Did you know that there's an eighth wonder of the world? It's called compound interest, and it can supercharge your real estate investments. If you want to learn how to leverage this powerful concept to grow a massive property portfolio and get filthy rich, keep reading! We'll dive into the mechanics of compound interest, the benefits of real estate leverage, and how to plan for long-term financial success.
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Did you know that there are actually eight wonders of the world?
The Seven are found on maps.
But the eighth is found right here… compounding interest.
If you're sick of hearing my dad jokes, then definitely do not read this article.
But if you're someone who wants to know:
Then definitely keep reading!
Now, let's be real...Finance and real estate can get quite dry.
When I start talking about compounding interest, you’re probably thinking:
“I didn't sign up for an economics class.”
“I didn’t want to go back to business studies at school.”
But what you really want to know is: How can I make more money?
It's crucial to understand how these simple models can actually help you realise:
Instant gratification and a lack of focus can be a recipe for disaster.
When you look at real estate, you might think: “Yeah, it's a long-term game, but nothing's happened for 2 months.”
The reality is, the long-term game is where you want to be. So, when clients come to us and say: “Ravi, I want to retire in the next 5 years."
Unless you're sitting on a lot of cash, have an amazing amount of borrowing capacity, or have equity in some property, it's probably not going to happen. Now, you may have seen my portfolio and asked yourself: “How has it grown so quickly over the last 9 to 10 years?”
To answer you: That is definitely still possible.
And when I say that, I'm NOT saying: “Yes, you can go out there and borrow under the same conditions as before.”
But there are so many tools now that you can use, which you couldn't use back then.
In addition to that, you can move at speed. In fact, when I was looking for property, it would take me anywhere between 9 and 12 months to actually find something. Until I got the hang of it, it really was a chore. So, if you're someone who needs help and wants to move at speed:
And then you couldn't actually find a property? Well, you definitely need to move quickly with a buyers’ agent. Now, buyers’ agents are really popular nowadays, so:
If you're interested in using our services, we're completely transparent with our numbers. If you’re interested in booking a call, you can do so here.
Now, let's jump into:
As you can see in the photo above, it says: “The power of compounding grows your savings faster.”
...awesome!
It also says: “The sooner you start to save, the more you'll earn with compound interest.” This is talking about saving, but we're going to relate this back to real estate in a second.
Now, what is compound interest? According to Moneysmart.gov.au, compound interest is:
For example: If you have a savings account, you'll earn interest on both the initial savings and the interest that you've already earned.
You can get interest on that interest! So the interest is now producing more interest.
That’s cool, right? But this is different from simple interest.
Simple interest is paid only on the principal at the end of the period.
Meanwhile, a term deposit usually earns simple interest. So hopefully that makes a lot of sense.
Now, how does this relate to real estate? You can really take advantage of it on two fronts:
Number 1: We know that you don't need to go out there and buy a whole property with cash only. I mean, you could go out there and buy a property for $500,000 and say: “Hey, I've got it in my backpack. Here’s the $500,000.”
Number 2: What most people will do is: Go out and put a 10% or 20% deposit down then the rest of the money is funded by the bank in the form of a home loan, and use that to purchase the real estate.
So the first advantage of getting into real estate is: “I can use, say, $50,000 to control an asset worth $500,000.”
Of course, there are other costs associated with that. But the main idea is:
“I don't need $500,000 to control $500,000.”
“I just need $50,000 to control that same asset.”
That’s the power of leverage. Where this really kicks off is when we match leverage with compounding interest. I'm going to show you an example shortly to explain how this all works.
Now, what I've got here is just a simple compound interest calculator.
It is very important we go through all the basics before we really ramp things up. Here’s what I've got:
What I want to show you is the difference even 1% can make on your property portfolio, and it's going to be ABSOLUTELY wild, which is why you need to be very careful with what property you purchase.
But we'll get to that in a second.
Going back to the calculator, I've set it to 5 years.
That is not long term but we've just done it for the example. So what we can see here is what the future value of that property is worth now which is $694,000
What does that mean? Well, that means from the initial balance of $500,000, I made about $194,000.
Giving me a rate of return of 38%
Now, numbers like that already sound amazing but because we bought this with leverage, it's actually a higher rate of return. When we go cash-on-cash return, that's where the numbers start blowing your mind because remember:
We didn't put $500,000 into this deal. What we did was put $50,000 and approximate costs of $25,000.
So really our initial balance is closer to about $75,000 to $80,000. In that case, what we have produced with that $80,000?
A $194,000 as our return and that's based on 6.8% worth of growth.
