Why property? Some people ask when looking for an investment. Well, as far as I’m concerned, real estate investing 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 ownership is such a powerful way to build wealth is down to one key concept: leverage.

Once I realized this, I didn’t look back. Now, if you’re an experienced investor, this may be obvious, but for the benefit of those who haven’t seen the light of day, let me explain… Leverage is your ability to increase your returns by using other people’s money (in this case, it is usually the bank’s money).

To give a clear example, let’s say you have £20,000 to invest. This can be a lump sum or through the release of principal in your primary residence.

So what is the best way to invest this money?

Option 1 – Keep it at your local bank

Considered by some to be the safest option, “at least you can’t lose it and you get a guaranteed increase in value,” the argument goes.

Money in the Bank – assumed return: 4%

Now £20,000

1 year £20,800

5 years £24,333

10 years £29,605

As you can see, after 10 years, you have made virtually no progress at all, especially when you factor in the effects of taxes and inflation.

Option 2 – Stocks and Shares

Now, for the last 10 years, although certainly not the last 4 years, the stock market has been very popular. However, I cannot accept that it is a better bet. When I read that the stock market is a better bet in the next 2 years as it will rise 15% per year as opposed to the real estate market which may rise 5% per year this does not factor in leverage so paints a very distorted picture!!

And I’ll show you why. It’s hard to say what kind of return you could get on the stock market, but let’s say you get 12% a year for the next 10 years, highly unlikely, but let’s get on with it. So if I could beat the odds and earn a 12% return each year…

Money on the Stock Exchange – assumed return: 12%

Now £20,000

1 year £22,400

5 years £35,247

10 years £62,117

Now that’s a big raise in putting the money in the bank, but it’s clearly not guaranteed. But can it be done better? I think you know what I’m going to say…

Option 3 Property

One of the best things about ownership is that it allows you to use the £20,000 to buy a £100,000 investment property (in other words, borrow the remaining £80,000 from the bank). Now let’s say the real estate market slows down to an average of only 6% return over the next 10 years. This would probably be a fair estimate in the UK, although there are many markets that are growing faster, let’s focus on the UK for 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 get a 6% increase on the full value of the property, not just the £20,000 you had initially. This is the power of leverage. In effect, you have increased your initial investment 5 times in 10 years! So even if the stock market rises twice as much per year as the real estate market for the next 10 years, you can still make a lot more money from the property.

Now, for simplicity, I have not included attorney fees, agent fees, or stamp duty. It’s true that buying property has more additional costs than buying shares, but it wouldn’t make a significant difference to your earnings: around 4% in the UK, higher abroad.

One thing to note is that, in the short term, you have greatly increased your potential loss, i.e. if the value of the property were to drop by 10%, you would lose more than your initial investment, because the value of the property would drop to £90,000 sterling. he still owes the bank £80,000, so he now has £10,000. By comparison, if the stock market fell by 10%, your investment would be worth £18,000, as you would only lose 10% of £20,000.

However, over a period of time, using leverage to good effect and using all the other skills you need when buying property, property is by far the best investment for most people.

The figures I have used have been very conservative, many people are earning much more than this in property, while anyone making the same returns in the stock market will generally benefit from some form of insider information or take a place very high in the company. , I imagine!