Compound growth the key on path to multiple property ownership

The biggest mistake most property investors make is stopping at one property, writes real estate strategist and investment expert James Fitzgerald.

According to the Australian Bureau of Statistics, fewer than one in ten Australians own an investment property.

Of that one in ten, 72 per cent of Australians who own an investment property only own one. That increases to 90 per cent if we expand to those who own up to two investment properties. There are only 5 per cent own who own four or more, and therein lies the problem.

Property investment is a great way to grow wealth and fund your retirement, but as the figures show most investors stop at one or two properties. That’s a great start but it’s not really going to deliver life changing returns.

Compound growth is the secret source to investing. And while it’s simple in theory, it’s not necessarily easy to do because it takes a great deal of disciple and focus, no matter what type of asset.

There’s a reason why 90 per cent of property investors only own one property it. It has little to do with the property they buy and a lot to do with the discipline and focus required to access compound growth.

Compound interest is the secret behind the success of some of the world’s wealthiest people, including Warren Buffet who said it was a major factor in growing his wealth.

When it comes to property investment, it means instead of using just one property to grow wealth, investors buy multiple properties, which will all increase in value at the same time.

The key is to invest in assets that will grow in value over time and then be disciplined enough to hold the properties and reinvest the equity in each property into acquiring further assets.

Rather than letting a property sit and slowly edge up in value, investors can work smarter by accessing the equity in it as it grows in value and put that towards the purchase of a second property and then the third and then the fourth.

Simple in theory, yet most property investors sell their property with five or six years.

Cash is king

Cash flow is a big key to success. It’s vital to buy cash flow positive properties, something only half of all properties investors manage to do.

Cash flow comes from the rent paid by tenants less the associated holding costs. As a rule of thumb, holdings costs - things like rates, insurance, property management fees and maintenance - should amount to 25 per cent of the rental income.

The remainder of rent goes toward paying interest on the loan.

One of the best ways to achieve reliable cash flow is to only invest in new properties that require little maintenance, attract high quality tenants and achieve higher rents. Newer premises also have more significant tax depreciation benefits.

The key message is to repeat the successful formula over and again and the longer investors allow compound growth to take effect, the greater the impact and reward.