03 Oct How do property investors achieve growth?
When you invest in property, compounding growth is achieved when the value of your property increases so that the amount of equity you have available grows along with it. The goal is then for this increase in equity to be used to buy further property, creating even more growth. As the number of properties in an investment portfolio then increases, the compounding effect escalates accordingly, so that profits are able to be accrued more quickly.
Compounding growth is therefore a clear goal for both new and experienced property investors, and a positive way to achieve long term growth and profit.
How does compound growth work?
A key to effectively achieving compound growth is to create the circumstances in which your investment property generates earnings, which you then reinvest to generate further earnings.
The following is a straightforward example that can help to explain the concept: If you buy an investment property valued at $500,000, and it increased in value at a rate of 6% per year (the average historical return on property in Australia), it will increase in value to $530,000 after the first year, $561,500 by the end of year two, with this trend continuing so that the value of the property (and the amount of equity that can be accessed) increases year on year.
This means that after 30 years, a $500,000 investment property is likely to be worth $2.872 million on common trends.
Likewise, the equity available in your property, which can be used to re-invest and grow your property portfolio, is likely to be in the region of $2.349 million.
Creating compounding growth as part of a property investment strategy
One of the secrets to understanding successful property investment is that it is the length of time that you hold a property, as opposed to when you enter the market, that ultimately produces profit.
This is because time is essential to achieving compounding growth. You need to own a property for a sufficient length of time so that it can increase in value (as outlined above), in order to create more equity with which to re-invest.
A strategic approach to property investment is required
Given the above, the path to an ever increasing property portfolio — and accompanying growth in profits — seems relatively straightforward.
However, without strategic planning your investment plans can easily stall, as evidenced by data from the Australian Tax Office (ATO) that found around 71% of Australian investors own a single property, 19% have two properties in their portfolio, and only 6% of investors own more than three properties.
What is the cause of this? Why do so few investors go on to build substantial portfolios containing multiple properties?
Positive cash flow is important for growth too
For a compounding growth strategy to be fully effective and facilitate a substantial growth in portfolio size, it also needs to be accompanied by a sufficient growth in rental income so that positive cash flow can eventually be built up over time.
This is an important part of a compounding growth investment strategy because as the number of properties in your portfolio increases, the amount of debt you need to service increases at the same time. The maintenance and other associated costs of owning property will increase, too.
Therefore, if an increase in the size of your investment portfolio is not accompanied by a sufficiently large increase in rental income, you will likely have less disposable income available to you and therefore less borrowing power, restricting your capacity to invest further.
How to achieve compounding growth when investing in property
As can be seen, different elements need to come together in order to implement an effective investment strategy that delivers compounding growth.
In short, an investment property needs to deliver high price growth and consistent positive cash flow at the same time. Although it sounds relatively simple, this is not easy to achieve.
For instance, price growth needs to happen at a sufficiently rapid rate, as if it happens over a very extended period of time, equity growth may be too slow to be fully capitalised on. Therefore, you need to have the knowledge and understanding of the Australian property market to select locations where an appropriately high rate of growth can be achieved.
Likewise, your initial investments need to be in areas where it is reasonable to expect that rental income will increase sufficiently quickly to generate positive cash flow so that you can access more borrowing. Without a thorough understanding of markets Australia wide, this sort of information and data can be difficult for the individual investor to access and use successfully.
However, while this may seem daunting, there is no need for concern — Power of Property is here to help.
Talk to Power of Property about implementing an effective investment strategy
Power of Property is committed to helping you grow your property portfolio and your wealth.
We demystify the process and give clear, comprehensible, well researched industry data that will support you in making well informed decisions, and put our extensive experience and expertise at your disposal.
Our network of industry professionals means that we can connect you with a variety of experts, including mortgage brokers, conveyancers, financial advisers and accountants, all of whom you can rely on to provide first rate advice and services.
Speak to Michael Lawton or Danielle Charlton to arrange a one-to-one property investment strategy session today.