Posted: Buying Investment Property
The Pyramiding Power of Capitalism and Real Estate
When somebody puts his or her money into stock, it grows. It grows linearly, but it does not grow geometrically. When something grows geometrically, it is growing at a much, much faster pace. Whoever figures out the power of pyramiding will be rich. It is the secret force of capitalism that separates the rich and the poor. It is the only way to become filthy rich. If you take advantage of it, you, too, will be rich.
This secret power is the power of borrowed money. Borrowing money is the surest way to riches. The middle class and the poor always try to avoid debt, and that is precisely why they remain poor and middle class. It is not their fault though, for the only debt they know of is consumer debt, which is bad. Some debt can be good; some debt can make you rich.
Every fortune in history was built upon debt; borrowed money is the driving force behind every millionaire’s fortune. So, you are probably thinking, “How can I tap into this power of borrowed money?” The answer is simple: invest in real estate! Real estate is full of borrowed money! Banks practically throw it at you. All you need is 20%, and they’ll give you the other 80!
Compare this to stock investment. You put in $20,000 into stock; you put another $20,000 into a property worth $100,000, and you borrowed the rest from the bank. We’ll say the bank is charging you 5% interest on your loan.
Time goes on, and both of your investments appreciate exactly the same amount – 6%. What does that leave you with? The stock has made you $1,200, and the real estate has made you $6,000, minus the $4000 that you owe for the loan, for a total of $2,000. The stock made only 60% of the real estate’s earnings. So, the real estate has made you 10%, but the stock only made you 6%. Clearly the real estate is the way to go.
But, it gets even better. What happens if your investments made 8%? Real estate would have earned you $4,000, but the stock would have earned you only $1,600 – only 40% of the real estate’s earnings. Do you see how real estate really is taking advantage of expontential growth?
What about the second investment you make? Say our investments make 8%, so now we have $21,200 from our stock and $24,000 from our real estate. We invest it again. We buy $21,200 worth of stock, and $120,000 worth of real estate, borrowing the other $96,000 at 5% interest. This time our investments earn again 8%, the stock earning $1,696 and the real estate earning $4,800. The stock, in this case, only earned 35%. It keeps getting better with time; real estate continues to earn a higher and higher percentage of the amount of capital invested, but stock is linear progression.
Real estate truly takes advantage of borrowed money, the essence of capitalism; it takes advantage of the pyramiding power of other people’s money.