If you have ever wondered how real estate creates wealth and moguls, you should stay with us because, today, we are laying out the 5 reasons as to what makes real estate so special. Learn how investing mitigates your biggest expense, what the cash flow return is, and how leveraging multiplies your annual percentage rate.
What You Will Learn About How Real Estate Creates Wealth and Moguls:
- What the investing is about and how it mitigates your biggest expense
- The cash flow return
- Why amortization isn’t an expense
- What most people think of when investing in real estate
- How leveraging multiplies your annual percentage rate
Click here to watch the full episode on YouTube!
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Speaker 1: This is Theriault Media.
Matt Theriault: Hey, rockstar, Matt Theriault, here. Just curious, have you ever wondered how real estate creates wealth? I mean, why has it produce more wealth and millionaire and billionaire moguls, than anything else? With so many other investment options available, how does it do that? What makes real estate so special?
Today I’m going to give you five reasons as to how real estate creates wealth and moguls, on this episode of Financial Freedom Friday. This is not going to be Robert Kiyosaki’s Cash Flow Quadrant, in case you were wondering. It’s something so much more exciting.
How real estate creates wealth and moguls, is really pretty simple, and its simplicity is probably a part of what makes it work for so many people. It’s simple, meaning, you don’t have to really think too much. By simply just owning income-producing real estate, wealth just, it happens. I’m gonna give you five reasons as to how it happens, and there are more than five, but I’m gonna give you the primary five.
First, it mitigates your biggest expense in life. This is important for any investment, as the most successful investors, they’re gonna tell you, investing isn’t necessarily all about how much you make when your investments go right, although that’s important, but it’s also very much about how much you lose, or don’t lose, when things go wrong. Whether a real estate investment performs or doesn’t, you still get the benefit of the depreciation and the deductions. I’ll just abbreviate there, depreciation.
What this means is, when things go wrong, you’re losses are minimized, and when things go right, your wins are maximized. This is a small ROI, but it’s still a return on investment. Let’s just say, 1% annually, to keep this really simple and conservative.
Most people don’t even recognize this, because it’s not money coming into their bank account each month, it’s money that’s not going out of their bank account. They take that for granted. But it is, indeed, a return on investment.
The second one is cash flow. Cash flow. You see, when you lease your real estate to someone for the right to use it, you receive income, they pay you for that right. From that income that you receive, that they give you, you then pay the property’s expenses, and you get to keep what’s left over, and that’s called cash flow.
This is a much more noticeable return because it’s money that shows up in your mailbox every month. A very conservative number, say, today’s market, it didn’t really matter what the market condition is, but, very conservative number, I’d say is 8%.
Then, there is amortization, amortization, I’m going to abbreviate this, too, with amor. This is probably the most commonly misunderstood, or undervalued profit center in real estate. One of the more, if not the most powerful one, when it comes to wealth creation. If you borrowed money from a bank to purchase the property, then this would be part of the property’s expenses that you’d have to pay each month, that debt.
People look it as an expense, but it’s not really an expense, it’s a realization of equity. That debt service, it’s paying off the load on the property, transferring more and more ownership to you every month. This is a big part of what differentiates an investment property from the home that you live in, your primary residence. In the home that you live in, it’s you paying that debt every month. It’s you buying your home.
In an investment property, it’s your tenant that sends you that money every month to take care of the mortgage payment, so it’s your tenant that’s buying this property for you. That’s what makes this profit center so special, and so powerful. It’s the one that people talk about the least.
The ROI here, in the beginning, due to how an amortization table works, it’s really small, but it gets bigger and bigger, the longer that you own the property. In the interest of keeping everything super conservative, super simple, let’s just say, it is 1%, also. 1% annually.
The fourth profit center of real estate is what everybody knows, and what everybody talks about, is appreciation. This is what most people think of when investing in real estate, they’re focused on the appreciation. They’re constantly concerned about whether or not this is going to be a good time to buy, they’re always trying to time the market, meaning, they’re wondering what’s the market going to do next. The truth is, nobody knows. When you find that person with that crystal ball, I’d be very grateful for that introduction. The truth is, nobody knows.
Although this is a bonafide profit center, it’s a speculative one. It’s the icing on the cake. These other three, this is the cake. Maybe the market from appreciation is gonna go up, it’s gonna go down, but while it does, or doesn’t, these other three centers are working for you. As the market goes up and down, historically, the average national appreciation over a 30 year period, is probably right around 3%, we’ll use that number in our equation, just to keep it simple and conservative.
These are the four or five points of how real estate creates wealth and moguls. Let’s add them all up, what do you have? You have a collective annual return of 13%, those are four out of five reasons how real estate works so well in creating wealth. 13%. It’s not all the much to get excited about, is it? It’s respectable, but it’s not the silver bullet to creating wealth that you were looking for. There’s gotta be something else, right? Well, there is.
It’s the fifth reason as to how real estate creates wealth and moguls, it’s what’s called, leverage. It’s this type of leverage that’s available inside of real estate. It’s not available to the average person in any other mainstream investment. You see, with the use of very basic leverage, let’s say you put 20% down, that’s customary, you put 20% down of the purchase price, the bank puts in the rest, the 80%. Then, collectively, the use of leverage in this example will multiply these other returns by three, turning this into an annual percentage rate of 39% every year.
It actually gets a little better the longer that you own the property, but with just 39%, let’s just keep it really conservative and simple, in the first year 39%, it starts to become pretty clear as to how real estate has created so much wealth for so many people.
If you’re a little confused by how I got the math and how I came to all this, I did it in advance, and I actually run down the math in this video right here, you can click this link, it will take you there. Click this to watch the actual calculations for each one of these profit centers. Or, if you’re listening to the podcast, you can go back to episode number 421, as I did the math there, too.
If you can show me another investment with the historical track record and the math to support 39% annually, and you can rely on that for the next 30 years, let me know. But until then, I’m going to continue doing what I’m doing, it’s why I refer to this show as, not so much a real estate show, I mean, I don’t care about the real estate, I just care about what the real estate does for my money. This is not a real estate show, it’s a money show, disguised as a real estate show, and I will see you next week for another episode of Financial Freedom Friday.