Here's an example, Bill and Ted both have $40,000 in cash. Bill puts his down as a deposit on a property, while Ted uses his to buy shares.
Let's assume that in the first year, the value of Bill's property increases by 9.8% - and Ted's shares go up by 12.6%. Which was the better investment?
Bill's Property |
Ted's Shares |
Deposit $40,000 |
Deposit $40,000 |
Banks will loan 90%
$360,000
|
Banks will loan 60%
$60,000 |
$400,000 @ 9.8% Capital Growth |
$100,000 @ 12.6% Capital Growth |
Return $39,200 |
Return $12,600 |
Bill get's over 3 times a better return in property. Bill's equity has gone up from $40,000 to $79,200. That's a reurn of just under 100%.
Ted's equity has gone up from $40,000 to$ 52,600, a return of 32%.
So even if the shares have twice the growth factor, the property offers more than twice the growth in true capital worth (equity) - simply because of leveraging ability.
Source: "Seven Steps to Wealth" by John L Fitzgerald
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