If you’re thinking of buying investment property, have you considered why? There are many personal, sentimental and cultural reasons that Australians like buying investment property: we can see it, touch it, furnish it, our parents owned one…
But to truly prepare for property investment, it’s key to understand the underpinning financial benefit: many of us have dreams and aspirations to do things we cannot currently afford. Some of us simply want to continue to pay for the things we do today and maintain our lifestyle.
Your magic number
We have found that the magic number for our clients is around $80,000. If you could achieve $80,000 income from your investments (i.e. without having to do anything) would you be closer to affording the things you want to do in life?
This would require an investment portfolio worth around $2,000,000. How are you going to get there? Investment in property is an effective way to accelerate your wealth and achieve your aspirations.
The property difference
Imagine Samantha, Gemma and Lyndall all have $50,000 saved and want to invest it. They all want to earn a passive income of $50,000 as soon as possible, but at least in 20 years. This would require about $1 million in assets.
- Samantha invests her $50,000 in cash and she earns 3.5% per annum on her money for the next 20 years.
- Gemma decides to take a little bit more risk and she invests it into blue chip shares on the stock market and earns an average of 8% over the next 20 years.
- Lyndall uses her $50,000 as a deposit on a home and purchases a $500,000 residential property. The property increases by an average of 4% per annum over 20 years and yields 3% as rental income.
Fast forward to 2036:
- Samantha (Blue) now has $90,000 cash in the bank.
- Gemma (Red) has investments worth $233,000.
- Lyndall (Green), minus the money she owes the bank and all the interest paid back on the loan over 20 years, has an investment worth more than $550,000.
If after 10 years Lyndall had used the additional value in her first property to purchase another investment property (providing the same income and growth), she would now have assets worth around $1.1 million.
All three need to start as soon as possible and they need to be serious about investing and growing their wealth.
Even where property produces only moderate capital growth, the benefits of leverage will truly accelerate wealth – particularly over the long term.
What if Lyndall selected a property that increased by an overage of 8% per annum and produced income on average of 4% (by way of rental income)? In 2036 she would have a property asset worth over $2,700,000.
Of course Gemma could also leverage into shares, but she risks a margin call and she may not be able to borrow as much against her $50,000. It is important that Gemma explore this with a financial advisor.
Even in this simple example, it’s clear to us where we would continue to recommend people invest for the best returns and significant wealth development. Perhaps this will make you reconsider your options and see property investment in a new light.