Why I Love Property
I was recently asked by a journalist when they were interviewing me, “Why is it that out of all the asset classes out there, why do you actually love property as a form of investment?”
And it’s pretty simple. It’s actually leverage. The fact that I can use the cash that I’ve got and leveraged it to buy a much larger asset, and then I can get the return on that much larger asset makes it (for me), the independent umpire when it comes to choosing an asset class. I remember the very first time that property investment was introduced to me was when I was watching the Ray Martin Show back when I was at Uni, during the day when I was at home having lunch. And I wanted to watch this person being interviewed. Her name was Jan Somers. And she’s been a great virtual mentor for me and I’ve recently had the chance to meet her on The Property Couch Podcast. She was up on a white board talking about how you can buy property, use the correct debt to buy that property, you can get some taxation benefits that can help you cash flow the property, and over time they will go up in value. And it kind of made a lot of sense to me, but as I’ve gone through my own personal journey in investing in property, and helping hundreds and hundreds of clients, it’s become crystal clear to me why I choose property over any other asset classes and that’s because of its advantage in leverage.
So, in terms of an example, let’s assume we’ve got $100,000 and we’re going to, whatever we choose, we’re going to get 10% on it. Let’s assume we get cash, we get 10% on the cash at the end of the year and make an extra $10,000 per annum. But what if I go and use that $100,000 and I buy shares, and the banks say they’ll leverage that 50%. So I could use that $100,000 and get $100,000 loan and all of a sudden I’ve got $200,000 to go and buy some shares and I get the return on that. 10% is then $20,000 so it is actually better than the cash. Then if you actually extrapolate that out to property, the banks will lend you up to 95% in some cases, but let’s be conservative, they’ll lend us 80%. So if I’ve got my $100,000 I can borrow another $400,000, put it together with my $100,000 so then I can go and buy a property for $500,000 and 10% on $500,000 is $50,000! So using the same $100,000 pool of cash that I started with, for cash, I’ll get $10,000 per year, for shares, I’ll get $20,000 per year and for property, I’ll make $50,000 per year. On paper it would be an absolute no-brainer and now the leverage is what gets you into it. But if you were going to leverage into a property, you actually need to be comfortable with debt.
So typically you have a definition of good debt versus bad debt. And I actually think that’s still not definitive enough. I think there’s three types of debt: Horrible debt, Tolerable debt, and Productive debt. And so the horrible debt is going to keep you poor. It’s credit card debt, store debt, you can go out and buy the latest television, the clothes on credit card and the moment you grab them they’re going down in value. There are no depreciation benefits, and you’ve got this debt to pay off for buying those assets. They absolutely keep you poor if you continue to buy goods using horrible debt. Then next one is what I call Tolerable debt. Typically what you use to buy the family home. But if you think about the good debt and the bad debt definitions, the family home would come under the bad debt definition because it’s not income producing, and there’s no depreciation or benefits. But I don’t think that it’s bad debt at all. And the reason I think that it’s tolerable is because you’re the only one paying it off, you’re the person that has to solely be responsible for the debt, but if you buy the right property, it’ll go up in value and it’ll feed the nest egg of the family. So therefore, I don’t think it’s bad debt, it’s tolerable debt. The third type of debt is that productive debt where you buy income-producing assets that go up in value and does have those depreciation benefits. So, therefore, you can leverage into these assets and help grow your wealth bank, and if you think about a lot of wealthy people in this country, they’ve got a lot of property, and they’ve often got a lot of productive income producing debt attached to that.
If you’re going to buy an investment property, you’ve got to be comfortable with debt, but if you think about older generations where they say pay cash for everything, never get into any debt. But if you think about it in terms of those three definitions, avoid the horrible debt, make sure you’re efficient on your tolerable debt, and get as much productive debt as you can. That’s really going to serve you when you build that portfolio. So think about the two kids that are in the playground. You’ve got one that’s got a sad look on his face and the other one is running around quite happy. So they say to the sad kid, “What’s making you so sad?” He says, “Well we’re so poor, we owe the bank $10,000.” And the rich kids says “Well, we’re so rich, we owe the bank $1 million”, and it’s really around changing the paradigm for which you look at debt in terms of that horrible debt, tolerable debt, and productive.
For me, whenever I’m asked which is the best asset class, because the property people are going to say property, the shares people are going to say shares, the cash people are going to say cash, but for me the independent umpire is how much you can get as a leverage exercise. You can safely leverage into more assets so you can get the compound return of a much larger asset. So it’s very simple, it’s the very reason why I love property. Leverage.