Delaying your investment could cost you serious money
Investors who choose to defer their entry into the property market may miss out on reaping the benefits over time.
Blogger: Paul Glossop, Director, Pure Property Investment
If you are reading this blog there is a good chance you have read a number of investors’ opinions, investigated some investment options, or even taken the plunge and invested in property. No doubt you have also read many expert options that differ from each other. However, as an avid property investor and self-confessed property research nerd, one opinion appears to remain constant. When a property investor is asked what their biggest regret is, the most common response is not starting sooner or not buying more.
I thought I would give some credence to this very common regret to hopefully entice those fence sitters to take the plunge now. Not next month, not next year – now.
So why now and not next year or the year after that? The answer is simple, compound interest. It’s the investment game's greatest leveller. From Warren Buffet to the mum and dad investors, compound interest applies the same way to all in sundry. If you buy the right property at the right time and you give it a minimum of one cycle in the property market, the chances are the earlier you invest, the earlier you will have cash or equity. The biggest barrier for many would-be investors is the illusion that they need a huge cash deposit. But I’m amazed at how many clients I sit down with who don’t fully explore all of the avenues possible to access the deposit needed to get into the property investment game. The right broker should be looking at all of your available options. From the basics of how much available cash you have, through to tapping into your parents’ available equity, and everything in between. More often than not, where there’s a will, there’s a way.
So what are the possible financial ramifications of delaying your investment journey? I’ll break it down to a very entry level investment of $300,000.
So let’s say we have two identical investors – Andrea and Anthony, both 26 years old. Both have a 10 per cent deposit of $30,000. However, Anthony chooses to wait another four years to save an additional $30,000, as he wanted a 20 per cent deposit. Andrea chooses to access a small portion, $30,000, of her parents’ equity, and invests in 2015 in a $300,000 property. Anthony invests in a similar $300,000 property, but he waits until 2019. No big deal, right? Well this is where compound interest really displays its full potential.
Let’s make all things equal and say that both Andrea and Anthony choose to wait until they are 55 to sell their investment to enjoy an early retirement. And let’s also assume that they both achieve an average annual capital growth rate of 4 per cent on their investment. Below is a breakdown of how each person will fair at the age of 55.
Anthony:
- Purchase date: 2019
- Purchase price: $300,000
- Deposit: $60,000
- Property value at age 55 (year 2044) with an average four per cent year-on-year capital growth: $799,000
Andrea:
- Purchase date: 2015
- Purchase price: $300,000
- Deposit: $30,000 ($30,000 parents equity accessed)
- Property value at age 55 (year 2044) with an average four per cent year-on-year capital growth: $936,000
So there you go, in the time Anthony took to save an additional $30,000 the power of compound interest has cost him $137,000.
The moral to the story is that if you don’t get the answer you want from one buyer’s agent or broker, speak with as many as you can to ensure you explore every avenue possible. Otherwise it may well cost you some serious money in the long term.