NZ capital growth

This quoting of returns on property comes up a lot, and it is not a relevant figure anyway. Here’s why:

If I put $20k in a Term Deposit and get back 6% return per year (good luck), then my return is $1,200 per year. Over 10 years my total return is $12,000 on my $20,000.

This is as much as I can get for my $20k in the Bank, unless I re-invest the interest and enjoy compounding interest. The problem is I have to pay tax on the interest, so my real return is much less. Not only that, but my capital ($20k) has been eroded by inflation.

But if I buy a property, I introduce the marvel of LEVERAGE.

If I put the same $20k into an I.P worth $100k, borrow 90% finance (including costs), and it goes up by 7% per year the result is:
– capital growth – $7,000 per year.
Over 10 years is $70,000 (most well purchased property will actually double in value every 10 years, so let’s just double it to $200k which is 10% per year).
– I have managed to buy a property that is cashflow positive AFTER tax by $20 per week. This is $1,040 per year – $10,400 after 10 years; tax free.

I pay nothing off the principal and don’t re-invest the pos cashflow back into the loan. At the end of 10 years I have:
cap gain: $200k – $90k = $110,000
pos cashflow: $ 10,400
TOTAL: $120,400

My return on my original $20k is approx 600%, or 60% per year.
And if you look look at just the cashflow alone, which is tax free, the return is $10,400 after 10 years (5.2%). Not exciting, but it is a NETT return.

This is not an unusual circumstance either. The above formula is done by me and many others every day.

By using LEVERAGING in the form of finance, good property selection, depreciation and tax deductions, rent return and capital growth, I can achieve far higher returns than 7%.

Oh, and one last thing; if I buy properties using equity – none of my own cash, and the properties are c.f.p.- the returns are infinity.

Cheers,
Marc.
[email protected]

“we get sent lemons; it’s up to us to make lemonade”