May 26, 2014
Yew Kong Lye
The trouble with modern society is that we’ve learnt to be very impatient. We want something and we want it now. Everything is instant and fast. That is why fast food is thriving and instant noodles, though nutritionally bankrupt, is one of the fastest moving consumer products.
If you’re looking to invest in property, I suggest that you get out of the fast, instant and impatient mind set because property investment is by nature a long term investment. The longer you hold on to it (assuming that you’ve bought in the right location) the greater return that you will reap over time. Property investment is not for you if you are impatient and want to see results instantly.
MY PROPERTY INVESTMENT CONCEPT
When I am using a buy and hold strategy, the fundamental concept is to minimise holding cost, hold it for a long time and reap the capital gains at the end. Note that there are two sides to the equation here-minimise holding cost and maximise capital gains.
You can minimise holding cost by:
- Having an interest only loan.
- Fixing your loan for the longest period if the rate is attractive enough.
- Taking advantage of generous tax incentives for owning an investment property.
- Improve and increase your rent by doing some simple things e.g. install an air-conditioner, give it a new lick of paint every 5 to 7 years, employ a gardening service to keep the property need and tidy, etc. ( You’ll find that the rental increase will far outweigh your investment providing you with a very healthy return on your investment)
The best way of maximising the capital gain is by locating your investment property well. See my previous article on how to locate your investment property.
THE MAGIC OFCOMPOUNDING
The main reason why you need to be patient when you’re investing in property is because of this concept. If Genie comes around and offered you $1m now or 1 cent that doubles every day for the next 30 days, what would you take? If you had taken the $1m now, you would be short changing yourself by a massive $449,000,000. (Your eyesight is not playing tricks, it’s million) Yes, 449 super-duper big and fast Veyrons. Don’t take my word for it; check it out with your calculator.
For the sake of consistency let’s take a 30 year period when assessing an investment property. Assume that you have located your investment well with some property researcher and it’s expected to grow by 10% every year and that you’re spending $500,000 on it. If a property grows by 10% every year, it should double every 7 to 8 years. Again, don’t take my word for it and check with your calculator. That property, at the end of a 30 year period, is worth approximately $8,000,000.
The value of the dollar may be worth a lot less in 30 years but, $8m is still a lot of moolar. Pay off your $500K loan and you would be making a profit of $7,500,000. Everybody can see how it works in theory and what a fantastic wealth creation concept it is. Do you want to know why there are not more people doing it? To me, it boils down to a combination of fear and impatience. 95% of people will fear about the “what ifs” and will be paralysed and do anything. Of the 5% who will do something, 80% of that will be impatient for instant result and sell before they can reap the full reward. So, where do you sit?
TIME CREATES EQUITY- WHICH LEADS TO LEVERAGE-WHICH LEADS TO SERIOUS WEALTH
If you have the patience to hang on to your investments, you’ll create some equity. The longer you hang on the more equity you will create. Most banks will lend 90% on an investment property and you’ll only need to extract about $60,000 to purchase a $500,000 off the plan investment property (to save on stamp duty and reduce the equity contribution).
The basic premise of wealth creation is to have an asset base as big as possible and to let it grow (compound) for as long as possible. Imagine in the aforementioned $500k investment property and you replicate that 5 times over. You will have a loan of $2.5m and I will challenge you to work out what your portfolio value will be in 30 years’ time if you had bought one property every year in the first 5 years and bought nothing else after that.
All that I know is that you would have created some very serious wealth. Note sure? Then give me a call on 0413 817 888 for a meeting and I’ll provide a financial planner who will crunch the above figures, at no cost to you.
I’m all for wealth creation but I believe that wealth for the sake of wealth is evil. Wealth only provides you with options- to lead a wonderful life and to contribute and make the world a better place. “If a free society cannot help the many who are poor, it cannot save the few who are rich.” John F. Kennedy