One of the common financial fallacies that keep ordinary salary-earning South Africans from building real wealth is that high returns can only be accessed through high risk investments and, conversely, low risk investments will yield only low returns.
This creates a dilemma for most South African investors: they simply do not have the risk appetite or even the financial capacity to risk losing their life savings to a high risk investment.
However, the low returns on low risk investments are simply not enough to build a financially independent retirement, given their limited monthly investments and, most often, limited time.
To solve this dilemma, investors need low risk investments that produce high returns. This seems impossible to investors who have been led to believe the fallacy that higher returns require higher risk investments, while lower risk investments will only produce lower returns.
“The truth is there are low risk investments that produce high returns.” However, he says these won’t be found among the traditional investment instruments that require investors to take high risk for, hopefully, high returns, or to accept low returns for lower risk.
“To achieve high returns with low risk, investors need to turn to an investment alternative used by the world’s wealthiest individuals and companies, including listed property companies and pension funds, and can be implemented quite easily by ordinary investors.”
This investment alternative is buy-to-let property. That by implementing the same model used by, for example, by listed property companies, investors need to acquire a buy-to-let investment property and rent it out to a tenant.
The monthly rental provides an immediate and ongoing monthly income, while the property itself produces ongoing capital growth year after year. The rental income keeps pace with inflation year after year as the rentals escalate each year, while the long-term capital growth also provides a solid hedge against the ravages of inflation.
The dual returns from the monthly income and capital growth produce the high returns most investors require, while buy-to-let property offers a low risk investment, as all the risks associated with this investment can be managed, if not eliminated, by implementing cost-effective and tried-and-tested risk management strategies such as taking out rental insurance.
Furthermore, the monthly income and capital growth will continue to accrue for as long as the property is held, and if the property is acquired in the right structure, such as a trust, this could be for generations, creating a legacy of wealth for one’s children and grandchildren.
Should investors not have a lump sum to acquire a buy-to-let property for cash, they can obtain a mortgage bond to acquire the investment property. This is known as gearing, and it significantly increases the returns on the investment, as the investor’s out-of-pocket investment is substantially reduced.
Investors following this option simply sacrifice the immediate rental income for a few years, using this income to cover the bond repayments and other property expenses, until the rental income, which increases each year, exceeds the monthly expenses and the property starts to produce a monthly profit.
This monthly profit increases each year, but grows exponentially once the bond is paid off, which can be done in as little as 11 years. And, during this time, the property continues to produce capital growth.
The buy-to-let property investment model, which is used by the world’s wealthiest, including the listed property companies, to build real wealth, is proof that you can get high returns, earning capital growth and an ever-growing monthly income from a buy-to-let property, through an investment alternative which allows you to manage, if not eliminate, all the risk.
Do not let the financial fallacy that ‘higher returns require higher risk’ prevent you from building real wealth in 2015.
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