Leverage in action

When people look at investing, there are three main areas to choose from: shares, property or cash deposited in interest bearing accounts.

A huge advantage of property is the added benefit of being able to highly leverage an investment property. This is where you use a small portion of your own money along with a large portion of borrowed funds to buy a property of a value far beyond your initial cash holding.

Let’s look at an example:

• If you invested $10,000 into shares that were growing at 10%, in 7.2 years they would be worth around $20,000.
• If you had used that $10,000 (either cash or equity) as a 5% deposit on a $200,000 property and borrowed the remaining 95% plus establishment costs and your property also grew at 10%, then in 7.2 years your investment would be worth $400,000.

By leveraging your investment you gain an extra $190,000 over 7.2 years

Due to the power of compounding, if you looked at the above example over a 21.6 year period, the un-leveraged shares would be worth $80,000 and the property $1,600,000.

By leveraging your investment through property you gain an extra $1.52 million over 21.6 years

Also, as capital growth occurs you can use this equity to borrow more funds and repeat the process over time to develop a multiple property portfolio.