Perhaps the #1 benefit of investing in property is that it can give you greater control over your life.
Superannuation whilst great offers you limited control. You firstly have to wait till your preservation age (which the government can and does change) and the Government can easily change laws regarding superannuation especially tax rates and caps.
Investment property also has government laws to consider, however, government cannot control when you sell, renovate, develop, refinance etc. They also cannot force you to sell a property or force you to take out earnings. You can also own property in different names or structures to give more flexibility and to align with your wealth creation and estate planning goals.
With multiple properties your control increases even more as you then have greater choice as to which property to take action on (i.e. sell, renovate, refinance etc.) and you can make this choice to your advantage based on the location of the property, ownership, your personal situation and market movements.
Australia’s 3rd richest person made money through property. 10 of the 50 wealthiest Australians are involved in real estate. Australia’s residential property market is worth 9.3 Trillion, nearly 3 times the value of all superannuation. And according to Corelogic, 57% of the average household wealth is held in property.
There is no doubt that property can help you build your wealth. Australian’s love property and over the past 40+ years residential property has grown on average 6.8% per annum.
Leverage (i.e. using other people’s money)
Banks love residential property too. They willingly lend people money to buy property and take out mortgages. Banks will lend you a lot more money for propety than they will for Shares or other types of investments, and the main reason here is they see residential property as lower risk.
Leveraging money from a bank or other lender (which could even be a private lender or family member) is one of the most powerful benefits of property investing. The reason being all comes to returns. Let’s consider an example….
- Say you had $200k to invest. You could invest this in cash and get 5% per annum. In 7 years this would be worth $281k and your equity gain would be $81k.
- Or if you took your $200k and borrowed the rest and bought a quality $1m property, and this asset returned only 3% a year (conservative) and assuming it is cash flow neutral (i.e. you don’t pay anything to hold the property), this asset would be worth $1.23M in 7 years and your equity gain would be $229k.
- The property (based on 3% growth) outperforms the cash (based on 5% growth) by nearly 3x times!
This example is simplified in nature but this demonstrates the power of leverage!!
You need to be comfortable with debt though and have strong financial discipline.
With these higher possible returs come risk too, so you need to ensure you do not gear or leverage yourself too high that you are not able to afford your life or sleep well at night.
Consistent and reliable demand for property
Approx 30% of all people in Australia rent and this is slowly increasing – so there will always be demand for property.
Demand for property is also NOT dependent on changes in commercial or retail markets. People always need somewhere to live regardless. This means there is overall demand in the long term and this pretty much guarantees long term demand and growth.
And Australians LOVE property!! People love to talk property, buy property, renovate etc. This also helps to always ensure strong demand.
Income stream when you retire
Investment property can provide you an income stream when you retire through rental income from tenants. For this to be practical and a useable source of income you generally need to have little to no debt on your properties when you retire so they are cash flow positive in order to cover all the holding costs (maintenance, insurance, rates etc.) and have a decent income surplus.
Estate planning for your children
Some people choose to buy properties in their children’s names or hand them to their children in their will. This can be an effective way of transferring your wealth but also helps your children get into the property market.
You are doing something ethical and positive
Most people wouldn’t invest in something (even with good returns) if it was against the law or unethical. Property investing is an ethical investment; you are putting a roof over someone’s head and doing a positive service for the community and for your tenants.
It is also important though that property investors take this responsibility seriously and show empathy when addressing tenant’s concerns and requests.
Risks of investing in property
Like any investment, investing in property has risks. When considering risks you should consider the risks of investing in property but also your risk profile. Different people have different attitude to risk and this impacts people’s ability to invest or not invest, and if they do invest this impacts what they invest in and how they go about it.
Niva Property are not qualified or licensed to provide financial advice. When making any investment decision, always seek expert advice from qualified and independent experts such as your accountant, solicitor and/or financial planner. The Niva Property team can, however, help you with property investment advice and also help you acquire a quality A-grade investment to suit your goals.