The property market has had its ups and downs in the last decade, but it’s still one of the most robust and safe investment classes, especially in the long term. In this blog post we will cover the reasons why.
- Safety: Research shows, Australian property has increased in value at a rate comparable to that of the share market since the mid 1920’s, at an average of 11.4% per annum. Of course, this is despite a succession of wars, natural disasters, recessions and crises. It has done so without the volatility of the share market, making it an all round safer investment.
“Shares have a marginally higher capital growth, but the difference in risk is huge. The risk is measured in variation in returns and capital growth (or loss) on shares can range from +40% in a year to -40% in a week! You don’t get that sort of variation in property. Hence why it is considered to be a safer investment.” [Investor, university lecturer and author – Peter Koulizos]
- It’s Easy: Real estate doesn’t require specialist knowledge to start an investment. Most Australian property investors don’t start off intending to invest in property, instead, buying a property to live in. Only after seeing how the value of their property increases, do they realise how much wealth can be generated from property.
Not only is it easier to begin investing in real estate, but it is also much easier to research than stocks or shares. Investing in the stock market requires a lot of specific education. You need to understand the workings of the system, the complex world of trading, as well as research brokers and fund managers. Once you’ve done this, then you have got to come to terms with the companies on the market. This involves trawling the financial press, annual reports, other company releases and so on.
Real estate however, is much simpler, at its most basic you can quite simply go online and start looking at properties. Admittedly, there’s more to getting property investment right, and being successful, than just picking a property. A significant amount of research can be done online, or by visiting suburbs, open homes, and auctions.
- Finance: Sometimes it can feel to be to the contrary, but lenders like property. Home loans are a major part of any bank’s business model. This means that lenders are much more likely to lend on residential property than any other asset class.
Leverage is also a very big determining factor when lenders are deciding whether or not to approve your finance. “You can borrow more when using property as security compared to using a share portfolio,” explains Peter Koulizos.
Lenders will usually lend up to 95% of the value of the property, whereas they may only lend up to 50 or 60% of the value of a share portfolio. This greater borrowing power allows you to benefit from the capital growth of a larger asset.
- Different Approaches: Real estate is a remarkable flexible investment. No matter what your financial arms are, you should be able to find a strategy that suits you. Common real estate investment strategies include:
- Long-term Capital Growth – Looking for to build a retirement nest egg? Long- term increase in value is the most effective way to do this.
- Positive cash flow – Need more money in your pocket now? Find a property where rent outweighs holding and maintenance costs.
- Adding Value – have you found a run down property with potential? You can renovate, subdivide, or develop and create value out of thin air. Even a simple paint job can score you a welcome profit.
- Control: When you invest in the share market, typically you need to hire a broker to handle your trades for you, and the value of any shareholding is reliant on market conditions, and the actions of the people running that company – introducing an element of uncertainty. This is much the opposite story in property; once you have settled, you directly own the asset and you have complete control over it. That’s a hugely powerful thing, because it means that you can influence both asset worth (by potentially adding value) and cash flow (raising the rent is a good example) directly – both of which are nigh on impossible to do so in shares.
- Negotiation: Purchase price in property is usually flexible to some degree. If you buy a share, you buy it at the market price at that time; there’s no scope to negotiate. In the property market, it is exactly opposite; buying and selling is all about negotiation (whether it be between yourself and a buyer, or agents, etc.). There’s also a huge scope to find undervalued properties, particularly deceased estates or mortgagee sales, or sales due to divorce.
- Negative Gearing – One of the most important benefits for investors is the fact that the tax office allows you to write off investment expenses against tax, therefore lowering your income and your tax bill and offsetting any shortfall between income and holding costs, either partially or completely.
- Depreciation – Investors also benefit from from depreciation. Depending on the age of the property and whether it has been renovated, this can run into thousands of dollars ever year, and can be the difference between being negatively gearing or paying for itself. Investors dismiss depreciation at their peril.
- Capital Gains Tax – If you sell your own home, you don’t pay any tax on the profit, meanwhile if you sell an investment property that you have owned for more than 12 months, you only pay capital gains tax (CGT) on half of the profit.
All three of these tax benefits mean that Australia has a uniquely favourable taxation environment for investing in property.
- It’s a usable asset: Whether your property is an investment or not, it is still just that – a property. This means, that if events should take a turn and you need to move into that property, you can (pending rental agreements obviously), and then if circumstances change again, you can move back out, returning the property to an investment. This is quite a difficult thing to do with a share certificate or a bar of gold!
- Demand/Supply: Due to the growth of the Australian population, the demand for homes heavily outweighs the supply, both rental properties and properties to buy. This demand provides another floor under the market which makes it less likely that prices will crash. Although the demand for properties is higher than the supply amount, you want to be careful where you are looking to invest, as some areas do suffer from oversupply.
- You can Pass it on: When thinking long-term for your investment, you don’t just have to think of your own lifetime, you can also consider your children too. Depending on the legal structure in which you own your properties, you can pass your investment properties onto your children, either before or after you pass away. Obviously, you can do this with shares as well, but how many top companies 30 years ago are still at the stop of the stock market today? Whereas a well-positioned property should continue to grow in value over the long term.
Are you waiting to buy real estate? You should buy real estate and wait! Hopefully these ten reasons have provided you with some information to help you make the decision to purchase a property for yourself or as an investment. If you need any further assistance, whether it be suburb knowledge, or how to take the next step; please don’t hesitate to contact any of the team at Eastside Property Centre for assistance!