With elevated interest rates, securing a mortgage to buy a house can be challenging. But what could be more surprising is how the numbers actually work once you start making mortgage payments.
“New mortgage math is brutal,” Austen Allred, co-founder and CEO of online coding bootcamp Bloom Institute of Technology, wrote in a recent tweet.
Allred explained that if you purchase a $1 million house with a $200,000 down payment and get an $800,000 mortgage at a 7% interest rate, in the first three years you’ll be paying $193,000.
But because of the high-interest rate, a significant portion of your payments would go toward interest, leaving a substantial amount still owed on the principal.
“After those $193,000 of payments your $800,000 mortgage is now at $774.5,000,” he said. “You paid $166,000 in interest, $25.5,000 in principal.”
The tweet has since received 7.7 million views and more than 31,000 likes.
In a follow-up tweet, Allred pointed out that his example assumes “a lot down and perfect credit.”
“I have no idea how younger generations will make it work,” he added.
While it’s difficult for new homebuyers to enter the market, there are ways to invest in real estate without buying a house. Here’s a look at three of them.
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Real Estate Investment Trusts
You can think of real estate investment trusts (REITs) as giant landlords — they own income-producing real estate and collect rent from tenants.
REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends. This requirement makes them appealing to investors looking to earn a passive income.
These days, there are plenty of REITs trading in the stock market. So it’s easy to invest in them. You can purchase shares of a REIT much like you would buy stocks of a company.
REITs can center their investment strategies around various kinds of real estate. Some may concentrate their portfolio on residential properties while others might hold assets such as shopping malls or office buildings.
Like any investment, REITs come with their own risks. So always conduct comprehensive research and due diligence before diving in.
Exchange-Traded Funds
Exchange-traded funds (ETFs) have been a popular choice for investors seeking a convenient gateway to specific sectors or indices.
You can use ETFs to tap into real estate, too.
Real estate ETFs usually hold a diversified portfolio of REITs, which in turn own the underlying real estate properties. By purchasing shares of a real estate ETF, investors can gain broad exposure to the sector with a single purchase.
ETFs charge a fee for providing that convenience. So make sure to check their expense ratio before taking the plunge.
The largest ETF focusing on the real estate sector today is the Vanguard Real Estate Index Fund ETF (NYSE:VNQ). It holds 165 stocks and has an expense ratio of 0.12%.
Crowdfunding Platforms
Crowdfunding refers to the practice of funding a project by raising small amounts of money from a large number of people. And it can be an excellent match for real estate investing.
Real estate crowdfunding platforms provide opportunities for people to invest in a wide array of properties across different geographical locations and property types. They typically have lower minimum investment requirements compared to traditional real estate investments. This means people can gain access to properties and portfolios that are typically off limits to retail investors.
Other than making the sector more accessible to the general public, some platforms also allow investors to select specific properties and projects to invest in.
For instance, if you are interested in single-family rentals, there are options to invest in rental properties with as little as $100 while staying completely hands-off.
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This article ‘You Paid $166K In Interest, $25.5K In Principal’: Tech CEO Explains The ‘Brutal’ Math Behind New Mortgages — Here Are 3 Ways To Invest In Real Estate Without Buying A House originally appeared on Benzinga.com
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Source: finance.yahoo.com