Home Sweet Home

 

"I don't know. It's grown almost sixfold in thirty years. It must be a pretty high rate of return," I reasoned.

"Just under six percent. A six percent average annual compound rate of return. Is that 'pretty high'?" Roy questioned.

"No, I suppose not. But they also got to live there rent-free all those years," I pointed out.

"Now you're getting to the heart of the matter, Dave. How much of a down payment did your parents make?"

"I remember Dad telling me that they put down twenty percent. So, that's . . ."

"Six thousand dollars," Tom rescued me.

"Leaving them a mortgage of twenty-four thousand dollars. The monthly payment on that mortgage would have been approximately equal to what it would have cost them to rent a similar home," Roy stated.

"So, in reality," he continued, "they didn't turn thirty thousand dollars into one hundred and seventy thousand. They turned six thousand into one hundred and seventy grand."

"You've lost me," Cathy confessed, shaking her head.

"Your parents invested only six thousand of their own money. The rest was borrowed. And, although they obvi-ously had to pay the money back, the costs of doing so were roughly equal to what their rent would have been had they been tenants in the same house—meaning that buying the house really only cost them the down payment.

"Look at Tom's real-estate deal. The place cost eighty thousand dollars, with the mortgage being for sixty-two thousand. The monthly mortgage payment, including taxes, is around five hundred and seventy-five dollars. That amount is being covered by the rent. Therefore, Tom and