The purpose of this section is not so much to give you the “how-to” of real estate – although there will be plenty of how-to advice – but to make you sit bolt upright and exclaim: “Wow, I never realized real estate was this good!”
The reason is that once you “get it,” once you understand why property is such a phenomenally lucrative and astoundingly simple investment vehicle, you will never be able to focus on a sitcom on television again without getting itchy feet, wondering whether the hour wasted watching the tube is costing you the deal of the decade.
You will be itching to apply all the investment ideas you’ve learned, and you will also want to invent your own and go out there and try them, modify them, and continually improve them.
Contrary to expectations and what we somehow seem to have been taught by our parents, relatives, schools, the mass media, and “experts,” it is possible to find a bargain property or even many of them in a row.
It is possible to buy properties using mostly or entirely other people’s money. It is possible to buy properties where the returns are 20 or 30 or 50 or 100 percent or more per year. What’s more, all these things are easy.
When I tell people that property is not just as good as other investments, not just a little better, and not even just a lot better than other investments, but tens or even hundreds of times better than other investments, most people do not believe it.
So, let me in this section show you why I think the property is so much better.
Imagine you have a lump of money to invest. It does not matter whether you have $5,000, $10,000, $100,000, or $1 million, as the same principles apply in each case. So let’s assume that you have $100,000 cash to invest.
Let’s also assume that you are considering investing your funds either in the stock market or in the property. Finally, for the sake of simplicity, let’s ignore all brokerage fees and commissions. I will simply pose four questions…
This may seem like a trick question. It is not! For most people, when you have $100,000 of cash to invest in the stock market, you can buy exactly $100,000 worth of stock.
Now I know some of you will protest that you can buy stocks on margin, but the reality is that investment houses will only let you do that with a very limited number of stocks, and then only for about 30 percent of the value of the stocks.
What’s more, if the stocks go down in value, they will make a “margin call,” in other words, ordering you to pay a portion of the plummeted value so that your borrowing percentage is down to within their acceptable margins again. The truth is that for nearly all stock market investors, they put up the entire purchase price in cash.
So, in nearly all cases, your $100,000 cash will buy you exactly $100,000 worth of stock. Let’s compare this with investing in real estate.
People often challenge this claim that banks and financial institutions fall over themselves to lend you money to buy property.
They are totally missing the point. Anywhere in the world, you can pick up a newspaper or magazine, look at television ads, or be confronted by huge billboards. You will never see advertisements saying things like: “Want to invest in diamonds, or antiques, or paintings, or precious metals, or stocks, or certificates of deposit (CDs), or mutual funds, or phone cards? Come and see us, and we will lend you the money to invest.” It sounds crazy, right? Yet these same newspapers and magazines and television channels and billboards continually run advertisements offering to finance for property acquisitions.
Remember how when you buy a new (for you, anyway) car, you suddenly notice all the other cars of the same make and model on the road? Well, when you look out for advertisements of institutions looking to lend you money to buy property, you will suddenly see them all over the place. And then you will also notice the lack of ads offering financing for other investments.
There is another way of looking at it. Imagine going into the bank, and saying to your bank manager something like: “I want to invest in gold, and my neighbor says that platinum is a good investment, and my kids are really into phone cards and baseball cards, and my husband (or wife) collects antiques, and we want to buy more stocks and bonds, so will you please, Mr. Bank Manager, lend us the money to invest in these things?” Chances are he will laugh you out of his office. And yet if you were to ask that same bank manager for money to buy property, he will look at the situation with interest, as he is generally eager to lend money on the property.
This tells you two things about property. First, it is still considered a safe and secure investment. As further proof of this, consider the interest rates charged on various loans. The interest rate charged on real estate loans is less than that charged on business loans, which in turn is less than that typically charged on credit card balances. Clearly, banks exact higher interest rates where the perceived risk is higher.
Second, the important thing to note from the observation that bank managers happily lend money on property (but almost nothing else) is that when you acquire property, you don’t even need most of the money required for the purchase! What a dream situation!
Think about this for a moment. Banks have the money, but fortunately, do not want to buy property (otherwise what would stop them from buying it all themselves?). And you want to buy property, but don’t have (all of ) the money. What a great opportunity for synergy!
This brings us full circle: With $100,000 cash, you can generally buy $100,000 worth of stocks, whereas that same $100,000 cash can buy you $1 million worth of property.
The advantage of this leverage is self-evident. If both stocks and properties went up by, say, 10 percent, then your stocks would have gone to $110,000 (a profit of $10,000), meaning that you would have made a 10 percent return on your invested capital. Your property would similarly have gone from $1 million to $1.1 million (a profit of $100,000), meaning that you would have made 100 percent return on your invested capital.
Of course, leverage works in both directions. If everything goes down by 10 percent, then the stockholder would only lose 10 percent of his invested capital, whereas the property investor would lose all of it. However, I will show you why I am not overly concerned with the risk of any downturn.