Property Investment
Why Investment Property Is So PowerfulHave you ever asked yourself "why investment property?"
Well, this will show you why property is not just a good thing, it is an excellent investment, when it is done right.
Investment property can accelerate your wealth creation handsomely but as you will discover, not all property is recommended.
We need to be smart and understand a few things first.
So, if you would like to know more contact us now or keep reading and exploring this site to find out why investment property can be excellent for you (the right type of course).
To start, let's forget about investment property altogether and just examine some simple principles and a few numbers (not many, we aim to keep this simple).
You have two primary investment choices
1.Cash Investment
2.Leveraged Investment
Cash Investment
You can either invest cash into an investment at regular intervals, such as with superannuation, cash management accounts etc. or you can invest cash as a lump sum, perhaps into shares or a managed fund.
Leveraged Investment
Leverage for investment means borrowing money to invest. Most commonly, this occurs when borrowing for a property. Many people call this negative gearing but negative gearing is not the act of borrowing money, it is the result of cash flow. Leverage can be defined as "doing more than you otherwise could". In other words, if you didn't borrow the money, you could not make the investment.
Which Is Better?
From your personal point of view, we can not tell as this is not financial advice . However, from purely a number analysis, leverage is clearly the most powerful wealth creation system. Read on to find out why...
Ask yourself this very tough question...
Which would you rather have?
$153,749 or $366,861
What a question, the $366,861 of course. Well that is what property can do for you.
It is all about the leverage. It creates power that you otherwise could not achieve.In the example below, you will see how a non-leveraged investment (without borrowed funds) would need to earn 12% p.a. to match a property that only earns 4.5% p.a. But of course, if the property earns an expected 6% to 10% p.a. then you will be miles in front.
The other question is, what is a realistic earn for the managed fund, most people would be delighted if they averaged 6% p.a.
Example
Say you buy a property for $400,000 and hang onto it for ten years. You borrow all of the money, plus establishment costs of say $20,000. This means you have a loan of $420,000.
After rental income and tax savings, you contribute $200 per week to fund the property.
Depending on the final average growth, the property will be worth:-
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The net equity is your end profit
Net equity is the property value less the $420,000 loan, assuming you never pay anything off the loan.
If you don't buy a property
Now let's assume you don't buy a property and you use your $200 per week to invest into an investment such as a managed fund, shares or a bank:-
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What did you notice?
The property only needs to average a growth rate of 4% to 5% p.a. to out perform the managed fund earning 12% p.a.
Isn't that amazing?
And.... Exciting?
And.... Exciting?
Especially, when you understand that the types of property we will show you have been averaging more like 8% to 9% or more p.a. growth over at least the past 30 years.
So, have another good look at the figures and get excited, don't worry about how it all works at this stage, just focus on the results. The 'how to' will be explained later.
Hopefully, you are now starting to see why investment property can be so good. And if you find someone else asking "why investment property?", you can direct them to this website.
A note about tax
Tax has not been calculated on the ten year values.
The property equity is taxable, if turned into cash by selling the property. In which case, capital gains tax applies. However, capital gains tax can often be substantially minimised with forward planning with a tax advisor.
The managed fund will have tax to be paid each year and when the investment is cashed in or drawn upon. Two types of tax are likely to apply, tax applied to income received by the managed fund and capital gains tax.
Anyway you want to look at it leverage is more powerful than investing cash. The only question that remains is "how to keep yourself safe and profitable?"
Author: Norm Glenn of Prime-Metro Property Group