Why Do People Invest in Property?

By Miguel Escobar. 20/006/2025

Have you ever wondered why so many people choose property as their preferred way to build wealth? Most would say it’s because it’s a safe investment, that property tends to grow in value over time, or simply because it’s a physical, tangible asset. And to a certain extent, that’s true.

But the main reason people invest in property, even if they don’t fully realise it, is because of leverage.

Leverage means using borrowed money to invest in something in order to achieve a greater return. Let me give you an example. Of course, leverage can work both ways. If property values fall or interest rates rise, your losses can also be magnified.

Imagine you buy a property that costs $500,000 and hold it for five years. Let’s assume it grows at an average rate of 3% per year. That means the property would be worth around $580,000 after five years.

Now, say you only have $50,000 to begin with. If you simply put that $50,000 in a savings account at 3% interest, your money would grow to about $58,000. That’s a decent amount, but not life-changing.

However, if you use that $50,000 as a deposit on a property and borrow the remaining $450,000, you're now using leverage at a 9 to 1 ratio. For every dollar you invest, the bank lends you nine. This kind of leverage isn’t common in most investments, but with property, it happens all the time.

In this case, your loan repayments might be around $2,400 per month. Over five years, you’ll have paid about $144,000. But not all of that reduces your debt—only a portion goes toward the loan principal. After five years, you’ve paid down around $41,000 of the loan, which means you still owe about $409,000.

So let’s do the math. If the property is now worth $580,000 and you owe $409,000, your equity is $171,000. You initially contributed $50,000 and paid $144,000 in repayments, so your total cash invested is roughly $194,000. Your net gain after five years is about $17,000. That’s still more than double what you would have earned by putting the $50,000 into a savings account.

Now let’s say you picked a better location and your property grew by 7% per year. After five years, it would be worth about $700,000. With the same loan structure, you still owe $409,000. Your equity is now $291,000. After deducting your deposit and repayments, your net gain is around $137,000. Again, compare that to just $8,000 in a bank account.

So the key to successful property investing is this:

• Property works because it’s leveraged. Many people don’t realise this. You’re growing your wealth using the bank’s money.
• You should choose an area with strong growth potential, not just a place where you’d like to live. It’s an investment, not a personal choice.
• Yes, there are other costs like taxes and maintenance, and some extra benefits like equity from repayments and depreciation, but capital growth is the main driver.
• You still need to start with some money. A deposit is necessary, and the more you can contribute, the better.

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Appendix: Calculation Details

1. Property Value Growth (Compound Interest Formula)

Formula: Future Value = Present Value × (1 + rate)^years

• 3% annual growth over 5 years: 500,000 × (1 + 0.03)^5 ≈ 579,635
• 7% annual growth over 5 years: 500,000 × (1 + 0.07)^5 ≈ 701,275

2. Savings Account at 3%

50,000 × (1 + 0.03)^5 ≈ 57,964

3. Loan Repayment Breakdown

• Loan: $450,000 at 5% over 30 years → approx. $2,416/month
• Over 5 years: 2,416 × 60 = 144,960
• Principal repaid after 5 years: approx. $41,000
• Remaining loan balance: approx. $409,000

4. Summary Outcomes

Note: "Total Cash Invested" includes both your initial deposit and five years of loan repayments.