Although there are the rare few that have done well picking individual stocks in the stock market, the reality is real estate offers the most potential for significant wealth development for the average investor.
A few things to keep in mind:
- Real Estate is a hard asset; It consists of physical assets such as the land it is built on and the building itself. There is intrinsic value to this (even with fluctuations in the market and regardless of the income it generates)
- Real Estate that is leased out to others has income that covers its expenses. Changes to its value does not change its ability to pay its bills.
Due to the above, banks look at lending on real estate as a relatively low risk endeavor. Given the volume of loans made every day, very few on the large scale ever default and require the bank to take back the property— and if they do, the bank can sell since it is a hard asset and has intrinsic value. Add to that fact, the majority of large loans are backed by the US Government. Try that next time you are trading stocks on margin!
So on to our story and a tale of two investments that illustrate the power of leverage:
A tale of two investments…
Jim works for a large, stable company that pays $80,000 a year for 30 years. During his time working, he puts away 10% into a retirement account each year. His retirement savings averages a return of 8% when spread out over 30 years and compounds nicely. When Jim is ready to retire, he will have about $1.2M.
Jessica works at the same company and makes the same salary of $80,000 a year. However, she takes the same 10% ($8,000 a year) of her income and invests it into a new rental property every 2 years. After two years, she takes the $16,000 and buys a two-unit standalone building (i.e., a duplex or “2-family”) in a southeastern state worth $80,000. Because she’s buying a hard asset and banks are willing to loan her money to do so, she can purchase an $80,000 asset with only 20% down, i.e. the $16k of savings from each year.
Now in Jessica’s case, let us assume she benefits from cash flow of 8%, appreciation each year at 3%, her tenants are paying down her debt (her mortgage), and she gets tax savings through depreciation on any gains!
So, in the worst-case scenario, after the same 30-year period, Jessica still has a similar $1M in cash but now she also owns the properties free and clear, which is worth double what she paid for them, and has a passive income stream from the properties for as long as she keeps them.
Where We Come In
At DW Capital, we look to purchase “value-add” properties that have an existing cash flow stream so that they are above break even from day one. Then, by implementing our value add plan, we increase the cash flow and overall value of the properties providing our investors a good return from start to finish.
