When it comes to real estate, there are really just two types of people in the world:
1. Those who view it as a complex and overwhelming entity, so they never unlock its potential, or
2. Those who understand that it’s without a doubt one of the greatest ways to build wealth starting from virtually nothing.
Which one are you? Either way, the good news is that you don’t have to remain in that first group forever if you’ve started there.
Perhaps all you need to know to switch and begin building your wealth is that real estate allows you to become rich using other people’s money…
Much of the magic of real estate comes from its unique gift of leverage, especially being able to leverage your money AND the money of others.
It’s one of the primary reasons why Donald Trump has been able to build a real estate empire. Whether you agree with his political views or not, he’s an excellent example of the moneymaking power of real estate.
So how does this leveraging of other people’s money work?
Let’s walk through an example to demonstrate…
First of all, let’s keep it simple and say that you get a 90% loan of the value of the property, and that the appreciation rate is 5% per year.
Here’s how it all works:
1. You buy a $200,000 property with 10% down
To do this, you’ll assume a loan of 7% per annum, fully amortized (extinguished by money regularly put aside) after 30 years. In just 5 years, thanks to appreciation, your situation will look like this just 5 years later…
- The appreciated value of the property = $255,000+
- The 90% available for loan = $229,000+
- The note balance = $169,000+
- The cash out refinance amount = $60,000+!
OK, so there’s property now after 5 years. And now that you have that $60,000 in hand, it’s time to buy property #2. But since you can leverage your money AND the bank’s money through a loan, it’s even more beneficial to buy a high valued property for a bigger return…
2. So take your $60,000 to put a 10% payment down on a $600,000 property. Assuming the same parameters as before, here’s your situation after just another 5 years…
- The appreciated property value for Property 1 = $325,000+; Property 2 = $765,000+
- The 90% available for loan for Property 1 = $293,000+; Property 2 = $689,000+
- The note balance for Property 1 = $216,000+; Property 2 = $508,000+
- The cash out refinance amount for Property 1 = $76,000+; Property 2 = $180,000+
So after just 10 years from acquiring that first property you now have $76,000 + $180,000, which is a total of $256,000!
That’s all from starting with $20,000 using the power of leverage on your money AND the bank’s money…
So now can you see why YOU should be investing in real estate?
