Leverage

10 Reasons to Buy your First Investment Property

One. 2009 is a good time to buy for a cashed buyer – It’s 2009 and there is a global recession, there is no shortage of foreclosures, or mortgagee sales. Get hunting for bargains. As fewer people can afford to buy, as times are hard, there are more people looking to rent, which drives up rent.

Two. You can share the risk, and cost – You can make fairly small investments if you share with others, however your return will still be equal to your percentage of ownership, and the overall gain in value of the property.

Three. You are in control – The performance of any investment is not guaranteed, however, a bricks and mortar investment may provide you greater control than other assets.

Four. Capital growth – Investing your money in the bank will not make you any capital growth. It may hold it’s value and be safe, however when you take inflation into consideration, you stand to gain very little. However, with property investment, the value of your property will almost certainly increase over time. This capital growth becomes your profit.

Five. Taxation benefits – There are many tax benefits in owning property, and in some countries more than others. Benefits come in the form of claiming against depreciating buildings, or negative gearing your investment to claim back tax on other income.

Six. Property makes millionaires – More millionaires have been created through property than any other form of investment. Property millionaires’ have been created at a rate of more than 58,000 a year since 2001. By 2010, there will be around three quarter of a million millionaires through rises in property prices.

Seven – Anyone can do it – You don’t require any degree or training, however, I suggest doing a fair bit of reading and seeking advice.

Eight. Property Investments provide Security, Houses don’t go broke – You can still loose money in a property investment, particularly if you have a rental void, or if you have to make a short sale. However, when compared to the stock market, where you are investing companies, property seems secure.

Nine. You can buy it with someone else’s money – Property investment gives you the ability to leverage other people money, and profit from it. Sure the bank will charge to a nice interest rate to lend you money, however the best part is the banks don’t share in the capital growth of the property, this increased equity will be all yours.

Ten. You can add value – You can add value to your investment by renovating or refurbishing your properties. Ensure that you are not over investing in the wrong property though, some areas and markets have a ceiling price.

It’s a great time to invest in property if you have the money, just make sure you seek professional advice, and do some reading.

Leverage

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!