There are many kinds of assets which you can invest your hard-earned money into. We are big fans of property because it’s a proven strategy and we find most also enjoy investing into bricks and mortar because they’ve seen what their Mum and Dads property has done over time.

However, it’s not for everyone. Read on to find out more to determine if this is the preferred asset class for you.

 

How do you feel about debt?

We don’t know too many people who LIKE having debt, although to quote J Paul Getty “If you owe the bank a $100, that’s your problem but if you owe the bank $100 Million, that’s the BANKS problem.”

IF you are a small thinker (and Mike grew up as one), then being comfortable with owing the bank $1 million is not going to sit easy. Simply, if you are going to own even a small portfolio of say five properties, you are probably going to have loans totalling somewhere around the $2 million mark, just as a starter.

Now if we told most people that, who either didn’t have a home loan now or who perhaps had one with a modest loan, that would be a turn off straight away. That’s ok. We said it wasn’t going to sit easily (for some).

 

Let’s just add some perspective here.

If you owned a basic home and say it was worth $400,000. Just say you had to borrow $320,000 to buy that home, you then have a loan to value ratio (LVR) of 80%. Pretty standard in housing and banking these days. How would you be feeling about that loan? We hear you. It’s big and can be a little scary (for some) and if something goes wrong, you might have trouble sleeping at night.

When Mike bought his first home in 1989 for $63,500, he had a $50,000 loan and he was crapping himself (to say the least). He was 27 years old, earning about $18,000 per year and just had his first child (cute little Bennie) and his wife was not working. Oh, the responsibility!

When he sold that house himself out of the local Mercury newspaper with a classified ad for $87,000 only five years later, he thought he was a genius. He then bought a house for $116,000 and had a $90,000 loan that for some reason he felt more comfortable with. Go figure! It was nearly twice the size of the earlier loan and he was ok about it.

Why is that?

“With education and experience comes confidence.” 

Mike Harvey

A year later, he unfortunately went through a divorce and bought his wife out of that particular house and bumped his loan up to $100,000. Yes, he was nervous about it, but Mike started to believe that he was on the right track. After he sold that house eight years later for $289,000, his belief in the power of property in Australia was firmly cemented in place.

We digress. Let’s get back to the example of your $400,000 property with a $320,000 loan. For many newbie investors, it can be a nervous start but if you did nothing but pay interest only for say ten years, it would be reasonable to expect that the property has doubled in value.

History shows Australian residential property will double in value every seven to ten years. Our own study of the Brisbane median house price came up with Brisbane growing by 8.04% per year on average for the last 60 years which is a doubling on average about every 8 years.

Now we have a property with a supposed value of $800,000 with a loan of only $320,000. How do you feel now with an LVR of around 40%. Feels pretty damn good, doesn’t it?

If that house was your family home, it is still a nice feeling. However nothing much has changed. You are still paying the same amount each week for the roof over your head and the roof is a little more worn than ten years ago so you need to start spending money on maintenance to pretty it up again.

However, if this particular house was your investment property, you can clearly say that you are $400,000 ahead of where you started. Now how do you feel?

 

A lot better – right?

For those people who feel too nervous to buy an investment property for the fear of what might happen should they face a surprise major financial situation or need, consider the following…

Suppose you had only your home as an asset and did not have the investment property we speak about and you needed say $200,000. What would your options be?

To sell the family home and use the leftover funds for this very urgent need. At best, you might have enough equity to refinance and increase your home loan BUT, if you had an investment property with just a little growth, you could sell this asset to meet the financial crisis and still have your lovely home – isn’t that a whole lot better?

Can you see how having just ONE Investment Property can give you comfort and peace around having options you would not otherwise have enjoyed?

Ok, having said all that, if you are still petrified of the thought of being in debt, then you are answering the question for yourself and you may not be a person who could make a good investment property owner, and especially not someone to build a portfolio of properties.

That’s ok, there are other things you can do that can be helpful in saving money and being a little more financially secure. Although to create real wealth and have the comfort of feeling in control of your financial future, you are going to need to take some sort of action and find an alternative way to create wealth.

A lotto ticket is the strategy of the masses so you could try that. Personally, we are much more optimistic about using the bank’s money and the miracle of compound growth to do it steadily and safely.

Discover more in our book How to Jump into Property Without Being Eaten By Sharks where we share more about how easy it can be to create a better life for yourself and your family. Get your FREE copy where you’ll learn when working with the right team who can help you on your journey and holding your hand throughout to help you avoid all the common mistakes that most investors make – makes it easy.

If you would like to discuss your individual circumstances with our OYSI team to see if we can help, contact our office on 07 5510 9341.

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