The Lessons School Forgot by Sammartino Steve;

Author:Sammartino, Steve; [Sammartino, Steve]
Language: eng
Format: epub
ISBN: 9780730343226
Publisher: John Wiley & Sons, Incorporated
Published: 2016-02-21T00:00:00+00:00

OUR GOAL SHOULD BE TO PUT EXCESS MONEY TO WORK AND USE IT TO GENERATE MORE ‘INVESTED MONEY' OR TOWARDS ENTREPRENEURIAL ACTIVITIES THAT ‘INVENT MONEY'.

2. Property

This is money we put into real estate — land, houses, apartments, buildings, factories, warehouses and offices. We can choose to live in them, rent them out to other people to live in or rent them out to businesses.

These are good places to store money because they most often generate a return on the money invested. Furthermore, unlike cash, the value of the dollar we put here is usually worth more the next year. This happens in two ways. First, we get rent for the use of that property, or we reduce our own cost of living by reducing our need to pay rent to live somewhere else. The rent puts money into our hands simply because we control the property asset. Interestingly, we don't necessarily have to own the property to extract rent; we just need to control the asset. Second, when we own the asset, we also gain money as it appreciates in value. If it is worth 10 per cent more next year, the original money we put into it will then be worth 10 per cent more. We can sell it at a profit, and keep the money we made from rent. Because the money was ‘invested money', it continues to grow in value.

This has been the greatest source of wealth creation since the dawn of time. Land, by definition, is scarce, has a limited supply and, when chosen well, can generate above-average returns on investment. But the real reason property generates more wealth than other sources is that it is viewed as more secure. Of course there are exceptions to this — mortgage-backed securities during the GFC come to mind — but because property is seen as secure, and when it is backed by rents and leases, financial institutions will lend money to acquire it.

In this case, if you have only 10 per cent of the funds to buy some real estate, and you borrow 90 per cent of its value, and it goes up by 10 per cent in a year, then in real terms you've doubled your money through borrowing other people's money. This is why property has such a success rate in generating wealth over time. Of course a property's value can drop, and for this reason it should be viewed as a place to store money for the medium to long term. Getting in and out of property is time consuming and costly, which is restrictive but also part of the reason for its stability. It also should not be undertaken unless the return is reasonable, and it is likely to be in demand by others if the renter (people or corporation) leave town.

Historically, over the long term property goes up in value. It also requires a far lower skill base than most other investments. Dumb money can do very well; often all the investor needs to be able to do is ‘hang on' long enough.

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