You may have gone out there bought property a couple of years ago and said:
“Well my property didn't average out to be 6.8%.”
“Maybe it was lower than that.”
“Maybe it was 3%.”
“Maybe it was 12% because you bought in the right location at the right time.”
12 months ago, I made three purchases(I’ll explain their breakdown in another article). Matching that with a 12-month performance wouldn't really make sense, so i’m giving you three data points here:
From those purchases, you can see:
So for the purpose of this article, I'm going to go in here and say: Well, look I can outperform the market because:
So I can go out there and say: “Instead of an interest rate of 6.8%, I can go in with something higher.”
Now, keep in mind this is at 5 years. If I go and change this to simply going 11% in 5 years time, the difference between the first scenario to the second scenario is almost “2x”
As you can see in photo above, that same property is worth: $842,000
Which means it's gone up by: $342,000
In the first example it went up by $194,000.
So you can already see the difference it makes by having the right tools around to be able to execute with speed and get into the right markets. Just to put the cherry on top! What we're going to look at is how this actually fares in the period of: 20 to 30 Years
Because realistically, if you're buying property simply to sell in 5 years? You are probably in the wrong asset! You might be better off looking at something like Dogecoin.
Now, what you want to be focusing on is:
And go put it into real estate. Do you know what happens next? You will have that real estate machine continue to grow! What will happen is that:
That’s just a beautiful thing because that means: you can retire earlier. So let's look at this example when we look at a 30-year period
What we've done here is go back to the original numbers of 6.8% and for 30 years. That $500,000 property will (not accounting for inflation) be worth close to about $3.5 million.
I know it sounds weird. I know it sounds absolutely absurd because we may have a rate of diminishing returns which means: It won't grow by 6.8% despite it having grown over the last 30 years by 6.8%. This might be true.
So for the purpose of this article, what we're going to do is: Look at a conservative number just to see what that could look like.
Keep in mind that inflation is going to erode a lot of this. Although I can get hate in the comment and you can be like: “Hey, well inflation is going to eat up most of that so it's actually not $3.5 million,”
You are right, because the truth is: it's probably going to be worth a lot less in today's value. But if that's what I can achieve with real estate, Imagine what would happen with savings if I simply went out there—- just put my money into a bank account and hoped that I made 3 to 4%?
That’s NOT even leverage money. So in that case, if you're going to have the same argument around inflation, I've already said I agree.
But you've got to apply the same rules to the Savings in your bank account and that's why I have a problem when people say: “Oh! I just need a million dollars if I go and invest into X fund or if I go and do this, I'll have a million dollars by the time I retire.”
Think about this…A million 20 years ago? It was actually like FU money.
Now, a million won't even buy you a place in Sydney. So, when you think about how high prices can go? It is just our limiting beliefs and our mindset that keeps us grounded to go.
“No, that can never happen.”
“I'm sure the guy that was selling the house for $190,000 in Sydney—-say 20 years ago, would never have thought his property would now be worth $3 million when he's gone on to sell in 2024.”
So you end up with $3.5 million this example being at 6.8%.
What if we reduce this and it’s 4% growth? What would that look like? Well, it would mean that the $500,000 property is now worth $1.6 million.
Again, at $1.6 million, you're still getting further ahead. That’s just with one property!
Now, you may be asking me: "Ravi, why is this all so important? Why do I need to know about compounding interest?" and say: “It sounds boring, and ultimately I can retire on a million or 1.5 mil by just saving my money and putting it into some funds.”
You probably could do that. But as we go through our later years in life:
Why? If you think about it, imagine you're in your 20s or maybe your 30s and you don't have kids? You have a lot of time. Then, suddenly, you have kids (some people may not want kids). I'm in the camp that I really want to have a family.
That means I'm going to have less time in the next 2 to 3 years than I do right now. This means all the extra time that I have, I want to be focusing on building my machine.
Why? Because if I build my machine now, it will make my life so much easier later.
You have probably heard that saying: “Easy life today means a harder life tomorrow, or a harder life today means an easy life tomorrow.”
That’s just basically how I live life and when you think about it, life's just gotten easier even though:
The numbers seem to get bigger, but the things that I want to buy don't necessarily get bigger. My point is: You don't need to go out there and buy 10 different properties.
You don't need a portfolio worth $10 million today.
It would be nice to have, but if you could do the real basics of just buying one property, you will learn:
That is when you'll have the confidence to go and repeat the process. That is how you retire early and on your own terms. That is what I advocate for…
So, if you want to do it in your 30s,
If you want to do it in your 50s,
Let’s go! Let's make it happen.
If you need the help, you can definitely contact Search Property.
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