There are lots of ways to make money and 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 favorable 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 peoples asset base and changed
their lifestyle, that my response is that it’s well worth the effort.
Sure it takes time, but over the
long term it pays off and as your skills and experience grows it gets easier as
well.
And, importantly, most investors
find the process of building an investment property portfolio fun.
1. High capital growth, which allows
us to grow our net worth, and
2. Secure income, which increases over time (helping you pay the mortgage).
2. Secure income, which increases over time (helping you pay the mortgage).
As such, 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 BRW Rich 200 list,
which is published each year, property has consistently been the major source
of wealth for multimillionaires all over the world.
Those that haven’t made their money
out of property 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 people 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
people, like you and me, to become property millionaires in about 10 years.
If you truly intend to become one of
the 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.
You never hear of houses going broke
do you? But lots of companies have gone broke.
Even companies previously considered
as 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 recognized
property, and especially residential real estate, as an excellent security.
The reason they’ll lend you up to
90% 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.
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% home ownership 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.
Another factor that adds to the
security of residential property as an investment is that you can insure it
against most risks.
You can insure 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.
Over the years the rental income
received from property investments has increased and this increase has outpaced
inflation.
Will this continue in
the future?
Well, statistics show that the level
of home ownership is slowly decreasing.
It is predicted that the percentage
of tenants will slowly increase from 30% of population to close to 40% of Australia’s
population by soon.
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.
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 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
$500,000. In seven years time the same property would be worth $1 million and
in 14 years it would be worth $2 million.
When you own a property worth
$500,000 usually you have some equity or your deposit and you borrow the rest.
Imagine you had 20% deposit and borrowed the balance ($400,000) from the bank.
After seven years you would still
owe the bank $400,000 (assuming you had an interest-only loan) and your net
worth would have increased from $100,000 to $600,000.
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 $2 million and your net worth would increase to $1.6 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 a prime security or collateral for loans, which means that banks may lend you as high as 90% of the value of your property.
Because of its history of security, stable income and proven capital growth, residential real estate is regarded as a 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 on
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 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, your losses are
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 capitalize 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!
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