Why Property?

The age old debate about which asset class performs better has passionate advocates on both sides. Statistics show that, on average, shares perform better than property, and yet, we prefer property; and that's the opinion of our director who spent nearly 20 years as a stock broker.

Why? The clue lies in the reason why banks are prepared to lend 80%, even more, on property compared to 50% on shares - leverage (gearing) and lower volatility make the difference!
 
If you enjoy a compound growth rate of 7.2% p.a. for 40 years your asset will grow in value by 16 times. If you financed it with cash only that's a handsome return of 1600% straight line. However, if you only contribute 50% and borrow 50% the increase in YOUR contribution (equity) is 32 times and if you only contribute 20% equity your equity will incease by 80 times!

So, the trick is to structure it properly - that's where we come in.

Where to Invest?
For the more nervous of us, being able to drive past the property and see that it is still standing can bring some comfort, but, is it worth giving up a superior growth rate? It doesn’t matter what you say - consider these figures. A $100,000 investment will grow, over 40 years to –
 
$480,000 at a 4% compound growth rate,
  $1,600,000 at a 7.2% compound growth rate,
  $4,525,000 at a 10% compound growth rate, and
  $9,305,000 at a 12% compound growth rate.

Becoming wealthy is a little like playing Monopoly – the one who can accumulate the most properties wins. When you borrow on an interest-only basis your debt stays the same, but the gap between the debt and the value of the asset is expanding faster and faster as time goes by. This is compounding AND leverage in action!

But wait there’s more, as Tim Shaw would say. There is a third factor working for you as well – our tax laws favour those who are smart enough to borrow for investment.

Money Magazine (September 1999) said it all “ Most other major economies have tax breaks that help their citizens to buy one home and to live in it. We, on the other hand, have decided to make it really difficult for Australians to own their own home, but very simple for a minority to own dozens of investment properties, paid for with someone else’s money and all funded by the taxpayer.”

Whilst we all know that real estate moves in cycles, many don’t appreciate that within those cycles, of, seven or ten years, major increases in value typically occur in only one or, perhaps, two years. The rest of the time real estate is drifting along, modestly growing, sometimes modestly declining in value. As always, the patient are the ones who enjoy the rewards in the long term.

Yes, there are risks and no guarantees. Future growth rates are not known to anyone. However, one thing is for sure, if you don’t employ the principles of compound growth you cannot succeed. The good news is that if you do employ them intelligently you cannot fail.

Sure, values can be moving away from you while you are trying to save the first $100,000, but you can borrow it from the bank for $5,500 a year and the government will contribute to that cost. So, properly structured, an investment of $400,000 should, on average, grow by around $24,000 a year.

When did you last save $24,000 from your wage?