 |
Property gearing allows you to purchase a sizable asset with a small depositDolf de Roos has done much to demystify and clarify the issues related to property gearing. He asks you to imagine a lump sum of money to invest (say a $100,000) and then poses for questions: How many dollars worth of stock can you you buy with $100,000 cash? The answer is self-evident-you can only buy $100,000 worth of stock. (This excludes the option of buying shares on margin but we wont consider that here) How many dollars worth of property can you buy with hundred thousand dollars cash in? His answer is that you can buy a property which is substantially more than this from $200000-$1000000. In effective you have an asset and million dollars that can generate rental income for you. This show the tremendous benefits of property gearing. This point is that when you buy stocks you have to put up the the entire purchase price in cash. When you buy property you have the banks and other lending institutions giving new money. They are usually reluctant to lend money to invest in gold or platinum but are more than willing to lend you money for property investing. Property is considered a safe and secure investment. Property gearing is also a huge advantage. A huge advantage of this is significant leverage. If both stocks and properties went up by 10%, then your stocks would have gone to $110,000 meaning that he would have made a 10% return on your invested capital. Your property would similarly have gone from $1 million to $1.1 million (a profit of $100,000) meaning that he would have made 100% return on your invested capital. Another example of brilliant property gearing! Question twothe moment you buy your hundred thousand dollars worth of stock using $100,000 of cash, how much is a stock worth? A stock is worth the price it is trading at as determined by which willing buyers unwilling sellers agree to transact a parcel of shares. And the value of the share is essentially determined by the last traded price on that stock. The moment you buy you one million-dollar property using your $100,000 cash and a mortgage of $900,000 how much your property worth? Essentially the property investment could be worth a vast amount less (say $600,000) or it could be worth a significant amount more ($1.5 million) this could be due to the fact that you may have unwittingly bought a property which you pay too much foror it could be due to the fact that a seller was desperate to get rid of the property you and you scored by only paying $1 million. There are many reasons why a property could be sold at a massive discount and these could be: Divorce-unfortunately this is a reality and very often couples will be forced to liquidate their assets in a bitter battle. Not getting a property appraisal. An owner may think that he knows the price of the property and may unwittingly let a property go at a bargain. Questioned threeWhen you buy your hundred thousand dollars worth of stock for a purchase price of $100,000, what can you personally do to increase the value of your stock portfolio? Your options are very limited because as a small investor if you have very little control over the running of the company. When you buy your $1.5 million property for a contract price of $1 million using your $100,000 cash and a mortgage of hundred thousand dollars, what can you do personally to increase the value of your property? They are a multitude of possibilities. He could do something as simple as painting it and then selling it for 20 or $30,000 more. You could replace the gutters, curtains, modernizing the bathroom,, install an alarm system, clean the carpets or pave the driveway. Question 4 You got hundred thousand dollars stock with hundred thousand dollars cash that was it hundred thousand dollars the moment you bought it. It has doubled in value to $200,000. What must you do to enjoy some of the increased value? The only you can do is sell either a portion of the shares for the entire share portfolio in which case you would be subject to capital gains tax. You bought $1.5 million worth of property for a contract price of $1 million using $100 000 cash and a mortgage of $900,000. It has doubled in value $3 million. What must you do to enjoy some of? What you can do is get the property revalued and if the earliest $3 million you can finance this $3 million and have access to the equity in the property. The equity is not taxable because it is not income. With effort and persistence, a knowledge of property investing can provide you with a significant stream of income particularly if you have them paid of and you are getting passive income from them. Beware also of the phenomenon of negative property gearing - if there is substantial contraction in the market such as we have now with the sub-prime melt-down, you could be caught on the negative side of the equation. Provided you have the resources to ride out the storm, you should be OK.
|