How Real Estate and Leverage Can Create Wealth
I would like to explain how leverage can be the essential ingredient to creating wealth by investing in real estate. We all understand there are many types of property to consider when buying real estate as an investment. Each property is unique and can be bought with various goals in mind for ROI (return on investment) . Income producing real estate is bought with the emphasis on the cash flow it produces while land might be purchased with hopes of appreciation over time. The average person with $100,000 who buys a $100,000 property. Who pays cash and then sells it for $125,000 thinks he has made 25% on his $100,000 investment. An astute real estate investor will take that $100,000 cash and perhaps buy 10 properties at $100,000 each putting $10,000 down on each and mortgaging the other $90,000. This investor now owns $1,000,000 worth of real estate. Now I realize I am skirting details like closing costs,cash flow etc but an astute investor would be sure of things like debt service and money for closing costs. An astute investor might even get the seller to pay the closing costs. An astute investor would leverage that $100,000 into $1,000,000 worth of real estate. Now let us assume it took the average person 5 years to cash out for the $125,000 and make his $25,000. Now let us assume the same results for our astute investor. That 25% return (say 5% per year not compounded = $25,000 on the average persons property purchased for $100,000. our astute investor cashes out for $1,250,000.00 . His profit is $250,000. Both had $100,000 to invest. The average person made 25% or $25,000. The astute investor made 250% or $250,000. With the same amount to invest over the same amount of time. The astute investor made 1000% more than the average person. That is the power of leverage in relation to real estate. Did the astute investor have more risk and hassle? Of course . Was it worth it ? I believe so.
I realize this may seem far fetched to some people especially in these economic times. I have helped my customers do this time after time over my 35 year career as a real estate broker, mortgage broker and appraiser. This is my third recession. In my 35 years I have made more money by investing in real estate than I have working in real estate. I have a saying. "The money is made in the buying" . The three most important qualities of a good real estate investment are location,location and location. I have another saying "It is not what you make but what you keep that counts". What you net after taxes is the money that you get to keep and spend. An astute real estate investor maximizes leverage and minimizes tax. That is how true wealth is created.