When you have a property worth $500,000 usually you’ve got any equity or your deposit and you borrow the remainder. That is an increase in your net worth of six-fold though the value of this property only doubled.
What would happen over the next seven decades?
Your first $100,000 investment would have grown in value 16-fold while your property only increased in value four-fold. This awesome increase in your net worth is a result of the joint effects of compounding and leverage.
You Can Purchase It With Someone Else’s Money
The return you get on property if you pay for your purchase with money (without obtaining a loan) is not much higher than what you could achieve with other kinds of investments.
Naturally, with property you typically don’t pay with raw money; instead you use somebody else’s money to buy your properties. In other words, you put down a small deposit, often 20%, and the lender finances the remainder.
Archimedes said, “Give me a lever and I will move the earth.” As investors we do not wish to move the ground, we only want to purchase as much of it as we can!
The ability to use leverage with property significantly increases the amount of gain you can earn and, importantly, it permits you to buy a significantly larger investment than you would ordinarily be able to.
Due to its history of security, steady income and proven capital development, residential property is seen as a prime collateral or security for loans, meaning banks can lend you as large as 90 percent of the value of your property.
They won’t give this ratio on other forms of investments. If you purchase shares in the banks, the banks might just give you 65% of the value of the shares, and for commercial property they lend 70% or so of the value of commercial properties.
In the technical sense leveraging, or gearing as it’s also known, means having a little effort to move a large object, such as the gears on your bike where you must pedal a little rotation to turn the big back wheel.
In the financial sense, leveraging is having a small quantity of money to control a massive asset. The more highly you’re targeted, the more the more money you’ve borrowed, and the lower your invested capital concerning your borrowings.
Commercial Property is a superb investment, as you make all the choices and have direct control over the returns from your property.
If your property isn’t producing good yields, then it is possible to add value through refurbishment or renovations or adding furniture to make it more desirable to tenants. To put it differently, you can directly affect your returns by taking an interest in your house and by understanding and meeting the requirements of prospective tenants.
There are hundreds of ways that you can add vale to your property, which will increase your earnings and your property’s capital value. Unlike most other investments, when property goes up in value you do not need to market to be able to capitalise on that greater value. You simply return to your bank or mortgage broker and get your lender to maximise your loan.
Even if you purchased the worst home in the worst possible time, the odds are good that it would still go up in value over the next few decades. History has proven that property is perhaps the most forgiving investment advantage over time. If you’re ready to hold property over several years, it is bound to rise in value.