How can I make my money work for me?  This may be a question that you have been asking yourself.  We received positive comments and questions about the topic from the last issue of our e-newsletter on “Make Money Four Ways with Investment Real Estate,” so we’ll go a bit further into this concept.

One of the most fundamental lessons from the Rich Dad, Poor Dad series of books by Robert Kiyosaki is, “Make Your Money Work for You.”  The lessons stress the importance of owning assets that create income, rather than relying on earnings from employment alone.  While keeping a job to pay the bills is often needed, there are opportunities to start part-time businesses or income streams that bring in additional income.

This builds on concept from a previous post, “Make Money Four Ways with Investment Real Estate,” which highlighted how money is made:
1) Income from Cash Flow (rent and other income),
2) Income from Equity Build-up (paying down the mortgage)
3) Income from Depreciation (Phantom Cash Flow, or paper losses for tax savings to offset income)
4) Income from Appreciation (the value of the property increasing over time)

Often when people are looking at putting their money to work for them, when they do not wish to start their own business, they debate whether they should put their money into real estate or stocks – especially in this time when both stocks and real estate are down.

There have been numerous posts on this debate.  A great example comes from the BawldGuy Talking blog where it names Real Estate as the hands down winner.  You can see the full post here.

Or, another perspective from The Digerati Life offers the advantages to each, which can be seen by clicking here.

We ran our own very simple analysis.  First, there are limitations with this analysis as it was simplistic and did not include nearly all the parameters.  It does not take into account each of the four ways to make money mentioned above and primarily deals with the last of these, appreciation.  We looked at an example of investing $40,000 in stocks and real estate.

For stocks, we used the approximate average annual return for the S&P 500 since its inspection of 8.5%.  To keep it simple, no fees for selling the stock were included, nor were options to use leverage since they are not as commonplace as leverage in real estate purchases.  In this case, the $40,000 investment would lead to the following results:

After five years, it would grow to $60,146, or a return of $20,146.27 and after ten years, it would lead to $90,439, or a return of $50,439, an 8.5% average annual return.

For real estate, we ran the calculations several ways using appreciation of only 3% or 4% per year and a down payment of 10% or 20%.  Although we did not apply any fees to stock sales, we did include an 8% fee to cost of sales and of course included the mortgage payoff.  The $40,000 investment lead to the following results…

With a 10% down payment and 3% appreciation, after five years, it would grow to $87,389, or a return of $47,389, or 16.92% average annual return.  After ten years, it would be $184,933, or a return of $144,933, 16.55%.

The same analysis for 10% down and 4% appreciation lead to a return of 18.01% and 16.84% after years five and ten.  20% down and 3% lead to 8.82% and 10.30% after the fifth and tenth year.  Finally, for 20% down and 4% appreciation, the returns after five and ten years were 12.35% and 12.65%.

For each scenario, the return is greater for real estate demonstrating the power of leverage and how it can be used to multiply your money.  Plus, as mentioned, these scenarios did not take into account other benefits of investment in real estate, such as additional income from positive cash flow and reducing taxes through depreciation.

Again, this was a very simplified analysis to show a quick example.  Of course, many people can and have made great investments and had huge returns in each area and each many be right for different investors under unique situations.

In either case, you can see the benefits of leverage and making your money work for you through real estate, so feel free to give us a call to discuss how it could fit into your strategy.

Filed under: Benefits of Owning Property, Leverage