One of the major advantages of property over other asset classes is that banks are more comfortable allowing borrowers to use the equity in their existing home as a “deposit” for purchasing an investment property. The power of ‘leverage’ means that the more you are able to borrow, the more you can invest and therefore the greater return you can generate over time.

Here’s a way to explain the power of leverage

Sue has $200,000. Sue can invest $200,000 in a portfolio of shares or use her $200,000 as a deposit to borrow $800,000 and purchase a $1,000,000 investment property.

Assuming both investments provide a return of 10% the outcome at the end of 12 months would be as follows:

As you can see, even after the payment of interest, the leverage attached to the investment property has magnified the investment return by three times. It should be noted that while leverage magnifies gains it can also magnify losses. In the above example a reduction of 20% in the property value would erode 100% of Sue’s equity i.e. her $200,000 deposit, whereas a non-geared share portfolio with the same capital depreciation would still leave Sue with a portfolio valued at $160,000.

There is no doubt that property investment can be an extremely effective asset to assist with the accumulation of wealth over the long term. However, there is no guarantee that returns experienced over the past decade will be repeated in the future. In addition, the common perception that property values double every ten years does not always hold true. Just ask those living in Perth who have seen property values fall on average by 7% for the ten years to January 2018.

A wealth accumulation strategy with a sole focus on property investment may not provide the best long term outcome. A portfolio with returns driven by only one asset class carries a high degree of risk.

A sound long term investment strategy should consist of a portfolio with exposure to all asset classes including cash, fixed interest, shares (Australian and International) and property. This approach ensures that returns are not beholden to the performance of any one asset class and generally provide a smoother return over time.

One of the major benefits of a diversified portfolio is the ability to act in the event of a market downturn. For example, having cash and fixed interest within your portfolio provides the capacity to be opportunistic in the event of a market downturn and purchase quality assets at depressed prices.

Constructing a diversified portfolio that is tailored to your specific objectives is a specialised skill and you should seek the advice on an Independent Financial Planner to assist in this process.