I recently have read quite a few articles about some young property millionaires. These articles outline the facts that quite a few at their early 20s or 30s have already owned a portfolio of properties that’s worth some million dollars (AUD), and the writers therefore name them millionaires.
Another impression (perhaps my thoughts are wrong) I have from reading these articles is that the news media may be just over-emphasizing the magic power of properties; it may convey biased ideas to many people that – Properties can make you rich; if you wanna be a millionaire, then climb up property ladder.
Let’s talk about the 1st misconception (Article A – Couple turned $15,700 into $10.5m by investing in property) that just because you own something (assets hopefully) that’s worth $5m (either cost or mark-to-market), then everyone can call you a millionaire? How many people think this is a correct statement please type “correct” in the comment box below.
The answer to the above question can be a “Yes” or a “No”. It depends. In plain English, when you are a millionaire, it implies that you have at least $1m worth equity in your pocket. If you wanna buy an asset that’s priced $5m, and you only have that $1m, you have to borrow $4m from someone, this $4m is liability.
I guess you got the concept now:- Asset = Liability + Equity
That’s why I said the answer to the question depends. I’m not here to suspect or belittle these property millionaires, quite likely many of them are real millionaires when the net difference between Assets and Liabilities equals or more than $1m.
What I’m trying to say here is readers shall think carefully when reading news. Just because the headlines say this guy has a property that’s worth $5m it does not mean he’s necessarily a multi-millionaire. Only when his equity, or net difference between asset and liability equals to or more than $3m he can be titled a multi-millionaire.
Let’s move on to the 2nd misconception (Article B – Young property millionaires share their tips) that if you wanna be a millionaire, property is the way. Yes it’s a way, but property investing is only one of many alternatives. And to make the first $1m from property alone and add that to your equity, you need luck and time.
First you have to be good at timing, knowing when the trough of the property cycle is and thus the right price of your targeted property. Next you have picked the right property, and make a great deal with your bank. At these points, many property investors say that timing and price are not very important in their buying decision, I disagree. I don’t think you still keep buying when you believe that the market is in bubble and the price is very high when compared to wages and rental.
Then you will have a good management team in place and good tenants; to minimise the vacancy rate and to maximise your cash inflow. And finally you may wanna restructure your portfolio by disposing of some under-performing properties at some point. Again here both timing and price are very important, whether you are a property investor or a trader. You wanna sell at a profit, your offer must have an optimal margin. However the catch here is the market must be climbing, and the price must be trending up. In other words, property investors or traders can only get out with profit when the market is still going up.
If I’m counting my 1st $1m (NZD) on net rental incomes from 10 properties, it’ll take me 4 years; And this happens only when all are mortgage free, each has zero vacancy and $25,000 net rental p.a.
If I’m refinancing the same portfolio interim, it may shorten timeline a bit; but how likely and how often you think the banks will do these for me?
Flip-flopping; buying low and selling high is quick to make $1m, but again how likely I’m able to sell 5 out of 10 with $200k profit each? And note each $200k profit is what you actually receive in your pocket after netting off all expenses.
Property investing is a way to achieve financial freedom. However before you are inspired by these headlines and property millionaires to become a property investor or a trader, think before you leap.
Since I’m both a property investor and FX/Options trader, I think I’m in a better position to provide with a fair comparison between Real Estates and Paper Assets, in terms of incomes and wealth building. In my humble opinion, to become a real millionaire or even a billionaire in relatively shorter time frame and higher certainty (counting on financial literacy rather than luck), Paper Assets are better. And here the Paper Assets are well covered or hedged.
All roads lead to Rome, all roads lead to financial freedom.