Investing involves an unending series of choices: Which investment vehicle should I put my money in? How much should I put there? How long should I leave it there? Before looking at the specifics of investing in real estate, and explaining how it can make you wealthy, we should probably take a quick look at the other alternatives. If you want to get rich, what's the best way to get there?

The important strategy is called "pay yourself first." The idea is to set aside 10 percent of your monthly income for long-term growth. We make the case that by following this strategy, anyone can build a satisfactory retirement nest egg over the long term. So let's assume for a moment that you decide to follow this advice, and you start setting aside 10 percent of all your income so that you can begin to build an investment program for yourself. Maybe you start putting the money in a money market

Let's assume that during your first year of saving, you are able to put away $4,000, 10 percent of your $40,000 gross income. If so, you probably feel pretty good about that, especially if this is the first time you've actually succeeded in starting a systematic savings plan. Let's assume, too, that you take another piece of advice from us and give yourself a big pat on the back. We strongly believe in celebrating these kinds of successes!

Now let's assume that with your new savings program in place, you start thinking about making a little extra money on your money, so that you don't always have to rely exclusively on your salary to provide for you and your family. After some calculations, you decide that it would be great if you could get to the point where you were making an extra $ 10,000 per year just from your investments. Seems reasonable, right?

Here's the rub: you continue your calculations, and pretty soon this reasonable target doesn't look so reasonable. You know, for example, that your money market fund is paying 2 percent annual interest, and you calculate that to get an extra $10,000 per year from that in the form of interest, you're going to have to build a nest egg of S500,000. That's depressing, you think to yourself.

What about the stock market, you ask yourself. Well, a little research shows that the stock market produces about a 12 percent annualized return, on average. That is a little better. Now you need only an $83,000 nest egg to generate your desired $ 10,000 per year extra return. And if you "margined" your money (borrowed up to 50 percent) in the stock market, you could get that sum down to $41,500 of your own money. Unfortunately, though, you also realize that it will take you 10 years of saving at your current rate of $4,000 per year to get close to the required $41,500—and, of course, you'll have to average that 12 percent return each and every year. As anyone knows from the experience of the last few years, the stock market doesn't always turn in a double-digit performance, and a downturn can have severe consequences for someone who's trading on margin. If your analysis stopped there, you'd have ample reason to be depressed. We're going to argue, though, that you shouldn't stop there. You should continue with your analysis, and look at the returns in real estate. Why? Because real estate has one thing going for it that no other investment vehicle has. We call it the power of OPM, or other people's money.

The advantage that real estate offers over ail other types of investing is that you don't have to have money to start investing. With real estate, you don't have to have money to make money. In some ways, the less money you have, the more money you can make.

Let's go back to our example. How long do you think it would take to turn your $4,000 nest egg investment into a million dollars, assuming that you could consistently earn a 20 percent return on your money? The answer: 30 years. Well, what if you don't have 30 years? Should you just give up (as many people do) and say to yourself, "I'm just too old to make any real money"?

What if you were to say to yourself, "I have only five years"? Could you do it?  Well, you would have to make a 200 percent annual return on your money—impossible in a money market account, and nearly impossible in the stock market. So how can you do it?

The answer, of course, is real estate. Here's how. Let's say you are going to buy a $50,000 property paying all cash. Let's say the property appreciates 10 percent, or $5,000, in one year. Your return on your 550,000 cash investment, therefore, is 10 percent—a respectable return, but not spectacular.

But let's say you don't have $50,000. Instead, you have only 55,000 to invest in the property. So you invest your $5,000 and take out a loan for the balance of the purchase price. The house still goes up 10 percent in value, but your return is now 55,000 on your original $5,000 investment—in other words, a 100 percent return on your money. This is a central concept, so if you didn't follow it, try walking through it again, and look at the next example, as well.
Suppose you could scrape together only half of the down payment, or $2,500, and borrowed the rest. If the same scenario unfolded (a 10 percent appreciation of the property in a year), you would earn a 200 percent return on your money. Keep going in this direction: what if you put no money down? Your return would be, well, amazing. And that is how you build wealth: through "leverage." You use the power of OPM (other people's money) to tap into returns that normally would go to somebody else.

Let's acknowledge quickly that this is a very simplified example. It doesn't take into account the interest that you'd pay on your loan (nor does it reflect any offsetting rents that you might collect on the property). The example doesn't include capital investments or maintenance expenses, nor does it consider the tax advantages of investing in real estate. But what this simplified illustration does do is show you how leverage, and using the power of OPM, can work for you, in the right circumstances.

 

Do you own real estate articles or stories and want to share with other investors? 
You have chance to win $100 Amazon Gift Certificates. We will give away 3 prizes for top authors each month!

Email your articles or stories to:  articles@buyincomeproperties.com

 

© Copyright 2001 - 2010 by BuyIncomeProperties.com               

 

 

Visit Real Estate Forums for every real estate investing topics!  Enter Here

    

Top of Page