What’s been swankier than gold down through the centuries? Not much, if you listen to conventional wisdom. As tooth, neck, and limb bling, maybe it’s still okay, but not so much when it comes to investments. Here’s why.
The price of gold today is $1,712.82 USD. When considering how this precious metal has surged in value over the past decade (it was below $500 in 2001), it’s no wonder millions of Wall Street investors have begun to put a bit of gold in their portfolio, while millions of others remain sitting on the fence, contemplating doing the same. Swank Life founder, Jake Swank, would like to remind everyone that while gold is certainly a better bet than Wall Street stocks, bonds, and mutual funds, there are a few basic reasons that keep it solidly inferior to income property investing. We’re going to talk about one of them today.
Another term for financing is leverage. When you spend a dollar on Wall Street you get exactly one dollar’s worth of product. Maybe that seems fine and dandy but that same dollar invested properly in real estate could buy five dollars worth of investment product thanks to the miracle of leverage. Here’s how it works. Pay close attention, now, because if you don’t get this, you’re liable to spend the rest of your life earning paltry returns on your money.
Most people are aware of the idea that the usual way to buy a house is to borrow the money from a bank. This is called a mortgage. In return for loaning you the money, most banks require a cash deposit roughly equal to about 20 percent of the purchase price of the property you want to buy. We call that the down payment, but you should think of it as your leveraging tool. If you had $100,000 to invest, probably the worst thing you could do would be to pay cash for a $100,000 house. Through the use of leverage, you could, instead, take out five different mortgages on five different $100,000 houses, putting a 20 percent down payment on each with the bank.
Can you see the amazing power of financing/leveraging? If you had taken your one hundred grand to the stock market, you’d now be the proud owner of exactly one hundred grand worth of shares. But by going the real estate route you now have leveraged the same amount of money into a cool half million dollars worth of property.
And the fun is just beginning. We haven’t even mentioned the almost too-good-to-be-true aspect of renting out your new investment to create a passive income flow. Don’t try that with your Microsoft stock. (Top image: Flickr | covilha)