A couple weeks ago, we talked about pre-construction units being at least 15% more expensive than resale units because you are buying the future value of something.
I got a very interesting comment on that and I want to share that with you.
Alex says “paying more money now letting your money sit around doing nothing is pretty dumb.”
And he went on to give an example “since Apple stock price would be higher 1 year in the future, so let’s pay 15% more for it now. I know I wouldn’t do that”.
I agree, I would not do that on Apple stock.
But he’s missing one crucial difference between stock and real estate.
In fact, it is the most important thing that makes real estate investing so powerful.
What is it?
The power of leverage.
With stocks, it is a dollar for a dollar.
If you want to buy $100,000 worth of stocks, how much do you need?
$100,000.
And you need to have that $100,000 right now.
If the stocks go up 50%, you get $150,000.
If they go down 50%, you only have $50,000 left.
Very simple, a dollar for a dollar.
On the other hand, if you put that $100,000 into real estate, let’s say you use it as the 15% deposit to buy a pre-construction unit.
Now with your $100,000, you are buying a unit that’s almost $670,000, almost 7 times the money you have.
And you don’t need that $100,000 now, you typically have 1.5 to 2 years to come up with that money.
Resale is a great choice too, as long as you have the whole down payment ready now, typically 25% or more.
And you have to be ready to get a mortgage at the current rate.
You see, with pre-construction, you are buying time, that’s why you need to pay a premium because time costs money.
Here’s the thing.
If real estate goes up 50%, then the unit becomes just over a million dollars ($1,005,000).
With your $100,000, you are now getting back $335,000.
Remember when stocks go up 50%, you are only getting $150,000 back.
But of course, if real estate goes down 50% in value, then you would be in a deficit of $235,000.
You would be better off renting it out and keeping it running instead because real estate always goes up in the long run.
With stocks, waiting for a long time does not always help.
Are you still waiting for one of your stocks to just return home?
I certainly am.
Now, I’m not trying to say that real estate is better than stocks.
They each have their own characteristics and risk levels.
I can only tell you from statistics that around 90% of people lose money in stocks while 90% of millionaires are made from real estate.
The power of leverage and time are certainly very unique elements in real estate investing.
Make good use of them to build your wealth!
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