Kris Krohn and we're back today with Limitless wealth TV doing some advanced
vocabulary. Some of you've been asking questions about amortization and
depression. I mean, depreciation. That can be a little
depressing. One of those two terms you're going to have to figure out which ones.
We're going to all break it down for you and help you understand what amortization
and depreciation really mean.
Alright, so for today's advanced real estate vocab, we're talking about amortization
versus depreciation. Now this is a really hot search for term and
sometimes people confuse these two terms so what I wanted to do today is just
break it down for you and get in the ease of really what it is. First of
all, let's just tackle what an amortization schedule is. So if you buy a
house with a 30-year mortgage, you need to understand something. It's not like
you're paying a portion of interest and a portion of principle that is the same
every month for 360 months or 30 years, what the banks are doing instead is
they're saying you know what, we're the bank, weren't charged, let's play by the
rules that we make and the rules that we make say that it should be mostly
interest up front with a little bit going to principal and after years and
years of paying on a mortgage, we'll start letting less of it go to interest
and more go to principal and by the way, after 30 years, by the time you've paid
the house off, you'll have paid a certain amount of interest and
obviously enough principal to pay off the house so how much interest are you
really being charged? On average, you're going to pay for your house two and a half
times over 30 years. Yeah, so if you have a $300,000 house, you're probably going
to end up paying $750,000 for the house, you're going to pay a lot of
money for that house because the banks have amortized on their
amortization schedule to be in whose favor? To be in their favor. Bottom line
is, they know that after five years people end up moving and so they don't
want you to pay down you know an equivalent of a sixth of the house in
five years over a 30-year period term what they actually want to do is make
sure that majority that is going to interest so bottom line is when you do a
30-year loan, the mortgage wins, the bank wins, they're going to win on interest and
remember they're going to have you pay for it two and a half times so that's what
an amortization schedule is. Depreciation is altogether something different. A
depreciation schedule really comes back to the tax benefits that you and I get
as investors for how the government thanks us for being an investors and
they stimulate the economy by getting investors tax write-offs according to
depreciation. Let me share with you what that means. The
depreciation rules have recently changed but off of the old rule for example, you
could take a home and depreciate it over 27 years. So for example, what that would
mean is take a hundred thousand dollar house and take a hundred grand and
divide it by twenty seven and you get right around three thousand dollars,
every year the bank will actually write off three thousand dollars of the house,
the next year, three more thousand, the next year, three or more thousand, the
next year, three more thousand so basically the depreciation creates a
significant tax benefit in fact, right now, the tax rules have changed on this
and you get to write off an even heavier percentage of the depreciation. There is
a catch-up period when you go to sell the house unless you're doing a 1031
exchange however and so to really break it down and make it really simple,
amortization is usually tied to interest and it's basically what amount and most
amortization schedules will favor the bank with most your payment being
interest now and then when you're near 27, the majority will be principal with
only a little bit of interest, banks are going to take their money upfront.
Depreciation is chopping up the house and basically saying you get to write
off this house in chunks over time and how much chunk is it? Well it ends up
being enough that for us investors, this ends up equating to some huge tax
benefits so when we say amortization versus depreciation, this one is in the
bank's favor instead of yours and this one is in your favor especially with
current tax law. Thanks for being here so we can break it down for you, hope this
is helping increase your massive knowledge bank. If it is, go ahead and
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