If I said there was a term deposit that paid 10% per annum I’d bet there’d be investors clambering over one another for a slice of the action. After all, a $100,000 investment would turn into $260,000 after ten years.
So what if you used that $100,000 as a deposit to buy a $500,000 property? To achieve the same return on investment in a ten year period that property would need to grow at an average annual rate of 2.5%. That’s the upper end of the Reserve’s inflation target and less than half the average annual return of our capital city property markets over the past three decades. Had your property achieved a growth rate of 4% per annum, your $100,000 would turn into $340,000. That’s the equivalent of a 13% annual return on your initial investment. Such is the power of leverage!
The unfortunate fact is that we’re conditioned to believe that if a property doesn’t double in value every ten years, it’s a poor investment. In reality, an annual return of 2.5% still provides a higher ROI than what you’ll likely achieve with alternate asset classes.
Ultimately, life is governed by the choices we make. Given our finite resources, it’s important we make the right ones. Property investment might not be for you, but you owe it to yourself to explore all your opportunities.