3 Types of Investments Compared: Gold, Stocks, & Real Estate – Video
Kathy Fettke: I’m excited to present to you the basics of real estate investing because personally, I get excited every time I really look at the fundamentals of this investment. Over the years I’ve checked out lots of other deals and other opportunities and just nothing seems to compare it. I think you’ll see why as we go through with this.
I put some examples here with Joe and gold. I know we have a lot of conservative people in the room who maybe think gold is a good safe bet. If inflation goes crazy and it will, it would be nice to have a little bucket of gold no question about it. I’ve been told about 10% of your net worth in silver or gold is a great way to hedge against inflation. The problem with that is, it doesn’t pay any money every month and it’s a gamble, but Joe wants to do and he buys a $100,000 worth of gold and now he has a $100,000 worth of gold.
This person, Mary uses $100,000 to buy stocks, but she wants to leverage so she buys them on a margin. She gets $200,000 worth of stock and she’s happy and she thinks he’s smarter than Joe.
Then we’ve got Pat, who uses $100,000, but he wants to leverage even more and puts 20% down to buy property. Now he’s got $500,000 value. It looks like Pat might be the smart one but we don’t know yet. It depends on the market cycle and where he bought, right? Let’s assume he just bought steady cashflow property that’s not going up or down, just predictable.
15 years later, assuming a 5% annual growth- This is very much an assumption just for comparison, there’s no way every year could just be 5%. Although, from 1964 until I think it was 2006, it was an average of 6% in real estate- Assuming a 5% growth, Joe’s gold is worth $207,000- Double his money, he’s happy. He made $107,000 profit and he’s feeling good about himself.
Now Mary stock is worth $415,000 in 15 years. She has paid a $100,000 margin and a $100,000 in capital. She made a $215,000 profit and is very happy. Again these are averages. There’s fees and stuff like that I’m not having.
Pat’s property is worth a million dollars at that 5% growth, because of the leverage, because he was able to acquire so much more than just the $100,000 that he had. Out of a $400,000 loan before that was paid down to $200,000 in that time frame, and made a $700,000 profit. It gets better, some of the properties were rented in that time frame so that profit was not including rental income. It was strictly inflation. The income that came in after expenses is that 10% of the $100,000, so it’s an additional $150,000 in that 15 years. Then Pat put all of that cash flow towards paying off the loan instead of putting in his pocket, that $150,000 would accelerate to pay off and he’d own those properties free and clear. That means he’d have a million dollar equity plus $120,000 of rental income for rest of his life, and then he’d pass on to his children or give to mom or pay for college or whatever it may be. Which plan do you like?
We’re not really taught a lot of this safe conservative investing because when you live in California we want to gamble. You could make a lot of money in real estate if you time it right and so forth, and that’s the key. You’ve got to time it right, you’ve got to know what to look for, see the signals and the signs, understand the market, what’s coming, and get in and get out at the right time. It’s kind of like day trading. Of course, you can make a lot of money but if you don’t time it right you will lose a lot of money.