Rather of investing the $20,000 in a mutual fund, let’s suppose as an alternative that the individual invested in a single-family home. Let’s suppose the investor puts down ten% on a $200,000 residence (like closing costs). Let’s additional suppose that the investor then rents the residence for an amount equal to the monthly mortgage and maintenance costs of the residence. Then, let’s say that the residence appreciates at an annual rate of five%.
At the end of seven years, the house will be worth $281,000. The investor’s $20,000 will have grown to $101,000, or roughly 2.5 occasions the return from a excellent mutual fund. It really is probably secure to say that this is a significantly better outcome than the mutual fund. This result happens mainly because of the principle of LEVERAGE.
The investor in this case received not only the five% appreciation on the original $20,000 investment, but also received 5% on the bank’s loan of $180,000. Of course, quite a few real estate markets are at the moment appreciating at a substantially greater price than five%, so this return could be unrealistically low. But the typical appreciation in actual estate over the previous several decades has been about 7%, so five% is a nice, CONSERVATIVE, example.
You may perhaps now be thinking that this complete concept of leverage is good and earning $81,000 on a $20,000 investment over seven years would be terrific. The trouble with this is “It’s Still Also SLOW.” We can still do substantially improved. In addition to leverage, we will need to add the principle of VELOCITY. For far more on Velocity, please see my report: “The Quickly Track to Your Monetary Freedom (Part 2) – Adding Velocity to Your Investments”.