Make America Rich Again

You need a boat to arrive so that you can go live the life you desire.

But you’re stuck on the dock, sipping lukewarm coffee while watching others zip by on speedboats. 

After graduating college and at my first job (dock), I invested in mutual funds through my employer’s 401(k).

That felt smart. Back then, I thought: “Why would anyone invest in real estate? Stocks return 10% over time. Real estate might achieve 5% or 6%, plus has maintenance hassles.”

I pictured real estate like clunky tugboat.

That’s before I understood the power of financial leverage by borrowing from a bank for real estate and getting a return on their money—not only my own.

Let’s compare the growth of a typical 10% stock market return and 6% real estate return over time.

Invest $100K in stocks, 10% return compounded:

Year One: $110,000
Year Two: $121,000
Year Three: $133,100
Profit: $33,100

Invest $100K down payment on $500K property, 6% return leveraged:

Year One: $130,000
Year Two: $161,800
Year Three: $195,508
Profit: $95,508 (math shown below)

The real estate return nearly 3X’ed the stock return. This is because your real estate achieved a return on both your $100K invested and the $400K borrowed from the bank.

In fact, when you adjust both returns for inflation, taxes, fees, volatility, and emotion, real estate probably wins by more than 3X.

We already know that this is also only one of only five ways real estate pays you. Stocks pay one way, maybe two if there’s a dividend.

If everyone did this, we would Make America Rich Again. Leverage Trump’s compound interest.

These next two paragraphs are heretical to some—even blasphemy.

This is a fresh way of demonstrating how compound interest (stocks) is weak.

Getting your money to work for you (stocks) won’t get your boat to the dock in time. You saw how getting other people’s money to work for you gets the boat there at least 3X faster.

Using a property manager removes hassles (boat maintenance) and makes this mostly passive—but not totally passive.

One thing that I love about real estate is its simple math. There are no exponents, trigonometry or calculus.

It’s just: addition, subtraction, multiplication, and division.

Here’s the math on the leveraged real estate return:

Year One: $500,000 x 1.06 is $530,000, minus $400K debt = $130,000
Year Two: $530,000 x 1.06 is $561,800, minus $400K debt = $161,800
Year Three: $561,800 x 1.06 is $595,508, minus $400K debt = $195,508

I hope that it makes the difference more clear than ever about how leverage creates wealth.