The Borrow Smart Chronicles - The Perfect Practice Mindset

Weekly Spotlight: A Practice Mindset

I heard the above quote years ago. I was a hard worker and always focused on practicing any time I could to get better. Practicing conversations, sales presentations, management skills, etc. What gobsmacked me was an upgrade to the quote. A performance coach said “Perfect Practice, Makes Perfect” - BUT “Practice Makes Permanent.”

Ouch. I was working hard, but I had bad technique, and that meant many of the behaviors in my life were simply reinforcing practices that were making things worse, bad habits made permanent. I had to stop and ask whether I should be practicing or making sure I had good technique before I continued practicing.

Most people don’t like to practice; the word is kind of loaded with dread. Go practice your piano. That said, what was the perfect practice for me? I needed to add quality to my quantity, and I had to know what high quality looked like. What is an expert? How would I measure success so I knew I was getting results? How would I re-learn and create a feedback cycle that made sure I was practicing perfectly and not just making it permanent? Ask these questions of yourself, and maybe they’ll grow some corn for you.

a BORROW SMART CONCEPT
RETURN on Real Estate

I see these graphs and charts regularly about real estate compared to other investments over time, and while they are often accurate, they base comparisons as if every buyer of real estate was paying cash. When someone buys a house with cash, then this chart would be more accurate. In reality, the average person in the US when buying a house, puts down between 13% and 14%. (source NAR).

Let's say you buy a $100,000 house (for easy math) with 13% down. You are using $13,000 of your current net worth and borrowing $87,000 from a lender. That is the very foundation of leverage—the use of a smaller asset to control a larger asset. Your return is on the $100,000 house asset, but because you have leverage, the $13,000 grows (or declines) based on the larger $100,000 asset.

It is the house asset that will appreciate (depreciate). If the house value goes up 5% over a year, the house is worth $105,000. You have increased your net worth by $5,000. You utilized $13,000 of your net worth, and now that net worth has increased to $18,000 in investment. That is a 38% return.

For most consumers, the majority of their wealth is inside the house because of the positive impact of leverage when borrowing. They can use a small amount of investment to control a large asset that historically goes up in value over any extended period in history.

• In the 1990s, that growth rate was about 3.90% per year.

• During the 2000s, it increased to approximately 5.00% per year.

• From 2002 to 2007, the rate was exceptionally high, at around 9.60% per year.

• However, from 2007 to 2012, there was a negative appreciation rate of -6.06% per year, primarily due to the housing market crash.

• Since 2012, the rate has been about 4.21% per year.

When considering a longer period, a conservative estimate for the average annual appreciation rate is often 3.5% to 4% per year, acknowledging that this rate can vary significantly depending on location and other factors.

Important: In our example, the buyer starts with 13% down and earns about 38% in the first year, but that return goes down as more and more equity remains inside the house. In the next year, they will have $18,000 of net worth in the house, meaning if they earn another 5% in year two, they will have a return of less than 38%. If you don’t understand this, let me know, and I’ll send you a copy of my book.

Here is a chart from my book that speaks to the impact of leverage on real estate returns over time.

LIABILITIES
What’s Happening?

REAL ESTATE
What’s Happening?

ASSETS
What’s Happening?

ON BEING HUMAN
What’s Worth Sharing?

DOPAMEMES
And Other Inspirations…

AIdeas
Future Hacks…

When using ChatGPT - ask it to ask you questions about what you are trying to accomplish.

One example:

“Before you start, please ask me any questions you have about this (project, request, image, etc.) so I can give you more context. Be extremely comprehensive on what you need from me to give me the best answer.”

Borrow Smart University || National Institute of Financial Education