Category
6 min read

The Power Of Compound Interest With Real Estate

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.

Written by
Ravi Sharma
Published on
July 29, 2024
Aerial view of Australia’s real estate property

Table of contents

Interested? Book a call
book a discovery call

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:

  • How compounding interest works
  • How you can leverage up with real estate and grow a massive portfolio

Then definitely keep reading!

Get Filthy Rich! 

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:

  • What your gains could look like over a 30 or 40-year period
  • How important it is to have a long-term focus
  • The pitfalls of wanting instant gratification
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:

  • Maybe you already have a pre-approval.
  • Maybe you've been looking for a while.
  • Maybe you did the statistics and thought: “Hey, these look great.”

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:

  • Do your research
  • Find someone you can relate to
  • Find someone who has gone out there and delivered results time and time again

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.

Understanding the 8th Wonder: Compounding Interest

 

Now, let's jump into:

  • What compounding interest actually is; and
  • How it can supercharge your portfolio.

Moneysmart’s compound interest

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:

  • the interest you get on the money you initially deposited (called the principal); and
  • the interest you've already earned.

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.

Breaking Down Compounding Interest: Real Estate Edition

Now, what I've got here is just a simple compound interest calculator.

Compound interest projection for 5 years

It is very important we go through all the basics before we really ramp things up. Here’s what I've got:

  • Initial investment: $500,000
  • Interest rate: 6.8%
calculator, I've set it to 5 years. 

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.

 

5 years set in calculator

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

Future investment value

What does that mean? Well, that means from the initial balance of $500,000, I made about $194,000.

Total interest earned

Giving me a rate of return of 38% 

All-time rate of return (RoR)

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.

Calculated initial balance

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:

  • An average growth of about 12.9% over the last 12 months;
  • The stats that we also have on our website, which averages to be about 11%; and 
  • The average of my entire portfolio, which has been growing for almost 10 years now and that averages out to be between 10 and 13%.

So for the purpose of this article, I'm going to go in here and say: Well, look I can outperform the market because:

  • I know exactly where to look 
  • I have a team of researchers and we can do it properly 

So I can go out there and say: “Instead of an interest rate of 6.8%, I can go in with something higher.”

Compound interest in projection for 5 years

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”

Compound interest in projection for 5 years

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.

Compound interest in projection for 5 years

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: 

  • How do I park my money from your:
  • High-paying job
  • Side hustles 
  • High paying income from your business 

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: 

  • You will eventually find that the equity that you receive from that portfolio is greater than your active income;
  • Your cash flow increases;
  • You will have a choice today; and
  • The equity gives you Choice tomorrow 

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.

Compound interest in projection for 30 years

 

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%.

Compound interest in projection for 30 years

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.

Compound interest in projection for 30 years

Again, at $1.6 million, you're still getting further ahead.  That’s just with one property!

Final Thoughts

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:

  • We have less and less choice.
  • We also have less time.

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:

  • I take on more stress;
  • I take on more things to do; and
  • I actually really enjoy it.

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:

  • The importance of how this works;
  • How compounding interest works;
  • How leverage returns work; and 
  • All those horror stories you heard about tenants ruining your property.

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.

Disclaimer: Important Notice for Readers

By reading the content provided on this blog, you acknowledge and agree to the terms outlined in this disclaimer, binding yourself to its provisions unconditionally.

This blog presents information for informational, educational, and general non-advisory purposes only. It's important for you, the reader, to understand that the information provided does not take into account your specific personal, financial, or other circumstances. Consequently, we do not offer legal, financial, investment, or taxation advice, recommendations, or guidance. Before acting upon any information from this blog, you are strongly advised to consult with an independent professional, including legal, financial, taxation, accounting, or other relevant advisors, to verify the information’s relevance to your particular situation.

The information is provided in good faith, derived from sources believed to be reliable. However, we do not guarantee the accuracy, completeness, or applicability of the information to your individual circumstances, needs, objectives, or financial situation. The information may be selective and has not been independently verified. Therefore, it should not be the sole basis for any decision-making.

We expressly disclaim any liability for errors, omissions, or inaccuracies in the information, as well as any direct or indirect losses, damages, or expenses that arise from relying on our content, regardless of the cause, including negligence or other factors. Your engagement with this blog is entirely at your own risk.

Please be aware, we do not hold an Australian Financial Services Licence as defined by section 9 of the Corporations Act 2001 (Cth), nor are we authorised to provide financial services, and we have not provided financial services to you.
A drawing of a house on a black background.

It’s not too late to start

Contact us to start building today.