Part 2: YOU TOO CAN BE RICH(How to Convert Your House Into an Asset)Copyright © Captain Adiari, MD.
http://www.OnlineGain.netYour house can either be a liability or an asset. In simple terms, a liability is that which removes money from your pocket while an asset is that which brings money into your pocket.
When the mortgage and the price of maintenance of a house are more than the money that you earn from the house, the house is a liability and not an asset. For example, if you own a house which has a rental value (the amount a tenant pays for renting such a house) of $500 per month and a mortgage of $700 per month (the month you are paying monthly as the mortgage) with an average monthly maintenance cost (the average you spend per month to maintain the house in good condition, which includes the property tax) of $20, you can calculate the value of the house as follows:
House Value = Asset - Liability
Asset (what put money into your pocket): Rental value
Liability (what removes money from your pocket): Mortgage + Maintenance expenses
i.e. House Value = Rental Value - (Mortgage + Maintenance expenses)
= $500 - ($70 + $20)
= $500 - $720
= -$220
This means you have a deficit of $220 every month. In simple terms, it means you have a loss of $220 per month to keep your house. In twelve months, this will become $2640 (12 multiplies by $220). If the mortgage is for 20 years and you do nothing about this loss, you will actually spend $52 800 (20 multiplies $2640) from your pocket to keep your house. By the time you add the inflation figures, the amount will actually be bigger.
You may actually argue that the appreciation of the value of the house over the 20-year period will offset any loss you incur. While this is true for most cases of real estate investment, however, the inflation rate if so high has the ability to tip your long-term investment into a liability rather than an asset. This is why cash-flow is more important in calculating the value of an investment than long-term capital appreciation, which can be disappointing in some instances.
Therefore, putting all these facts together you can calculate what will be the value of your house by the end of your mortgage with this simple formula:
H = (R+ A) - (M + E + I)
H = House value
R = Rental value estimated over the period of the mortgage, e.g. 20 years
A = Appreciation value estimated over the mortgage period
M = Mortgage loan over the period
E = Expenses, including Maintenance, Taxes, etc. over the mortgage period
I = Inflation value estimated over the mortgage period.
A positive value for H means that the house generates profit, but a negative value like the -$220 in the example above means the house is rather yielding a deficit or loss. Such a negative value signifies that even though you have paid off the mortgage of the house, you have actually ended up buying a liability. That is, you end up losing money instead of earning it, and this will continue except you do something to turn the situation around.
P.S.: Watch out for the Part 3 that teaches on how to convert your home to an asset.
About the Author:-----------------------------------------------------------------
Adiari Captain is an expert on Proven Home Business. To find the best home based proven business ideas and opportunities so you can work at home visit:
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