Rich people have something in common, and I will explain it in this article. This may be a little painful, and should be warned in advance. They all regard their houses as houses, not investments. Yes, I know it sounds crazy to North Americans. How can such a high value thing not be an investment?
Easy to understand rich people almost always have financial knowledge, know the power of interest, the time value of money, and the return on investment. Your neighbor calculates how much money he earns at home in this way.
-Payment of US $500000
Renewal cost – $45000
-It sold for 600000 dollars.
Revenue – $55000
It’s hard to argue with these figures because it looks straightforward, isn’t it? In fact, there is a lack of information here, which can change the calculation. How long has he owned the house? How much interest did he pay? In addition to maintenance, what other expenses have been incurred? Repair, maintenance, etc. Finally, the time value of the money. The $600000 he received today is less than the $600000 he received when he bought the house.
I once laughed at this concept and thought it was unimportant. This is not at all. Let me give an example.
Purchase of residential buildings for 500000 dollars in 2001
In 2004, the maintenance cost was $10000.
Maintenance expenditure of $35000 in 2006
In 2007, the maintenance cost was $5000.
Sales in 2008 at $600000
The inflation rate is even 2%, which is only true in fairy tales and government statistics. Let’s see what the results are. We will take the $600000 received in 2008 as an example. I will simply reverse the $600000 to 2001, find its value, and compare it with the housing price of $500000.
2007 $588,000
2006 $576,240
2005 $564,715
2004 $553,421
2003 $542, 352
2002 $531,505
2001 $520,875
Total profit=$20875
Now we deduct expenses. In order to improve efficiency, we also regress expenses. If we want to regress, we must regress all the data.
$9412+ $31,637+ $4429=$45,478
Now let’s run all the numbers.
Purchase $500000($2001)
After sales profit in 2001 $20875
US $45478(2001)
$24603 loss
I didn’t take into account the real estate agent’s fees or interest costs. Both are important. I added $100000 to the value of this house in six years. By anyone’s standards, this is a very healthy growth, but that person still loses money. For example, we removed the dog’s reward? Yes, it may be a good idea, but we have to reduce the price. The net effect depends on the wisdom of the decoration. Some updates add more value than others, and some do not add value at all.
This is an example of how sophisticated investors view investment. They know the power of interest rates and inflation, but most people think they are too small to consider. In this case, even if the inflation is insignificant at 2%, the homeowner will lose the potential profits of 80000 daughters. I can assure you that the inflation rate will exceed 2%. How do you do it? It’s easy. How much did it cost to buy milk five years ago? Ten years ago? Increase by 2% every year to confirm that you have reached today’s price. I promise you can’t. If we use milk, meat, vegetables and other goods that cannot hide inflation, we will begin to see how high inflation is.
Do you begin to understand why rich people don’t regard their houses as investments? Or is it a bad investment at most? I hope this will serve you in the coming years. Imagine that inflation is actually close to 5%. If I work at 5% inflation, you don’t even want to know these figures. Regardless of real estate agent fees and management costs. Banks and large financial investment companies fully understand the power of inflation and interest.
Now turn the scene upside down. You can play a wealthy investor. I think you will prefer this kind of transaction.
Suppose you decide to borrow money to renovate mortgages and big things, such as boats, cottages and houses. We will say that you will lend 75000 dollars to a good couple who want to renew their house. Let’s classify the numbers. We will use 5% as the interest rate. It’s a very low interest rate. But these days it is the average level for such loans. The loan will last for more than 7 years.
$75000 loan month in 2001 $1056.14
2001 Interest(Your Profit) $3462
2002 Interest $3001
2003 Interest $2518
Interest in 2004 US $2010
The interest rate in 2005 is 1477 dollars
The interest rate in 2006 is 917 dollars
2007 Interest $330
Total interest: US $10253 ROI: 13.67%
But please note that, to be fair, the time value of money will erode your profits, but your maximum interest income comes early. This means that you will lose less because of inflation. Now inflation is your friend, not your enemy, as before. In addition, the couple who borrowed money from you agreed to pay 5% interest, but in fact, they paid more than 10% interest because of benefits. I wonder if they will choose to update if they know that an additional fee of $5000 to $10000 is required.
This example is one of the basic principles of investment. Before becoming a successful investor, you must understand the power of these concepts. Most people think that investing is to choose the hot stocks and become a millionaire. In fact, rich people rarely do this. On the contrary, if you want to risk huge profits, use the concept of leverage. What’s the meaning of this?
Leverage is simply borrowing money or using existing collateral to get more money. In the previous example, earning 13% is a fairly safe investment, but the loan of 75000 dollars is not enough to make a lot of money, so how can we make a lot of money with this system? This is the role of leverage. In fact, it is used in many investment models, but we will discuss this.
If you assume you are rich, you can get money at 3% interest rate. Because you have assets that can be used as collateral. You can get $20 million at 3%. In this case, the target is 3% to become an expenditure, and to borrow at an interest rate higher than 3%, but to keep the investment low risk. If you know you can get 5%, the risk is small. This 2% has become your profit, but now it is far more than 2% of $20 million and 5% of $75000. I think you can quickly calculate in your mind and understand how it works.
