No, I am talking about your example of using a mortgage to buy it.
Off course if you use a 5% mortgage to fund something producing a 2% return, you may struggle to get a sound result in a reasonable time.
However if you funded it with your own equity, you might get a result the was ok, (attest compared to holding the cash)
Only when the return on capital is higher than the interest rate paid on the debt.
I look at each asset and simply ask "will owning this asset generate a better return than holding the cash I am swapping it for?"
Forgetting about price Bubbles for a second,
Lets imagine a car space did offer a 1.7% free cashflow return after all out goings, and the capital value of the car space would at least increase with inflation, and the cashflow would increase with inflation.
if that were true we would have basically an inflation hedged bond, albeit a low return bond, but given its inflation hedging ability, it would be far better than a bank account or even a 5% bond where the capital is eaten away by inflation, the after tax return of the car space at 1.7% cash flow would be about equal to a 6% bond once inflation and tax is adjusted for.
Once we have decided that the asset its self is a good investment, only then should we decide to use leverage or not, now if we could get financing at 1% maybe we would, if it was only available at 5% we wouldn't.
Good points.
You raised a point I've been thinking, thought I settled on an answer but seeing how smarter people I've talked to tend not to see it that way...
You were saying that if an investor purchase, say that car spot, and it returns say 2%. It's fully funded (i.e. no debt) and the only other alternative at the moment, and into a foreseeable future, is a lowly bank deposit.
So a 2% return looks pretty good. Especially because it's not from borrowed money where if we were to borrow it'd cost us, say, 4%... and our alternative is 1.7% at the bank.
That makes sense, technically. But my thinking is that shouldn't an investor have a price on their own equity and only invest it towards assets that, assuming the investor accurately appraised it, return above that required rate of return [cost +].
So it'd be better to put it in a bank deposit box; or in short term bonds... where, yes, it doesn't do much but when you find the opportunity you are pretty much guaranteed you can take that parked cash/principal out intact, with a few bucks in interests... and invest it in a more profitable [above or at your required cost].
To put in an asset that may or may not fetch the original invested capital when you need it... and in the meantime it return a fairly low return you set for yourself. That might not work out well in the longer term.
I'm raising this because I know a fair few property investors who own property/ies they bought some years back. Owed little to nothing on it... have a return that's pretty low compare to the current capital gained/market price... but are pretty high compare to when the price they first bought it at. e.g. Say they bought a property for $300K some decades back. It now yield 10% if we compare to that $300K. But yield, say, 2% on the current $1M quoted price.
Assuming that the investor is not being lazy, can't be asked and are aiming to maximise return....
Question is, it does not make sense for them to say that... well, it return me 10% on my investment [made years ago] so I'm way ahead.
Or... a property investor who had made capital gain but whose current rental yield is still low saying that, one day when it's all paid off I'll get rental money for nothing.