There's more leverage in real estate than in shares

Author: David Potts
Date: November 16, 2006
Publication:  The Age

Ed Chan is the principal of Chan & Naylor Business and Tax Accountants and co-author (with Tony Melvin) of How To Control Your Super Now ... With A Self-Managed Super Fund! (distributed by Dennis Jones and Associates) and the business bestseller How To Legally Reduce Your Tax ... Without Losing Any Money.

If you were given $20,000 where would you put it?
I would choose the asset class that would allow me the greatest leverage. I can leverage more through real estate than shares.

Some banks will lend a greater LVR (loan to value ratio) on shares but the interest they charge is a lot higher to cover them for the greater risk and should the share price fall they instigate a margin call, forcing investors to sell when they should be buying. In real estate when the market falls there are no margin calls so it gives you an opportunity to buy.

What was your first investment?
Shares. I relied on a financial planner, which was the worst thing I did because back then, financial planners were simply glorified sales people who had failed at selling products in a different industry.

What's your investment philosophy?
Increase the size of my assets as soon as possible by working my existing assets harder. I don't let them sit there idle. Most people work themselves really hard but their assets, including the equity in their homes, often sit there not working very hard at all.

What are your current investments?
Property due to its ability to leverage against.

What's your best call?
Apart from picking my wife, my first investment property.

Worst call?
A share that went under and selling some earlier properties. There is less emphasis on diversification when investing into real estate because quality properties cannot disappear from the planet like some shares have done in the past such as HIH and OneTel.

Do you own property?
Yes, but let me say this up front: I do not mind where I make my money from, as long as it's legal, honest and contributes back to society. Also, to make money from investing it needs to take little personal effort and time from me. Property is a great asset class because it has a long track record, but most importantly it is highly leverageable when compared with other asset classes.

Do you have a mortgage?
No. If I did have a mortgage I would only accelerate repayments if I could not do better with the money elsewhere.

When do you plan on retiring?
The term retirement is coined for someone who hates what they do and cannot wait to get away from it. If you love what you do then why would you go away from doing it? I love what I do so I consider myself already retired!

How's your super looking?
I do not believe in the traditional super because it's difficult to leverage through it. But through a self-managed fund there are all sorts of possibilities with leverage. I know this is not for everyone but it certainly makes sense for me.

What's your No.1 financial tip?
The first rule is that it needs to be safe. What you are buying is not property or shares, what you are buying is time. The more time you buy the safer the portfolio. Then you leverage the size of your assets because the greater asset size you have the more money you make. You can only leverage through borrowing money.