Real Estate Investing for Everyone by Martin Stone

Author:Martin Stone
Language: eng
Format: epub
Publisher: Dover Publications
Published: 2019-02-25T16:00:00+00:00

Pretty nice, isn’t it? But the story gets even better. To see the real advantage to real estate investing, we need to add the second wealth-building concept into this equation: leverage. According to Merriam-Webster, leverage is defined as “an increased means of accomplishing some purpose.” When it comes to investing, our definition is “making money using someone else’s money.”

What’s great is the entire real estate industry is built around encouraging the use of other people’s money to fund these types of investments. The biggest proponent of the concept is the federal government via the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). The FHA and VA encourage home ownership by offering financing for home buyers with low or no down payment programs. The purpose is to encourage people to own their own homes. These FHA and VA loans are nothing more than loans designed to take advantage of leverage, which is encouraged by our government.

What’s amazing is so many people take advantage of using borrowed money to buy a home but never take advantage of this idea to make any additional real estate investments that could secure their future for good. These same homeowners marvel at how much their home appreciates over the years, but when it comes to long-term planning, this light bulb always stays dim. So let’s get out of the dark.

As you learned, one of the great advantages of real estate is it offers several types of return. The cash flow gives you something to spend today, yet the appreciation creates the big-time wealth for your future via the use of leverage. To demonstrate the effect of leverage, let’s talk about just this one component of return from real estate: value appreciation.

The value of property increases in most areas of the country because of inflation and demand. Bread, milk, and gas seem to cost more every year and, thankfully for real estate investors, so does housing. We call that value appreciation. Appreciation rates vary all over the country, but regardless of where you live, most areas always seem to have some steady increase in value as the years go on. To demonstrate how this will work to your benefit, we’ll use a rate of 5 percent appreciation for the following example. If you own a property worth $500,000, this means that it will go up 5 percent in price every year. If you paid all cash for your house, this means you earn 5 percent on your $500,000, which is $25,000.

Paying all cash for a property, however, isn’t what makes real estate investors money. Rather, it’s using leverage to its full advantage that creates their real wealth. The idea is to use a little bit of your own money, lots of someone else’s, and then reap the rewards of 100 percent of the investment. Here’s an illustration of a return after one year of ownership assuming two different down payment options. We’ll use a 20 percent down payment (the amount it would take with

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