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The three super ways to power up your investment returns

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If financial freedom were an attorney general, he or she would be very clear about one thing. Financial success is directly linked to investment returns.
 
Your assets need to perform at a certain level. When they meet the required benchmark, they generate sufficient, sustainable and quality income streams that enable ‘lifestyle-living’.
 
This simply means you have reached a stage of your where your assets can support your desired lifestyle, where you are free to leave your job, corporate slavery as it may be, where your reliance on a paycheck is null and void and where you can escape the rat race to enter into a new world of living. I know, it sounds like an over-promised pipe dream, but it certainly doesn’t have to be.  
 
To get to this new world, you will have to select your income generating assets very carefully. Whether it’s a business or investment product, poor asset performance will keep you stuck in the rat race and cost you time, money and energy. No good, so asset selection is something you’re going to have to get right.
 
One of your goals must be to maximise performance. For this you need a basic understanding of how investment returns operate.
 
Returns are normally expressed as a percentage. The math is not too hectic but basically you divide the income paid by an asset by your investment in the asset and then multiply by 100 to convert to a percentage.
 
Income includes the revenue generated by an asset, and your investment includes all your expenses, fees and capital or money that you used to acquire or build the asset.  
 
 
 investment returns calculation 
                                  
As you may well remember from school, the top part of the equation is known as the numerator and the bottom part the denominator.
    
So, if a bank account pays you $100 and your investment in the account was $1000, your return is 10%:
 
$100              x 100
$1000
 
If a business pays you $500 and it costs you $1000 to run and maintain, the return is 50%:
 
$500               x 100
$1000
 
If a project generates $100 and it cost you $500 to set up, the return is 20%:
 
$100               x100
$500
 
Notice how as the numerator or income increases, while keeping the denominator or investment the same, the return increases. Similarly, as the denominator or investment decreases while keeping the income or numerator the same, the return increases.
 
►In practice, there are three ways to increase your investment returns:
 
1. Maximise your assets income.
 
Remember, you need to find the right deal for you. It won’t come knocking at the door. Property is a good example. I only purchase buy-to-let units in areas where I know the demand for rental units is high. Because there is a higher demand, I can charge more in rental.
 
The strategy: Find the right asset, or find a market that will pay you the right price for your assets. 
 
2. Minimise your investment.
 
You can lower your investment by simply asking and negotiating. Have you ever asked your financial institution to lower their fees on your account? Have you ever asked an estate agent to lower her commissions?
 
For example, I only negotiate with motivated property sellers as they are more open to lowering their prices. They are keen to get rid of their assets and I am keen to buy them at a lower price.
 
The other way is to use other peoples’ money, also known as leverage. If you use less of your own money and more of other peoples, your investment (denominator) decreases.
 
The strategy: Find a low investment asset, like a run down property for example, and turn it around. Alternatively, get someone else like a bank to pay for the asset. Just bear in mind that you will now have interest charges to contend with, but the idea is to pay for this using your assets income.  
 
3. Structure the full package: increase income and lower expenses.
 
I love property because I can generate phenomenal returns. Here’s why:
  • I only buy from motivated sellers, which means lower prices/investment.
  • In most cases, I finance deals using the banks money, which means low or no investment on my part.
  • I tend to purchase run down units, which means lower prices/investment.
  • I only purchase in high rental demand areas, which means more income.  
Suppose you buy a buy-to-let unit for $40,000. You pay a deposit of $4,000 and the bank finances the rest. Your rental income for the year is $6,000. The annual return is therefore 150%:
 
 
$6,000             x100  
$4,000 
 
The strategy: Negotiate/find deals that generates sufficient income at the lowest possible investment. (Easier said than done though).
 
►Wealth creation is a deal making process.
 
It is your responsibility to find and negotiate the best deal for your situation. It doesn’t have to be property. It could be a mutual fund, product, service or investment deposit. Whatever works for you.
 
Essentially, the right assets generate the right investment returns that will enable you to achieve your goals.    

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