Middle class kids seem to miss something these days. I am no expert on kids, but I look around at the kids of my contemporaries and as a rule they are seriously unmotivated. They don’t have a fire burning to do anything extraordinary. They don’t aspire to be the best they can be, or to create, learn, or build stuff. They have had life too easy.
If you are a parent I am sure you would love to find the magic bullet that would get your kids fired off in the right direction. I was a kid a few years ago, and a lazy SOB at that. I turned out okay, having worked really hard over the last three decades trying to build a legacy. So what was the magic bullet that got me off my butt?
I think it was one of the few things I learnt as a teenager that got me thinking — that magical concept of compound interest. Don’t worry about the equation, (I know I didn’t) but the penny dropped for me when I realised that if I was able to accumulate surplus capital every month and invest it, within a relatively short period of time I would not have to work.
I discovered that the reinvestment of the accumulating interest, on top of interest, would eventually have such momentum that I would be able to draw a living wage out of the fund every month without adding capital and it would still grow.
And that is the basis of building wealth which got me hooked as a teenager. Then I realised that if you play with the formulae a bit the outcome gets much more exciting! If you increase your capital contribution by say 10% every year, or if you can increase the interest or return on the capital that you have already invested, it has an even more interesting result.
It sounds like I am about to advocate an insurance product, but far from it. If you think about it, the insurance company needs to take your money, give you the promised return (maybe not far off what we assumed above) and still make a profit for their shareholders. So what do they do? They invest in property.
Yes, it’s not all they do, obviously, but they buy shopping centres and commercial buildings that generate a rental return, and a capital growth bonus.
So what I’m saying is that when the penny dropped and I discovered the rule of compound interest I realised I was free to concentrate on building wealth, and not looking to build a career. There may be few corporate ‘jobs’ for young people but there are endless opportunities to build wealth.
Enter real estate
So now we get to talk about simple real estate investment.
You might not be able to help your child buy a shopping centre unless you are playing monopoly, but remarkably, residential property investment is a great place to begin accumulating wealth. It also involves a broad range of skills that will be valuable in life. Buying a residential property involves the discipline of saving, negotiating to purchase, understanding agreements, negotiating a loan from a bank, then finding tenants, maintaining the property and managing cash flow so the rental income comes in timeously, and is enough to cover expenses.
You can still find good, clean, low maintenance investment properties: small flats and townhouses in well run secure complexes near places of work that yield 7% to 10% per annum in year one. Interest rates are manageable at the moment and the fact that the banks are turning down home loans means that more people are forced to rent.
Property antagonists will tell you that property is only appreciating at small multiples, but understand the real effect of having a bond. If your property is worth R500 000 and it only grows in value by 5% it will be worth R525 000. If you were able to get a first time buyer bond with a deposit of R50 000, and the rental yield covered your levy, maintenance, and bond on the R450 000 balance, your actual return on your capital employed would be 50% for the year. Then your rental will escalate, and you will discover that your type of property has appreciated by 27% in the year, and your return on the initial R50 000 gets way more exciting.
It’s actually pretty simple. You don’t have to start big to end big. You only have to have the discipline to sacrifice something today for your benefit tomorrow. Small increments every year will provide financial freedom. And maybe it’s the magic bullet that will get your cherub off the sofa and pointed in the right direction.