Real Estate, Business, and Investing

I've been reading a fair bit lately about what I'll call the "Three main ways to make money besides working for someone else", which are real estate, business, and investing, and I've found something interesting. If you talk to a real estate guy, you will hear something like this: "My parents bought their house in 1963 for $10,000 and now, in 2009, it is worth $500,000. Where else can you find returns like this?"

If you talk to a business guy, you will hear something like this: "I started a business with nothing but a bucket of nails and a hammer, now I run the largest construction company in town. Where else can you find returns like this?"

If you talk to an investor guy, you will hear something like this: "I bought stocks in Microsoft when it was still worth $1/share, then I sold it a few years later after it had split several times for $40/share. Where else can you find returns like this?"

Of course, everyone loves his/her field the best. But who is right? Donald Trump is certainly not doing too bad with real estate. I think Bill Gates has the business thing down pat. And I don't think anyone would argue that Warren Buffet is doing fairly well in the investing world.

So, it seems to me, that they are all right. So the question becomes, what are you interested in? All three of these vehicles to wealth have their own pros and cons. They each seem to suit a different personality type a little better. For example, if you hate people, you might want to consider getting in to investing. But really, they all can work to generate a lot of wealth for you if you know how to harness them.

It seems to me that the key really seems to be leverage. What is leverage? To a cave-man, it's putting a stick under a rock to pry it out of the way. To us savy internet types, leverage is taking advantage of someone else's time or money to make more money for ourself.

Example #1 (no leverage): Work 40 hours/week @ $20/hour. Gross profit = $800
Example #2 (leverage someone else's time): Pay 4 people $20/hour to work 40 hours/week. Each person can produce $40 of product or service/hour. Total paid to people = $3200. Gross profit = $6400 Net Profit = $3200

Example #2 seems a little more attractive, does it not? At the end of 1 week, you made 4 times as much money. This is an example of leverage someone else's time. You can get far more done if you hire other people to do it.

How about other people's money?

Example #1 (no leverage): Buy an investment property for $200,000 cash, no mortgage. Hold it for 5 years, sell it for $250,000. Gross profit=$50,000. Return on investment = 25%
Example #2 (leverage someone else's money): Buy the same property worth $200,000, but only put $25,000 down and get a mortgage for the rest. Hold it for the same 5 years and sell for the same $250,000. Gross profit still = $50,000 But Return on Investment = 200%. If you had $200,000, you could potentially buy 8 properties instead of just one and make $400,000 in 5 years instead of just $50,000.

It seems to me, whether you want to be a real estate mogul, a business guru, or an investment tycoon, you can make large sums of money, as long as you learn to use leverage.

Hooray for other people's money and time!

Dad