Leverage in Real Estate
The two most common ways of investing ones savings are paper investments, and real estate. Ok, real estate makes sense, but what are paper investments? Well, these days pretty much anything that isn’t property is a paper investment, that includes the stock market, mutual funds, forex, and you get the picture. So what should you invest in? Let me try and do a little comparison.
The biggest difference between real estate and paper assets is leverage. Lets say that you and your friend each have $20,000 to invest. Your friend wants to put it in the stock market, he’s read a few books and thinks that he’s got it figured out. You, on the other hand, want to start building up a property portfolio. Your friend, Bill, scouts around, talks to a few brokers and does a little online research and thinks that he’s found a few winners so he goes ahead. But of course with $20,000 dollars he can only buy $20,000 worth of shares. In 6 months time his portfolio grows by 10 percent (not bad) so now its up to $22,000. I’d be pretty chuffed, but now lets see what happens with you.
You decide not to look too far away, so you stat doing some property research in your local area, and, of course, you don’t mind starting small. You start off with 2 options, you can find a house for $20,000 (highly unlikely), or you can use the $20,000 as a down payment on a larger piece of property. I’ve spoken about the beauty of compound interest, but now I want to talk about the beauty of leverage. By using leverage and the banks money you can easily acquire a $100,000 property asset for only $20,000. In fact, you can easily do better than that cause if you shop a around, you can find a motivated seller who is willing to sell you a $150,000 property for a mere $100,000.
So in 6 months Bill’s portfolio grew by 10 percent, which translates to $2,000, but if your portfolio grows by the same percentage (which is more likely), you could pocket $10,000. Hows that for a bit of leverage.
If you want to look into investing in property I seriously recommend ‘Real Estate Riches’ by Dolf de Roos.
Simon
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