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Typical rent for a 1 – 2 bedroom apartment in a nice and safe neighborhood will range anywhere between $500 to $1,500 monthly, depending where you live.  A 3 bedroom house will typically range from $1,500 to upwards $3,500 monthly, again, depending where you live.  Usually utilities are not included.  Let us use an example of a one to two bedroom “in-law” type format built within a single family house.  This would include a small kitchen and sitting/living area in a typical “Smart Home” format and its associated use with the “Smart Home Program”.  We should easily be able to get $850 monthly on average, although this can also range from a $400 low to possibly as high as $1,500/mo., again, depending on where you live.  We include utilities in this case (you’re not allowed to install two separate electric meters in single family houses for they would be considered a duplex and need to be zoned for such).  For example, over a 5 year period of time, such a monthly rental would add up to a total of $51,000 (with a range between $24,000 – $90,000 over 5 years).  Although $850 per month doesn’t seem like a lot of money, if you calculate it out to 5 years, $51,000 is a considerable sum.  Compare this to a typical high yield savings account on $100,000 that normally now pays out around 0. 75% (usually a high yield money market account) at the time of this writing.  In 5 years, this would only generate $3,821 compounded daily.  Calculating this five year period out to thirty years, the course of a standard 30 year mortgage, would come out to a total of $25,232.  Now compare that to $850/mo. saved over 30 years.  Your total just in rental income alone would come out to $306,000!  What a huge difference, comparing $25,232 to $306,000 (that’s over 12x).  If you placed this monthly income into a savings account offering 0.75%, at the end of 30 years you would have made an extra $37,266 just in interest alone ($12,034 more than if you just placed your savings in an interest bearing account at  0.75%).  Altogether, your combined savings would be a tidy $344,116.  That’s why Albert Einstein called interest calculated on a compounded basis the “8th Wonder of the World”. 

One of the great benefits of a home mortgage is that the Internal Revenue Service (IRS) still allows the interest you pay on a mortgage to be deducted on your yearly income.  A mortgage is a specialized loan usually employed in real estate loans.  As such, it is specifically called an amortized loan where you pay the greatest amount of interest in the first years of such a mortgage (check out the monthly interest rate costs on Bankrate.com).  For example, if you take out a $400,000 mortgage for 30 years at an interest rate of 5%, your monthly payment will be $2,147.24.  In the first year your mortgage payments amount to a total of $25,767/year.  With an amortized loan, the interest component will be $19,865 with only $5,902 paid into the principle of the loan (principle is that amount you pay into the cost of your home which we call equity – the amount you actually own in the home).  Thankfully, over a 30 year period your interest contribution diminishes on a monthly basis.  For example, by the 15th year, your interest paid for the year is $13,294 (with the difference of $12,470 going toward your home equity or principle) whereas in the 30th year, your interest payment is only $685 yearly with $25,082 going towards paying off the principle.  With your last payment, you have paid off the loan completely and you hold 100% equity in the house which means you own your home free and clear.

As a side note, when people look at an amortization schedule, they’re often shocked at the amount the lending institution is able to “profit” on what seems like an unfair way to calculate interest.  I wouldn’t necessarily disagree.  However, in numerous countries such as Argentina, Brazil and other nations, banks do not even offer mortgages or loans on home purchases.  Therefore, most individuals would never be able to afford a home unless they worked probably 20-40 years and saved like crazy (in such cases, homes are often passed down to children from the parents).  Although a mortgage can be considered a one sided loan to the lending institution, it is still an extremely beneficial financial tool in allowing you to purchase a home early in life. 

Now, let’s see how we can reduce the total amount of interest charged on your mortgage.  We will look at how we can do this by paying off additional principle thru income generated by the “Smart Home” apartment and using the IRS ruling that allows us to deduct our income taxes against the mortgage.

In the first year of our $400,00 mortgage, our interest cost would be a total of $19,865 for the year.  As mentioned earlier, Uncle Sam allows us to deduct this amount from our total income tax burden.  Let’s say you’re married and have a combined income of $90,000.  The federal tax rate in 2023 for a married couple making $90,000 is 22%.  Hence, your total tax burden to the IRS (not including other deductions) would be $19,800, based strictly on your income, effectively leaving you with only $70,200 of disposable income (realize this does not include state income tax, state sales tax and property tax deductions and any other deductions your allowed to claim against your income which we will later cover). 

However in your first year of home ownership (and subsequent years as well) you can subtract the cost of mortgage interest paid from your total income.  Hence, $90,000 – $19,865 (your first year of interest you paid on your $400,000 mortgage) = $70,135.  Because federal tax for 2023 on total income made between $22,000 – $89,450 is only 12%, your total income tax burden is lowered from $19,800 to $8,416, effectively saving you a whopping $11,384 in tax savings just in the first year!  Again, this is not “chicken feed”.  Essentially, you’re saving/making an extra $11,384 in that one year just by having a mortgage on your home.  Or put another way, you just made an extra $11,384 simply by owning a home and having a mortgage on it. Realize this will take place year after year as long as the federal income guidelines remain the same (check yearly).  Also realize that your interest payments will decrease yearly, so at some point you may go over the $89,450 income limit at a 12% tax rate.  But this won’t happen for quite a few years.   You can calculate what this will be by projecting these amounts in the future using the amortized mortgage calculator at Bankrate.com (I have calculated the cut-off point at $111,665 income/year for when you can no longer take advantage of the interest mortgage deduction for the year 2023).  Nonetheless, we figure you will save tens of thousands of dollars in taxes that you would normally have to pay if you did not own a home.  In reality, this is a hugh savings plan that can amass into an incredible sum at the end of a standard 30 year mortgage. Realize this does not include the income of $850/month that can be generated from a “Smart Home” rental to add in to your “home savings plan”.  Are you able to see the wonderful benefits that home ownership can offer?

It is also worth mentioning that this “home savings plan” also works in conjunction with typical increases in your property value that we see take place over time.  To illustrate this concept, in 2003 we built the Windsor model “Smart Home” for an approximate total cost of $300,000.  Three years later, we sold the home for $547,000 which amounted to a whooping $247,000 profit!  However, a caveat needs to be mentioned.  Yes, the timing in this example was incredible.  This took place when we sold at the height of a real estate market right before the real estate bubble burst in 2008.  No way do we take credit for such good fortune.  Sadly, numerous individuals speculated their life savings on multiple home purchases and lost it all when the bubble burst. But we are not using real estate speculation in our example here.  We are showing that home ownership can be a very worthwhile investment over time and should not be considered a speculation .

One other great tax advantage that needs to be mentioned is that after two years from the purchase of a house or occupying your newly built home, you can sell your home and not have to pay any tax on the profit (this is applicable only to a primary residence).  This is HUGH!  There are very few investments where one can write off total profits made on any personal investments such as stocks, bonds, precious metals, etc. without having to pay capital gain taxes which can range from 12% up to 28%!  Moreover, real estate will typically hold its value much better than a potentially volatile stock market.  However, it does have the potential downside of being less liquid in the case where you need to sell quickly.  But the fact remains, we all need to live somewhere and a single family house is a super investment that can later become a wonderful nest egg.