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Did you know that 99% of Warren Buffett’s wealth was created after he turned 50? He has effectively made 1% of his money in the first half of his investment journey, and then 99% in his second half!
If you asked him for the single most powerful factor behind his success, he’d unequivocally tell you that it is ‘compound interest’. He’s been preaching this for decades, and it has made him one of the richest people alive.
Sensibly applying leverage to low-risk and appreciating assets, and then holding for the long term, is a universally accepted formula for wealth creation. It’s how most real estate fortunes have been made.
Over time, the compounding returns continue amassing on a larger and larger asset base, and then wealth gains can accelerate exponentially. Strong, stable cash flows are what allow people to hold their investments, and having sufficient cash reserves in place are very important here too.
Today’s 15 minute episode goes into a lot more detail. The show notes are below, thanks for listening!
[1:37] Definition of leverage.
[2:00] High level example of how leverage can enable you to control a larger asset base.
[2:35] More detailed example of how an investment can deliver higher overall returns (higher return on equity), despite lower capital growth on the underlying asset.
[4:45] Bank appetite for allowing higher leverage against property.
[4:40] Concept behind ‘good debt’, e.g. when you sensibly leverage into an asset that is likely to appreciate in value.
[5:45] How capital returns can significantly outweigh the running costs of holding investments.
[7:00] How negatively geared assets can become neutrally geared and then eventually positively geared over time, this is due to rents rising in line with higher asset values, but then debt either reducing or staying the same.
[7:35] Definition of compound interest, and explanation of why real investment benefits are often at the back end of typical hold terms.
[11:00] What are the opportunity costs of delaying investments, those in their ‘accumulation phase’ take note, also listeners can access the Money Smart website to properly calculate compound interest.
[14:50] A wealth mindset can help you overcome the fear of debt, and where appropriate it can help you implement investment strategies, rather than just defaulting to savings strategies, which may not be as beneficial.
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The Long Property Show provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing in the Long Property Show constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
