What Is The Best Way To Create Wealth?
If anyone ever asks me what is the best way to create wealth I tell them Real Estate, hands down! My #1 choice in creating wealth and making money is in real estate investing. Why? Let me tell you a little secret.
There was a study completed in 2020 that had some surprising details about how people today become wealthy.
You may not know this, but in this study, the report stated that there were Seventeen-Million Millionaires in America, and of these Millionaires, about 85% of them became wealthy from being involved with real estate.
Eighty-five percent of the seventeen million millionaires made their wealth from real estate.
That statement says a lot. It tells me that real estate, whether from active or passive investing is better than investing in the stock market. How many financial advisors are going to tell you that? Only a very few, I’m sure.
Wikipedia.com describes real estate investing as it involves the purchase, ownership, management, rental, and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development.
Let’s look at some reasons Real Estate is an attractive alternative to investing in the stock market. Any investing will always have a certain degree of risk involved, no matter what it is. If anyone tells you that big returns are guaranteed, run from them. The truth be told, you can make a lot of money investing in real estate, but you can also lose a lot of money investing in real estate. Having the right “system” and “education” will minimize the risks and allow you to be much more successful.
In real estate investing, the property you are investing in is actually an asset. It is a tangible, real asset. An asset never loses all of its value. This is why asset investing in my opinion is better than speculation of investing in the stock market.
The stock market is different. Investing in the stock market you become an equity owner of a company’s stock. That means you actually own a very small piece of the company. You have no authority or control over how the company is managed. If the company is poorly managed, the company could go bankrupt and your piece of this company becomes worthless.
Investing in mutual funds is much safer than investing in a single stock of a company, however. What makes mutual funds safer is the diversification of the particular fund you invest with. For example, one mutual fund may actually invest in twenty smaller companies. If one of the companies stock takes a hit and loses a significant amount of value, your total portfolio value doesn’t drop tremendously. There will likely be some other stock this fund invests in that will rise, offsetting the stock that lost money.
Watching the value of your stock on a daily basis you might see tremendous swings in stock prices, rising and falling like that of a roller-coaster ride.
If someone in the media, for example, says something wrong, or hints at an oncoming financial crisis, it could start a panic selling on Wall Street, leaving your stock at a much lower value. There is a lot of speculation that goes on behind the scenes and stock prices can be manipulated by word of mouth. Just last year, for example, when the media talked about the worsening effects of the pandemic, the stock market followed suit with some big dips in value.
Real Estate, on the other hand, is totally different. The value of the property doesn’t fluctuate as stock does in the stock market.
In fact, property values have never fallen lower than 30% in any six-month interval, ever, which makes it very resilient to outside forces. This makes it a much safer investment. Today you don’t even have to know anything about investing in real estate properties. There is a fund on the NASDAQ that allows you to invest in Real Estate Properties. It is known as REIT or Real Estate Investment Trust. This is a passive approach to earning dividends on money invested in real estate.
A Real Estate Investment Trust (REIT) is actually a company that owns, operates, or finances income-producing Real Estate. An investor invests money into this REIT company similar to how an investor would invest in stock. He is paid a dividend-based income from his percentage of money invested.
According to REIT.com, “In total, REIT of all types collectively own more than $3.5 trillion in gross assets across the U.S., with public REIT owning approximately $2.5 trillion in assets, representing more than 500,000 properties. U.S. listed REIT has an equity market capitalization of more than $1.35 trillion.”
Approximately One Hundred forty-five million Americans live in households invested in REIT through their 401(k), IRAs, pension plans, and other investment funds.
Below is a chart of some REIT funds available and their track record of earnings.
REIT is not just the only investment for people. There are several options to investing in real estate. The main thing to know is you don’t have to be rich to invest in real estate. Many people across the country are investing money every day in real estate, but they are using other people’s money. Yes, you heard that right, Other People’s Money.
The greatest advantage of investing in real estate is, the more debt you have in real estate, the more cash flow you can create. This one single statement is never taught in school, yet it is a fundamental principle that has made many people quite wealthy. This makes your investment a good way to getting your money working for you, instead of you working for money.
I attended a three-day real estate seminar this year when I learned about the above principle of leveraging debt to produce cash flow. Let me elaborate on this principle with an example. I am going to give you two scenarios. You tell me which one, A, or B, is better.
Example A – You purchase a rental property for $100,000. You pay cash for this property, leaving you with a $0 mortgage. You collect rent payments from the people renting this home of $1200 dollars a month. You have to pay taxes and insurance on this property. The formula looks something like this:
Rent – expenses = cash flow
$1200 x 12 =14,400/yr – 1200/yr insurance = 13200 – 1500 taxes = $11,700 year. So your investment of $100,000 is providing $11,700 a year cash flow.
Example B – You decide to do something different, you purchase the four properties at the same price at $100,000 each. You only have $100,000, so you put 25% down on each property, which equals $25,000 per property, and then borrows the rest. So for each property, you borrow $75,000 for a total of $300,000 borrowed.
