I am a patent engineer, electrical engineer, and real estate investor. I’ve bought and sold millions of dollars of real estate and love real estate. When I was young and at a job interview, the interviewer asked me about my goals. I told him that first I wanted to make a lot of money, then help people. I am writing this blog to try to help people.
My belief is that the best way that ordinary people can increase their net worth dramatically is through real estate investing. I’m not talking about your personal residence. I’m talking about carefully chosen rental income property.
Any list of the world’s richest self-made people includes a healthy proportion of people who made their money in real estate. Consider this article, for example:
http://www.forbes.com/sites/erincarlyle/2013/09/18/how-self-made-forbes-400-billionaires-earned-their-money/
Real estate investors make money though rental income, tax advantages, and leveraged appreciation.
Leverage is a very powerful wealth builder. It is the way that the Wall Street bankers get rich.
Consider a $100,000 property that can be rented out for enough rent to cover expenses. Your down payment was 10% or $10,000. It goes up 10% in value. How much was your return on investment? No, not 10% but 100%. That is the power of leverage. If you bought $10,000 in stock and it went up 10%, you’d only have a 10% profit.
The calculation isn’t this simple, of course, because there are transaction costs when you sell real estate that are higher than when you sell stock. So you need to view it as a longer term investment. If you do, you’ll be amazing at how quickly you can amass wealth with rental real estate.
Of course, leverage cuts both ways. If the house goes down 10% in value, you lost 100%. Over the long term, we have inflation. There can be periods of deflation, like from 2007 to 2012, but they are rare. Why? Because the Federal Reserve can engineer inflation by increasing the money supply. The Federal Reserve is run by banks, not the government. Banks make money when there is inflation. Therefore, the Federal Reserve does not ever want deflation and will do its best to create inflation during the rare deflationary periods.
Individuals in the U.S. have access to incredibly inexpensive leverage right now. Did you know that the U.S. is one of the only countries in the world with 30 year fixed loans? Would you lend money to someone else at 5% interest and say the rate will be the same for 30 years? Even if inflation is 8% in 5 years, you can only collect the 5%? I wouldn’t make a loan like that. The reason 30 year fixed loans are available is because of Fannie Mae and Freddy Mac which were both taken over by the U.S. government, which also injected cash into these entities. The U.S. government is effectively subsiding low cost mortgages. If you don’t believe that, go to a credit union and ask them about their rates for commercial mortgages. They will be much higher than 30 year residential mortgages. Take advantage of this largess.
You can have leverage with stock, by buying on margin, but it is not common to be able to have as much leverage as you do with real estate. Also, your rate is not going to be fixed for 30 years. You are not going to have 30 year amortization. You’ll probably be able to borrow 50% at best, and your rate will adjust as market rates adjust.
I will have more for you next time on advantages of rental real estate investments.
I have a WA state real estate license that I use mostly for my own investing and for friends. If you are interested in buying or selling real estate in Cheney, WA, I would be happy to work with you as long as you are willing to come into the office so we can get to know one another first. If you are interested in investing in real estate in another city, I am happy to share my knowledge with you, or to make a referral.
Note that I am not a real estate attorney and none of this should be construed to be legal advice.
You can lose money making investments. The real estate downturn of 2007 proved this to a lot of people. I am not making guarantees, just providing ideas. Use at your own risk.