I’ve often been asked in the past where to invest money or how to get started investing money. Typically, the first thing that would come to mind for me is something I know little about, which is securities, stocks, bonds, etc. Sure, having been in real estate finance for 15 years I know as much as the next person when it comes to the stock market and the uncertainty that comes with it. Which stocks to buy, which adviser to listen to or which security to invest in? I would start out by explaining my limited knowledge of buying stocks and explain that I’ve never bought a stock in my life and I don’t even have a retirement count, nor do I contribute to an IRA. I don’t have an E-trade account or a financial adviser, I’ve never had one.
So, the conversation and my answer to their question would usually leave them more confused than before they asked me and although I was as genuine as one could be, I was subconsciously disengaged. I knew the answer to their question, and I had the best piece of advice that anyone could ever give, but it simply wasn’t registering. The advice I gave them was no advice at all.
It wasn’t until about 5-6 years ago that I fully understood what the answer to that question was. There was no right answer and there was no easy clear path to financial success by simply deciding upon where to invest, who to invest with or what to invest in. The answer to their question went one small step further than determining WHAT, WHERE, and WHEN to invest their money. It was not a matter of who, what, where and when to invest their money, it was a matter of HOW to invest their money. I’m fully confident that every single person that’s ever asked me this question was looking for the quickest, most lucrative, surefire way to turn their money into the highest amount of money possible in the shortest amount of time, with the least amount of risk. Obviously, this is a complex question with a countless amount of options and an infinite amount of uncertainty. The answer to this question can vary greatly depending on the audience asking the question. The audience asking me was typically an employee or a friend around my age or younger (I’m 38 years old) and they typically weren’t working with much money, if any at all. I suppose this was more of a reason for me to not over-complicate what should have been, some very uncomplicated advice.
Bottom Line: Leverage
What it boiled down to wasn’t necessarily the amount of money they had available to invest. Rather, the answer boiled down to the amount of money they had access to. When it comes to investing, millions of Americans overlook the most important investment tool in existence, and this is the tool of LEVERAGE.
Okay sure, leverage sounds like a complex and far reaching strategy that requires the knowledge of Warren Buffet. This is simply not the case and it simply isn’t used by enough Americans today.
Credit and Collateral
There are millions of Americans today, many between the ages of 25-35 that have the desire and have the means to tap into the liquidity of the housing market but fail to do so because buying a home doesn’t usually come to mind when discussing retirement savings and/or financial planning.
However, it should be the first investment, hands down, that young Americans should make before any other major long-term investment. Assuming decent credit and a limited amount of collateral (3-4 months’ rent payments saved up) there is no other available investment opportunities that exist in the world today, that make more sense than buying a home.
Stock Market Investor – Renter
Sure, the stock market exists for a reason and it makes sense to many investors to invest there. Let’s assume that an investor can invest $10,000 today and reasonably expect to get a 6% compound return on that investment for the next 20 years. Let’s also assume they are contributing $6,000 per year to this investment at the end of every year. The future value of this investment would be $252,784.90 or $122,784.90 realized gain after the initial $10,000 investment and each subsequent $6,000 annual investment. Not too bad right?
Real Estate Investor – Homeowner
Historically, real estate has proven to be the best long-term investment decade after decade, but the untapped potential is not emphasized nearly enough. Let’s assume the same investment as above, but let’s assume the $10,000 is a down payment on a $200,000 home and the $6,000 per year is for insurance, taxes and repairs and maintenance to the home. Let’s assume that home prices meet the historical average of approximately 6% price appreciation. The future value of this $10,000 investment after 20 years = $641,427.09.
If That Doesn’t Clearly Paint the Picture
In the above comparison, let’s not forget that after 20 years, the renter in the first illustration is still paying rent and has seen a significant increase 20 years later. Let’s assume the rental rate used was the same as the mortgage payment on a $190,000 loan amount @ 4.5% on a 20-year fixed. This payment would be $1,176.55. So, after 20 years, assuming a 6% increase in rental rates, the renter would be paying $3,773.36 in monthly rent (and climbing), while the homeowner would own his home free and clear and have no housing payment.
So not only does the homeowner have an asset valued at $641,427.09 compared to the renter’s $252,784.90 stock investment, but the homeowner is saving $3,773.36 per month and growing at a 6% annual rate.
Fast forward 10 years, this is an additional $638,900 in savings to the homeowner. Let’s also remember that the rental rate increases for year 1-20 wasn’t factored and let’s remember that the mortgage payment of $1,176.55 is fixed (+$250,000 in additional savings).
Homeowner vs. Renter Comparison after 30 Years:
A). Stock Market Investor – Renter: $452,697.00 (Still Paying Over $6,000 In Monthly Rent and Growing).
B). Real Estate Investor – Homeowner: $1,530,327.00 (Home paid off – Free and Clear)
The Bottom Line is: Leverage
What it boiled down to wasn’t necessarily the amount of money they had available to invest. Rather, the answer boiled down to the amount of money they had access to. When it comes to investing, millions of Americans overlook the most important investment tool in existence, and this is the tool of LEVERAGE. Okay sure, leverage sounds like a complex and far reaching strategy that requires the knowledge of Warren Buffet. This is simply not the case and it simply isn’t used by enough Americans today. Why would anyone invest only $10,000 of their own money when they could invest their $10,000 + $190,000 of someone else’s money?
So my question to the 24-38 year old’s is…. GOT REAL ESTATE?
Check today here to see if it makes sense for you to purchase property in today’s market.
Prospect Financial Group
948 Garnet Avenue
San Diego, CA 92109
NMLS: 349089 | BRE: 01837707
Jason Vondrak has been in the mortgage industry since 2004 and co-founded the mortgage brokerage Prospect Financial Group in 2006 in San Diego, California. Today he serves as President and CEO of Prospect Financial Group and the president and founder of Prospect Property Group, a real estate development company, established in 2012.
“I’ve had the privilege to serve in an industry that exists to ensure homeownership remains among the top priorities of government and citizens alike. Over the years, it has been a pleasure working alongside homeowners, real estate professionals, and business associates combining efforts and teaming up to help homeowners realize the dream of home ownership.”