Real Estate investor Grant Cardone, with holdings of $2B, shares why leverage provides the everyday person with a way to create massive wealth not offered by other investment vehicles.
People have been conditioned to believe that debt is bad. This has been the case for generations. Yes, it can get you in trouble in many cases. Maxing out credit cards to buy things you can’t afford, or to finance a vehicle that costs twice as much as your annual salary, can put you in a tough spot financially.
When it comes to investing in real estate, however, debt can be your best friend. Using debt the right way when purchasing an investment property is referred to as leverage.
I’m sure you remember learning about levers in science class when you were a kid. The lever allows you to lift an object with significantly less force than if you were to do it on your own. That same concept works in real estate. Leverage allows you to purchase an asset with significantly less money than if you were to pay for it all yourself.
This is what makes real estate the greatest investment available. You can buy a $1 million property with $250,000, or a $10 million property with $2.5 million.
“I could never have amassed $2 billion worth of stocks, but I did with real estate because of the safe leverage available.”
Leverage is one of the top reasons the CEO of Cardone Capital, Grant Cardone, loves real estate as much as he does. He has been able to build enough wealth through real estate to carry on in his family for generations. He was able to do this by learning how to properly leverage the bank’s money to increase his returns exponentially.
Grant Cardone shared with us how the everyday person can also use leverage to create generational wealth with real estate. “I could never have amassed $2 billion worth of stocks, but I did with real estate because of the safe leverage available. I borrow money for half the cost of the cash flow generated by the real estate.”
Here’s an example of what he’s talking about.
An apartment building generates an annual cash flow of 8%.
He borrows the money to purchase the apartment building at a cost of 4%.
This means he’s making 4% on the bank’s money.
“Leverage is the ultimate multiplier”
That’s just one of the benefits leverage provides when investing in real estate. Cardone explains, “Leverage is the ultimate multiplier. It allows us to use $1 to buy $4. What other investment allows you to invest $1 million and own $4 million in assets?”
With leverage, you collect cash flow on the $1 million you invested, while waiting for the entire $4 million to appreciate.
Cardone explains it like this. “So, at what price would I need to sell this $4 million property to make 100% on my money? At first glance, you would think I need to sell for $4 million to make 100%, but in reality I only have to sell it for $1 million to accomplish the 100% target. I paid $1 million to buy the property, not $4 million, as I was able to use leverage to cover the rest.”
The reality is, you can likely sell it for more than that after 10 years. Savvy investors force the appreciation on the apartments they buy. This means that they don’t wait for the value to increase with the rest of the market. They increase the income, which directly impacts the value.
Cardone explained, “The apartment’s value is not determined by comparables like a house is. The apartment’s value is determined by the rents and the cash flow produced by the property. The only way the property will be worth more money is because it produces more NOI. The NOI can only increase if the rents increase.”
To force the appreciation, Cardone Capital raises the rents over the five or ten years they hold a property. These don’t have to be significant increases. They just have to be increased more than the cost to operate.
Cardone further explained, “If I can increase the rents 30% over 10 years, which is less than 3% each year, the property will increase in value over 40%. Remember, that’s 40% on the entire property, not just the down payment.”
If you look at the example of investing $1 million to buy a $4 million property, that $1 million would become $1.6 million. Add in cash flow of 6% annually, and you have another $600,000. You’ll have also built about $1.8 million in equity from paying down the principal on the loan.
$1 million – return of original investment
- $1.6 million – profit on the sale
- $600,000 – cash flow
- $1.8 million – equity build
$5 million – total returned
That’s a 400% total return, or 40% annually.
“They’re able to get access to deals that were never available to the average investor before.”
There’s no other type of investment out there that can produce those kinds of returns while providing the safety of a hard asset like real estate. What about the people that don’t have $1 million to invest into a $4 million property?
Crowdfunding has become a way for the everyday investor to participate in larger deals that can provide these kinds of returns. These deals are often much larger than $4 million, which means the example above can be scaled even greater.
Cardone said, “A larger deal means more units. The more units I have, the more I can increase the value by raising rents. That’s why I target properties with more than 200 units for our investors. We all make more money that way.”
Most crowdfunding deals have a minimum investment between $25,000 and $100,000. They therefore open up this level of real estate investing to a lot more people.
Cardone talked about the investors that partner with Cardone Capital, saying, “They’re able to get access to deals that were never available to the average investor before. Not only that, but they don’t have to worry about finding the deals, getting the financing, or managing the properties.”
The bottom line
There are more and more investment opportunities popping up every day. From cryptocurrency, to artwork, to different types of new technology. None of them have been building wealth for centuries like real estate has. No other investment has been around as long as real estate, and nothing else has created more millionaires and more wealth.
If you want to learn more about how leverage helps make real estate the greatest investment available, Grant Cardone has a lot of great resources on his website at CardoneCapital.com.