This got me thinking the other day…
I was watching some business show and it reported on the average return of superannuation funds over the last 15 years.
…4.9% per annum.
You shocked?
I am a little bit. I know there has been some bad years of late, but ten of the fifteen years were pretty good.
It begs a question as to what exactly did they invest in?
That's an easy one.
The stock market.
So I thought to myself, what did I invest in 15 years ago that might be able to contrast against the pathetic returns of Super. Here's what I dug up.
I bought a property in 1997 in Brunswick, Melbourne for $104,000. I had to put down around $27,000 to cover the deposit, stamp duties and costs. The interest rate back then was around 6%.
…it was negatively geared by about $150 a month.
I sold that property in 2004 (don't ask – a long story) for $349,000.
OK, so let's calculate a return.
I invested $27,000 in 1997 and returned $245,000 in 2004. That's a total return of 907% in 7 years. An impressive figure, yes.
But here's another way of looking at it that's a bit more real.
The average annual return would be a massive 38% compounded. I won't explain how compounding works, but it's important.
(Yes, that's right. I triple-checked the numbers).
Now of course, that would not be my net, because I had a little bit of negative gearing going on and I had to pay some capital gains tax when I sold.
But whichever way you look at it, it completely “crapped” on the the Super investment in half the time.
You're probably saying, “Yes, but if you invested directly in to shares, you would have averaged 11% or better.”
Yeah, sure I agree. But it would not come close to these types of figures.
Now, there are a lot of reasons why…
The biggest one of all is the leverage you can get in real estate on a cash on cash basis. Nothing beats it.
Even when you take in my net cash-flow loss per month, (which incidentally went positive about 3 years into the deal) and the capital gains tax paid, this deal averaged around 33% return per annum compounded on my cash invested.
33% per annum compounded for 7 years.
Again, nothing comes close to this type of investment.
Here's the best part of it. For that 7 year duration, I did very little, hardly lifted a finger, no renos, no hard work and it doesn't get any easier than that really.
Incidentally, if you're curious, that property is probably worth about $550,000 today… Ouch! It hurts when I say that.
So why am I telling you all this?
Because 1997 was a lot like 2012.
Here's what I'm talking about…
– The interest rates are about the same.
– The sentiment around real estate is the same.
– We've come off a serious global crisis… back then it was a recession.
– And rents are starting to match mortgage payments in a lot of places (this happened in '97)
…look, nobody knows what's going to happen in the future. But I know one thing for sure. That I'd rather take my chances with real estate than anything else out there. You can't sit on the fence. I mean, how many real estate cycles do you want to miss?
Imagine looking back in 7 years (again) and saying, “Damn, I knew I should have got involved when interest rates were 5-6%.”
You need to seriously sit down and start thinking how you can generate a 900% return on your investment in the next 7 years and then work out how to do everything within your powers to buy as much real estate as possible in the next 2-3 years.
It's happening now. More and more investment style properties are coming on the market at a virtual neutral cash-flow position. Some even slightly positive. And these properties are in hot growth areas.
Time to get serious. Time to get to work.
Signed with Success,
Jon Giaan
Knowledge Source
P.S. Hey, you might have a similar story. Let us know! Let's start telling folks that they're crazy to invest in anything else. If you truly understand cash on cash returns, why would you? Your thoughts, please?
P.P.S. The only other place you can get these crazy returns is running a business. But unfortunately it's hard work, most people don't know what they're doing, and there are certainly no guarantees.
Alison says
Hi Jon,
I agree with your comments. I just bought my first home. I saved up for the last 10 years put in 40% and even with all the re-payments and such a low interest rate I’m paying less than my rent!! so it was a no-brainier. my plan over the next 2-3 years is to build on this for exactly the same reasons you gave.
thanks for your comments i enjoy reading them. I’ve been on your list for a few years…and can see how much you have grown. i was interested because of your professional sports background which is similar to mine but a different sport:)
thanks
Alison
pisces says
Excellent story! Why are Australians being forced to put their money into managed super funds and often told by their employer which fund they may use, when the fund managers are worse at returns than the average Joe putting that money in a bank account?
Going out and buying a house from a real estate agent, renting it out and hoping it will increase in value is a strategy, but not a guaranteed one.. House prices have been known to plummet in the past. Your point about low interest rates currently make it a better bet but good research and education is needed first. And, I do not think that Australia has really suffered the full effects of the global crisis that is continuing to unfold. I think that is still to come.
Paul says
Hi Jon,
I have been following your emails for some time. This particular story of yours is exactly like my wife and Is, (we purchased for the same price in the same year) only we sold a couple of years later for a slightly higher return. We were fortunate enough to have two properties however and leveraged off them to purchase others. We are currently putting our returns with some leveraged funds from our personal home into a commercial development. Do your really think that particular set of cycle/events is repeatable in the next seven years? I hope so I’d like to do that again.
Cheers
marty says
Hi Jon,
I have a similiar story. Purchased a art deco block of 4 flats in st kilda in 2000 for $950k. Had it recently valued at $2.5m and have done nothing to it. Will renovate soon and do small development in the backyard to increase returns.
Also purchased double storey vic terrace in albert park in 2001 for $630k as a investment. Recently did new fitout for $60k (Materials only) and had it valued at $2.1m.
Best of all ,with both purchases i borrowed full amount + stamp duty from bank by using equity. Looking back i have had great growth and used none of my own cash except for servicing loans.
Buy the right property, right location with high land value and never sell.
I have done this many times over and it works for me!
Trevor says
I bought in Adelaide in mid 2006. 1st home owners scheme. Borrowed 110%, as one could back then. Borrowed $60k to do reno, and am putting it on market next month asking $295-315k. All the time I have had the place I have paid less per week than would have paid renting. Take out the $195k owing and rest is profit without having put any capital in. Why would anyone want to rent?