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This is an interesting question.
Many people are drawn to buying their first home to live in, but the question is this:
Is this the smart thing to do in today’s world or is it an emotional decision that may cost them considerably over the years ahead?
The average mortgage term for a new home now is around 30 years. So let’s say purchased a family home for $500,000, allowing for interest over next 30 years you would pay back around $1million.
There is a 3 to 1 rule, which is this, you have to earn 3x what you pay for your mortgage as 1/3rd will go in tax, 1/3rd will go in the cost of living over next 30 years and 1/3rd for the mortgage.
This means that a $500,000 mortgage may cost you $3million in future earnings to eliminate.
Wow that is scary! It is also the reason that so many people struggle financially throughout their lives and then retire broke.
They simply didn’t understand finance in the first place.
Now what if they had Invested in a property instead and rented where they wanted to live? Would this be so bad considering that the average family changes houses every 7 years, why not rent for this term and invest instead?
See here is the trick, the Rich borrow money for property that goes up in value. Say they buy 2 investment properties valued at $500,000 each, that’s $1 million dollars in bank loans.
If in roughly 10 years those 2 properties have doubled in value, that gives you $2 million in property value. Take away $1 million in loans and you have $1million in profit.
You could then sell one of those properties and own the other outright.
While the first home owner still has 20 years to go on the family home, the Investor has used financial leverage to get leaps and bounds in front.
You see the investor had two tenants and the taxman helping them cover most of the costs and may have only needed to put in a small amount each week to cover the costs.
Rich think is:
1 million in loans equals 1 million in profit in 10 years.
Poor think is:
Take out $0 in investment loans, but don’t realise this will cause $0 profit in 10 years, and leave 20 years to go on the family mortgage.
Two people working for another 20 years at 40 hours per week each for 48 weeks per year = 76,800 extra hours worked to achieve what the investor possibly achieved in 10 years.
Why? Because the emotion of owning their own home outstripped financial logic.
Is this emotion of owning your own home worth going to work for an additional 76,800 hrs? You decide!
Starting to get the picture?
I have observed two main reasons why people don’t create wealth, struggle throughout their life and then retire broke.
- Fear:
They are too scared to act. The fear of borrowing money prevents them from becoming an Investor. Yet they should fear a life of poverty more, ending with a non-sustainable pension.
- Lazy:
Easier for them to do nothing. Learning is a hassle for them and sadly they will work for far longer than they need to and retire broke. All this could have been avoided in a few hours of education over a coffee to learn some smarter financial strategies.
Why is property so powerful in creating wealth?
The reason is very simple, over time property goes up in Value.
The average property prices in Sydney in:
1960 = $8000
1970 = $34,000
1980 = $120,000
1990 = $240,000
2000 = $360,000
In Sydney 2015 the average was $960,000.
With the Tennant and Taxman helping, most investors are paying very little out of their own pockets to purchase an investment property.
Let’s look at that again, you buy $1million worth of property and its almost self-funding. It will make you $1million in profit over 10 years, can you see why the Rich want $10million from the bank?
Owning a number of properties can give you an opportunity to spoil your family with holidays, nice furnishings, a financial stress free environment, new cars, school fees paid and the list goes on.
If you want to create wealth, then you will need to learn to master your fear of debt.
Make the banks your best friend in your goal to be financial free.
Disclosure Statement
We would like to fully disclose to you that Invest Partners Group is not a financial advisor, and is only given general advice and such advice, has not taken into account your individual circumstances, objectives, financial situation or needs, and that you should assess your own position or consult an appropriately licensed financial advisor.
Should you require specific advice in that regard, you should speak to a licensed financial advisor.
