The foundation of any structure or building is arguably the most important part of the building. The same is true for investments, and the foundation of a good investment is a high rate of return.
So what rate of return is considered a high rate of return?
First let’s talk about what is NOT a high rate of return. In the US, inflation averages between 2 and 3 percent per year (unless it’s 2022 and inflation is almost in double digits, yikes). So if you’re not making at least 3%, you’re actually losing money because inflation is causing the purchasing power of your investment to decline faster than the rate of return is making it grow. So if you invest in something like a CD or certificate of deposit at .19%, YOU ARE LOSING MONEY, not making money.
What are some other average rates of return?
Bonds average 5-6% not bad, but not great either.
Stocks average 10% over the long run.
Crypto…..it’s so volatile that the average returns change constantly, but bitcoin has averaged just a 5.16% ARR 2010-2021 if that gives you an idea. Not great.
Again all those numbers are AVERAGES. So those are the returns for the average investor aka me and you.
Now with real estate every property and market are different, but both Dallas and I regularly get over 100% returns on our rental properties.
How are our returns THAT high? There’s a lot of reasons, but the biggest reason is leverage. We purchase super valuable assets with relatively little of our own money.
Think about this, imagine 2 neighbors, John and Kevin. If John was to invest $5,000 into a well performing stock, and his neighbor Kevin invested $10,000 in the exact same stock, who would make more money? Obviously Kevin would. He invested twice as much money, so he made twice as much money in return, but who has the higher ROI? Trick question: they are exactly the same.
What if you could invest $5,000 but get to buy $10,000 worth of stock? You’d make the same amount of money as Kevin with half of the initial investment aka you would have DOUBLE the ROI as Kevin.
Now what if you could invest $5,000 and buy $100,000 worth of stock? You’d make 20 times more money and your ROI would be 20 times higher than Kevin’s investment.
This is exactly what happens when you invest in real estate. You get to buy this awesome asset, a rental property, and you only have to put 3.5%-25% down.
That means you could potentially buy a property worth $142,000 for just $5,000. The bank will loan you the rest of the money. AND the asset will perform the same whether you paid cash for it or bought it with leverage.
Let’s be conservative and say that in the first year the property goes up in value 3.5% (that’s the national average for the US by the way). Your first thought might be that, that’s not too exciting. In fact that increase is barely above inflation
But a 3.5% increase on the $142,000 property you own is an increase of $4,970. Now, remember your initial investment? $5,000 and in one year it made you $4970. That’s a 99% rate of return. You basically doubled your money in one year!
The kicker is that, that 99% ROI, is just ONE of the ways to make money through Real Estate.
Disclaimer: Theoretically you can use leverage and invest in any type of asset like stocks or bonds or anything really. But the only problem is banks won’t lend you money to buy stocks or bonds or mutual funds or anything like that. They want security, so they want their loans backed by something tangible, something reliable, something like a piece of real estate. Real estate is the only investment that we know of that banks will readily give you money to invest in, so it’s one of the only ways to tap into the power of leverage.
Disclaimer 2: What’s the catch? When you get a loan, now you have a monthly payment to worry about. Plus when you have a loan, you’ll have to pay interest on the money you borrowed, so won’t that eat away at your return.
Well first off, you’ll have a tenant who pays you rent, at least enough to cover the mortgage payment (we’ll show you how to make sure this is the case in a future post), and whatever’s left over you get to keep as a bonus, just in case that 99% rate of return wasn’t enough for you.
Second, yes you do have to pay interest on the loan, but it’s not you who pays the interest. You make your mortgage payment with the rent you collect, so you personally don’t pay a single dollar of interest. Your tenant pays all the interest for you. And in fact, they’ll also pay down your loan balance for you so eventually you’ll own the entire property without a dime of debt left on it.
But even if you did have to pay the mortgage with your own money, remember inflation? It averages between 2% and 3% per year (or much higher this past year). Guess what interest rates are on mortgages? Right now they are 5%-7% (we have some as low as 2.5%). Most of our properties are locked in around 3.5%.
That means after adjusting for inflation…..it’s basically interest free. Crazy. The money you borrow is pretty much interest free because even if you are the one paying on the loan, you get to pay it back with inflated dollars.
To bring it all together; the foundation of a good investment is having a high rate of return because at the end of the day, that’s what builds your wealth the fastest. And getting crazy high returns with real estate is way easier than with other investment types because of the ability to amplify your return by using leverage.
Your real estate coaches,
Dallas & Greg
