This weekend I met a potential client at a new condominium community. He and his wife mentioned they were talking about purchasing their first investment property. I congratulated them saying there's never been a better time to do so. As the conversation progressed, I overheard them saying that they could sell stock and buy the condo outright. We continued on our tour of the property, exchanged information and parted company.
Today I sent them an e-mail and mentioned that I had overheard them talking about selling stock to buy the condo outright. I said that unless they were counting on the rental income to finance their lifestyle, that they would be much better off only putting down as much as needed to get the property to cash flow by a hundred or two dollars per month and financing the rest. This was a foreign concept to them, so I went on to explain:
The power of buying real estate is in leverage. Using other people's money to finance your fortune. A stock investor that purchases a stock for $50.00 per share has to put down how much to purchase that stock? Right, $50.00 per share. However, when you buy real estate, you can often buy it for no money down. (Assuming you plan to live there) OR if you want an investment, you can often get away with putting as little as 10% down. So in the example of this particular condo, if the purchase price is $170,000 and say you have to put 20% down to get it to cash flow, you only have to put $34,000 down. That leaves you an additional $136,000 that you could either leave in your stocks, or you could purchase MULTIPLE properties with that same $170,000 LEVERAGING someone elses money to finance your real estate empire.
This is the time that the rich get richer. Imagine, if your stocks return 10% per year. And a home appreciates 5% per year. You would think that you're getting a better deal on the stocks right? Well if you've got $170,000 invested in the stocks, you've actually got $170,000 invested. But if you have a rental property, you've only got in this example $34,000 invested, but you're getting a 5% return on $170,000.
Stocks - 10% return year 1 - $17,000
House - 5% return year 1 - $8,500
Return on Investment (ROI) Stocks - 10%
Return on Investment (ROI) House - 25%
Now imagine if you had parlayed that $170,000 into 4 or 5 homes and you were getting a 25% ROI on each of them! This is how the rich get richer. And if you wanted to hedge your bets, keep half in the stock market and only purchase two or three investment properties. You STILL come out way ahead.
If you'd like to learn more about investing in real estate, don't hesitate to give me a call.
John Hurlbut, ABR, GRI
John L. Scott Real Estate
(253) 222-2626 - Cellular