What is the best type of investment?
When people look at investing, there are three main areas to choose from; shares, property or cash deposited in interest bearing accounts. Why has property proved to be the most effective choice? In Australia and many other places around the world, over the past 50 years property has averaged 10% p. compound growth. (Carefully selected properties have averaged even greater returns). Not forgetting that investment properties also generate an income from rent.
Median priced property in Australia have averaged growing at 2 – 4% p. higher than inflation, making it a very solid investment. One of the most effective way to build riches is to accumulate a portfolio of investment properties (over the space of 7 to10 years) and then let the power of Compound Interest work to your benefit. The main reason that property can be utilised more effectively than shares as an investment, is due to the added benefit of being able to highly leverage an investment property.
Leveraging is where you use a small portion of your own money along with a large portion of someone else’s money (a bank loan) to secure an investment of a far greater value than you could have, using only you own money. If you invested $10,000 directly into shares that were growing at 10%, then in 7.2 years they would be worth around $20,000. On the other hand if you had used that $10,000.00 as 5% deposit on a $200,000.00 property and borrowed the remaining 95% plus establishment costs. If this also grew at 10% then in 7.2 years your investment would be worth $400,000. Meaning that by leveraging your investment you have gained an additional $190,000.
Compounding has an even greater power, the longer it is allowed to work. With the above example, if you were looking at a 21.6 year period, then the results are quite staggering. The un leveraged shares would be worth $80,000 and the property $1,600,000, a differential of $1,520,000. It is possible to borrow 100% of the purchase price of a property plus expenses by securing the deposit against your own home, so that you don’t need a cash deposit. Isn't going into debt a bad thing? There are two types of Debt. Good Debt is where you borrow funds to secure a capitally appreciating, income-producing asset. Bad Debt is where you borrow to buy a capitally depreciating, non-income producing item such as a car, boat or holiday. There are many different strategies for property investing, which suit different people depending on their current income or financial position.
A combination of using Good Debt to buy property and then allowing Compounding to do its work – seems to be one of the most effective way of creating wealth. But this is definitely not a “Get rich quick scheme”, on the contrary it is a “Get rich slowly” scheme which works most effectively over a 10 to 20 year period. It takes patience and perseverance, but after having spoken to dozens of other property investors, many of whom have become multi millionaires within the space of 10 to 15 years, I am certain that it is worthwhile.
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