You have four mortgages of $75,000 each. The PITI (Principal, Interest, Taxes, and Insurance) payments for each mortgage are $950.00 every month. The rent you will collect on each property is the same $1200.00. Your cash flow on each property is $250 per month (1200 – 950) after each mortgage is paid. That equals $1000 total each month, which equals $12,000 per year.
$11,700 per year in example A is lower than the $12,000 per year in example B above. Remember, example A has no mortgage, and example B has four. So, you tell me. Can having debt be a good thing? The answer, positively YES!
Now, let us take this one step further. Let’s see how long it will take to pay off all four mortgages. By not spending your cash flow and using it to pay down the mortgage on house #1 it will be paid off in 3.8 years instead of 30 years. Roughly 42 months one of the four houses will be debt-free! Rinse and Repeat. House #2 will be paid for in another 23 months. The third house will get paid off in 18 months, and so on. This is how you get your money to work for you.
By using OPM (other people’s money) in roughly 8 years you have four rental properties, all paid for, producing $48,800 a year in cash flow. This is how the wealthy get wealthy and stay wealthy.
In the above example, more debt equates to more cash flow. This formula doesn’t even include the depreciation that you are allowed to claim on your income tax every year. This deduction makes this deal much sweeter than the numbers I am showing. Depreciation reduces taxes significantly. So owning real estate and using OPM (other Peoples Money) you have created a steady cash flow.
After our real estate instructor showed us this example – I was hooked – hook, line, and sinker! I thought about it for a moment… What if I was taught this scenario in high school, where could I be now? After realizing that for the last 40 years, I have been working in vain on a plan that was never going to make me wealthy, or even debt-free. Plain and simple, I was angry!
Owning rental property is the ultimate goal, but starting in real estate with no money is going to take some hard work and careful planning with lots of education. As long as you remember to never touch the cash flow until it equals or surpasses your expenses, you will always remain financially free.
One of the paths to earning some money to get the money working for you is by becoming a real estate broker.
A real estate broker can help other investors get financing to fund their real estate projects. You get paid, like a finders fee for connecting the real estate investor to a lender. There is absolutely no risk involved with this type of transaction.
There are three types of Lenders. There are the HML, or Hard Money Lenders, which are institutions that loan large amounts of funds for a short time period, usually no more than 1 year, with an interest rate and points that are higher than a Bank. There are fewer qualifications an investor must meet in order to qualify. The HML usually loans up to 70% of the total purchase price and 100% of the repair costs.
The second type of lender is the PML or Private Money Lender. This could be anyone, your neighbor, your friend, even family members. It is anyone that has a large amount of money that they wish to loan to earn interest on their money. Banks pay less than .1% interest on the money that is deposited in their bank. If you can offer them 10% annualized interest on the money they lend you, they will be making much more money from you than they will earn from the bank. This is a win-win situation for you and the PML. You have money for a short-term loan and they receive 10% interest on their money.
Just so you know, if you were to move your 401K retirement plan or IRA into a self-directed retirement account, you could use these funds to invest in real estate. As long as the money is not touched by you and stays intact as a retirement fund, any profit that is generated by the investment can grow the self-directed IRA faster than mutual funds.
The third lender is a traditional bank or savings and loan association. These institutions have a much higher qualification for a loan and a much longer time period before any money is released. This makes any real estate deal very hard to get under contract because most good deals need to move much faster, sometimes in just a few hours, than what a traditional bank can do.
Another great way to earn great commissions is by wholesaling properties. There is no need to have a real estate license to be a wholesaler. Find a motivated seller and get them to commit to your offer to buy their property at a discount. With a contract, you now have a vested interest in the property. You can sell your vested interest in the contract to another investor who will become the new owner of the property.
Wholesaling is creating a win-win situation with the property. You found a solution for the seller to rid themselves of their particular problem and you also helped the buyer get what they wanted – the contract to buy the property. The best part about this transaction, you got paid for getting the property on contract. Oh, I forgot to mention, you didn’t have to use any of your money.
Another way to earn a significant amount of money is to ‘rehab’ the property and make it just like new again. You may have to just replace some appliances, new paint, new doors, etc. Or, it may take a total rebuild. Either way, you sell the property at market value. List the house to sell through a realtor and get top dollar for your property.
This rehab is also known as a flip, and the only reason you bought the property was to sell it for the highest price. This will usually tie up your investment funds for several months or up to a year before you can sell it for a profit.
A lot of real estate investors don’t want to wait this long for getting paid. This is why wholesaling is a far easier and faster direction to go to earn a commission.
This is the main reason real estate remains one of the best vehicles to invest money in to make the greatest amount of money, in the shortest period of time.
I hope I have been able to show the financial structure of how real estate can be a very lucrative, rewarding career to be in. The money is made on the buy. That is, buying a property at a discount will always leave enough money for everyone to profit when the property is sold.
If you can think of anything that I forgot to mention or didn’t elaborate enough about then I welcome you to leave a comment and tell me how I can provide better, more accurate content for you.
To Your Success.