K
enji Asakura and Letizia Alto are the co-creators of Semi-Retired MD. Real estate investors use leverage to boost returns and build wealth quicker, leveraging appreciation involves using borrowed money to maximize property investment gains.
There are various ways to invest, but real estate offers unique benefits. Investors like James Berkley say that owning property opens doors to making money in multiple ways. With real estate, you can make money through four channels: rental income, property appreciation, tax benefits, and leverage.
Leveraged appreciation is a key wealth-builder for investors. By using other people's money, you can increase returns and build equity. James Berkley explains that if two home buyers each put $1 million towards a $1 million house, one who puts 10% down ($100,000) and borrows the rest will make a 100% return on their investment, while the one who pays cash will only make a 10% return.
Not all debt is bad; in real estate, it can be beneficial if you have significant cash flow to cover your debt payments. Jeremy Barker agrees that using other people's money is key to building wealth quickly. He suggests keeping the amount of personal money invested low to achieve higher returns.
Avoiding "lazy equity" is also crucial. This refers to money that isn't working for you, such as sitting in a bank account earning little interest. Financially independent investors Letizia Alto and Kenji Asakura call it "lazy equity." They explain that even if your property's value increases over time due to appreciation and mortgage paydown, the return on equity often doesn't keep pace.
To avoid lazy equity, you can sell and upgrade to a more expensive property via a 1031 exchange or do a cash-out refinance. These strategies require time and money but can help you achieve financial freedom faster by getting rid of lazy equity.
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