Real Estate Investing For High Yield instead of Profit?
There is a massively miss-understood principle in investing, and I must admit, I didn’t get it either until someone showed me. So, let me help you understand and focus on the true goal – the real desired result – in investing.
Stephen Covey, author of 7 Habits of Highly Effective People, said “The main thing is to keep the main thing the main thing”.
In investing, at first glance, the main can be said to make profit – to make money. But with a little experience and additional thought, that can be refined and adjusted to a more correct concept. The MAIN thing is to make money safely; to not LOSE money; to grow your money; to improve your financial independence.
So, as an investor, the MAIN thing is to make the best return, with the least risk. This goal is best pursued with a proper understanding of real estate investing for high yield.
The term “yield” is most often associated with investments in stocks. But I am not speaking of yield in that connotation. For many years, I focused on profit. If I built a house and spent $100,000 of my money to build it and cover all costs of construction and sale, then sold it for $150,000, then I made $50,000 profit or a 50% return on my investment. Of course, using time required would then give me an annualized figure. If I could repeat this scenario every 6 months, I would then make 100% return on my money yearly. Making 50% profit twice will give me 100% profit, and thinking annually – a 50% yield on my investment.
OK, not so bad. My risk was $200,000 in that year, and my reward was $100,000. So, my yield – my GROWTH – was 50% of my risk. I started the year with $100,000, I ended the year with $200,000 so I made $100,000 profit, but I risked $200,000 and received $100,000 for that risk. The point is that I am now examining my investment on a risk/reward basis, rather than a cost/profit basis. And I am doing real estate investing for high yield.
So, how cares? What is the difference?
The difference is that one method allows survival while the other method allows wealth. The difference is real estate investing for high yield. Certainly a difference worth considering! To make the point, consider this:
I can use my money as described above and make the profit and yield indicated. Or, I can use someone else’s money to build the house. So, I have an investor – a bank or private party – lend me $90,000 and I place $10,000 of my own money in the pot – the proverbial “skin in the game”. The investor charges me 10% for using their money for 6 months – which makes me pay 20% as a yearly rate. Outrageous!! Who in the world would pay 20%??!! Let’s look at the numbers.
So I spent the same six months on the project and only made $41,000 profit instead of the $50,000 I was making. I lost money! My yearly salary just went from $100,000 to $82,000 and my standard of living went down. But let’s look at the yield!
What was my risk? $10,000, right? What did I make? $41,000! I made $41,000 on a $10,000 investment. Hello!
I made a 410% return on my money. If, then I did it again in that year, I make another 410% return. So, I risked $20,000 in the year and I made $82,000 return. My yield went from 50% to 820% when viewed annually. My dollar profit figure went DOWN. Why am I happy? Because I want WEALTH not SURVIVAL. I want to do real estate investing for high yield with KISS Capital!
Consider this: I have $100,000 to invest and I build houses. I can build 2 per year. Or, I can use investors under the second option above and I can build 10 houses at a time, 20 per year, right? I can put $10,000 in each of 10 projects. Here are then numbers:
Do it twice in the year – so $820,000.
I invested the same $100,000, but I made many more investments with it. This is LEVERAGE.
Did my RISK go up? NO! I risked the same $100,000. However, since that money was spread over ten investments, my actual risk went down, didn’t it?
My profit on each investment went down. But instead of making 100% profit and $100,000 this year, I made 82% profit and $820,000!!!
Do you think I care that my profit percentage went down?
Do you think I care that I am paying someone a 20% annual percentage rate to use their money? How many people would be happy making 20% APR on their money?
Some will argue about whether the market will bear 20 houses, or the risk in selling 20 houses in one year, etc. etc. But that is missing the point ENTIRELY. This article is not about building and selling houses. It’s about changing your view of what is important in investing.
Simply put: investing is about using your money to make money. When you can LOWER your risk and RAISE your return – DO IT! Do real estate investing for high yield!
Stop thinking about profit percentages and survival.
INVEST FOR YIELD and grow wealthy.
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