Investing in Real Estate works because of leverage. Other People’s Money is the leverage of real estate.
Whether you use a bank, investors, relatives or seller financing, you are using other people’s money. It is the leverage that allows people with little or no cash of their own to buy a property and benefit from real estate.
This is unique to real estate.
In the stock market, you buy shares of a company. Your upside and downside are limited to the gain or loss of the shares you own.
In real estate, you are able to benefit from the value of the whole property. In residential real estate, your success is determined by the surrounding properties. In commercial properties, you can force appreciation through reducing expenses and increasing rent.
The power of leverage is undeniable when compared.
Stock Market vs Real Estate and Leverage
Let’s say you have $10,000 to invest.
If you invest $10,000 in the stock market, and the stock goes up 17%, which is really good. Your $10,000 is now worth $11,700 and your gain is $1,170.00. That’s great!
Compare this to $10,000 invested in Real Estate.
Suppose you purchase a property for $100,000 and are able to get in for just $10,000. It happens a lot. You have $10,000 of equity and $90,000 of leverage using other people’s money. According to the Case-Schiller Index, home prices rose from 1987 to 2009 an average for 3.4% per year. In this case, your $1000,000 property would now be worth $103,400.00. Your gain is $3,400.
Which would you prefer:
17 % on $10,000 = $1,170.00
3.4% on $100,000 = $3,400.00?
That’s the power of leverage!
This is one of many reasons to consider investing in real estate. Currently there are tax benefits available to real estate investors. There is the real possibility that the Trump Administration may reduce some tax advantages of real estate in an effort to simplify the tax code.
Regardless of what happens with the tax code, the power of leverage remains.
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