The Idea Behind Real Estate Investment

All of the people on earth understand pretty well how to buy a property, how to apply for a loan, escort a solicitor, communicate with the real estate agent, pay the holding fees and even understand how to do a price comparison and sometimes unavoidable due diligent.

Most people understand the logic behind investing in real estate and know that sometimes in the future, their home or their property investment will double or triple in value.

So, if we all know that, what’s the real problem is?

Well, there is no major issue here and all legit, accumulate your real estate assets and wait for the future to act on your behalf.

However, only 3% invest in properties seriously, and only 7% have more than two properties outside their home.

So, actually, people don’t have a lot of confidence in real estate as a wealth vehicle or understanding how accumulating assets will contribute to their future security.

There is a smarter way to go about investing, and the only way to succeed is to know what you are doing. Most of the investors buy and hold for the long term, without knowing the risk element that associates with their purchase, which will hurt their wealth acceleration significantly.

What we do, then?

We buy real estate assets that can grow significantly in value, and that can provide us with income.
We borrow most of the money from the bank, and on some occasions, the government gives us a high tax deduction return.
When the real estate asset grows in value, we use the equity growth to repeat the same structure.
Now, let’s get the compounding growth magic takes care of our wealth, and this is the secret of financial success.

What’s the idea behind the investment?

Case 1

You borrow 90% of the value of the property
90% LVR give you 10% of equity.
With 10% growth of the property, you have 100% returns on the capital you invested.

I repeat, you invest little as 10% of the value of the property and make a 100% return of investment (ROI). This formula is the wealth foundation! Forget about the purchase price and how much you spent for deposit. Your ROI is 100%.

Property purchase price $500,000
Loan $450,000
Deposit $50,000 (10% equity)
Growth 10% $50,000
Current value $550,000

Capital return 100%, you have now $100,000 in equity while you invested only $50,000

Case 2

You borrow 80% of the value of the property
80% LVR (20% equity).
With 10% growth of the property, you made 50% returns on the capital you invested.

Property purchase price $500,000
Loan $400,000
Deposit $100,000 (20% equity)
Growth 10% $50,000
Current value $550,000
Capital return 50% ,you have now $150,000 equity.

Case 3 – you take into account all the initial cost to buy the property

You borrow 82% of the value of the property
82% LVR give you 18% of equity.
You paid Stamp duties $20,000
You paid solicitor fees of $1000
You paid for title, searches and transfer $2,000
The property grew only 4% in the first two years and then 5% in year 3 and 4 and 8% in year 5, year 6-8 value reduces to 6% and later, on years 9-10 jump to 14% = total of 72% in 10 years.

Property purchase price $500,000
Loan $410,000
Deposit $90,000 (18% equity)
Stamp duties, legal, mortgage costs $23,000

Year	Growth Rate	Capital growth pa	Property value	P&L	ROI %
1	4%	$20,000	$520,000	-$93,000	-1
2	4%	$20,800	$540,800	-$72,200	-1
3	5%	$27,040	$567,840	-$45,160	-37
4	5%	$28,392	$596,232	-$16,768	-13
5	8%	$47,699	$643,931	$30,931	24
6	6%	$37,992	$681,922	$68,922	55
7	6%	$42,961	$724,884	$111,884	90
8	6%	$43,493	$768,377	$155,377	126
9	14%	$107,573	$875,949	$262,949	214
10	14%	$122,633	$998,582	$385,582	313

On this example, in year 2-3 you already made 50% ROI if we take into account only purchase price as cost. If we add duties, legal and other property costs, we will start slowly, but in year five, as you see above, we will begin to see the ROI growing. Between years 7 to 8, the ROI will be more than 100%, and on year 10, we will be on a 313% return.

If we have the patience to hold the property for another ten years, results will be phenomenal. (Take into account that in some cases you will start reducing your loan, and your equity will grow; also, rental income will grow and will turn from 4-5% to 8-12% gross yield.)

Year	Growth Rate	Capital growth pa	Property value	P&L	ROI %
11	15%	$149,787	$1,148,370	$535,370	435
12	15%	$172,255	$1,320,625	$707,625	575
13	23%	$303,744	$1,624,369	$1,011,369	822
14	20%	$324,874	$1,949,242	$1,336,242	1086
15	10%	$194,924	$2,144,167	$1,531,167	1245
16	9%	$192,975	$2,337,142	$1,724,142	1402
17	8%	$186,971	$2,524,113	$1,911,113	1554
18	10%	$252,411	$2,776,524	$2,163,524	1759
19	13%	$360,948	$3,137,473	$2,524,473	2052
20	16%	$501,996	$3,639,468	$3,026,468	2489

Imagine, you manage to build a few assets as above, and a substantial property portfolio, your profit (P&L column) multiple by 4, 5 or 6, your rental income will multiple, and your likelihood to create a net asset without a mortgage will be high.

To create significant wealth without any worries, you will need to buy well and validate the property risk-return before every purchase to peruse good results.

Reducing the risk with all the property elements will set a good property milestone.

Risk key factors:

Land size
House/unit size
House position on the ground
Property configuration
Property floor layout
Property condition
Age of the property
Price percentile
Street location
Suburb key economic
And many more vital keys can be analyzed through investinproperties Pty Ltd service.

The data always comes from an independent source and together with full-service transparency we look for the lowest risk and highest return (Equity and Cash flow)

The capital growth and ROI table as you can see above, will not always look very promising; therefore, only proper risk & Return analysis, will make sure your asset will perform substantially.