Why invest in property?
There are lots of ways to make money and there seems to be a group of property pessimists around at present.
Then there's the government who seem to tax investors wherever they can and give tenants more control.
Some people would argue that real estate investing isn't really that easy.
They complain that it takes time to develop the knowledge to understand the property market.
It can take months to research areas and find the right investment property.
Then when you've found it, you need to negotiate to get it at a favourable price.
And that's not all…
You will need to negotiate a loan and find a solicitor to settle the property.
This part alone will take 30 to 60 days.
Then, when you have settled the property, you still have to either find the time to manage it yourself or else try to find a reliable property manager.
Is this all starting to sound too complicated?
You are not alone – that's the very reason some people ignore property and choose to simply park their money in shares or managed funds.
But from personal experience, I know so many people who have become financially independent by investing in real estate and I know how real estate has grown my own asset base and changed my lifestyle, that my response is that property investment is well worth the effort.
Sure it takes time, but over the long term it pays off, and as your skills and experience grow it gets easier as well.
And, importantly, most investors find the process of building an investment property portfolio fun and the end result, if done correctly is...
1. Capital growth, which allows us to grow our net worth, and
2. Secure income, which increases over time.
As such, a residential property must be a key to your wealth-building program.
Let's look at the reasons to invest in property in more detail...
1. More Millionaires
If you look at the results others have achieved, you have to say that property makes pretty good investment sense.
According to the AFR Rich 200 list, which is published each year, property has consistently been a major source of wealth for Australia's multimillionaires.
In fact it’s the same all over the world.
And those that haven't made their money out of property but maybe through businesses, generally invest their money in real estate.
Remember, there's nothing wrong with seeing what successful people do and applying those principles to your own life.
If the majority of extraordinarily wealthy people have used real estate profitably, it stands to reason that there’s money to be made in this sector.
2. Anyone Can Do It
Property investment is not just for the wealthy.
It doesn't really take large sums of money to get involved in real estate.
This is because banks will lend up to 95% and sometimes even 100% against the security of residential property, which means that most Australians with a steady job and a little capital behind them can afford to buy investment properties.
It has been shown over and over again that careful and intelligent use of real estate can enable ordinary Australians, like you and me, to become property millionaires in about 10 years.
If you truly intend to become one of wealthy people in the future, you should probably take a serious look at using property to your advantage.
3. Security
It’s often said that residential real estate offers the security of "bricks and mortar", but let’s take a closer look at why I believe it's one of the safest and potentially most profitable investment markets in Australia.
You never hear of houses going broke, do you? But lots of companies have gone broke.
Even companies previously considered blue-chip companies have gone broke.
Yet even allowing for the ups and downs of real estate values that we hear about, the underlying trend of property prices in the major capital city residential markets has been steady growth.
You don't have to believe me when I say that residential property is a secure investment.
Just ask the banks.
Banks have always recognised property, and especially residential real estate, as excellent security.
The reason they'll generally lend you at least 80% of the value of your property is that they know property values have never fallen over the long term.
In fact, the entire Australian Banking system is underpinned by the continual growth of residential property.
Another factor contributing to the security of the residential property market is its size.
It has been estimated by CoreLogic that there are 11.3 million residential properties in Australia with a total value of about $11.1 trillion.
And the total outstanding mortgage against these properties is $2.3 trillion - in other words, the overall loan-to-value ratio of all the properties in Australia is less that 22%.
But the really special feature of the residential property market is that owner-occupiers, that is people owning or paying off their own homes, own about 70% of these properties.
Investors own the other 30%.
Think about it....residential property is the only investment market not dominated by investors, and this effectively gives investors a built-in safety net.
Even if all the investors were to leave the market at once, it would not totally collapse.
This 70% homeownership is a huge advantage for another reason- the majority of the market in which we invest does not act according to normal investment criteria or motivation.
If times get tough the majority of homeowners don’t panic and rush to sell as can happen in other sectors such as the share market.
So while property prices do fluctuate over time, affected by supply and demand, the large homeowner market will always underpin property values.
In fact, 56.3% of Australian household wealth is in housing.
Another factor that adds to the security of residential property as an investment is that you can insure it against most risks.
You can ensure the building against fire or damage and you can insure yourself against the tenant leaving and breaking a lease.
4. Income That Grows
The rental income you receive from your investment property allows you to borrow and get the benefit of leverage by helping you pay the interest on your mortgage.
Will this continue in the future?
Over the years the rental income received from property investments has increased and in the last few years haas well outpaced inflation.
At the same time, statistics show that the level of homeownership is slowly decreasing in Australia.
It is predicted that the percentage of tenants will slowly increase.
There are a number of reasons for this but, in particular, as property prices keep rising, fewer people are able to afford their dream homes.
We know that the government is having difficulty providing public housing, which means there will be plenty of opportunities for landlords to make good money in residential property investment, particularly if you own a property that will be in demand by tenants of the future.
5. Consistent Capital Growth
Good capital city residential property has an unequaled track record of producing high and consistent capital growth.
Over the past 45 years, the value of the average property in Melbourne and Sydney has doubled in value every 8 to 10 years or so.
However, in the short term, the picture is much more uncertain and confused and at times capital growth stops and even reverses for a time, as we saw in the early 90s and in the slump of 2003- 2006 as well as in 2022.
In all Australian capital cities, this growth has averaged just under 8%, compounding each year over the last 25 years.
These are just averages.
The better your property selection - where you buy, what you buy, how well you negotiate, and how you finance your property investment - the better your returns could be.
