Real estate is often credited with creating more millionaires than any other asset class. Let’s take a closer look at the core properties that make real estate such an attractive asset & why investors continue to have so much success. The three core properties we will focus on are leverage, flexibility and scarcity.
Leverage is the single most important tool when building wealth. Leverage is an investment strategy that uses borrowed funds to increase potential returns of an investment. The most common form of leverage is a mortgage loan, which allows a property buyer to contribute a fraction of the overall cost (down payment), while realizing all potential profits. When used responsibly, leverage enables investors to generate outsized returns compared to investing with their initial capital base, spread personal capital further as it does not need to be tied to a single investment, and off-set risk by maintaining higher cash reserves to navigate potential obstacles going forward.
Leverage is commonly accessible in real estate as mortgage loans are often insured by the federal government or private insurance providers, which protects the lender in the case of default. This is a massive advantage that real estate has compared to other traditional investments, which often require extensive oversight to obtain leverage. As a result of these insured loans, the barrier to entry is greatly reduced without diminishing upside potential (minus interest), leaving investors favorable conditions to profit.
The flexibility of real estate is superior to any other asset class and quite unique comparatively. A single property has considerable optionality: primary residence, fix & flip, long-term rental, short-term rental (Airbnb, etc), all while realizing potential property appreciation. The ability to leverage a multipurpose asset that compounds cash flow and property appreciation is incredibly valuable.
Flexibility also reduces overall risk as investors are able to adapt to market conditions and navigate potential obstacles. For example, regulatory overreach could suspend short-term rentals, but the property can then pivot to a long-term rental or fix & flip. Calculating risk and reducing downside exposure is essential to building wealth and the level of control investors have within real estate is unmatched.
The last core property of real estate is scarcity. Although we recognize Earth to be inherently finite, it becomes increasingly more scarce as global population continues to grow. Exponential growth is simple to understand in concept, but quite difficult to grasp in real terms. For example, it took two million years to reach a global population of one billion, which then exploded to over seven billion only two hundred years later. The United Nations project global population to reach eight billion by 2023, followed by ten billion around 2056- a 23% increase in global population growth in just 36 years!
Simple supply and demand economics suggest that growing demand for limited supply will result in higher prices. The United States represents only 6.1% of global land, making U.S. property largely scare at present, with regional demand increasing. Under the expectation that the United States continues to be a desirable place to live, real estate will likely continue to deliver outsized returns.
In summary, the ability to leverage a scarce multipurpose asset while compounding cash flows and appreciation is impressive to say the least. The combination of these core properties is not found throughout other asset classes and the accessibility of leverage in real estate is second to none. For these reasons, real estate reigns king of wealth building.
“The major fortunes in America have been made in land.”
-John D. Rockefeller
“90% of all millionaires become so through owning real estate.”
“Buy Land, they’re not making any more of it.”