HOW TO LEVERAGE REAL ESTATE TO BUILD MASSIVE WEALTH

by | Feb 16, 2022 | Real Estate

There are many ways to build wealth: start a company, invest in stocks and shares, and buy crypto (perhaps). However, real estate is the only option that allows you to leverage the power of debt safely.

Related: Building a new digital real estate empire

For the most part, people don’t go into debt to buy other assets. Yes, you can do a leveraged buyout of a stock, but it’s extremely risky. The price might fall, causing you to lose more than just the sticker price.

With housing, though, the same fears don’t usually apply. And that of course includes bigger ticket real estate investments in world capital cities (of which Toronto more and more is becoming one). And  markets like Dubai – for example, buy villa in Palm Jumeirah, if your appetite is more on the exotic side. While the economy became overextended in 2008 and there were numerous defaults, the same is unlikely to happen again (at least, in the same way) because of new lending limits.

Ways to build wealth: Using your real estate asset

Borrowing or “levering up” is a powerful way to build wealth because you’re using other people’s money. You put down a small deposit of your own capital on a house and then go to a bank and ask them for the rest. They then pay you a loan that you can use to buy the rest of the asset.

Let’s say that the deposit for a home is $40,000. The total cost of the property is $200,000 and when you rent it out, you can earn a decent $15,000 per year.

When you compare the $15,000 to the price of the asset — the $200,000 house — the return doesn’t sound that good. But when you compare it to the actual money you put in — the $20,000 — it seems much better. You’re nearly making double your money in the space of a year.

Image: Sotheby’s International Realty Canada, Instagram @canada_sir, For sale, 320 Dallas Road, Victoria, B.C.

Granted, you’ll have various costs to contend with, such as the mortgage. But even if these eat up half your returns, you’re still making $7,500 on an initial investment of $20,000. Where else can you get that sort of return?

In this post, we take a look at some of the ways you can leverage real estate to build massive wealth. The amount of money you can acquire is enormous, particularly if you stick at it for more than a decade. Here are some of your options:

Start house flipping

Flipping homes is a strategy that’s been around for a long time. Over the decades, investors have become exceedingly good at finding properties ripe for renovation.

To be successful in the house flipping game, you need to prepare yourself for unexpected problems. Despite your best efforts, things will often go wrong. Even if they do, though, you can usually make money.

The downside is the time involved. Most investors have to actually spend time at the property, orchestrating renovation efforts. In other words, it’s not the kind of investing that you can do with a regular day job.

However, properties mostly pay for themselves. If you can find willing buyers — of which there are many at the moment — you can make profits of tens of thousands of dollars every few months, potentially far outstripping what’s possible with a regular day job.

Become a landlord

Another popular option is to become a landlord and adopt a cash flow approach. The idea here isn’t to flip properties: instead, it’s to find those with the highest yield.

As a rule of thumb, the higher the yield, the lower the capital appreciation (and vice versa). However, that’s not always the case. Yields can rise at the same time as capital values, particularly if you buy in a booming area. This way, you win double — both in terms of the value of the property, and regarding the rental income.

Set up a limited real estate company or partnership

The law allows you to become a landlord in your own name, but it’s not a good idea. If any of your investment decisions go south, your personal finances will be on the line.

To avoid this, protect yourself by setting up a limited liability company. This way, you can merge your funds with those of other investors and perhaps make bigger investments. You can also protect yourself from company bankruptcy or other issues.

Real estate limited partnerships or RELPs are where a group of people own a set of properties. RELPs are a type of private equity not traded on public exchanges. They usually last between seven and twelve years and help individual investors find properties worth investing in. They are generally for high-net-worth investors, with minimum investments starting from $2,000 to $100,000.

So, which of these strategies will you use to build massive wealth?

Top image: Harvey Kalles listing, via Instagram @harveykalles, For sale, 245 Carlaw Ave., #400, Toronto

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