I was hardly out of my teens when I bought my first house. I was only 20 years old. It was a great move though. Probably the smartest thing I’ve ever done. I learned early on that Real Estate is the best wealth building investment option available.
I made over $300,000 off it, and only put $7000 down.
I knew it was smart, but mostly because I was surrounded by Real Estate Experts at the time, and you pick up tidbits like that. I didn’t know WHY it was smart.
It ended up working really well for me, even though it did seem a bit random or just like it was just good timing. I didn’t know it at the time, but unlike other investment options, the odds were on my side the entire time.
It probably Even helped me through the housing crisis ten years ago.
There are A LOT of great wealth opportunities in Real Estate, but I’m going to stick with the basics, and focus on WHY just the act of buying a property is the smartest thing you can do, and how it’s even better if you already own something and are thinking about buying property as an investment.
LEVERAGE
When I was 20 years old, I put $7,000 down as a deposit on my first home. Notice that even though The sales price of the house was $140,000, my initial investment was $7,000, After all, I was 20 years old, I didn’t have $140,000 laying around.
I used somebody else’s money.
I saved up the $7,000 and qualified for an FHA loan (which means it was insured by the federal government.) FHA even allows you to use borrowed money for the down payment.
In investment terms, using someone else’s money to buy something is called leveraging your money.
Leveraging your money works better with Real Estate than any other investment because the interest rates are usually very low, and the federal government helps out significantly by making the interest on the borrowed money tax deductible.
And if you rent out the property, you might not be required pay taxes on some of the rental income.
You can write off almost ANY Real Estate expense on an investment property.
So for the sake of explaining how Leveraging works great for Real Estate, lets buy a house for $100,000.
You put $5,000 (or 5%) down as your down payment, and over time, the value of our house increases (or appreciates – I’ll get to appreciation in a second), but for now, the value increases to $110,000.
You now have profited by 10%, or $10,000 in equity, which is the value of your house that isn’t incumbered by a loan.
Since you only put $5,000 down, and you made $10,000 from it, your return on investment is 200%.
Now, let’s look at how that plays out if you didn’t buy your house with a loan.
You save up and buy the house for $100,000 cash, and the value goes up by $10,000, just like before.
But instead of receiving a $200% return on your investment, since you’ve fronted $100,000, you’ve only earned 10% back
And THAT is why leverage works so well with Real Estate.
But… just like any other market, Real Estate has its up and down cycles as well.
This is something we’re all to familiar with, since we all got our butts kicked in that “housing crisis” or “Economic downturn” in the late 2000s.
Let’s just call it what it was: It was a meltdown that ruined the lives of millions, and people are still shaking off the dust from it.
It was the worst financial disaster since 1929, and the second worst economic crisis in the history of the United States.
But some people didn’t do too bad.
Because a strange thing happens when you look at housing as an investment.
From 2006 to 2012, both the stock market and Real estate prices dropped 50 to 60%, but while the entire world was financially melting down, Real Estate owners that were renting out their properties were increasing their rents.
These poor folks who were losing their homes left and right, had no choice but to rent, and that increased the demand for rental property significantly, and property owners increased their rents.
So, from an investment standpoint, or from the perspective of your retired grandparents who were reliant on their investments, rental property was a huge winner, maybe even a safety net from all their other investments that were tanking at the time.
We talked about leverage, and the stability of owning a house, but another huge benefit of owning a home as an investment, is that unlike other investments, you have the ability to control what happens to your investment. You can do stuff to it and add value to it.
For instance, you can remodel, add square footage, add a bedroom or central heating, and it could significantly add to the value of your investment.
So in that same example I used before, you bought a $100,000 house with $5,000 down. But then lets spend 20,000 to add an additional bedroom.
Adding that bedroom increased the VALUE of your house, and for our example, let’s say it’s now worth $160,000.
Your total investment, or the total amount of money you’ve spent, is now $25,000, and you’ve gained $35,000 in equity, which equals an additional 140% return on your investment.
By the way, this is one of safest investments you can make.
There’s enough good information out there that can help you figure out how much your improvement will cost and what kind of increase in value to expect.
Get to know your local realtor, they’re pros at this stuff, and can help you out.
They can probably even tell you to scrap a bad idea and help you figure out a better plan.
This can particularly come in handy when you’re looking for a home.
Maybe buying a fixer-upper can jump-start the return on your investment.
Upgrading can also mitigate some of your risk.
If you add value to your house, and the housing market dips (as it can be expected to do), the improvement you made could boost the house’s value enough to where you are still in the positive. or at about break even. or even minimize losses compared to what you would have experienced without making the upgrade
So, let’s pretend that happened.
Using our earlier example, your house that you’ve invested $25,000 in, and was worth $160,000 but now has dropped 20% due to a bad market is now worth $128,000.
At this point, We’ve spent $25,000, and we’ve earned $28,000 on it.
It hasn’t been a great investment (yet), but thanks to the improvement we made, we haven’t lost our shirt, either.
Now one of the benefits of owning Real Estate that you always hear about, is appreciation, or how the value of a house increases over time.
Let’s downplay this a bit, because I know it seems like you can just buy a home and get rich if you sell it real quick, but that usually isn’t the case.
The price of a house does increase over time
But, It’s a common misconception that as the price of a house increases, that its actual value increases with it.
That’s why I suggest that as an investor, you should expect that the price of a house increase right along with the value of everything else you can buy.
Meaning the price of your house in ten years will increase at a similar rate as the price of a bag of tortillas, or, right along the rate of inflation.
That might not sound like great news, but it actually kinda is.
Remember that leverage tidbit? That’s starting to look even better now, right? I mean on our house, we only wrote a check for $5,000, right?
Well, that also means that Aaron Burr loaned us $95,000.
And every month for the last ten years, we’ve been paying our mortgage payment,
and a portion of that mortgage payment reduces the amount that we owe to that murderer,
and even though our house’s value has only increased at the same rate as everything else we buy, we’ve payed down the loan enough to have a considerable amount of equity.
Not to be a Debbie Downer though (wah wah)…
but That murderous former vice president has also been charging us interest on that loan,
which means we’ve paid the lender enough to probably consider the equity gain a minor bump in the grand scheme of things. So Thank you leverage for saving the day…
But every once in a while, something happens in a community that you have no control over, and it can increase a home’s value at a higher rate.
It could be anything from a new stadium, or shopping mall being built nearby.
I live in one of the worst traffic areas in the country. Our commute times are a nightmare. It’s horrible.
I remember when a toll-road was built nearby that cut down the commute time to where most of my neighbors work.
I remember that it seemed like the value of my home jumped $25,000 overnight.
There really is so much more to buying a home, and even though this channel isn’t necessarily dedicated to Real Estate or financial literacy, it does tie in.
I am starting this channel to make the world a better place, even if just for one person. And my hope is that someone sees this video and starts to think and plan for what will probably be the most important financial decision of their life.
