Although nobody would literally keep their money under their mattress, many people inadvertently do something similar. At The DI Wire, we are here to inform our readers about the best alternative investments that will bear fruit in the long run.
When people keep money at home, they will lose money eventually because it does not gain any interest or profits. It also loses its buying power because of inflation and other factors.
This is why people created banks and savings accounts because idle money earns us interest. Other people consider money market funds, CDs, or bonds, as alternative investments, but like bank interest, it sometimes does not make much money.
The DI Wire discovered that most people lose more money on house equity. While we can agree that a house gains value with time, it is not 100% that the house is an asset.
Robert Kiyosaki defined an asset as something that adds money into someone’s pocket, while a liability takes away money. Using this definition, we classify a permanent residential home as a liability because the homeowner has to pay monthly mortgage fees, taxes, insurance, and maintenance.
On the other hand, a rental house or apartment brings in a steady monthly income, making it an asset. However, since people can sell their homes after paying the mortgage, we can refer to it as an investment.
With that logic in mind, we must determine whether the investment is worth it. The best way to assess the performance of a real estate investment is using return on equity. This shows the percentage return the house gives in relation to its equity.
Unlike other investments, people get alternative investments like real estate using leverage or loans. Therefore, we need to calculate how much money the house is making on the down payment, the equity. Let’s calculate the annual ROE of primary residents with and without mortgages to make it easier for our readers.
Let’s take the first example where we buy a house for $200,000 cash, and the house increases its value by three percent, or $6,000. To determine the return on equity, we divide the increased value by the equity, the initial $200,000 investment.
This gives us a three percent return, which we don’t find very exciting. However, it is not that bad when we consider other benefits like living in your own home and having the freedom to do whatever you want in the house.
In our second example, we buy a house with the same price on a mortgage and pay a $40,000 down payment. By the end of the year, the house will have increased its value by $6,000. When we divide the increased value, $6,000, by our initial investment, $40,000, it gives us a 15% return. The main point here is that the lesser money we invest in real estate, the higher the returns.
Since we found that many people get an alternative investment for long-term benefits, we decided to take the two houses and calculate the return on equity after ten years. Since the house goes up by three percent or $6,000 a year, this makes it $69,871 after ten years. When we divide this by the initial investment, we realize a 34.94% return on equity.
When we buy the house on mortgage, pay the same down payment, and pay our monthly mortgage fees accordingly, our principal goes down by $38,369. We add this to the original down payment since it’s the money we have added to the investment over ten years.
Therefore, to get the equity, we divide the property’s increased value by the sum of our investment, $78,369, and we have an 89.16 return on equity. These examples show that, in the short or long run, having high home equity benefits the bank and is not a wise financial idea.
According to our experts, here are some ways our readers can access and use home equity:
- Home Equity Line of Credit
- Cash-out refinance
- Interest-only mortgage
The DI Wire experts also add that the amount of money an investor accumulated depends on:
- The amount invested
- The period of investment
- The return the money yields
- The amount of taxes paid
