There are three investment vehicles
which can make you rich. Stocks, businesses, and real estate.
Stocks can return lots of money in a
short amount of time, and can have a steady rate of return using
investing techniques such as dollar cost averaging. However, but how
much stock do you think you can buy for $20,000 dollars? $20,000
worth of stock. What about using someone else's money to buy more?
Try asking your bank manager for a loan of $100,000 to buy stock!
You wont be very successful. This is the principle of leverage. In
stock there isn't much of that, you can't get rich using other
peoples money. Also with such a volatile market trading can be nail
biting!
Businesses for most people, can be
very hard to start and run. I read somewhere that 9 out of 10
businesses fail with in the first year. Out of the successful
businesses left, within the next 10 years 9 out of 10 of those
businesses fail. Although running a successful business can be very
profitable most people are held back by the financial and personal
risk, along with long start up hours.
I am not saying that these two assets
will not work to create money, they can, but for the average person
it is quite hard to do so.
Throughout the centuries the rich have
used real estate as a safe guard for their money and as an asset. So
why is real estate such a great asset?
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Leverage: With real estate,
people and companies will lend you money to invest. How much real
estate can you buy with $20,000? Probably between $100,000-$300,000,
depending on the lender. So you only really need a small portion of
the funds to buy an expensive asset.
High level of control: With
real estate you can do things such as write your own terms for the
contract, increase the properties value, increase the rent, build,
subdivide, negotiate lending terms. Although you have a high level
of control with a business, it is a bit more risky. How much can you
influence the price of stock? Well, not a lot unless you are within
the company.
Capital gains: With real estate
you can instantly create wealth and equity by
buying the property at a
discount. Also the property can appreciate over time. For
example,
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Growth is 8%. You buy a property for
$125,000 with a $12,500 deposit.
First year value: $135,000
Second year value: $145,800
Third year value: $157,464
Tenth year value: $269,865
$12,500 was turned into a gain of
$144,865 over ten years! Just
imagine if you had a property in an area of 10% growth!
"Yes, but the
value of property can go down too!". True the property market
can go down, but if you follow the right investment strategies you
wont loose money. It is that true the property market can go down.
However if you never sell how will you loose money? You may loose
equity at some point but the prices are bound to eventually come up
again. Even if the prices are down you are still collecting the rent
weekly so there should be no problem.
Cash flow:
The capital gains would be enough of a
reason just to invest in real estate. But apart from your keeping
your money safe, it can also provide you with a profit. Going back
to the previous example,
You have an interest only loan for
$112,500. Lets assume the property has a 9% yield
and the interest rate is at 5%.
Rent from property per
annum: $10,125
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- Interest payments per annum:
$5,625
- property taxes per annum: $1,000
- Insurance per annum:
$600
- Repairs:
$200
- Property manager:
$1,000
Before tax profit: $1,700
Now whether you loose profit or gain
profit at this point depends on where you live and the tax laws. For
example in New Zealand from this point you could claim depreciation
of building and chattels and make more profit after tax. You may
also receive a tax break on the interest you pay on your loan. However
even if you were taxed on the $1,700 you would still make money.
Insurance: How much would it
cost to insure a business? The premiums would be HUGE! On the other
hand, how much does it cost to insure a property, not a lot. Even if
natural disaster occurred, with the right insurance plan you
wouldn't loose money.
Demand: Home ownership is
decreasing throughout the world, therefore it is more common for
people to rent properties today then ever before. This will work in
your favor because if demand is increasing for rental properties,
prices for rent will go up.
To sum it up using out example:
You have made a deposit of $12,500 to
buy you a $125,000 asset which, is becoming more in demand, in ten
years can increase to $268,865 giving you equity along with a
passive income of $1,700 per year!
This article was written by John Whiteside. The original article can be found here
http://www.use-your-equity.com/realestateinvesting.html . Use-Your-Equity can show you how to create value in your home, then show you how to use the newly created equity to make money.
http://www.use-your-equity.com for more information.
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