How property is your life raft from the rat race

Posted by Gavin Chau

If you ever want to see what corporate slavery looks like, scroll through LinkedIn and look at the stuff people post:

“I’m feeling energised from the summit!”
“I’m passionate about digital health!”
“I’m thrilled to be part of this dynamic team!”
“Leveraging my expertise to drive strategic growth!”

It’s a ridiculous bit of theatre where they know you’re lying, you know you’re lying, you know they know you’re lying, and they know you know they’re lying. But everyone has an unspoken agreement to pretend that everything’s fine. Or maybe people have fooled themselves into thinking this is what they want from life because they can’t see any credible alternative. I don’t have the answer; these are deeper waters than I’m qualified to wade through.

Chuck Palahniuk and David Fincher beautifully captured the absurdity of the modern corporate man in the ultimate bro movie Fight Club (1999). The protagonist discovers the existential dread of getting everything society tells him he wants, only to feel empty. The first scene that comes to mind is the workplace presentation.

Personally, I’d rather be washed out to sea by a tsunami and have nothing to hold onto but a floating cactus than be forced to restrict my freedom of expression and be crushed into thinking I must act a certain way to fit in with everyone else. Looking at the popularity of movies like Fight Club, I can’t help but guess that a silent majority of the population probably feels the same way but doesn’t have another way out. I’ve been there myself, having experienced the culture of working in big corporate organisations.

I can only guess why most property investors have decided to get into investing. I suspect it has something to do with hope. For me, it was a lifeline out of that world. I was incredibly lucky to stumble onto the solution early on in life, and for anyone reading this, congratulations! You have as well, and you don’t have any idea how fortunate you are to have found the answer. If you weren’t born wealthy, there are only two ways out of the rat race.

The first is to start your own business and work for yourself, which is a risky move with a high probability of buying yourself a low-paying job. Particularly in developed countries where the secular trend is for all businesses to be eaten up by big businesses. The second is to find some investment that beats the rate of monetary debasement, which, by my calculation, is around 10.5%. This is also extremely difficult without using leverage (borrowing money to invest).

The thing to understand with leverage is that it magnifies both the upside and the downside. So, to be effective, the asset needs to have a specific set of characteristics. Namely stable returns that generally trend upwards without many sharp downturns that will wipe you out. The good news is that property is the perfect vehicle to lever up as it fulfills those requirements.

Most average properties using a 90% LVR have an internal rate of return of around 15-20% over the long run and up to 30-40% during the final years of a bull run. If we consider what this means for a moment, the average returns of the best hedge funds in the world, such as Bridgewater, run by legends of macro investing like Ray Dalio, are being comfortably beaten by ordinary mum-and-dad investors buying property. While it’s not as cool and sophisticated, I’ll take practicality and effectiveness over sophistication any day of the week.

Posted by Gavin Chau, on 16th Apr 2024