When people pouring their money into real estate on the hope that price of their real estate investment will appreciate and at the same time hoping for positive cash flow coming from the rental income. While these hopes lie on prayer “Dream comes true”, it only indicates that the investors are innocent or naïve.
When making any investment, it’s only the best investment when it’s most business-like and vice versa. Thus, when putting in business sense on real estate investment, it sounds like a terrible investment. The reasons? When you make an investment on real estate, normally the up front deposit is 10% of the purchase price or less. This will immediately translate to the fact that the investment you made is based on gearing of 0.9x (meaning that you are using $1 to buy $10 product). This will put your situation very dangerous. While people always brainwashed with “Power of Leverage”, what they don’t told is there is also “Destructive Power of Leverage”. When you use $1 to buy $10 product, it is a good investment when this product price appreciates, say 10%, thus your new price of the product is $110 now. This means by invest only $1, it gives you not only 10% return, but 1,000% return!! ( ($110-$100)/($1)* 100%). But, what happen if the case is reversed, that’s your new price of the product you bought drop 10% of the original price? Let us figure it out: ( ($90-$100)/($1) * 100%) = -1,000%, that’s negative 1,000% return!!
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