Now, let LitPoodle, our superdog, explain how real estate can build wealth through the story of dog investors.
Dog Investors, Dog A and Dog B graduate from college and land jobs in Gotham city where they both earn exactly the city’s median salary of $65,000 p.a. They both diligently save 10% of their incomes. They also receive the same 3% salary increment annually
But you know what, the median condo price in expensive Gotham city is $1M!! Dog A starts saving towards downpayment, aiming for 20% down. While Dog A collects its savings in a bank account, Dog B decides to invest in rental properties across USA (where the market is growing and the total annual return is 10%+), each time it collects $25K for downpayment.
Guess what happens after 20 years? Dog A has saved $195K in its bank account. Meanwhile Dog B has built a portfolio of 7 rentals worth $750K & $20K in the bank.
Dog A isn’t still able to afford that 20% down because the condo price has now jumped to $1.5M. Whereas Dog B is not only 4 times wealthier but also can afford a bigger condo!!!
How did Dog B do it even though they both started together and had similar incomes?
Build Wealth through Real Estate
Because Dog B, through real estate investments, was able to harness the
1. POWER OF TIME
Time is money. If you are not making money out of time you are wasting time. So Invest early.
For e.g. the value of an initial investment of $25K growing @ 10% p.a.. after
After 5 Years
$40,263
After 20 Years
$168,187
Over the long run, most homes appreciate thanks to inflation. By investing early in appreciating assets, Dog B was able to capture the power of time.
2. POWER OF GROWTH RATE & COMPOUNDING
Here’s the difference between letting $10K in annual savings collect in a checking account returning 1.25% p.a. vs investing that in assets returning 10% p.a.
After 20 Years
Because of its compounding nature, the importance of growth rate cannot be understated. Even a difference of a few percentage points annually can create massive disparities eventually.
So every time you consider an investing, ask for the rate of return (or its growth rate) and use it to compare investment opportunities.
3. POWER OF LEVERAGE
You, the investor, get to keep all the appreciation in the property’s value. Many times this appreciation constitutes a significant portion of the return.
Real estate investments allows a high degree of leverage (75 – 80%) and when done carefully, they are stable enough too.
For e.g. let’s consider a house that has appreciated from $100K to $130K over a period of 10 years. And let’s say the investor put in $25K ($20K for downpayment and $5K for closing)
Due to appreciation in value, the investor’s equity has ballooned by $30K. Even though the house has appreciated only by 30% over 10 years, this $30K is a 120% return on the investor’s original investment of $25K!!!! All thanks to power of leverage.
Best of luck with your real estate investing!!
