Understanding the math of real estate is crucial
Your chances of being the next Facebook inventor are minimal, but the chance of you buying real estate is possible. I’ll show you exactly how you can get a fifteen percent or higher internal rate of return on your money. All it takes is cash flow, appreciation and an exit strategy.
When I was sixteen I wanted to help my mother and I couldn’t. That became the driving force for me to want to create wealth so I could help her and others.
My goal wasn’t money, it was charity. I wanted to take care of people. People like my family, parents, etc. If I was broke, I couldn’t afford to fund other’s lives. I wanted to take care of me, my family and have reserves to help others.
I spent twenty-five years working my tail off, taking my extra money and investing it into real estate. I missed many things so I could earn extra money so I could invest in real estate and create a passive income stream. The goal was that my passive income would overtake and make more than my earned income.
My number-one rule in investing was to invest in something or someone where I wouldn’t lose my money. Stocks don’t do that. They’re speculative and I can’t control them. Studying wealth and how the super-wealthy created and grew their wealth led me to real estate. And not any real estate, but multifamily real estate.
Buy a real asset that produces cash flow is very different than buying stocks. For example, buying four million of stocks costs me four-million dollars. But buying four-million dollars of real estate only costs me one-million dollars. Why? Because I only have to put an initial payment down to obtain the property.
Understanding the math of real estate and how to get your investment to multiply is fundamental. One of the many factors to look at is what your IRR is.
An IRR is a metric used to estimate the profitability of a potential investment. This is then used to evaluate the attractiveness of a project or investment.
In real estate, specifically multi-family real estate that I invest in, I’m always looking for a huge IRR. In fact, an IRR of fifteen percent and higher (much higher sometimes) is absolutely possible.
To show you an example, here is the IRR on a deal with below average to average returns:
$4,000,000 property with an initial investment of a $1,000,000 as down payment and $3,000,000 financed. Over the course of ten years, my cash flow each year is five percent and a ten percent appreciation on the equity (not the total investment) totals fifteen percent IRR right there. If you factor in the debt pay down (DPD) of ten years at one-point-five percent, the IRR total is thirty percent.
Real estate investing the correct way (so you don’t lose money!) can be complicated. In the most basic sense, you have to pick great assets in great locations that cash flow and wait as long as it takes and then sell at the perfect moment to maximize your investment.
GC, Cardone Capital.
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