Many people have the general belief that real estate is a great investment but a somewhat less tenuous grasp on exactly how to compare Return On Investment (ROI) to other investment assets like savings, stocks, bonds, or mutual funds.
To understand it best, you need to know about the Four Pillars of Return on Investment. It’s not about any single pillar but, instead, a synergistic combination of them all, which create an ROI number for comparison. Approach these ideas with an open mind because some of the concepts may challenge long held conventional beliefs.
Pillar #1 is Appreciation – While many people think this pillar is the entire point of real estate investing, we know it is just the icing on the cake and more speculative.
Pillar #2 is Cash Flow – Real estate is not a good cash flow asset and aiming only for this from your property investments is not the best way to create wealth.
Pillar #3 is Principal Reduction – Tenants and inflation pay down your mortgage.
Pillar #4 is Tax Benefits – You will literally save a fortune in taxes over your lifetime. With the 1031 Exchange, you can defer them forever.
Now let’s look back into history. Over the last 100 years the ROI for various investments are as follows:
• Stocks 9.2%
• Bonds 4.8%
• Cash 4.1%
• Real Estate 6.7%
BUT…then when we take into account the fact that proper leverage techniques allow you to control properties by only putting 10% down, we exponentially increase our return. Based on that 10% down, real estate now returns a whopping 67%. Read it and weep Wall Street.
