Property Investment Leverage

The key concept in property investment is leverage. If you have experience in the industry you may already understand this concept, but for the benefit of those who are new, I will explain it. Leverage is your ability to increase your returns by using other peoples’ money to increase the overall value of your investment. With property investment it’s usually the bank’s money.

It makes more sense if you look at some numbers

Say you have $30,000 to invest. This would need to be a lump sum to invest in the first two options, however for option 3 it could be equity from your main residential property which you live in. Lets look at the best way to invest this money?

Option 1) Place your money into a term investment or savings account with your bank

We would be looking at about 3-4% return. After you consider tax on profit, and inflation you are going make very little progress at all. Although, your money will be very safe.

Option 2) Stock Market and Shares

Unlike with the bank, your money would be considered not as safe invested in stocks. However, a lot of that depends on the risk of the stocks you buy.

This table shows how much money you would make if your stock gained 8% annually for 10 years. 8% may be a fairly conservative profit from playing the stock market, however, if you wanted to play safe, I think it is a good index to use.

Year Total Value Annual Profit
1 $30,000.00 $2,400.00
2 $32,400.00 $2,592.00
3 $34,992.00 $2,799.36
4 $37,791.36 $3,023.31
5 $40,814.67 $3,265.17
6 $44,079.84 $3,526.39
7 $47,606.23 $3,808.50
8 $51,414.73 $4,113.18
9 $55,527.91 $4,442.23
10 $59,970.14 $4,797.61

Doubling  your money playing the stock market over 10 years is a good investment, however this projection takes into account an 8% annual gain, and assumes you have invested wisely. There are other variables which haven’t been considered.

The numbers for property investment look even better.

Option 3) Property Investment

The best thing about property investment is it enables you to leverage the $30,000 to purchase a property of $100,000 – $200,000, depending on how much deposit is required.  Your investment will grow as a percentage of the value of the whole property, not just the amount you have invested.

Year Total Value
1 $200,000.00
2 $212,000.00
3 $228,960.00
4 $247,276.80
5 $267,058.94
6 $288,423.66
7 $311,497.55
8 $336,417.36
9 $363,330.74
10 $392,397.20

Looking at a conservation rate of growth for the property market of 6%, the overall value of your property would double in 10 years, however, rather than the investment of $30,000 doubling, the whole investment has doubled. Even if you only had only paid off interest, and no principle, and you still owe the bank $170,000, your $30,000 has turned into $222,397.20 of equity in the property.

So as I am sure you have guessed the $222,000 is much better than the $60,000 from the stock market!

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