Last month we talked about how leverage can make your money work much harder for you; especially where it involves property.
In this post, we look at the growth of a property purchased for $250,000 and held for 30 years.
In the graph above, a $200,000 loan was used leverage our $50,000 cash, to enable the purchase of a property valued at $250,000.
Assuming a pretty conservative growth rate of 5% per year for that property, through the magic of time and compounding, its value is $1,080,486 after 30 years!
If we deduct the repaid loan amount plus interest for the same period ($386,640 in total), we are left with total net growth of $693,846 or $23,128 per year. This is an average net annual growth rate of > 9% from the original $250,000 property value.
However, remember that we didn’t put $250,000 into the original purchase of the property… We actually only put in $50,000 cash. Therefore, the total average annual return on our investment of $50,000 is > 46%.
Better still, in the calculations above, we’ve taken the total loan costs off the final total growth figure. However, with an investment property, tenants would be paying rent and we would also be receiving tax deductions from the ATO. In many cases, over a 30-year loan term this income and tax credits will be enough to cover loan repayments and holding costs (council, strata, water rates etc). This means that our returns are likely to be much more than this.
It’s clear that by using both leverage and compound growth, you can supercharge your property investment returns.
In this instance we have looked at how investing in a property worth $250,000, with conservative gains of 5% per year can return either:
- An average 9% per year return (over 30 years) with compound growth; or
- An average of 46% per year (over 30 years) with compound growth plus leverage.
So recapping on the last few months of post the three key points to really boosting your returns are:
- Investing early, allowing as much time as possible for compound growth to occur
- Buying the right property that will have high capital growth (Rule of 72)
- Leveraging to make your money go further and increase your asset base
If compound growth, the Rule of 72 and leverage have thought us anything it’s that making your money work harder for you just makes good sense. So talk to us about all of these can impact your own property investment or property portfolio.
We can also apply the above graph for your own property investment opportunities, to see how your own financial future could look.
We look forward to talking to you.