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.
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,
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.