Introduction: estate moguls

You bring 200,000 in cash and borrow $800,000 to purchase a house worth one million dollars. You purchased it at an average cap rate of 8%. That implies that after running costs, it earns $80,000 per year before paying the mortgage. You borrowed $800,000 at 5% for 30 years, which means your annual mortgage payment is $51,540.

Your 200,000 investment produces around 10,000 in principle payments and 30,000 in cash flow in the first year, for a 20% return on equity. That’s rather excellent! But things improve.

Assume you pay off your debt over the following 10 years and your net income improves by 2% each year. Because you are on a long-term note, your payments remain constant but vary each year to include more equity and less interest.

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So the tenth year looks like this:

Net income of $95500, mortgage interest payments of $34,000, and principle payments of $16,500 So you now have a 61k return on your 200,000.

But your 200,000 is no longer 200,000. Because net revenue was increasing at a rate of 2% per year, the building’s worth climbed by around 200,000 dollars during the same time period.

In this example, you would have earned $705k in cash flow, principal, and value gain over a ten-year period. A 35% average return on the original investment of $200,000. You’d probably refinance the property and use part of the several hundred thousand dollars in principle to acquire other homes.

Wealth creation is determined by how much you can grow net income and how much leverage you are willing to take on. More leverage, however, may be problematic; net income does not always rise, and if you are a lousy manager or hit a weak market, net income might fall, resulting in the reverse of this case. The finest “estate moguls” combine their debt with having cash on hand to weather a downturn since having cash on hand allows you to acquire more at lower costs.

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