By the way, that's another great thing about the property.
You can outperform the average by researching areas of strong capital growth, by buying your properties below market value and then adding value, which increases your capital growth and rental return.
If a property increases in value by 10% per annum (averaged out over a number of years) then the value of that property doubles every seven years.
Imagine you owned a property worth $700,000.
In seven years' time, the same property would be worth $1.4 million and in 14 years it would be worth $2.8 million.
When you own that property worth $700,000 usually have some equity or your deposit and you borrow the rest. Imagine you had a 20% deposit and borrowed the balance ($560,000) from the bank.
After seven years you would still owe the bank $560,000 (assuming you had an interest-only loan) and your net worth would have increased from $140,000 to $840,000 (the value of the property $1.4 million dollars less your mortgage of $560,000.)
That's an increase in your net worth of six-fold even though the value of the property only doubled.
What would happen over the next seven years?
Your property would once again double in value to around $2.8 million and your net worth would increase to $2.2 million dollars.
Your initial $100,000 investment would have increased in value 16-fold while your property only increased in value four-fold.
This amazing increase in your net worth is due to the combined effects of compounding and leverage.
6. You Can Buy It With Someone Else's Money
I will let you in on a little secret.
The return you get on real estate if you pay for your purchase using all cash (without getting a loan) isn't much higher than what you can achieve with other types of investments.
Of course, with real estate you usually don't pay using raw cash; instead, you use someone else's money to buy your properties.
That is, you put down a small deposit, often 20%, and the bank finances the rest.
This is called leverage.
Archimedes said, "Give me a lever and I'll move the earth."
As investors we don't want to move the earth, we just want to buy as much of it as we can!
The ability to use leverage with real estate significantly increases the amount of profit you can make and, importantly, it allows you to purchase a significantly larger investment than you would normally be able to.
Because of its history of security, stable income and proven capital growth, residential real estate is regarded as prime security or collateral for loans, which means that banks may lend you as high as 90% of the value of your property.
They won't lend this proportion to other types of investments.
If you buy shares in the banks themselves, the banks may only lend you 65% of the value of their own shares, and they only lend 70% or so of the value of commercial properties.
This makes the residential property an appealing vehicle for building wealth.
In the technical sense leveraging, or gearing as it is also known, means using a small effort to move a large object, like the gears on your bicycle where you have to pedal a small rotation to turn the large back wheel.
In the financial sense, leveraging is using a small amount of money to control a large asset.
You do this by borrowing money and mortgaging your property and using this borrowed money to invest in a larger asset.
The more highly you are geared, the more money you have borrowed, and the lower your invested capital in relation to your borrowings.
As you can see from the examples in the table above, the higher the degree of gearing, the more leverage you achieve, and the more your returns are magnified.
But be warned, gearing not only magnifies your profits, if the value of your investment falls, but your losses are also magnified as well.
7. You Are In Control
Property is a great investment because you make all the decisions and have direct control over the returns from your property.
If your property is not producing good returns, then you can add value through refurbishment or renovations or adding furniture to make it more desirable to tenants.
In other words, you can directly influence your returns by taking an interest in your property and by understanding and then meeting the needs of prospective tenants.
8. Tax Benefits
These are so important that we have a number of different articles on this in series, so we'll skip over-explaining them here.
9. You Can Add Value
There are hundreds of ways you can add value to your property, which will increase your income and your property's capital value.
These include little things like giving it a coat of paint or removing the old carpet and polishing the floorboards underneath.
Or you could do major renovations or development works.
10. You Don't Need To Sell It
Unlike most other investments, when real estate goes up in value you don’t need to sell in order to capitalise on that increased value.
You simply go back to your bank or mortgage broker and get your lender to increase your loan.
11. Most Forgiving
Even if you bought the worst house at the worst possible time, the chances are good that it would still go up in value over the next few years.
History has proven that real estate is possibly the most forgiving investment asset over time.
If you are prepared to hold property over a number of years, it's bound to rise in value.
There's really no other asset class quite like property!
Note: So while the property markets will create significant wealth for many Australians, statistics show that 50% of those who buy an investment property sell up in the first five years.
And of those who stay in the investment game, 92% never get past their first or second property.
That's because attaining wealth doesn’t just happen, it’s the result of a well-executed plan.
Planning is bringing the future into the present so you can do something about it now!
Just to make things clear...buying an investment property is NOT a strategy!
It's important to start with the end game in mind and understand what you need and what you want to achieve.
And then you have to build a plan, a strategy to get there.
The property you eventually buy will be the physical manifestation of a whole lot of decisions that you will make, and they must be made in the right order
That's because property investment is a process, not an event.
If you’re a beginner looking for a time-tested property investment strategy or an established investor who’s stuck or maybe you just want an objective second opinion about your situation, I suggest you allow the team at Metropole to build you a personalised, customised Strategic Property Plan.
When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because we’ll help you:
- Define your financial goals;
- See whether your goals are realistic, especially for your timeline;
- Measure your progress towards your goals – whether your property portfolio is working for you, or if you’re working for it;
- Find ways to maximise your wealth creation through property;
- Identify risks you hadn’t thought of.
And the real benefit is you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor.
Click here now and learn more about this service and discuss your options with us.
Your Strategic Property Plan should contain the following components:
- An asset accumulation strategy
- A manufacturing capital growth strategy
- A rental growth strategy
- An asset protection and tax minimisation strategy
- A finance strategy including long-term debt reduction and…
- A living off your property portfolio strategy
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