In Message #1399, I talked to you about wrestling. I said: “Determination and technique matter first and foremost. You can win against competitors who are far bigger than you but don’t have your technique or drive. But if you want to win the heavyweight crown (where the biggest purses are), you’ll have to compete against people who have great technique and are very determined and very big. So you’ll have to put on some weight.”
Fact is, determination and technique matter not only in wrestling but also in just about every aspect of your life – including your investments in real estate. Determination is what gets you to act. No woulda, shoulda, coulda… no endless dreaming and a bunch of “on the other hands.” You get off your butt and accept the challenges you must face in order to achieve your goals. Technique helps you meet those challenges successfully.
In real estate, in particular, technique allows you to take an idea and turn it into a significant amount of money, equity, or both very quickly. You can buy a house under market value in a fast-rising area. Put zero money down on the purchase, make some strategic, low-cost improvements, and gain $55,000 to $70,000 in a year. You can do the same with a small multi-unit building and pick up $105,000 to $155,000 in a year. I know. I’ve done it.
Once you’ve mastered technique and built up capital at the low end of the market, you can gradually move up the market to the bigger money. But be sure to move up with technique as your guide. If you go for size alone and forget how to buy right, you can get clocked. But if you continue to use sharp real estate investing principles as you work your way up to bigger properties, the rewards can be tremendous.
Here’s why: Let’s say you’ve built up an investment property “portfolio” of $100,000. It’s a single house. And each year, it produces about a 10% return on the asset (the house, that is). It appreciates by 5%, and you pick up 4% in net rents (rental income after all expenses and carrying costs). You also pick up 1% or so in amortization (the equity you gain from the reduction in the balance of your loan).
That 10% might be a return of 100% or 200% or 1,000% or more on your investment – depending on how much you put in to buy it. If you put in a total of $10,000 (down payment and closing costs), you’ve gotten back 100% of your investment the first year. If you’re $5,000 out of pocket, you’re up 200%. If you only forked over $1,000, you’re up 1,000%. And if you bought the property with absolutely zero down (including closing costs), your returns in terms of percent are impossible to calculate.
Somewhere in the neighborhood of infinity… Fair enough. But now let’s apply this same scenario to a million-dollar property. The percentage returns again depend on your down payment. But the money is far bigger. Now you’re gaining in the neighborhood of $100,000 a year in appreciation. And as the net rents increase and the value compounds, your yearly gains “inch up” to $111,000, $122,100, and so on.
The point is, once you’ve learned how to take control of an income-producing asset – with a good purchase price and with a loan that lets that asset pay for itself (including loan costs, management, expenses, etc.) – you can move up to larger assets, with greater income and greater equity creation, year after year. You were determined enough to act and not just sit there gnawing your fingernails, mumbling about “real estate bubbles.” And you developed technique.
So, yes, you understand that there are real estate bubbles. But you know how to make profits safely during inflated markets… and you are prepared to act for even greater profits when those bubbles burst. You begin with value-buying and financing techniques that you implement at the low end of the market. And when the time is right, you move up in weight class – where the purses are bigger.
So, as real estate investors, our hats are off to Royce Gracie, who, in Message #1399, demonstrated to us how determination and technique can help us conquer mountains. And our hats are off, too, to Dan Severn – the “mountain of a man” – who returned to the ring after his defeat by Royce Gracie as big and strong as ever, but with added skills… and went on to capture the Ultimate Fighting Championship crown.
In my next message, I’ll show you how you can start at the low end of the market, purchase under-valued properties with little or no money down… and then gradually “roll those properties up” to the high end of the market to generate more income and equity from a single property in a single year than you may have ever made at a full-time job.[Ed. Note: Justin Ford is the editor of Main Street Millionaire, ETR’s Real Estate Investment Success Program. For information, click here.]