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The most basic concept in Finance is Risk vs. Return.
It goes like this: When comparing two investments, the investment with the higher risk will also carry the higher return. This is why government-backed bonds return less than corporate bonds, for example. The government bonds are guaranteed; the corporate bonds are not.
But with respect to homeownership, the concept of Risk vs. Return does not apply. Or, at least, not in the same manner.
Consider a mortgage for 100% of a home's value. The homeowner "owns" the home, but didn't make a downpayment to purchase it. As the home increases in value, the homeowner has a right to those gains.
With a 0% downpayment, the math looks like this:
($0 investment) / ($10,000 gain) = Infinite Return On Investment
Using this math, the more than a homeowner invests in his home, the lower the return on that investment will be. This is because it's not the initial investment that is growing; it's the home's value that is.
Real estate appreciates (or depreciates) independent of the upfront investment (i.e. downpayment).
Take small risks, get big gains. That is the Real Estate Game for investors.
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator click to get a free, no-obligation rate quote.
You can also find Dan on Twitter and Google+.
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