Property Investment
Investing in property has been for a long time a very rewarding asset class. While numerous successful investors have used the property as a vehicle to develop their wealth. That is not to so purchasing any property is going to provide a financial reward. It is important to note, that just like any other asset property does have potential risks. Though, It has proved over the long term to be a relatively stable asset class that provides great returns for educated investors. There are numerous advantages to investing in property. Each of these can be utilised by an investor in order to maximise their return on investment (ROI).
Leverage
When comparing property to other financial assets one key advantage which property has is the ability for an investor to leverage their money. Leveraging is where an investor borrows against their capital in order to make a larger investment. Note, leveraging your money can increase the risk of an investment as price change is magnified. However, it can also be an extremely powerful wealth-building tool. Take the following example for instance:
If an investor has 100k he may use this capital to purchase an investment property. If the property costs 400k property the investor will pay approximately 14k in stamp duty, 2k in soliciting fees, and building and pest inspection. This leaves a remaining 84k for the 20% house deposit. The annual repayments are $16,200 per year (30-year P&I loan at 3%) plus additional expenses of around 4k for insurance, rates, and property management fees, a total of 20.2k annually.
If the property rents for $450 a week this equates to 23.5k annually. This would mean the property’s cash flow position is positive 3.3k per year. If the property grows by 10% over the course of the year, it will be valued at 440k. Adding the additional cash flow and growth would equal 43.3k. This is a 43.3% ROI in a single year. This demonstrates the power of leverage.
Capital Growth
Capital growth is largely the biggest benefit associated with investing in property. The ability to purchase a property and over time have it rise in value is what attracts most investors. Property historically has continued to rise over time when combined with leveraged has outperformed many asset classes. Historically property prices have doubled in around every decade. This is not to say past performance is indicative of future performance. Though it sheds some light on the likelihood of property prices rising in the future and the benefit of holding this type of asset.
Value-add Potential
Given it is a physical asset, investors don’t always have to wait for the market to move. Properties can be bought with value-add potential. This means a property can be renovated in order to manufacture equity within the investment. Whether it be a small cosmetic renovation or a larger development, there are many instances where investors make money in property without sitting on their hands. This is unlike any other investment class and adds another huge benefit to investing in this asset class.
Consistent Rental Return
Property provides a consistent rental return from your investment. As explained above, a rental return of a property can be extremely lucrative for investors. Unlike other assets, property has a consistent rental income agreed upon over a period of time. This eases the stress of paying for the expenses associated with property. If the property has a high enough yield and/or deposit investors can actually profit each week from their properties.
Buffer Storms
Historically, property has done quite well to buffer crashes or bounce back from them relatively quickly. This is not to say that property hasn’t or can’t crash, as it has. However, during economic downturns property has usually don’t quite well to buffer the storm. Many other investment tools have shown far greater volatility which can increase the risk for an investor.
This may be partly due to the fact that property is an illiquid asset. This means it is harder to get in and out of property. Resulting in less movement from property investors during downturns. Moreover, property is not only an asset class but also is a key living structure. This means home buyers who occupy a larger proportion of the property market are unlikely to sell during a downturn. Why? Because they would need to re-purchase back into the same market. This keeps supply low during downturns and supports property prices.
Tax Advantages
Finally, an additional advantage to property investment is the tax benefits associated with this asset class. Investors can reduce their overall tax burden by claiming expenses as deductions on their income tax. This puts more money into the investor’s pocket at the end of the year. This can be great for middle and high-income earners who pay a large proportion of tax.
(Please note, tax benefits are the icing on top of the cake and not the cake itself. They are an additional benefit but should not be the focus of an educated investors strategy).
The Verdict
Ultimately whether you invest and which asset class lies with you the investor. Though, it is important to note the numerous benefits of property investing if that is something you are interested in pursuing. Hopefully, this provides you with greater insight into how property can be used as a vehicle to build wealth.
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