Four Magic Questions : Part 5

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

(Page 5 of 5)

But, I can hear some of you say, if you don't sell, how will you ever access the increase in value?

The answer is simply to refinance. You get a new appraisal (this time for $3 million) and go back to the bank and ask for a new mortgage. At the 90 percent loan-value ratio, you would get $2.7 million in your hands. After paying off the original $900,000 mortgage, you would still have $1.8 million left over of surplus new cash in your hands.

And ask yourself this question: Is the $1.8 million taxable? Of course not! Why would it be taxable? It is not income, so there would be no income tax due. Similarly, you have not sold the property, so there can be no talk of a capital gains tax.

You could use this $1.8 million as a 10 percent deposit on a further $18 million worth of property, which, combined with the $3 million you already own, makes your total portfolio worth $21 million.

At this stage, if property values were to go up a mere 1 percent, you would have made $210,000 (1 percent of $21 million). And the surplus passive rental income cash flow would be very handsome. If the property were to go up by 10 percent (perhaps in one year, or perhaps over a period of, say, five years), then you would have made a further $2.1 million (10 percent of $21 million). At this stage you could again re-finance, pull some more money out, and invest in more property, or you could buy anything else such as an airplane (tax-deductible if you use it to fly around inspecting your expanding empire).

This airplane raises an interesting point... In his book Rich Dad Poor Dad, Robert Kiyosaki explains how the poor earn their money, pay tax on it, and then spend what's left on the things they want. On the other hand, the rich earn money, spend it on the things they want, and then pay tax on what is left. Well, the property investor has an added benefit:

When he refinances a property, first he receives money for which he has expended no effort (as in exchanging time for money), then, there are no tax obligations attached. Next, he gets to use this tax-free money to buy the things he wants (in this example an airplane). Furthermore, he gets a tax benefit from the interest payment on the money that he didn't even have to earn but simply got from the bank. Finally, he can depreciate the asset to give a further tax benefit. All aboard please!

But I am getting ahead of myself.

My aim in writing this chapter is to share with you why I think property is not just as good as other investments, not just a little bit better than other investments, and not even just much better than other investments, but tens and even hundreds of times better than other investments.

My belief is that whereas most other investments do not offer significant leverage, property offers tremendous leverage through the generous application of mortgage financing. What's more, unlike with other investments, you can often buy properties at prices significantly below their true value, you can do things to them to further increase their value way beyond the cost of the improvement, and you do not need to sell to reap huge benefits from the increase in value.

Taken one at a time, the advantages just mentioned make real estate a phenomenally powerful investment vehicle. However, when considered in unison, when these advantages work together, the effects compound each other, and, as we have seen, an investment of a mere $100,000 may give you access to $18 million without much effort at all. Even if it were only half as good, the resulting $9 million would still be phenomenal! Even if it were only one tenth as good, the $1.8 million would still be spectacular! Even if it were only one hundredth as good ($180,000), that is still, in my biased view, wildly better than the results of investing the same original starting capital of $100,000 in something that does not offer the advantages discussed in this chapter.

Now I have no illusions: For every argument and example I present in this book, there will be scores of detractors who will cry foul. They will seize specific clauses, phrases, sentences, and passages, and quote them in such a way to try to convince themselves or their audience that what I am saying cannot be right. They will say things like: "Where I come from you certainly cannot get 90 percent mortgages!" or "You cannot make $20,000 profit by spending $400 on paint and throwing in a weekend of labor in my town! Deals like that don't exist here."

If you choose to agree with them, that is fine by me! I will address the doom-and-gloom merchants, naysayers, disbelievers, and detractors later in this book. For now, please accept that what I have described here is my reality.

My contention is that most detractors of property do not fairly compare property with other investments. Consciously or subconsciously, they distort the truth, and then end up believing this distorted perception themselves. So, it is time to explore the benchmark used to compare most investments. You can then decide for yourself what is accurate and what is not.

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.