FAQ 110 What are the best strategies for making money in real estate?
We have looked at this question in great depth. The answer comes back to stripping back the investment vehicle ( real estate)and looking purely at the numbers. Math will provide the answer. The power of compounding plays the major role in identifying which strategies give the best outcomes.
Imagine a strategy where you put 100% in and get 130% out. Repeat this 3 times in the year taking the proceeds of the previous investment and fully committing it to the next investment the math is 1.3 x 1.3 x 1.3 = 2.197 so whatever you put in to the first activity you end up with more than double after 1 year. Moving this forward to rinse and repeat over 3 years and we get 2.197 x 2.197 x 2.197 = 10.6
So our activities have multiplied our starting capital by more than 10 times!
A starting capital of $100k would end up being greater than $1m in 3 years.
From this math we can see that the RETURN on our equity is the most important figure AND the benefit of compounding ( also coined to be the eight wonder of the world) play the major part in growing your equity.
If we look at the lower figure of 1.2 x in the above example then we end up after 3 years with capital of $515k – a staggering halting for just a % decrease in return on equity.
So now we understand the value of knowing the RETURN ON EQUITY and it’s relationship to realestate. We need to understand how each realestate strategy performs from a return on equity perspective. Clearly those strategies that perform poorly ( low returns) are the ones that we should avoid.
We end up with a league table of real estate strategies sort by return on equity performance. We then have to overlay our own personal investing profile together with the market profile for the targeted locations. Starting from the top of the list work your way down until you arrive at a fit to your personal profile AND the market profile of your targeted location. This is the strategy which will give you the highest return and best outcome.
