10/26/2005

10-26-05 - 3

10-26-05

In the end, the only really big advantage of real estate investing is that you can get these great loans (mortgages) which you can use to put into investments. This allows you to get an asset which is appreciating faster than the interest rate, and the difference is pure profit. What's more, the asset can be very large compared to the capital needed to get in. If you could take out a big loan and put it in the stock market you could do similarly well, assuming you could find an investment that's as good.

Specifically, imagine you get a $100,000 interest only loan at 7% interest. Your monthly payment is $525. Now say the real estate market is going up by 10% each year. In 5 years you sell and pay off the load and get $61,051 . You invested $525*60 = $31,500, so your profit was $29,551 . Assuming you had to put up maybe $10,000 to get in, that's a very big profit - 300% - even though the market was doing 10%, because you were so heavily leveraged.

What if you just put your $525 monthly investment into stocks that return 10%? After 5 years you would have $40,354.91 , for a profit of $8,854.91 - much less. If you invest that $10,000 capital you had to start too it would return $6,105.1 profit, for a total of $14960, about 150%, half as much as the house.

In the real world, a lot of the reason why real estate investing is so good is because it forces people to save a much bigger percent of their savings than they otherwise would. If you have a big mortgage, you pay it and live frugally. If you don't, you could put the same amount in stocks, but instead you buy fancy things.

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