Real life example of thinking outside the box....

I have said it before, I have been a property investor for quite a few years, so I have a pretty

good idea of how to decide what works and what doesn't work as an investment.

In my opinion, the reason why property investing works so well, is that most of the investment is done with other peoples money! Let me explain (using current interest rates and rental returns......

• I decide to buy a strata property (factory unit) for $1,000,000.

• I put down $300,000 deposit and borrow $700,000 giving me 30% equity.

• The property gives me a net yield of (say) 4.8%, which is $48,000 per annum.

• The interest on the loan is (say) 4%, which is $28,000 per annum

• The property costs (strata, council rates, land tax etc) will be around $6,000 pa.

• Gross rental is $48,000 - $6,000 (fees excl. interest) = $42,000 (a 4.2% net rental return)

• Cash return is $48,000 - $28,000 - $6,000 = $14,000 before tax or $9,800 net after tax.

• Net return is $9,800/$300,000 x 100 = 3.2% return on my capital per annum.

• Now, if we apply the capital gain per annum of 8% which is what property increases in value each year on average, then the numbers become VERY interesting as you will see in the next paragraph......

My investment is making 8%pa Capital Gain on $1,000,000 ($80,000), PLUS 3.2% Rental Return ($9,800), totalling $89,800 each year on my $300,000 initial investment. That is a 29.9% return each year on my initial $300,000 !

Now if we apply the Rule of 72 (see lesson on the Rule of 72), we can see that my $300,000 equity will DOUBLE in value every 2.4 years.

But here's the "cruncher"..... can you see it yet?!!!

$89,800 return on $1,000,000 is an 8.98% return........ See it yet???

OK, here it is..... I am making $89,800 (as long as I don't sell my property and create a taxable event) for a $300,000 investment.

OR, another way to look at it....

• I am paying 4% interest on $700,000 (total $28,000) while at the same time

• I am making a 12.2% return on $1,000,000 (8% capital gain PLUS 4.2% rental total $80,000 + $42,000 = $122,000)

In borrowing the $700,000 and in effect, using "other peoples money", I am making a huge 12.2% return on $1,000,000 while just paying 4% interest on only $700,000.

THIS is how money multiplies and how people get wealthy.

Now if you thought that this is what I meant by "Thinking Outside the Box", then you are only partly correct..... there's more!

Most people, will understand the above concept when explained to them.

However, few people will consider taking the same concept and applying it in other ways.

For example and for illustration purposes only, let's consider the following: What, if after we did our homework and due diligence, and we find that a particular listed company whose stock pays (say) an 8.9% dividend. Also, we find out that the dividend is close to 100% stable each and every month.

Now, what if you borrowed (say) $200,000 and invested it in the stock of choice and earned 8.9% per year on it ($17,800) and were able to pay (say) 4% interest on the $200,000 ($8,000)?

You would be making $9,800 per year "out of thin air", OR 4.9% per year on someone elses $200,000 !!! Interesting eh?

Can you calculate the return on your investment (ROI) in the above scenario?

When money was cheap immediately after the COVID pandemic started, one could have borrowed at less than 2% interest rate, and be making 20%+ gains on property and stocks.

Another example of thinking differently si as follows:

During the period post COVID from April 2020 to about end Q1 2022, people have been complaining that their savings were earning 0.5% interest in the banks here in Australia. However, for whatever reason, none had considered the option of actually using their savings to buy bank shares.

While people were complaining about earning 0.5% interest on their bank savings, there were others that instead, bought shares in the same bank!

Between about mid 2020 until mid 2022, the share investors were earning over 7%pa dividends from the banks, AND also made a nice capital gain of around 75%.

To paint a picture here:

Person A invests $10,000 in a bank savings account and after two years, their investment has turned into $10,100.

Person B invests their $10,000 to buy shares in the same bank. After two years, their investment has turned into a little over $17,250.

Do you understand the importance of thinking outside the norm???

The same amount invested, and into the same bank can produce a huge difference in returns, depending on was how it was invested.

The above are just examples of "Thinking Outside the Box".

They are examples of how it could be done if the numbers stack up.

Making money on borrowed money or "other people's money" is fundamentally what property investing is all about. That, plus the use of inflation and compounding.

By the way, the answer to the ROI question in the above scenario is actually - "an infinite rate of return on your money"! If you are making $9,800 per year with none of your own money invested, then your rate of return is $9,800/$0 x 100 = Infinite%

Of course there are risks, as with all things.

Heck, crossing the street can be risky if you don't know how to do it properly!

However, if one does their homework and detailed due diligence, purchases the right asset(s), ensures the numbers stack up, and leaves a margin for error etc. then thinking outside the box and differently to the masses, can be an effective wealth creation method.