Imagine I handed you $100,000. What would you do with it? A lot of people might choose to put it on their mortage. Some people might take a much-needed holiday. But if you’re here, you probably already know there’s a better way… investing!
So, how would you use $100,000 towards creating future wealth? I’ll walk you through a few options and compare the results over a 10 year period to see which one performs the best. You might be surprised!
Your first option is to put your money into a savings account.
At the time of writing, you’d be lucky to get 3% interest in a saving’s account. So, let’s do the math. $100,000 with 3% interest, compounding yearly for 10 years comes to $134,392.
So you will technically earn $34,392. But really, you’re barely ending up in front. Here’s why…
Putting your money into a saving’s account is like doing nothing with it, because a third of the interest you earn (assuming you’re sitting in the 32.5% or 37% tax bracket) will go to tax. But more importantly, the target inflation for Australia is 2-3% per annum, so the interest you receive might only just help you keep up with inflation. To stay in front of inflation, pay the tax, and actually make some decent money, you’d need to get getting a much higher interest rate.
Your second option is to put your money into shares.
The average return in the Australian stock market tends to be about 7% – one year will be a bit more, the next year will be a bit less, but over the 10 year period, it will even out to about 7%.
So, let’s do the math. If you put $100,000 into shares for 10 years, increasing at a rate of 7% per year, you’d end up with a portfolio worth about $196,715. So we’ve essentially doubled our investment, which isn’t too bad, but possibly not good enough to retire on!
Property with 80% Mortgage
Your third option is to purchase a property with an 80% loan, and a 20% deposit.
The biggest asset you could buy in this situation would be a $400,000 property, because you’d need to borrow $320,000 for the 80% loan, and we’d put in $80,000 for the 20% deposit, leaving us with $20,000 to cover acquisition costs like stamp duty and legal fees. We’d avoid Lender’s Mortgage Insurance by sticking with the 80% loan.
So, what would happen to our $400,000 property in 10 years? Historical trends from the last 50 years show that the average property growth in an Australian capital city over a 10 year period is usually about double (sometimes more). So at year 10, we’d most likely have a property with $800,000. If we had an interest-only loan, and we didn’t pay off anything, we’d have equity to the value of $480,000 from our initial $100,000 investment.
The reason we get such an incredible result with property is because we can take our $100,000 investment and use leverage to get a bigger asset at $400,000.
And you also have to consider that our property that rented initially for $400 (covering costs), has increased its rental rate to $800 per week, and outgrown costs, resulting in a passive income.
Properties with 95% Mortgages
But actually, you can take things a step further with property.
What if we went and got into two properties? It IS possible with $100,000 to get two $400,000 properties, mortgaged to the maximum 95%, with 5% deposits of $20,000 each, leaving $60,000 for our costs, including Lender’s Mortgage Insurance. It might seem a little crazy, but it’s well worth it because…
In 10 years, both properties have doubled in value to $800,000, with $420,000 equity in each property, or a total of $840,000 equity. Between both properties, you are now receiving $1,600 per week rent, which gives you a nice passive income (once you take out your costs).
ALL of this is from the same starting investment as the first three examples. Now you can really see the power of property and leverage.
Which One Would You Pick?
So, let’s be honest with ourselves… which one of those four options did you choose at the start? Now that you’ve seen the potential results, would you pick something different?
But Wait, I Don’t Have $100,000!
Huh, are you serious? You didn’t win the lottery? You don’t have a wealthy benefactor? You haven’t spent the last few years slaving away and saving every dollar?
First of all, you might actually already have $100,000 to invest if you already own your own home and have available equity you can use towards an investment property. But if you don’t yet own your own home, you might have a family member willing to lend you some money to get started. Otherwise, you can earn and save the money in a relatively short time. Here’s how (in a nutshell!)…
If I was starting from scratch, like you, what I’d do is work incredibly hard and save every single bit that I could for a year, living as cheaply as possible. I’d work a day job and a night job, eat two-minute noodles, and avoid any unnecessary expenses. Then at the end of that year, I’d use the money to get into my first property and then go back to living like normal.
For most people, it IS possible to get the money once you know how and once you see the results you can get from investing the right way.
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