Episode Details

Way back in 1996 I bought my first home. It was a two bedroom flat in a very ugly brown brick building, probably built in the 70's with nothing done since. It wasn't flash but it was within my budget and in a good location close to town – Kew for the Melbournites. I paid $107,000.

Now I know that for those looking to buy their first home, $107,000 is probably pretty sickening right now, but 20 odd years ago that was the going rate.

4 years later and I'd meet my now wife, and it was time to move from a flat to a house. We were starting to think about having a family. So I sold the flat for $189,000.

Now those straight numbers - $107,000 purchase price, $189,000 sale price, look pretty good right? And they were. It equates to 15% per year growth. I wish I could say that I got that return due to a whole lot of research and planning, but the truth is it was pure luck. I bought when I could afford to buy, and I sold when I needed to sell.

But that 15% does not tell the true picture, and that's what I want to explore in today's episode. My actual return was just over 68% per annum. Yep you heard that right – 68%!

Gearing. Borrowing to invest. It's about magnifying outcomes. Gears are used in engines and other mechanical devices so that one small turn over here can lead to a really big or fast turn somewhere else.

This magnification of outcomes may be the key to you reaching your financial autonomy goals in the time frame you want. It's an accelerant. But as with all accelerants, gearing also has risks. It's a tool you can definitely use to gain the choice you desire. But it's one to use as part of a well thought out strategy, with the potential downsides considered and mitigated against where possible.

Property investment is the most common area where we see gearing, but it can just as easily be done with shares, exchange traded funds, or managed funds. Given the interest costs associated with borrowing, gearing only makes sense into investments that are likely to grow, and where the expected return after tax is greater than the interest cost. So for instance it wouldn't make sense to gear into a term deposit investment – the return on the term deposit would be less than the interest expense.

So let's get back to my 68% per annum return. I'd be disappointed if you weren't a bit sceptical. The Financial Autonomy community is a savvy bunch and you know the old saying, if it sounds too good to be true, it probably is. But stick with me, in this instance it really did happen.

When I bought my first home, I put down a 10% deposit. So that meant I put in $10,700 and the bank funded the rest. Of course there was some stamp duty but it wasn't a lot at that price point, and I had a friend help me with the conveyancing so that cost me next to nothing.

Over the 4 years that I owned it, for much of the time I had a flat mate in the spare room, and her rent helped with the loan repayments. I didn't really make much of a dent on the loan during that 4 years, but it went down a little, and I had a roof over my head.

So I sold for $189,000. The first thing to happen was that the associated loan needed to be repaid. With that done I had around $93,000 in my bank account. Now of course I had to pay a real estate agent for the sale, and some legal costs. I can't recall exactly how much they were, but being conservative, let's say I was left with $87,000.

I bought my flat for $107,000, and sold it 4 years latter for $189,000, a gain of about 15% per year. But the real story here, the one relevant to me, is that I put down almost $11,000 of my savings, and 4 years later, that had become $87,000 – my savings had multiplied by a factor of 8!

Now as I said at the start, whilst I'd love to say that I got this amazing return because I was some sort of property investment genius, the truth is it was pure luck. But you make your own luck. I wasn't to know the