Is Property Investment a Good Investment Asset for You?
Why is property investment a good investment? Why not invest in shares or bonds instead? Which investment is the most secure?
If you’ve come to a crossroads in your life where you’re ready to start building your wealth but questions like these are bouncing around your head, then it’s time to sit down and start your education on investing.
First of all, if an advisor was to ask you what your big financial goal was and how you planned to achieve it, what would you say?
In this scenario let’s say your goal is to have your dream home paid off and be living comfortably in retirement. That’s a pretty stock-standard ideal for most Australians.
The challenge from there is how you go about generating that wealth and reaching financial success. The unfortunate truth is that a lot of Aussies are relying on their superannuation and the pension to provide that future – and it likely won’t be enough.
If done right though, property investment can get you where you want to be.
THE PRINCIPLES OF WEALTH
There are three basic principles around wealth that can help you understand how investing works and why property is a good investment.
One: Understanding money buckets
They say money makes the world go round. Well in a sense once you understand how money works, you can then reframe, change and redirect its impact on your own life almost instantly.
That’s where our money buckets come in. Money buckets are how you grow and accumulate wealth.
Most people only have one bucket and all they’ll put into that bucket is one thing – their wages. But investors know that this isn’t enough to create financial freedom or success.
That’s why we need to have other buckets being filled at the same time. These come in the form of other assets or strategies that work alongside our wages to help build that wealth, whether that’s shares, side hustles, or our favourite – real estate.
Two: Knowing your number
It might seem morbid looking into how much money you need to die, but knowing that number is going to inform your investing strategy from day dot.
See the average life expectancy is rising which is something a lot of people didn’t factor in when planning for retirement. In this day and age if you’re living a fairly healthy lifestyle, you have a good 30 years of life to live after finishing work around age 65.
The question you have to ask yourself is, will you merely survive in that time – or will you thrive?
Assuming that a combination of your super and pension will help you to thrive is quite frankly foolish. The pension number for a couple today is around $36,000 per annum. The average super balance at retirement is $128,000 if you’re male and $73,000 if you’re female.
It doesn’t take a mathematician to tell us that no-one is living the high life off those numbers for 30 years.
In order to retire comfortably, or retire lavishly, you need to do the maths and work out what you’ll need coming in every month to live the life you want.
Three: Learning what grows your wealth vehicle
Like we’ve already alluded to, property investment is a good investment vehicle for creating wealth. Of course, if you want to go down the roads of businesses or shares that’s completely fine.
For us though, real estate has always had incredibly reliable returns, and being a physical asset, it will always be around in society.
But what drives the growth in real estate? Well, there are six market drivers that help push up values:
- Population growth
- Infrastructure growth
- Supply vs demand
Each of these will influence property growth. So if you can find population growth in an area where infrastructure is improving and expanding, where you know that people are going to want to live, then that’s a good place to invest.
FIVE REASONS TO INVEST
A lot of people go through life, or at least the early stages of adulthood, living paycheck to paycheck and spending money with little to show for it.
But wouldn’t you feel more financially secure if you had money and assets to provide for yourself now and in the future?
The thing about financial security is that when you have it, everything else in your life changes for the better. That’s why the sooner you start creating wealth the safer you’ll feel and the more you can live the way you want without having overarching guilt.
Here are five more reasons you might choose to invest in property:
One: It creates confidence
We know investing gives you security which in turn manifests itself into confidence.
Not only will you feel better knowing you can meet your financial obligations this month, but you’ll also be pumped knowing you’ll be covered as well for the foreseeable future.
Investing also creates confidence in your abilities to reach goals and meet the needs of yourself and others – like a family.
Two: It delivers financial freedom
As long as you stick to it long term, investing in property can help you live life on your terms.
If you’ve planned well, made strategic decisions, and acquired the right amount of real estate according to your number, then you should be able to live passively off the income it brings in each week, month, and year.
With your financial needs met and taken care of, you can experience a freedom like no other across all areas of your life – and having that ability is a very powerful thing.
