Making money in real estate boils down to these three simple factors…
1) Leverage
2) Appreciation
3) Timing
Leverage & Appreciation are the cornerstones of all real estate wealth.
Timing is the variable that determines if you win, or if you lose.
Let’s look at Leverage…
Just about anyone can control a property with a relatively small amount of cash… or sometimes no cash at all… THAT’s WHY real estate investing makes such good late night infomercials… because any fool can sign on the dotted line and take control.
…that’s called Leverage.
That’s what got me into this business decades ago… and why real estate is still such a sweet way to build wealth. Nowhere else can someone with no cash and no credit get legal control of a valuable asset so easily.
Now Remember…
Just because it’s possible, doesn’t mean it’s smart– that’s where knowing the local market cycle comes in.
The most common way to get leverage is by simply getting a mortgage loan.
More ‘creative’ examples of leverage include tying-up or controlling a property with an “option to purchase” or buying it via an installment contract, or buying subject-to the existing mortgage. There are dozens of other ways to achieve leverage… that’s what all the get-rich-quick programs focus on – how to get control of a property with little or no money down.
Here’s a simple example…
Let’s say you bought a $100,000 house by putting $10,000 down.
You have what’s called a 10:1 Leverage Ratio – meaning for every $10 of value, you invested only $1 of your own cash… you’re leveraged 10 to 1.
(B.O.Y. means beginning of the year, E.O.Y. means the end of the year, and R.O.I. is your return on investment.)
If the value of that $100,000 property increased 7% the first year – you’ve got a $7,000 gain…
(7% of 100,000 is 7,000)
Here’s where leverage gets interesting.
Because you only put up 1/10th of the total value…
That 7% gain – that $7,000 1st year appreciation – produces a 70% return on your original out of pocket investment.
You with me?
The $7,000 gain divided by your $10,000 investment = 70% ROI, for the first year.
But wait – it gets much better… or I should say…
It CAN get much better… let’s say the market continues to appreciate 7% a year for the next 6 years. That $100,000 property is now worth $160,578. That’s a $60,578 profit on your original $10,000 investment… A 606% return for just one house.
See why real estate – leverage and appreciation – CAN be so profitable?
If you’re in a rising market, you get wealthier with each passing day.
Where else can you
get that kind of return?
In appreciating markets, where a rising tide lifts ALL boats, you can leverage multiple properties and use more aggressive no-money-down strategies.
Let’s take it a step further and look at an aggressive leveraging strategy… one you’d only use in appreciating markets…
This time, instead of putting $10,000 down and buying the property outright, you do a lease option. Let’s say you pay the seller a $1,000 option fee on a three year deal. The market appreciates 7 % per year.
After three years, the house is now worth over $122,504… there was $22,504 in appreciation.
Because your $1,000 upfront investment was so small, the ROI goes through the roof… a 2,250% return on your cash in just three years.
Now, let’s get really aggressive, let’s use that same $10,000 down payment in the first example, but do TEN lease options at $1,000 a pop.
Three years later, that $10k has grown to $225k… almost a quarter million dollars.
See how it works?
See how you can turn $10,000 into $225,000?
All you need is leverage and an appreciating market.
But remember… only a flaming idiot, or a green newbie would get this aggressive without first knowing exactly where the local cycle is… just because you CAN do deals like this doesn’t mean you should.
It’s the APPRECIATION that made you money – not the lease-option strategy.
Because when you boil it all down… big-time,
Real estate success is nothing more than a market cycle play.
Get the cycle right, you win.
Get it wrong, you lose.
Compounding appreciation coupled with leverage is how Generational Wealth is created.
It’s not any more complex than that.
When you’ve got both leverage AND Appreciation working for you, it doesn’t take long to be set for life.
I know it is a LOT to digest. Why don’t you join me on a Live Streaming Event where I’ll explain exactly how this Generational Wealth works, and much more.
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