Four Magic Questions : Part 1

Real Estate Riches: How to Become Rich Using Your Banker's Money
by Dolf de Roos, Ph.D.

A large percentage of the rich in America today make their wealth (or keep it) through real estate. In Real Estate Riches, self-made real estate mogul Dolf De Roos reveals why investing in property is so astoundingly simple and lucrative, as well as insider secrets for getting into-and ahead-in this high-profit business.

Chapter 1

The purpose of this book is not so much to give you the "how-to" of real estate - although there will be plenty of how-to advice - but to make you sit bolt upright and exclaim: "Wow, I never realized real estate was this good!" The reason is that once you "get it," once you understand why property is such a phenomenally lucrative and astoundingly simple investment vehicle, you will never be able to focus on a sitcom on television again without getting itchy feet, wondering whether the hour wasted watching the tube is costing you the Deal of the Decade. You will be itching to apply my how-to ideas (and those gleaned from other books and sources), and you will also want to invent your own and go out there and try them, modify them, and continually improve them.

I will show you that contrary to expectations and what we somehow seem to have been taught by our parents, relatives, schools, the mass media, and "experts," it is possible to find a bargain property, or even many of them in a row. It is possible to buy properties using mostly or entirely other people's money. It is possible to buy properties where the returns are 20 or 30 or 50 or 100 percent or more per annum. What's more, all these things are easy.

When I tell people that property is not just as good as other investments, not just a little better, and not even just a lot better than other investments, but tens or even hundreds of times better than other investments, most people do not believe it.

So, let me in the next few pages show you why I think property is so much better.

Imagine you have a lump of money to invest. It does not matter whether you have $5,000, $10,000, $100,000, or $1 million, as the same principles apply in each case. So let's assume that you have $100,000 cash to invest. Let's also assume that you are considering investing your funds either in the stock market or in property. Finally, for the sake of simplicity, let's ignore all brokerage fees and commissions. I will simply pose four questions...

Question One

How many dollars' worth of stock can you buy with $100,000 cash?

I often ask this question during seminars and am not infrequently met with a sea of blank faces, as if it were a trick question. It is not! For most people, when you have $100,000 of cash to invest in the stock market, you can buy exactly $100,000 worth of stock.

Now I know some of you will protest that you can buy stocks on margin, but the reality is that investment houses will only let you do that with a very limited number of stocks, and then only for about 30 percent of the value of the stocks. What's more, if the stocks go down in value, they will make a "margin call," in other words, ordering you to pay a portion of the plummeted value so that your borrowing percentage is down to within their acceptable margins again. The truth is that for nearly all stock market investors, they put up the entire purchase price in cash.

So, in nearly all cases, your $100,000 cash will buy you exactly $100,000 worth of stock. Let's compare this with investing in real estate.

How many dollars' worth of property can you buy with $100,000 cash?

Well, clearly, you could buy a $100,000 property. But you could also buy a $200,000 property, by taking out a mortgage for 50 percent of the property's purchase price. You could also buy a $300,000 property by taking out a 66 percent mortgage. In fact, you could buy a $1 million property by taking out a 90 percent mortgage.

Now I know that for many of you the notion of buying $1 million worth of property with a mere $100,000 cash is way beyond your comfort zone, and into the fear territory of your minds. The figure of $1 million may be a bit daunting, and then you can't help but think that if you have a $900,000 mortgage, how on earth are you going to pay the interest on that? After all, at a nominal 8 percent interest per annum, that would amount to $72,000 per year in interest, which may be more than you are presently earning!

The answer is that if you did buy a $1 million property with $100,000 cash, you would have an asset worth $1 million that would generate rental income for you. If you had bought wisely, then the rent would more than cover your expenses.

The point is that when you buy stocks, you generally have to put up the entire purchase price in cash. When you buy property, you generally have banks and other lending institutions falling over themselves to give you money.

People often challenge me on this claim that banks and financial institutions fall over themselves to lend you money to buy property. They often cite difficulties they have had with such institutions, and use examples of these difficulties to counter my argument.

They are totally missing the point. Anywhere in the world you can pick up a newspaper or magazine, look at television ads, or be confronted by huge billboards. You will never see advertisements saying things like: "Want to invest in diamonds, or antiques, or paintings, or precious metals, or stocks, or certificates of deposit (CDs), or mutual funds, or phone cards? Come and see us, and we will lend you the money to invest." It sounds crazy, right? Yet these same newspapers and magazines and television channels and billboards continually run advertisements offering financing for property acquisitions.

Remember how when you buy a new (for you, anyway) car, you suddenly notice all the other cars of the same make and model on the road? Well, when you look out for advertisements of institutions looking to lend you money to buy property, you will suddenly see them all over the place. And then you will also notice the lack of ads offering financing for other investments.

Copyright © 2001 by Dolf de Roos, Ph.D.

About the Author

Dr. Dolf de Roos began investing in real estate as an undergraduate student. Despite going on to earn a Ph.D. in electrical and electronic engineering from the University of Canterbury. Dolf increasingly focused on his flair for investing, which has enabled him to have never had a job. He has, however, invested in many classes of real estate (residential, commercial, industrial, hospitality, and specialist) all over the world.