What is Compound Growth?
Compounding is the process of investing an asset's earnings, such as interest or capital gains, to yield additional earnings over time. As investment grows, it will earn from its initial principal as well as accumulated earnings from prior periods.
Compound Growth and Property.
The following is an example of how this can be an incredibly advantageous concept when it comes to investing in property:
If an investor was to purchase a property valued at $600,000, and the capital growth of this property was 6% per annum, this property would increase in value by $36,000 by the end of the first year. In year two this property would increase in value by $38,160, and this will continue with the value growing exponentially over time.
Whilst the increase in value in the example above is significant, every year the property is held the compounding benefit increases. By the tenth year, the property would be growing by more than $60,000 p.a. and would be worth over $1,000,000.
As a property grows in value it opens the ability to leverage off the equity to invest again to increase the compound growth potential. By reinvesting the capital growth from your property investments, you can increase the compounding benefit.
If the same investor above was able to secure an additional property at $500,000 assuming the same capital growth of 6% per annum. They would see the portfolio increase in value $66,000 in the first year and nearly $70,000 in year two.
The more properties you have, the faster your growth compounds. By year 10 the combined properties would be worth over $1,850,000.
Whilst these figures are just for example purposes you can see the benefit of compounding growth and the reinvestment grow your property portfolio significantly.
Importance of Choosing the Right Property.
To have the best chance of capital growth in property investment, it is important to understand the underlying macro and micro factors that contribute to property price direction.
At Meridian Australia, we utilise our unique model and economic data sourced from our unbiased Investor Panel of economists to identify property markets that have the potential to realise strong capital growth.
Looking to get the property investment conversation started?
Or, just looking to stay in the loop?
Tim Davis – Property Investment Consultant
P: (02) 9939 3249
Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your circumstance.