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TRUMP UNIVERSITY WEALTH BUILDING 101

But what if a leveraged property never yields positive cash fl ows? Surpris-
ingly, leveraged rental properties can provide a relatively attractive return,
even without positive cash flows or price increases.

Say that after 20 years of ownership, your rent collections cover operat-
ing expenses, pay off the property’s mortgage balance of $160,000, and give
you a net annual income yield of zero. At the end of year 20, you sell this prop-
erty for $200,000, your original purchase price, but by growing your down
payment of $40,000 into free and clear property ownership 20 years later, you
received a return on your investment of nearly 8.5 percent.
If your down payment was $20,000 (10 percent) and your rent collections
paid off your mortgage balance in 20 years, your $200,000 purchase/sales
price would bring you a return slightly over 12 percent.

Wealth from Infl ation
A January 2006, article in Money magazine reported that since 1950, housing
had appreciated at an average rate of 4.5 percent a year, and, after infl ation, had
generated quite lousy returns—about 1.6 percent a year. Money concluded
that this proved housing yielded poor returns relative to stocks, essentially
giving readers the advice: “if you want a great return on your investments,
avoid property, buy stocks.”(A similarly inept article, “Stocks vs. Real Estate”
appeared in the May 2007 issue of Money .)

Never Trust a Journalist with Numbers Never trust a child with a loaded
gun, and never trust a journalist to interpret numbers. The rate of return fi g-
ures and conclusions that Money reported mislead more than enlighten; quite
signifi cantly, Money omits the returns that property owners receive from rental
income, tax shelter, and other sources. You cannot meaningfully compare the
relative merits of alternative investments until you accurately account for
the total risk-adjusted returns that each investment provides, or is reasonably
expected to provide. But Money also errs for another important reason.

Leverage Leverage multiplies the reported 1.6 percent infl ation-adjusted
real estate ROI. If investors paid 100 percent cash for their rental properties,
the appreciation fi gure that Money calculated might prove correct. However,
because nearly all property investors employ leverage, this calculation falls
woefully short, in both method and result.
Let’s return to our $200,000 property purchase. Say you sell this prop-
erty after 10 years of ownership. At purchase, you invested a $40,000 down

payment and financed $160,000 at 6 percent over a 30-year term. When you

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