If you invest in stock, your money will grow. Your money grows like a line, linearly. However, is will never grow geometrically. Geometric growth is much faster than linear growth. Anybody who takes advantage of geometric growth will be rich. Geometric growth separates the rich and the poor; it is the secret force of capitalism. In fact, there is no other way to become rich. If taken advantage of, it will make anyone rich.
The secret power we are talking about is the power of borrowed money, as this is the surest way of them all to get rich. The poor and middle class struggle because they are seeking always to avoid debt, rather than focusing on getting themselves into good debt.
The richest people of all time built their fortunes with good debt; good debt is the force behind every one of their fortunes.
You, too, can take advantage of this power. All you need to do is dive head first into the world of real estate.
The advantage is quite clear if you compare it with stock investment. Say we put twenty-thousand into stock, and we put twenty-thousand into a one-hundred-thousand dollar property and borrow the other eighty. (The bank is charging us five-percent interest on our loan.)
After some time passes, both the investments, for simplicity sake, have increased by the same amount: six percent. The stock, therefore, has made us one-thousand, two-hundred dollars, and the real estate has made six thousand. Of course, you’ll need to subtract the four thousand that you owe the bank for use of its money, but that still leaves you eight hundred dollars ahead of the stock’s earnings.
Let us just say that both investments appreciate by six-percent. The stock will have earned one-thousand, two-hundred dollars, and the real estate would have earned us six-thousand. After taking away the four-thousand that we owe the bank, we’re left with eight hundred more dollars from our real estate earnings: two-thousand versus one thousand, two-hundred.
It gets even better. If our investments appreciated eight-percent, our stock would have earned only forty-percent of what our real estate did.
If we make another investment after this, assuming an eight percent growth rate, we will have twenty-one-thousand, two-hundred from stock, but we will have twenty-four-thousand from our real estate.
Of course, we will invest it all again. After buying twenty-one-thousand, two-hundred dollars worth of stock, and one-hundred-twenty-thousand dollars worth of real estate (which we borrowed ninety-six-thousand of at five-percent interest), assuming an eight percent earnings growth again, the stock has made us one-thousand, six-hundred and ninety-six dollars, but the real estate has earned us four-thousand, eight-hundred dollars. The stock has dropped to thirty-five percent of the real estate’s earnings.
The more time goes on, the higher percentage earned on capital invested in real estate. Stock, however, only grows linearly.
Real estate truly allows one to take advantage of the power of borrowed money, the core of capitalism. Other people’s money will allow you to become rich.