From: alexhormozi
The majority of millionaires are made through real estate [00:00:00]. This contrasts with billionaires, who are primarily made in private equity [00:00:01]. The moneymaking process used in real estate accelerates value [00:00:13].
How Real Estate Creates Wealth
When investing in real estate, specifically a house, money is typically made in two primary ways:
- Appreciation The value of the house increases over time [00:00:25]. For example, a house worth one million dollars could become worth two million dollars [00:00:27].
- Rental Income Receiving monthly checks from tenants [00:00:32]. This “production from a renter” provides regular income [00:00:38].
If you own your own home, you primarily make money through appreciation, as you are either not paying rent or paying a mortgage to the bank [00:00:41].
Types of Appreciation
Appreciation in real estate can occur in two forms:
- Natural Appreciation Value increases simply over time [00:00:49].
- Forced Appreciation Value is increased by performing work, such as fixing things, cleaning, or adding amenities like a kitchen [00:00:51]. This makes the property more appealing and increases its potential sale price [00:01:00].
Advantages of Real Estate Investment
Real estate is a simple business model [00:01:09]. Investors buy a house, make a down payment, and take a loan for the remainder [00:01:14]. The goal is to place a tenant who can cover the loan payments [00:01:18].
Real estate is generally considered a reliable investment because land is finite (“they’re not making any more land”) and the population tends to grow over time [00:01:27]. This reliability has historically provided returns over many years [00:13:46].
Risks and Considerations
While simplified, real estate investment carries risks, and many people have lost money in it [00:01:24].
A significant risk to real estate value is population decline [00:01:36]. For example, Japan’s real estate market has declined due to its decreasing population [00:01:38]. It’s important to recognize that population growth is not always guaranteed [00:01:44].
When purchasing real estate, it’s advisable to buy in areas where the population is growing or increasing [00:13:56].
Comparison with Private Equity
Real estate has an “upside limit” compared to private equity [00:04:08]. It’s unlikely to achieve a 100x return in real estate, whereas this can happen regularly in private equity [00:04:10]. A key difference is that you cannot relocate a house to a more valuable neighborhood, like Manhattan [00:04:00].
Another distinction is the ability to start with almost no capital. While building a house from scratch costs money, a business can be started with almost nothing, selling time and generating cash flow from the outset [00:13:00]. This allows for the potential of starting with zero cost and becoming worth billions, which is not possible with real estate [00:13:13].
The reason private equity at the highest levels makes more money than real estate is because it requires a wider range of skills [00:13:28].