Why Genuine Property Investors Never Buy Cash
So you think you’re a Property Investor, a Guru, the Jedi of Returns, the Master of Capital Appreciation. If you are buying with anything but as much debt as you can then you are still an amateur.
Maybe you’re rich, obscenely wealthy, money is nothing to you – if you’re buying with cash you are a mere beginner on the property scene, level one, there are Grandmas with more property sense than you, I don’t care how big your portfolio is.
Why? One simple word, LEVERAGE.
The principal, however, is worth reiterating. If you use debt at a lower interest rate than the return you are getting on your investment then you are making money out of thin air. If for example you could get a 100% loan (not realistic in the UAE I know) of AED 1m and were paying 5% interest, and you used it to buy a property yielding 6% you would be making 1% on someone else’s AED 1m. Imagine if the unit goes up in value 5%. When you resell you pay the 1m back and you get to keep the 50K you made, even though none of the money was yours. The bank doesn’t participate in your gain.
If you had the AED 1m dirhams anyway and you used it to buy the property yes you would be making 6% as opposed to 1% above but it has cost you the use of AED 1m. You could have used that 1m to by a second property valued at 4m and be making 6% on 4m (less the cost of the AED 3m loan at 5%).
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