Leveraging Your Way to Millions

Many working people has made their wealth through either property investment, stock investing or setting up their own business. Sorry, I have to say that the majority bulk of people made their first million through property investment. Why is it easier to earn from property?

Firstly, one may think that a house may cost $300K now. In 10 years, if property price rise by 30 percent, one could have made $90K profit. $90k capital profit in 10 years is equivalent to $9K each year. It works out to $750 per month excluding rental yield.

Rental yield is actually quite low at average of 2.5 to 4 percent yearly . This is because, one had to take into the account of the interest incurred when using a loan. At 2.5 percent yearly, this works out to $625 monthly rental. This amount may be low but borrowing interest has been included in the calculation which means it is pure profit considering there is no fluctuation in housing prices.   
Why do i say it is easier to earn from property investment? The reason is simple. One made use of leverage to buy. That is one may just have the money to put downpayment for the house. He is actually using advanced money (money that he does not have now) to purchase a asset that likely to appreciate in price years down the road. While he is struggling or making the loan payment, his money is constantly working for him since the day he signed the loan agreement to purchase the house. Author of famous book “rich dad, poor dad”,   roberto kiyosaki is a great advocate of property investment in which he manage to acquire houses after houses even before loan is paid. He leverage on the low interest, his tenant money and the bet that housing price won’t collapse.
This is unlike other asset classes in which loan(leverage) are not possible. Let us take a look at compunding interest, one may get 7.5 percent yearly compound interest but the money will not balloon up the instant the money is put unless one have huge capital to begin with. Using rule of 72, at 7.5 percent interest, one will double his initial sum in about 9.6 years.  Yes, that is quite fast. However, if one has just the capital of 25K initially (same downpayment amount for a house), with no leverage. He will earn 25K at the end of 9.6 years if he does not add additional  money to compound. Even if he put in $600  additional monthly to compound, he will earn about 51K interest.
In comparison with property purchase, one will earn $75K in rental and a capital appreciation of $90K. total: $165K. This is about 3 times more than using compound interest. Why? This is because, the house asset was given to the buyer even though the buyer has not fully paid the loan.  The buyer has use leverage (using money he does not have) to have a asset making money for him the instant he signed the loan agreement. Hope you Understand now?


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