Friday, August 28, 2009
Real estate also has the advantage of being easy for the layperson to understand. He or she, when learning to invest in stock, must learn all kinds of complex accounting; otherwise, he or she will not be able to interpret financial statements, so he or she will not get an accurate interpretation of the current state of the company. Real estate, however, does not need complex analysis. A few simple calculations are sufficient. It is so easy that banks are willing to lend hundreds of thousands of dollars to anyone with good credit, and anyone with a twenty percent down payment.
Our stock has earned us only sixty percent of what our real estate earned. The stock could only earn six cents for every dollar, but our real estate made us ten. Now, you tell me which one is better. Our real estate has earned us far more. If our investments made eight percent, our real estate would have earned us an even bigger percentage over our stock. The stock would have earned only forty percent of what the real estate would have. Investing it yet a third time, assuming we earn again an eight percent interest rate, the stock will have only made us thirty five percent of the real estate’s earnings. You see, as the amounts get bigger, the gains from the real estate get bigger and bigger when compared with the stock’s earnings.
Twenty percent is all it takes in the world of real estate, and sometimes it takes much less. The bank will provide all the rest. So, you can buy and use to your advantage an asset that costs hundreds of thousands of dollars for a mere twenty percent of their worth. Imagine what you could do with such a big tool. You could never borrow this much in business or stock! Twenty thousand dollars put into stock will fare worse than the same amount put into real estate in the form of a down payment on a piece of rental property.
Borrowed money is the answer to capitalism, even for stock buyers and entrepreneurs. Many entrepreneurs will bide their time and run their business, making paltry earnings, all so they don’t have to borrow. They figure that they will eventually have the budget to do bigger things. While this is true, this is progressing at a very slow pace. Sure, they get one hundred percent of the earnings that way, and perhaps they’d get as little as twenty five percent if somebody invested a large sum of money into the business. However, because the assets the entrepreneur had to work with were so much bigger, this twenty five percent will be much, much more than the one hundred percent he would have earned if he had only used his own money.
Stock sees only linear growth; real estate sees geometric. Geometric growth is much faster than linear. Anyone who takes advantage of geometric growth will be rich. In fact, the rich and the poor are separated because of this difference. Anyone can use geometric growth. The secret is the power of borrowed money. Someone in stock or business can take advantage of geometric growth if they borrow money, but it is difficult to get and much higher risk than in real estate. By seeking constantly to avoid debt, the poor and the middle class will forever remain in their class and will fail to move into the world of the rich.