Hot property

Tonight on television I watched a series called Hot Property. The show featured property investors and how they were faring. It taught me a few lessons on property, mainly that we can make alot of money out of property by renovating and upgrading the house. The show featured a young girl who looked like she was in her late 20s already having a portfolio of 8 million. That was simply amazing. I wish I could do that one day as well. Not with property, but with shares.

I have learnt a thing or two about properties. It is a very rock solid way of making money, almost guaranteed. You don't even need to diversify. That is because house prices don't drop on the norm. They only increase in value over time. Isn't that amazing? An investment that cannot lose? Well, whats the catch? The catch is that value of houses do not appreciate like shares, and that property investors sometimes have to pay stamp duty. And they do not get franked dividends. Neither do they have the excitement associated with shares. Everyone can be a winner by investing in property. Definitely a popular choice amongst many people that they want to be property investors in the future. After all, you can't lose, and that is so attractive on its own.

Another attractive feature which complements the fact that you can't lose in property is that you are able to go to high gearing levels. You can even gear up to 80% of the house. Yes, you do end up paying interest expenses but then, your Return on Equity will be at amazing high levels per year. Risky going to gear at such a high level? Not at all because, remember, house prices don't fall, so if they go up there can only be one winner: you. So the ability to be able to gear to high levels and you can't lose and a tremendous return on equity and the bank is not worried about the loan because it is secured by the property: lets all become property investors?

Recently, I found a real life example of how easy it is to make money if only we have ... money. Two residential areas with old houses on it near my neighbourhood is on sale right now. Yes, two slots with old houses on it. The plan is to buy the land with the two old houses, demolish the old houses, and build 8 new townhouses on top of it. The seller is looking for $1.5m for the land and the building permit. The 8 new townhouses can be sold for the least $500k each. After adding the cost of building the new houses, the total cost would be around $3.1m. And assuming we sell all the houses for $4m, it is a neat $900k profit over the span of 2.5 years? That is why the rich is getting richer. It is still for sale now, but I don't have the money YET, if you do, you can go and take this tremendous opportunity right in front of your eyes right now. I'm assuming you know where I live.

But lets look at it closer, assuming you don't gear, and put $4m of your money over a span of 2 years into the house, and make a profit of around a $1m. That is really only about a return of 12.5% per year on your money. Not much at all. That is even below my required rate of return that is on average 16.16% p.a. By investing in shares, we are able to get even much higher returns on equity. The 12.5% is pre-tax and not including any franked dividends you would get from shares. The understanding here is that when buying the property we go ungeared, but that is seldom the case in real life.

I would still prefer shares over property. I understand that you can make millions out of property, yes. But you cannot make billions with property. That can only be achieved by means of business. And business is what I like. As you can already tell from the many posts. However, investing does include property and it is an asset class not to be underestimated. And I look forward to buying my first property in the future!

To all my readers out there who wants to be a successful investor too, I urge you to consider shares as well as property in your investing career.