Property investment has huge rewards even in todays real estate crisis. Property investment will give you a better return than stocks over 10 years. Why property, some people ask when looking for an investment. Well, as far as I am concerned, property investment is, and always has been, the most powerful type of investment for building wealth. It has been said that over 90% of the world's millionaires got there by owning property. The reason property investment is such a powerful way to build wealth is due to one key concept: leverage.
One of the great things about property is it enables you to leverage the $20,000 to purchase a $100,000 investment property (in other words, borrow the remaining £80,000 from the bank). Now say the property market slows down to an average of only 6% return for the next 10 years. This would probably be a fair estimate in the US, although there are plenty of markets which are growing more rapidly, lets concentrate on UKSfor this example.
Money in Property - assumed return: 6%
Now $20,000 ($100,000 property value - 80,000 mortgage)
1 Year $26,000 ($106,000 property value - 80,000 mortgage)
5 Years $53,823 ($133,823 property value - 80,000 mortgage)
10 Years $99,085 ($179,085 property value - 80,000 mortgage)
Make sense? So you make 6% increase on the full value of the property, not just the $20,000 which you initially had. This is the power of leverage. In effect you have increased your initial investment 5 fold in 10 years! So even if the stock market increases by twice as much per annum as the property market over the next 10 years, you can make far more money from property.
Now for simplification, I have not included lawyers fees, agents fees or stamp duty. Admittedly buying a property has more additional costs than buying shares, but would not make a significant difference on your profits - around 4% in the UK, higher overseas.
One thing to point out is that in the short term you have greatly increased your potential loss ie if the property went down by 10% in value, you would lose more of your initial investment, because the property value would go down to $90,000, you still owe the bank $80,000, so you now have $10,000. In comparison if the stock market dropped by 10%, your investment would be worth $18,000, as only lose 10% of $20,000. Property investment is a great place to park your money for the long term.