Three: It protects against inflation
A big reason to invest in property is to protect yourself against inflation. Because property is a growth asset, not a defensive one, it should comfortably outperform the rate of inflation over the long-term.
If your assets are earning above the inflation rate then that essentially means you’ll have the money you need throughout the rest of your life, regardless of whether or not you decide to retire early.
Four: It reduces tax
This is a big reason why property is a good investment – it can help reduce your tax and even pay off your assets!
This requires a little forward planning and a savvy accountant, so check out this explanation on How Smart Investors Use TAX To Pay for Their Properties.
Five: It requires you to pay attention
Life can get really busy and the more responsibilities we have the crazier it can feel.
If we’re not investing, it can get all too easy to fall into complacency and pay little to no attention to how we’re managing our finances.
Investing requires us to be hyper aware of our financial position, understand our leverage capacity, and set aside the money we need to both meet our obligations and grow our wealth.
IS PROPERTY A GOOD INVESTMENT IN AUSTRALIA?
Residential real estate has provided quality returns over the past 20 years, matching Australian Shares and outpacing inflation. In fact a report from the ASX and Russell Investments released in June 2018 examined the returns of long term investments.
It found from the 20 years to December 2017, residential investment property saw better gross returns than the share market.
In terms of capital growth, it doesn’t necessarily have the speed of crypto or stocks (as we say, real estate is a marathon not a sprint), but in terms of delivering consistent results over the long term it’s a fantastic investment option.
WHAT TYPE OF PROPERTY SHOULD YOU CHOOSE?
When you start out investing in property you will pull together a strategy with your team based around your financial goals, and from there you’ll determine what types of properties you want to invest in.
Typically, a first time investor will look at a mix of houses, apartments, and townhouses.
Pros and cons of houses
- Houses offer better opportunities for capital growth as land tends to appreciate in value – this also means more potential equity to unlock
- Depreciation of the building on the property can help offset your tax bill
- Strategic improvements can be made to accelerate wealth e.g. renovations, subdivision, development
- Higher maintenance costs
- Generates lower yields
When to purchase:
Purchased at the right time of the market cycle and in the right location, investing in houses is a good strategy for investors in the early and middle stages of their lives.
The concept of investing in houses has to do with capturing as many growth cycles as possible. Generally, if you buy when the market cycle is at its lowest and hold, you’ll gain the most benefit.
Pros and cons of apartments
- Higher rental yields and a good option for inventors who need to be cash flow positive
- Easier to hold as a strata manager is responsible for the maintenance and upkeep of the building
- A more affordable option than houses
- Lack of land value means less capital growth
- Incur strata fees which can add to ownership costs
- Limited in the renovations you can do
- Location can be detrimental to its success, particularly if it’s in an oversupplied part of the market
When to purchase:
Investors who are further along in their property investing journey and need to diversify, or those nearing retirement, would do well to buy an apartment or unit as they can be a good source of income.
Pros and cons of townhouses
- If in the right location can deliver both good capital growth and high yields
- Potential to renovate provided by-laws allow it
- Lower entry and maintenance costs compared to a house (good for beginner investors with limited financial capacity)
- Strata restrictions which can impact ability to update a property through renovation
- Face more competition from similar properties
When to purchase:
Townhouses are suitable for most property portfolios. They offer individuals who are in the beginning stages of growing their investment portfolios a lower price point than houses, but they also offer good capital growth prospects and provide access to leverage that can help investors continue to grow their wealth.
PROPERTY IS A GOOD INVESTMENT AS LONG A YOU COMMIT TO IT LONG TERM
Why invest in property in Australia? Or why invest in property at all? Because property investment is a good investment asset for creating passive income and long term wealth.
As long as you hold it for a good 15 to 20 years, it remains less volatile than other asset classes and provides stable income – after all, people will always need somewhere to live.
If you’re ready to get started in your real estate journey then sign up for our next free property investing masterclass. These high value events are packed full of information about where the markets sit right now, how to invest both wisely and smartly, and it’ll connect you with the Positive Real Estate team who have been dominating the property investing industry for over 20 years.
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