts down a down payment, the bank funds the other portion it seems like the cycle's repeating itself again. So the bank is the one who's in complete control of the situation getting rich and you are the one managing the asset so the bank still owns the asset.

The bank still profits from you. That's if real estate goes up what if the value of real estate goes down? I mean it's speculation, we don't know but the fact of the matter is real estate values can go down. It does it isn't purported as always going up the value of your real estate can go down and let's hope the value doesn't go and this is the key let's hope the value doesn't go below the amount of your mortgage or let's hope that your tenant can continue paying for the rent no matter what in terms of the situation the bank still profits from you. They've got you being the manager not the owner and you are the one taking all of the risk.