Instead of investing the $20,000 in a mutual fund, let's suppose instead that the individual invested in a single-family home. Let's suppose the investor puts down 10% on a $200,000 house (including closing costs). Let's further suppose that the investor then rents the house for an amount equal to the monthly mortgage and maintenance expenses of the house. Then, let's say that the house appreciates at an annual rate of 5%.

At the end of seven years, the house will be worth $281,000. The investor's $20,000 will have grown to $101,000, or roughly 2.5 times the return from a good mutual fund. It's probably safe to say that this is a considerably better result than the mutual fund. This result occurs because of the principle of LEVERAGE.

The investor in this case received not only the 5% appreciation on the original $20,000 investment, but also received 5% on the bank's loan of $180,000. Of course, many real estate markets are currently appreciating at a much higher rate than 5%, so this return could be unrealistically low. But the average appreciation in real estate over the past several decades has been around 7%, so 5% is a nice, CONSERVATIVE, example.

You may now be thinking that this whole idea of leverage is great and earning $81,000 on a $20,000 investment over seven years would be terrific. The problem with this is "IT'S STILL TOO SLOW." We can still do much better. Besides leverage, we need to add the principle of VELOCITY. For more on Velocity, please see my article: "The Fast Track to Your Financial Freedom (Part 2) - Adding Velocity to Your Investments".

Warmest Regards,

Tom

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