As real estate investors, we not only know this but we take it to a whole different level!
Here’s a quick look at how you might be using leverage.
Leveraged ReturnLet’s say you buy a home for $100’000.00
And put down 20% $20’000.00
And you have to borrow $80’000.00
Since the market improves an average of 5.7% each year, one year later your home will be worth $105’700.00.
You made a $5’700.00 profit on a $20’000.00 down payment (just over 3 & half years you are paid back). Conversely the Stock Market
The same $20’000 does not create an additional $80’000 that is leveraged:
In the stock market, your investment is only the $20’000 you have to invest. If you get a 5.&% return in a year (that’s good for the stock market), your profit will be $1,140. Increase the Leverage, Increase the ROI
Increasing the amount you borrow, increases the profit made on money that isn’t yours.
The more house you purchase, the higher your leveraged investment increases.
The greatest profit that you will make will tend to not be made with your money, but with the lender’s money.
Money you owe – isn’t yours; but the equity on it is!
What About That Money You Now Owe?Well that’s neat too, because inflation tends to increase at an average of 3.6 per year.
So every dollar you owe, and haven’t had to pay back yet, tends to decrease in value by 3.6 cents each year, until you pay it off.
So your debt is actually devaluing!But I still have to pay back $80K?
No you don’t, that’s what tenants are for! Not only will tenants pay back that $80,000 for you, and as a nifty savings account for you; but done the right way, they will over pay you.
And that is Monthly Cash Flow – A whole other amazing dynamic helping your real estate investing returns!
Above Video Text Transcript:
00:00 Hi Joe White here with Grow 00:02 property-management here in Philadelphia 00:04 I want to talk about the advantages that 00:05 real estate investing has over other 00:07 forms of investing I think it’s kind of 00:10 common for those involved in real estate 00:12 investing and be kind of blown away the 00:14 others would even consider investing in 00:17 different playgrounds like the stock 00:18 market and there was that invest in 00:20 stock market see real estate is 00:22 something that’s very foreign and not 00:24 within the reach 00:24 there’s certainly validity to both sides 00:26 you know real estate investing has very 00:28 powerful dynamics that blow all forms 00:31 investing out of the water but it’s not 00:33 like the stock market where you can 00:34 simply read the New York Times financial 00:36 page a couple days a week get advice 00:39 from a good stockbroker or even watch a 00:42 TV crew that’s respected and get some 00:44 great tips you know real estate 00:46 investing is always going to require you 00:48 to make the calls you can’t even get a 00:51 stockbroker to help you out or financial 00:53 advisor on it if they can’t get a fee 00:55 they’re gonna tell you don’t do real 00:57 estate investing real estate investing 00:58 is bad stay away from it 01:00 so you know I want to take some time I 01:03 want to record a few different talks a 01:04 few different podcasts about why real 01:06 estate and I say it blows all forms of 01:10 investing out of the water but I want to 01:12 lay it out over a few podcasts I want to 01:14 prove it to you you know I want to say I 01:15 want to show you the money but I’m not 01:17 gonna do that to you I won’t weigh that 01:18 one on you so I’m gonna start today with 01:21 a real biggie and that’s the concept of 01:23 leverage real estate doesn’t just give 01:26 you a return it gives you a leveraged 01:27 return so let’s say you buy a property 01:31 for $100,000 and they make you put 20% 01:34 down so you have to invest twenty 01:36 thousand dollars of your own money and 01:38 at this point you’re going to have to 01:39 borrow $80,000 to get you that hundred 01:42 thousand dollar property so it’s very 01:45 cyclical 01:46 but property values nationally increase 01:48 in average of five point seven per year 01:50 so this time next year your property 01:53 your $100,000 property that you 01:55 purchased this can be with one hundred 01:57 five thousand seven hundred dollars and 02:00 you just made a $5,000 profit on your 02:04 twenty thousand dollar investment in 02:06 just three point five years you will be 02:08 paid back your initial investment of 02:10 twenty thousand dollars now the stock 02:12 market 02:13 same $20,000 will not be utilizing 02:16 additional $80,000 that is leverage so 02:19 in the stock market your investment is 02:21 only the $20,000 that you have to invest 02:24 you know if you get a 5.6 percent return 02:27 in stock market which is probably what 02:30 you typically get that’s kind of an 02:31 average return over here your return is 02:34 only give you one thousand one hundred 02:36 and twenty dollars not gonna be the five 02:38 thousand seven hundred that you’re 02:40 getting for real estate so big 02:41 difference there so the more you 02:44 leverage in real estate the more profit 02:46 you typically will make now what’s nice 02:50 is the money that you owe isn’t yours 02:54 but the equity on it is and that’s the 02:56 power of real estate one of the powers 02:58 of a real estate there is many we’re 03:00 actually going to go through several I’m 03:01 not in this podcast but in a couple 03:02 others so now what about the money you 03:04 owe well that’s kind of neat too because 03:07 inflation tends to increase in average a 03:09 three point six per year so every dollar 03:11 you owe that you haven’t had a chance to 03:13 pay back yet tends to decrease in value 03:16 by three point six cents each year until 03:19 you pay it off so your debt is actually 03:21 devaluing so you want to now ask me Jeff 03:25 all right well that’s all well and good 03:26 but you still have to pay back that 03:27 eighty thousand dollars no you don’t 03:29 that’s what debits are for so all right 03:32 well happening investing next I want to 03:34 talk about the tax advantages the huge 03:36 tax advantages with real estate 03:38 investing which are even more powerful 03:39 than leverage I will see you in the next 03:41 podcast
