For the average person, investing can seem like a gamble. Stock prices COULD go up in value, but they might not. Likewise, bitcoin COULD be worth $1 million per coin by 2025, but on the other hand, it might crash and burn, as it has already over its tumultuous decade-long history.
The problem with most investments is that they’re a bit of a gamble. You buy them, hoping that over time their value will go up and that you’ll be able to sell them at a higher price. When you buy a stock in a firm, for instance, you hope that the company will make better use of its capital and people and generate higher profits in the future.
The funny thing is that we’ve seen this kind of behavior in the property market. In the run-up to the 2008 financial crisis, people were buying houses, believing that the price could go up forever. The market experienced a kind of mania where people lost touch with reality, thinking that they could buy a house and flip it for a profit, ad Infinitum.
Of course, when looking for investment properties for sale, you’re not interested in whether the price will appreciate or not: you’re more concerned about whether you can generate positive cash flow. People buy real estate so that they can rent it out for more than it costs to own the property. So for instance, rental has to cover property taxes, maintenance costs, and mortgage payments. If the cash flow is positive, then you’re making money. The appreciation of the property is just a nice bonus, but it’s not essential.
You Can Lever Up Safely
Levering up to buy regular assets is a significant risk. Let’s say that you decide to buy stocks in a company because you believe that it will yield outsized profits in the future. You go to the bank, take out a loan, and then invest that loan in company shares. You hope that the share price will rise faster than the interest accrues on loan, bagging a profit. But companies can fail, and the value of their equity goes to zero. Then, not only are your shares worth nothing, but you have a huge loan that you have to repay, something which could do substantial damage to your finances.
Property is different. When you buy property, you can be pretty sure that the price is never going to go to zero. People will always want houses. Even in some of the most depressed housing markets in the US, like Detroit, you can’t just move into somebody’s apartment for free: there’s a price to be paid.
Leverage makes it easy to take control of an asset. Sure, for the first few years, the majority of your rental income will go on paying off the mortgage, but over time, you’ll begin to pay it off and owe less interest on the remaining balance. Eventually, the majority of your rental income will be pure profit.
Will you use real estate to build wealth?