I was recently asked by a journalist when they were interviewing me, “Why is it that
out of all the asset classes out there, why do you actually love property as a form of
investment?”
And it's pretty simple.
It’s actually leverage.
The fact that I can use the cash that I've got and leverage it to buy a much larger asset,
and then I can get the return on that much larger asset makes it, (for me), the independent
umpire when it comes to choosing asset classes because I remember back to the very first
time that property investment was introduced to me when I was watching the Ray Martin Show
back when I was at Uni, during the day when I was at home having lunch; and I wanted to
watch this person being interviewed.
Her name was Jan Somers.
And she's been a great virtual mentor for me and I've recently had the chance to meet
her.
She was up on a white board talking about how you can buy property, use the correct
debt to buy that property, you can get some taxation benefits that can help you cash flow
the property, and over time they will go up in value.
And it kind of made a lot of sense to me, but as I've gone through my own personal journey
in investing in property, and helping hundreds and hundreds of clients, it's become crystal
clear to me why I choose property over any other asset classes and that's because of
the leveragability.
So, in terms of an example, let's assume we've got $100,000 and we're going to, whatever
we choose, we're going to get 10% on it.
So let's assume we get cash, we get 10% on the cash at the end of the year and make an
extra $10,000 per annum.
But what if I go and use that $100,000 and I buy shares, and the banks say they'll leverage
that 50%.
So I could use that $100,000 and get $100,000 loan and all of a sudden I've got $200,000
to go and buy some shares and I get the return on that.
10% is then $20,000 so it is actually better than the cash.
Then if you actually extrapolate that out to property, the banks will actually lend
you up to 95% in some cases, but let's be conservative, they'll lend us 80%.
So if I've got my $100,000 I can actually borrow another $400,000, put it together with
my $100,000 so then I can actually go and buy a property for $500,000 and 10% on $500,000
is $50,000.
So using the same $100,000 pool of cash that I started with, for cash, I'll get $10,000
per year, for shares I'll get $20,000 per year and for property I'll make $50,000 per
year.
So on paper it would be an absolute no brainer and now the leverage is what gets you into
it.
But if you were going to leverage into property, you actually need to be comfortable with debt.
So typically you have a definition of good debt versus bad debt.
And I actually think that's still not definitive enough.
I actually think there's three types of debt: Horrible debt, Tolerable debt, and Productive
debt.
And so the horrible debt is actually going to keep you poor.
It's credit card debt, store debt, you can go out and buy the latest television, the
clothes on credit card and the moment you grab them they're going down in value.
There is no depreciation benefits, and you've got this debt to pay off for buying those
assets.
They absolutely keep you poor if you continue to buy goods using horrible debt.
Then next one is what I call Tolerable debt.
Typically what you use to buy the family home.
But if you think about the good debt and the bad debt definitions, the family home would
come under the bad debt definition because it's not income producing, and there's no
depreciation or benefits.
But I don't think that it's bad debt at all.
And the reason I think that it's tolerable is because you're the only one paying it off,
you're the person that has to solely be responsible for the debt, but if you buy the right property,
it'll go up in value and it'll feed the nest egg of the family.
So therefore, I don't think it's bad debt, it's tolerable debt.
The third type of debt is that productive debt where you buy income-producing assets
that go up in value and does have those depreciation benefits.
So therefore you can leverage into these assets and help grow your wealth bank , and if you
think about a lot of wealthy people in this country, they've got a lot of property, and
they've often got a lot of productive income producing debt attached to that.
So if you're going to buy investment property, you've got to be comfortable with debt, but
if you think about older generations where they say pay cash for everything, never get
into any debt.
But if you think about it in terms of those three definitions, avoid the horrible debt,
make sure you're efficient on your tolerable debt, and get as much productive debt as you
can.
That's really going to serve you when you build that portfolio.
So think about the two kids that are in the playground.
You've got one that's got a sad look on his face and the other one is running around quite
happy.
So they say to the sad kid, What's making you so sad?
He says, well we're so poor, we owe the bank $10,000.
And the rich kids says well we're so rich, we owe the bank $1 million, and it's really
around changing the paradigm for which you look at debt in terms of that horrible debt,
tolerable debt, and productive.
So for me, whenever I'm asked which is the best asset class, because the property people
are going to say property, the shares people are going to say shares, the cash people are
going to say cash, but for me the independent umpire is how much you can get as a leverage
exercise so that you can safely leverage into more assets so you can get the compound return
of a much larger asset.
So it's very simple, it's the very reason why I love property.
Leverage.