Real estate is the correct path to becoming a millionaire. For centuries, we have learned to look up at the buildings around us and see opportunities to invest in each of them and to look at the wonderful beauty and exciting chance to enjoy a higher rate of return, a more tangible investment, and immediate diversification.
As with anything new, the fear of the unknown can often be a detriment to not move ahead with a new idea or concept. I have heard stories of an office getting their first desktop computers back in the 1980s. Often, an office might have one computer, and one person was designated as the gatekeeper. You had to go through her or him to do anything on the new-fangled thing. Now, many high school students go through their day taking a laptop from class to class that has more power and capability in it than does the first desktop computers. Heck, your smartphone can do more!
The point is as people got to learn about how a computer works and all it could do, people weren’t so afraid of them and embraced them. I know that someone can go from the unknown regarding real estate to seeing it as the best investment they can make. All it takes is a little research. I am going to cover a few of the positive reasons to consider real estate here. Other articles will highlight additional supportive reasons not to be afraid and to tackle the real estate market.
Real estate has many advantages over investing in stocks, bonds, or mutual funds. It creates leverage and predictable cash flow, appreciates in value, provides a higher return, and increases your equity as you pay down your mortgage monthly. Let’s unpack these at greater length so you can see why real estate is my investment of choice over the stock market.
Leverage is the most essential advantage in real estate investing! It increases your real estate value through the use of borrowed capital to increase the potential return of an investment. This also results in an increase to your personal net value.
How? The ratio of the mortgage loan to the value of your house is called loan to value (LTV) and typically dictates your leverage on a real estate investment. For example, if you take out a loan of $700,000 to purchase a one-million-dollar house, the ratio is 700,000/1,000,000, which equals 70 percent. If the LTV is 70 percent, this means that for every dollar value of the property, the bank will loan you 70 cents. You have to come out of your pocket for the other thirty cents in the form of a down payment. In this case, for every thirty cents, you can buy one dollar worth of real estate value, leveraging your deposit to buy much more value. Does that make sense? Now, if we add a couple of zeros, you can buy one million in real estate value for a $300,000 deposit based on an LTV of 70 percent.
So, let’s say that the property pays a 10 percent return on your investment per year on a $300,000 deposit investment. When you multiply 10 percent of $300,000, you will generate $30,000 per year in income based on the 70 percent LTV just described.
Now, to understand how leverage works, you need to persuade the bank to increase the LTV based on your track record and creditworthiness. In this scenario where you leverage this property to 85 percent, you would only have to make a fifteen-cent deposit for every one dollar, instead of thirty cents. So, in the real estate transaction just described, you’d only have to make a $150,000 deposit. In this case, since the income stays the same and the deposit goes down, your rate of return on investment doubles. With a $30,000 income on a $150,000 investment, the rate of return is determined by dividing income over deposit—30,000/150,000. From this, you can see that the return of 20 percent doubles the rate of return to 20 percent.
The real estate market is usually much less volatile than the stock market, which creates more stability. Since it can take longer to liquidate your investments, this, in turn, increases a longer and safer period to significantly weather storms and market volatility. You cannot just pull out and reinvest like you might try to do in the stock market, which reduces emotional reactions and behavioral responses.
Real estate is . . . well . . . real. One of the main consideration factors for me is the tangibility of the real estate investment versus a stock investment. When using other people’s money to create investment opportunities, there is nothing like what an investor feels when he or she conducts a virtual or live tour of a property, looking at it and/or touching it firsthand.
This is one of a series of articles based on my book, Modern Wealth Building Formula – How to Master Real Estate Investing. I have a passion for helping others secure their future. As the professionals say, “The best time to start is now!” Please follow me as I continue to give you insight and strategies for achieving your retirement dreams. We can do this together!