How to Beat Vegas and Make 214% on Your Money This Year

Post image for How to Beat Vegas and Make 214% on Your Money This Year

by Ryan

Each year millions of wide eyed and money hungry gamblers flock to a neon lit sand pit hundreds of miles from the barren Sierras. They come in droves to test their luck with slots, cards, and roulette. Free booze pours as gorgeous people from around the world make these new guests feel like they hold the key to the city of sin. However, what happens in Vegas, stays in Vegas, including their money…

With the toss of a die or flick of a card wealth is made or futures destroyed.

But what if I told you, you could beat Vegas without getting your knees broke and end up swimming with the fishes… Would you be interested?

There is a way, and it’s in your very own neighborhood, hidden behind the cute white picket fence of old lady Johnson’s yard. No, she isn’t holding illegal poker tournaments or cockfights in her basement, but she does offer a sweet deal when she decides to sell.

Gambling and Monopoly in Your Neighborhood
When old lady Johnson finally puts her Park Avenue house up for sale you can purchase her home with an amazing offer. That is, if you’re a first time home buyer and American citizen (sorry Canada). There’s a loan out there in the world of mortgages that allows first time home buyers to purchase a home for 3.5% down. ONLY 3.5%!!!

This isn’t something that was only available in 2004 when times had never been better, but you can walk down to your local mortgage lender TODAY, and get this amazing deal. So who’s the dealer of such an amazing loan?

The Federal Government Helps You Roll the Dice
Believe it or not, the one who encourages this risky behavior and gambling is no other than Uncle Sam. I always thought he was the good uncle, but I have a feeling he likes the idea of more homeowners as a bigger tax base…

Thanks to your good ol uncle Sam you’re able to finally afford that first home. You place an offer in on old lady Johnson’s Park Avenue Estate and end up closing on the property for an even $100,000. Ironic that you do so, because that’s a great amount to use for our upcoming example…

Now, you’re probably reading this article because you want to know…

How do I Make 214% on my money this year?
Here’s the kicker. Since your down payment is so low you’ve got a huge amount of leverage on the property. Leverage is a great thing if property is going up because it magnifies the amount you’ve put into the property, but it also magnifies your losses.

Here’s why…

Let’s pretend for a moment you took the FHA loan and placed 3.5% down on the $100,000 park avenue home… You’ve put $3,500 into the property of your own money. Not chump change, but not exactly a large sum.

Let’s also then pretend that the housing market goes up by 4% in the next year. The house is now worth $104,000, $4,000 more than it was last year, so you’ve made $4,000 off your $3,500 investment. Not too shabby huh? That’s a return of… you guessed it… 214%!!

But let’s play devils advocate for a minute here… what if the house decreases in value by 4%?

Well, then the house is worth $96,000 and you’ve lost your $3,500 and owe an additional $500… if you sell of course. But being in this situation is a big reason why it’s not good for career oriented individuals to buy the house in the first place.

You can play with the numbers all you’d like, but the fact of the matter is this: leverage is one of the best ways to build wealth and beat Vegas, but it also comes with great risk, as we’ve seen in the past few years. So consider both the risk and reward when rolling the dice with your future real estate investments.

Which choice do you think is more risky; A night in Vegas or purchasing a home with a tiny down payment?

Image from James Marvin

Related Posts with Thumbnails
If you enjoyed this post, make sure you subscribe to my RSS feed!

{ 4 comments… read them below or add one }

Ashley January 6, 2010 at 11:15 am

What about the $7,000 that you’ve paid towards the mortgage on your investment in that year? What about the $2,600 you paid in closing costs? Property tax and home owner’s insurance isn’t cheap either. If old lady Johnson is indeed old, I assume her house is also and won’t be in pristene condition and will need some money put into it.

Poor advice.

Ryan January 6, 2010 at 12:28 pm

Hey Ashley,

You also forgot the $8,000 tax Credit and tax advantages given through home ownership. The article is meant to illuminate the power of leverage, not to be a complete walk through on every aspect of buying a house.

Ashley January 7, 2010 at 6:04 am

Well, not to beat a dead horse, but from what I understand, the house you use your tax Credit for has to be your primary residence for 3 years or you’ll have to pay it back.

Initial investment: $3500
Closing costs: $2600
PITI: $9000
Total investment after 12 months=15,100
Sell the house for $104,000 and save $1900 for taxes.

Total loss is $9200

Granted, you do get a place to live for 12-months, so let’s deduct $7200 for the rent you aren’t paying.

Still losing $2000. I’m not a real estate investor or a gambler. Looks like Vegas might be a better deal than this, though. Even parking $3500 in a money market account will let you walk away from the deal with an extra $45 in your pocket after 12-months.

Let’s run the numbers for 3 years, so you get to keep the $8000 tax credit:
$3500 down payment
2600 closing costs
27000 PITI
____
33,100 total investment

3500 tax savings
8000 tax credit
8000 profit on house
_______
19,500 return

This way, you’re losing $13,600 over a 36-month period. But if we deduct the $21,600 rent that we didn’t pay those months, you come ahead $8,000. If you sold the house yourself without using a Realtor, you could sell it for $100,000 and break even. Anything above that is a profit!

Ryan January 7, 2010 at 7:20 am

Well thank you for taking the time to do that all, but again, this article is meant to illuminate leverage, and only the concept of leverage.

I think the horse has been killed twice…

Leave a Comment

CommentLuv badge

Previous post:

Next post: