You probably know someone who has a made a bundle in real estate by buying at a low price and selling at a much higher price. It wasn’t uncommon in parts of the country (for example, California and Florida) for someone to enjoy a 500 percent appreciation of home value over just a few years.
You don’t need an accounting degree to understand how investing in real estate in appreciating markets can make you lots of cash. If you buy a home for $100k and sell it six years later for $500k, you make a $400k profit. Nice return on your money.
But, there are other ways to make money on property, even in areas that aren’t appreciating in value. By just owning property, you can use the equity in your property to turn a profit. But be warned. This is not for the faint-hearted or loose-fingered. There are risks involved when investing, and using property and equity to make money should only be done with complete understanding of the risk. If you don’t understand it, don’t do it. You’ll probably lose your money.
This is stuff that financial professionals have been doing for years. They borrow money at one rate and invest it at a higher rate and enjoy the free money. There are several ways the pros do this and it’s really no big secret. One way is to make lower payments on your property using deferred-interest or interest-only payments and invest the difference in something that has a higher rate of return.
Let’s assume you have a mortgage with a rate of 7 percent that has a minimum payment of $500 a month and a full 30-year fixed payment of $1100 a month. If you only make the minimum payment for five years and take the difference ($600 a month) and invest it in a 401k with a company match, you will make more than the cost of borrowing the money. Think of it as borrowing $600 a month at 7 percent and putting that money into a 401k that has a rate of return around 10 percent. You are essentially making 3 percent on your money. Add to this a typical 401k company match that many employers offer as a benefit and now you have a really good investment that has made you money that you wouldn’t otherwise have.
Another way to use your equity to make a profit is to use cash from your home to start a small business. If you have a solid business plan and a great product or service, you just might be able to turn a profit and make money on the borrowed cash. Again, if you pay a mortgage rate of 7 percent and your business has a return on investment greater than 7 percent, you’ve made money. It’s pretty simple and money-savvy investors have been using tactics like this for a long time. The main idea is to get the lowest rate and payment possible and turn the money over into a profit as quickly as possible. But it’s no sure thing.
Anytime you invest you are going to come up against risk. And investing other people’s money, which is what you are essentially doing when you borrow for an investment, can be very dangerous if you lose money and are stuck with debt. But, if you plan ahead, do your homework and invest smartly, you can make money with your home or real estate, without having to sell.