The fact is that many millionaires in this country either made their money or protect their wealth in real estate. Why? Because of leverage. Would you be happy with a 10% return in your stock or mutual fund portfolio? Of course! Your money will double about every seven years, which is great. How about a 3% return on a real estate investment? Which one is better? You might be surprised. Take a look at a $10,000 investment in each at different intervals:
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| STOCKS | REAL ESTATE | |||
| ANNUAL RETURN | 10.0% | 3.0% | ||
| YOUR MONEY | $10,000 | $10,000 | ||
| BANK'S MONEY | $0 | $90,000 | ||
| TOTAL INVESTMENT | $10,000 | $100,000 | ||
| TIME | VALUE | EQUITY | VALUE | EQUITY |
| YEAR 1 | $ 11,000 | $ 1,000 | $103,000 | $ 4,030 |
| YEAR 5 | $ 16,105 | $ 6,105 | $115,927 | $ 21,799 |
| YEAR 10 | $ 25,937 | $ 15,937 | $134,392 | $ 48,334 |
| YEAR 15 | $ 41,772 | $ 31,772 | $155,797 | $ 80,829 |
| YEAR 20 | $ 67,275 | $ 57,275 | $180,611 | $120,884 |
| YEAR 25 | $108,347 | $ 98,347 | $209,378 | $170,595 |
| YEAR 30 | $174,494 | $164,494 | $242,726 | $232,726 |
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In other words, $10,000 invested in the stock market that earns 10% annually would be worth almost $175,000 in 30 years.That’s phenomenal, right? Actually, yes. It’s also pretty difficult to do year in and year out, and would definitely involve a lot of volatility at times. What would your $10,000 investment (10% down payment) in a $100,000 property be worth in 30 years with a measly 3% gain each year? Over $230,000! Free and clear. Still appreciating. Still collecting rents (that should have increased about the same rate over the same time period), and still with the tax benefits. That’s leverage. It’s simple, but it’s powerful. A lot of really smart people pat themselves on the back with their 10% gains in the market. But you can do this without studying an online account or reading the Wall Street Journal or watching Bloomberg Television all day. Real estate just does not change that quickly. It may (on rare occasion) have a correction like the one we are in now, but usually that only comes after phenomenal growth like we’ve seen over the last several years. And the smart investor will have no problem taking advantage of the opportunity those lull periods create.
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The scenario above, of course, is a simplified one. It is strictly intended to show the power of appreciation in leverage, and does not account for mortgage, tax and insurance payments, nor capital improvements. Nor does it consider rents (vacancies or the explosive cash flow of rent appreciation in later years). It also does not discuss the significant tax benefits and deductions that come from real estate. The main points are these: 1) In the long run, real estate is a much safer and more consistent earning vehicle than the stock market, and 2) The easiest way to make money is to use someone else’s!