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Why invest in property?

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Martin Josselyn, Rule Three Property Performance

 

On paper, most people understand that investing in property makes sense. But the real question might be, why should I bother? The answer might lie in comparing our savings ability, that is breaking it down to how much we might be able to save each week long term for retirement, and what options we have with that amount of money.

Out of all the clients we have spoken to over the last 15 years, one clear thing is apparent, and that is that regardless of how much money you earn it is often difficult to save, because as you earn more so to, do you spend more. For most of our clients, they are not DINKS (double income no kids), they are in fact DIAMONDS (double income, awesome mortgage and no dough).

This article explores your savings options, compares the option outcomes and includes leveraged property and some information for building a property portfolio.

 

Why property as an investment option?

In this scenario let’s say you set a goal that you need to put some money away for retirement but you are restricted in the amount you can save because you probably have a mortgage, family, bills and let’s face it, not a lot of spare money to put towards retirement at the end of every week.  But you’re committed and you make a decision to save $50 per week, or $2500 per year every year for the next 20 years and put those funds toward that retirement goal. The graph below compares the fundamental options available to you over those 20 years.

Let’s see where the $50 per week gets us.

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Firstly the most basic of all savings methods might be ‘under the mattress’ or ‘cake tin’ and believe it or not, it’s always been an old-fashioned favourite. It’s a tangible alternative, there’s no risk and it’s always available to you. But the downside is also its accessibility – it’s easily able to be spent and there’s no return on your investment. This gives our average mum and dad just $48 000 after the 20 years for retirement.

The next most fundamental savings method might a Bank with a regular savings account options, and although it provides more security, it generally comes with a low interest rate. Let’s suggest however, that you are able to find an account with a 5% average return with no fees or charges (we would all like to have one of those).  If you could find that account and you resisted the temptation to withdraw those funds, then the money saved at an average 5% compound interest over 20 years would amount to just $82 000. Of course this figure does not take in to account income tax and the standard fees and charges that a bank will charge.

Some people might look for a more sophisticated way to save money and might choose the option of Managed Funds as a better alternative. Our research shows that the average return on a managed fund has been somewhere around 7.4%ⁱ. We have adopted 7% for the exercise. And if in the same way we invest $50  per week over 20 years our investment would grow to $104 000 over the same period.  Certainly better than the cake tin, but a long way short of a comfortable retirement.

The last and perhaps most fundamental and popular savings method in Australia today is Superannuation. With the advent of the government’s superannuation guarantee levy most working Australians now have superannuation.  According to our research the average return on industry fund shows an average return of 8.7%ⁱⁱ.  The unfortunate thing about superannuation at that return, is that for those people solely relying on super for retirement, they will have only amassed $133 000 for the same $50 per week saved.

As you can see it is almost impossible for most average people to save their way to retirement.  And that most savings require the ability to leverage to get a better return so that the amount received becomes sustainable for retirement.

In 1997 I said at a conference and the same remains true today that if there was a secret to wealth creation at all…then surely it must be ‘that it is important to try to control as much of an asset base as possible for the smallest amount of out of pocket cash-flow, so that when you get growth, you get growth on what you control not what you contribute’. The above graph surely adds weight to the argument that it is almost impossible to save your way to a sustainable retirement, and therefore I maintain that sensible leveraging as and when cash-flow and equity levels allow…is a viable option.

You have many other options available to you, one of which is investing in property. Using a staged acquisition program, I can show you how to leverage property so our mum and dad example still invest the same $50 a week over the same 20 year period. And that they invest in 3 properties over a 20 year period as and when their cash flow and equity levels allow. Using the assumptions shown in the following diagrams it is potentially possible for a result to exceed $2 million in nett assets for the same out of pocket cash-flow.

Well worth consideration!

 

Martin Josselyn, Rule Three Property Performance

martin@rulethree.com.au

Martin Josselyn is a licensed agent, qualified financial planner and mortgage broker and has over 15 years experience in direct property investment portfolios