Why People Invest In Real Estate

There are several sound reasons supporting the idea of investing in residential property. Australia’s continual population growth, a well-reported housing undersupply and ongoing infrastructure development all underpin long-term house price increases.

Perhaps the biggest reason why property is so popular as a form of investment is that it is relatively easy to understand, especially when compared to shares and other financial assets. Property is tangible; it can be touched, renovated and customised. Yet tangibility doesn’t equate to simplicity and depending on your personal situation, property may or may not be ideal for you.

Property can be less volatile than shares or other investments

Research has shown property to be less volatile than shares. Volatility is a measure of how much a price moves over time. Less volatility in an investment is typically good, since returns will likely be more stable. The benefit of low volatility for property investors is that, while shares can rise and fall by the minute (and even alter in price drastically overnight), property typically rises or falls in value gradually.

You can leverage property to borrow up to 90 per cent (or possibly more) of the investment value

Banks will typically lend much more to someone purchasing a property than shares. Investment properties can be purchased at 80 per cent LVR (loan to valuation ratio), or up to 90 per cent LVR with mortgage insurance (note that mortgage insurance is an added cost). And if you already own your own home and have a reasonable amount of equity in it, you may not even need a deposit. For example, if you have a house worth $400,000 and you have a $100,000 mortgage on it, you have $300,000 of equity in the property. You could use that equity to obtain finance to buy other properties, rather than having to provide the deposit from your own money.

You can earn rental income as well as capital growth

Ongoing rent from tenants can help you service your loan repayments, while capital growth (where the property rises in value) can provide gains when you sell the property.

Property can provide tax advantages

Property can provide tax advantages where the cost of owning the investment exceeds the income you receive. When this occurs it is referred to as negative gearing. (you can learn more on this topic by CLICKING HERE). If you take out a loan to purchase an investment property the interest on the loan is tax deductible, and you can deduct such expenses as property management fees, loan costs and repairs. Depreciation also provides advantages on newer or renovated properties. Homes are depreciable over 40 years, and capital improvements such as a new kitchen or hot water system are also counted. Of course, tax benefits alone are not a good enough reason to invest in anything, yet they can provide advantages as part of an overall investment portfolio.

Improvements to increase value

You can exert direct control over the value of your investment by making improvements to your property.

Invest for the long-term

Property should be considered a long-term investment. You should consider a minimum investment of five years, and preferably seven to ten, to be a suitable timeframe. There are some good reasons for this. Buying an investment property involves substantial upfront, ongoing and exit costs. Therefore in order to make a profit, the value of an investment property needs to grow by more than the value of these costs, and the after-tax costs associated with holding onto the property.

Most investors target capital growth from their property investments, yet it can take time for a property to increase in value and it doesn’t happen in a straight line. You may need to endure occasional years of low or even negative growth throughout the course of your investment.

Property is often described as a stable investment which can bring about the notion that it is a ‘low risk’ option. This is not technically true. The fact that property occasionally goes down in value is a reflection of its inherent risk. All investments have an element of risk, but risk is reduced when you have a long investment timeframe as you are giving yourself time to ride out any short-term volatility in returns.

In fact the potential for volatile short-term returns are a normal part of investing in higher risk asset classes (such as property) and investors with long-term horizons should not view these periods as alarming.

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