February 17, 2009

The Real Estate Accelerator - Leverage

One of the best books I have read as I have studied the benefits of real estate investment is Real Estate Advantage by Sharon L. Lechter, a CPA, and Garrett Sutton, an attorney. They are part of the consulting group organized by Robert Kiyosaki, as part of the Rich Dad Poor Dad series of books. I would recommend the series to you as a way to quickly get up to speed on real estate investments.

In this book, there is an example of how real estate can outperform other forms of investment for retirement. The example is short but powerful. Let me quickly summarize why I prefer real estate as the center of my own retirement program.

If you have $20,000 to invest, how would your investment grow if you put it into 1) a mutual fund that earns 5% interest income per year; 2) Invest $20,000 and borrow $180,000 for a rental property and let your equity compound; 3) Invest $20,000 and borrow $180,000.. but rather than letting your equity compound, you borrow out the appreciation every two years and use that appreciation to buy another property at a 10% down payment (use your own $20,000 to buy the first property and then use the increased value over two years to make a 10% down payment on a new property and repeating the process every two years).

At the end of seven years, how would your money have grown?

Choice 1: $28,142 Net Equity 5.8% Average Annual Return

Choice 2: $101,420 Net Equity 58.2% Average Annual Return

Choice 3: $273,198 Net Equity 180.9% Avg. Annual Return

One of the advantages you have with real estate investing is an “earning accelerator” called “leverage.”

If you would like to read more about leverage purchase the book and read chapter 2; or send me an e-mail and I will be glad to send you more details.

For more details on how real estate return on investment return on investment compares with stocks, please click here.

Tagged With: leverage, real estate accelerator, real estate investments and retirement