Leverage: The Key To Wealth With Real Estate
Posted on February 16, 2007
Leverage means that you can control a large investment with a small amount of money. You can leverage an investment in the stock market. If you have $10,000 to invest, your stockbroker will let you buy $20,000 of stock. That’s a 50 percent margin, which is the most the government will allow you to leverage stock purchases. With real estate, it’s not at all uncommon to see 80, 90 even 100 percent leverage and occasionally more than 100 percent.
The reason you can borrow so much more to buy real estate is because the risk of real estate going down in value is very low and the risk of stocks going down in value is very high. I guess that’s the reason I am so heavily invested in real estate and have very few of my assets in stocks.
Becoming a millionaire is simple. All you have to do is start with a dollar and double it 20 times. Think I’m kidding? $1-$2-$4-$8-$16-$32-$64-$128-$256-$512-$1,024. That’s 10 times. Notice how it starts out slowly and then begins to snowball? That’s exactly the way a real estate portfolio grows. It starts slowly and gradually begins to snowball until one day you wake up and realize that you really are a millionaire. Let’s keep it going: $2,048-$4,096-$8,192-$16,384-$32,768-$56,536-$131,072-$262,144-$524,288-$1,048,576.
Simple isn’t it? Just double a dollar 20 times and you’ll have over a million dollars! Note that I said simple, not easy. Very few people know how to double a dollar and of those that do, few have the patience to keep at it long enough to be successful. If you look at the numbers, you’ll see that it takes until the seventh double just to reach $100 and three quarters of the money doesn’t come until the final two doubles. Most people become discouraged long before they reach the final years in the doubling process because they try to do everything themselves.
You may be able to buy something for a dollar and sell it for two dollars. But think about having to buy two items to sell for four dollars, followed by four items you would have to sell for eight dollars and then eight items to sell for sixteen dollars. Are you beginning to get the picture? If you’re trying to do it all yourself, each double brings a doubling of the workload and eventually it overwhelms you and you become discouraged. It probably will happen long before you doubled the dollar enough times to reach the first $100.
Let’s compare this with real estate, which allows you to leverage both money and people. Assume that you purchased a $100,000 property on which you were able to obtain a mortgage of $90,000. You would invest $10,000 and it would be a 90 percent leveraged investment. Assume inflation increased the value of the property 7 percent, and the rental income earned by someone else, paid the mortgage down $2,000 and left you with $1,000 after expenses; you would have gained a total of $10,000 on a $10,000 investment. That’s how real estate allows you to double a dollar without having to work yourself to death in the process. If you could leverage a deal 95 or 100 percent, which can be done in many cases, inflation could be 3 percent or less and the value of your equity would still double even if you had no excess income after expenses.
Imagine what could happen if you devoted a portion of your time to finding deals rather than trying to earn enough to double your dollars. If you found just one deal a year like this it wouldn’t take long to become a millionaire.
As I said earlier, it sounds simple, but that doesn’t mean it’s easy. Most things worth having don’t come easy, otherwise everyone would have them and they would lose their value. People are making deals like the one described in this column every day in markets all across the country. I know because I get emails from them telling me about the various techniques they used to put the deals together.
Unfortunately, I also get emails from others giving a litany of excuses for why it’s not possible to find deals that work in their area so they aren’t wasting their time looking. For 35 years I’ve been investing in Western North Carolina and Upper South Carolina and not a year has passed that someone hasn’t told me it’s impossible to find deals like that here. Rather than argue, I’ve just kept on buying.
Here’s a tip! You can make excuses or you can make offers. Excuses will get you nothing. Making offers may get you a lot of NOs, but they will occasionally get a yes and it’s the yeses that bring success. You never know what a seller is willing to do until you ask. The way to ask is to make offers that will work for you and see how the sellers respond.
The worst thing that can happen is your offers may be rejected. Look at it this way, you find a property that interests you and you make an offer. You didn’t own the property before making an offer and if the offer is rejected, you haven’t lost a thing. On the other hand, if the seller responds with a counter, a dialog has been opened that may result in the two of you reaching a mutual agreement to purchase the property.
In our Weekend Millionaire books, audio and computer programs, we teach you how to make offers that will make money if accepted. Until you start making offers, the only thing you can make are excuses.
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