Knowing and Doing

A lot of people will tell you they know all about compound growth.

But how many people are experiencing the benefits of compound growth? Because that’s what knowing is; truly knowing is doing.

As I wrote in Bulletproof Investing, compound growth is the secret sauce of investing.

Compound growth in real estate investing means getting growth on growth. Specifically, more than one property growing at the same time.

The Australian Tax Office publishes data each year about how many Australians own investment properties.

In total, there are 2.2 million Australians who own one or more investment properties, so about one in nine Australians.

But when it comes to owning more than one investment property and potentially achieving that compound growth, the numbers start to drop away considerably:

ATO, Individuals – interest in a rental property, by overall net rent outcome, 2020–21 income years.

It is very difficult to become financially independent through investing in just one property. I believe you need a minimum of three investment properties to do this.

While the numbers show plenty of us own investment properties, only 1 percent – or one in 100 Australians – own more than one.

So, why do so few people properly understand and do what needs to be done to benefit from compound growth?

The natural reaction is to think they might have bought a property that didn’t perform, so were put off from investing further.

This is not the case, house prices have more than doubled in value in the past decade and yet the number of investors with more than one property has remained stagnant.

I think what it comes down to is mindset. The top 1 per cent of property investors are disciplined and don’t fall into the trap of getting caught up in much of the unfounded speculation that swirls around the Australian property market.

The remaining 99 per cent often fall into the trap of listening to uninformed commentary about the market and what it may or may not do and they act irrationally based on emotion instead of logic and reason.

According to Corelogic the average investor sells their property within 9 years of buying it. Most people will tell you they know the best method for property investing is to buy and hold, yet the majority do exactly the opposite – buy, sell, buy again.

The costs of getting in and out of real estate are 3 to 5 per cent on the way in, a similar amount again on the way out. And that’s before hopefully paying some capital gains tax.

If you then buy back into the market, you’re up for another 3 to 5 per cent.

Effectively that means you’ve thrown away at least 10 to 15 per cent of the wealth you just made in transaction costs.

Compound growth isn’t complicated, but it’s not easy and as the above set of numbers show – it’s not commonly done. 99 out of 100 people don’t reap the real benefits of compound growth.