I had a real estate coaching student come to me recently and asked me if she should invest her equity of her home into other real estate.
And it's a question she was getting from her clients as well.
So I explained this to her in a story form, so she could explain it to her clients as well.
So let's assume that you had $400,000 in equity in your home. And you leave $200,000 equity in your home and you pull $200,000 out.
Now, how do I pull it out? I refinance it or I get a HELOC loan for that $200,000.
So now I have $200,000. Of course, I'm paying interest on it. It's not free money. Let's assume I'm paying 5.5% interest today.
With that 5.5% interest, I now have to beat that rate of return in order to make money.
So let's assume then I go out and I take that $200,000 and I find an investment property. Maybe it's a duplex or a triplex, and I spent $700,000 on it.
That's reasonable because they gotta put 25% down generally on investment property. So that $200,000 would cover that amount.
And now let's throw out the cash flow and all that stuff, that's for another day.
And I'm just gonna look at appreciation rates.
Let's assume that that new triplex or duplex I bought goes up in value next year by 5.5%.
Now, the question for you is:
If I'm paying 5.5% on my interest on that HELOC loan, where I pulled my equity out of, and I'm gaining 5.5% interest on my new property that I purchased...
Am I breaking even, or am I making money?
That's kind of a head scratcher at first, but let's dive deeper.
So remember when I gain 5.5% per on my investment property, what's it based on?
It's based on the whole value of that property, the full $700,000.
So 5.5 times 700,000 is $38,500.
But I didn't actually invest $700,000, right? Remember I only invested $200,000. So if I take $38.5k and divide it into $200,000, what's my rate of return?
Well, I'm making 19.25% on my money, just by putting into that investment.
Now I gotta take off the 5.5% that I'm paying the bank, yes. But I got a solid 13+% interest investment there, not counting cash and everything else and other tax benefits that come along with it.
So just by walking people through this process and kind of taking them step-by-step logically through it, you can get people to really have their eyes become wide open to the possibilities of real estate.
Now here's something to remember about real estate:
80% of all millionaires made their first million in real estate.
And it's very easy to get financing to get into that leveraged position. Remember leveraged real estate debts is the best kind of debt you have. That's why people make money and people do it every day of the week.
Now as interest rates keep rising, we gotta be a little bit careful. We gotta be more sensitive to that. We gotta be super strategic in how we deploy our leveraged debt.
But it can still make us a ton of money.
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