There it is again – that same old question.
Ask your yourself this question. If you bought $100,000 worth of shares and they doubled in value to $200,000, how much would you have? You might say $200,000, but that’s not the answer. To get use of the money, you would have to sell the shares and pay capital gains tax on the profit. An alternative is to sell just some of the shares to get your hands on some profit. That is counter-productive because by selling part of your portfolio, you are reducing the value of the portfolio working on your behalf. Success always comes from having a larger amount of growth assets working on your behalf, not a smaller asset.
Ask yourself another question. If you used the same $100,000 as a deposit (to go with a $400,000 loan) on a $500,000 investment property and it also doubled in value (of course we don’t know when that will happen, but it will happen), how much would you have? The answer is $1 million. You might say, “Wait a minute, above you said you would pay capital gains tax on the share profit”. The property scenario is different because you don’t need to sell it to get your hands on the profit. When you own a $1 million dollar property and owe just $400,000, it is not hard to convince a bank to lend you more than the starting $400,000. In fact the banks would probably knock you door down trying to lend you 80% of the new value – or $800,000. You already owe $400,000; this means the bank would give you an additional $400,000. The new $400,000 could be used as a 20% deposit on a further $2 million worth of property. Now you would own $3 million worth of property – the original $1 million and now an additional $2 million. If (when) the $3 million in properties gain just 10% in value, you make $300,000. That’s more than the value of the shares you might have otherwise owned.
Suddenly the share idea doesn’t look so good. It’s easier and more peaceful to play in the bigger league in real estate than in shares.
Now we’ll be honest. As good as the above example is, it is the slow way to get rich in real estate. We will tell you all about the optimal ways when we meet.