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Stocks Vs Real Estate Examples
With assets, capital return on investment is based more on how much asset you control rather than own outright. You can usually control more than you own outright by borrowing money against your asset and leveraging it to produce a higher return. It’s access to this leverage that magnifies your return on investment (ROI) and because Real Estate has greater access to leverage, your return is always going to be higher for a given underlying rate of appreciation.
The following are examples – assuming you have $100,000 to invest – either in the stock market or in Real Estate. Note: To maximize your ROI, you will want to leverage the investment to the maximum degree to which you have access.
Stocks: You can borrow up to 50% of the value of your portfolio on margin.
Therefore, your $100,000 investment will allow you to borrow $50,000 for
a total investment portfolio controlled by you of $150,000.
Assuming 8% Appreciation:
$150,000 x 8% or $12,000 ROI at the end of one year. Compare your original investment of $100,000 and your capital ROI for the year divided by the total return on your total controlled portfolio
($100,000 / $12,000) = 12%.
Note: Most people assume that when the pride of their Real Estate rises 6% they are earning a 6% return. But, since they have invested only their down payment, their actual cash-on-cash return is significantly higher.
Real Estate: You can borrow up to 90% of the value of your portfolio. Therefore, your $100,000 investment will allow you to control $1,000,000 worth of Real Estate!
Assuming 8% Appreciation:
$1,000,000 x 8% = $80,000 ROI at the end of one year. Compare your original investment of $100,000 and your capital ROI for the year divided by the total return on your total controlled portfolio
($100,000 / $80,000) = 80%.
You can see in these examples that for a given appreciation rate, real estate produces an 80% return on your investment dollar and stocks produce a 12% return on your investment dollar.
Conventional wisdom dictates that the higher the level of leverage, the risker the investment. We mitigate or contain risk in Real Estate investing by defining parameters that make the investment as risk adverse as possible.
We prefer residential properties that the buying public can afford in areas that are ripe for appreciation and has a strong demand for rental housing. This type of asset provides a very basic need for everyone and that is shelter. We can do without any company’s stock in the marketplace, but we cannot do without a place to live.
Simply put; By purchasing the right Real Estate investment and maximizing your leverage on it, you can be assured of a solid long term wealth building strategy for you and your family.
2nd Examples in which assets produce returns for their owners is income. For a stock, income is called a dividend. For Real Estate Investment, income is called rent.
Stocks: The average blue chip or “safe” stock pays income or dividend at an average rate of 1.5% - 2%. That means that you would have to own or control $10,000,000 (Ten Million Dollars) worth of stock to realize an income of $150,000 to $200,000 per year.
To control $10,000,000 worth of stock, you would need approximately $7,500,000 and borrow 50% on that to get to the $10,000,000.
Real Estate: Investment grade Real Estate produces an income or rent that is approximately 6% - 8% of the value of the asset. That means if you controlled $10,000,000 worth of Real Estate, the income generated would be $600,000 to $800,000
per year. It is your access to leverage that makes controlling $10,000,000 worth of Real Estate more realistic than controlling $10,000,000 worth of stock. With access to 90% financing, you can control $10,000,000 worth of Real Estate with $1,000,000 vs $7,500,000 you would need to control the same amount of stock.
(To facilitate all of your tax and financial needs, we advise and expect that you consult with your financial advisors for the exit strategy which best suits your specific goals, needs, and financial/tax requirements. Due Diligence in any real estate purchase is strongly recommended. Quantum Realty Solutions does not guarantee future returns on investments. Estimates on possible future appreciation and returns on investments are based on the best information available to Quantum Realty at this time. )
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