Investing in properties is a sure but slow way of getting rich. Many people have become rich through property investment by steadily working at it. You don’t need to have a lot of money to start investing in properties. Because of the power of leverage, you can buy properties using other people’s money. The basic idea of property investing is that the lesser your money you can put into buying a property, the greater your chances of making a higher return on your investment. To better understand the power of leveraging, let’s compare investing in properties with investing in equities.
Power Of Leveraging:- Properties vs Equities
By investing $100,000 in equities, you get to control $100,000 worth of equities. A 10% increase in the price of your equity would generate a 10% profit in your investment (i.e. $10,000) while a 100% increase in the price of your equity would generate a 100% increase in your investment (i.e. $100,000). In contrast, by investing in a $100,000 property, you do not need to come up with $100,000 as you can apply for a loan from the bank to finance a major part of your purchase. It is common for banks nowadays to offer up to 90% margin of financing to assist you in your property purchase. Therefore, by investing only $10,000 of your money, you get to buy a $100,000 worth of property in which 90% of the property price is financed by the bank. A 10% increase in the price of the property (i.e. $10,000) would already generate a 100% increase in your investment as the money you put in is only $10,000. Wouldn’t it be easier for a property to increase by only 10% compared to the price of an equity to double before you make a 100% return on your investment? That’s the power of leveraging at work.
Capital Appreciation vs Rental Returns
To be successful in property investment, you will either need to make a huge capital appreciation from the disposal of your properties or generating good rental returns from your tenants. If you prefer to buy and sell properties only, then you will need to have the holding power or ample reserves to be able to meet your monthly bank installments (for properties that are financed via bank borrowings) before you eventually dispose off the properties at a profit unless you paid for them in full by cash. The other common option for most of the property investors starting out would be to rent out their properties to good paying tenants who are helping them to meet their monthly bank installments. Make sure that the monthly rental you receive from the tenant is more than the monthly bank installments to enjoy a positive monthly cash flow.
Once you have successfully rented out your property, rinse and repeat the process to build up your property portfolio and start enjoying this passive rental income so that you can let your properties appreciate over time to make a good profit later should you decide to dispose them off. Therefore, it is imperative for you to be a good and successful landlord in order to be a successful property investor. Always keep in mind that your tenant’s rent is paying for your mortgage and other expenses and this will eventually make you rich in the long run.
In my next article, I will provide some of the important tips to be a successful landlord in property investment, so stay tuned…
