Leveraging Your Money to Get Rich Part III
So how can I get stinking rich, not just rich?
Well, you could still benefit from that profit of $420,000 if you had rented your home out and put someone else’s money to work for you. But let’s think bigger now.
Let’s say for the sake of argument, that you did have $200,000 in the bank. What would you do with it? Honestly, that’s between you and your financial advisor, but let’s look at a basic example.
Assuming you are doing quite well financially and you have a large income, let’s say you decided to split that balance up into 5 equal portions of $40,000.00 each. Then, you shop around and locate five $200,000 homes that would make great rentals. You put $40,000 down on each property and the bank extends 5 loans to you in the amount of $160,000 each. You now own 5 homes, and you owe the bank $800,000.00. You’ve shown that you can afford the monthly payments, and you’re off and running, hopefully earning a standard property appreciation rate as averaged over the past 10 years or so. As in my previous example, assuming all of the properties appreciate at 4% annually for 30 years, by the end of that time you will have 5 homes completely paid off all worth $620,000 each for a total real estate portfolio worth 3.1 Million dollars.
What if I’m unable to carry that much debt?
Quite honestly if you cannot afford the debt, you’re setting yourself up for financial disaster, which is where lots of people are right now. Not only did they invest in a portfolio of properties, but they paid way too much for them on loans with interest rates that are about to adjust upwards and have no equity gained because the home’s value has dropped. Not only that, but the loans that were written for them were interest only, so every dollar spent goes straight to the bank and nothing goes into the house.
But, for the sake of this example, if you cannot afford to make the house payment, then you find someone who can. Someone who is willing to rent will cover your costs, provided rental rates exceed your mortgage payment. So let’s see…
You own 5 homes to the tune of $1,000,000 ($200,000 X 5) and your initial investment is only $200,000.00. You owe $800,000 in loans, and your monthly mortgage requirements on each home are somewhere in the $1200.00 range. You manage to put renters in each house at $1300 per month, creating a passive income of $500.00/month ($100.00 X 5 Homes). The renters pay your mortgage bill which saves you the $200,000 in interest over the 30 year period. At the end of it all, you’ve tied up $200,000 to leverage the growth of one million dollars worth of real estate resulting in a portfolio of homes worth $3.1Million dollars in 30 years, owned free and clear.
Not bad, but not without risk. Always remember that there’s risk, and be prepared for the hard times, like when the rents are low, or when you can’t get someone into the home.