Why invest into property?
The performance of residential real estate as an investment is undeniable. It has provided sound and consistent investment returns over the long term for many years and is seen by many as the most ‘risk averse’ investment class there is due to:
- Property is often seen as an ‘easy to understand’ investment as its seen as safe and stable and provides us with a sense of control
- It provides long term capital gains, it’s always in demand plus someone else is helping to pay it off
- Well chosen property has continually appreciated in value over the long term as land is in short supply and our population is increasing
- Property gives us greater leverage (borrowing power) than other investments as banks will often lend up to 95% of its value, and
- Property will never be worth nothing – its solid bricks and mortar (and land)
Using the equity in my home to invest
This is what astute people do.
Our equity is the part of the property that we own outright. So if our property is worth $500,000 and our Home Loan is $200,000 then we have $300,000 worth of equity.
So you’re going to purchase an investment for $400,000. Unfortunately lenders don’t lend 100% of a property’s purchase price and we don’t have a cash deposit so we need a Plan B.
Good news – the equity we hold in our current home is ours and we can kind of do what we want with it. This includes ‘pledging’ or mortgaging it to a lender in exchange for a loan (that can be our deposit). So if we need a 20% deposit to buy this investment (stay with me), we can take out a loan for $80,000 (20% of the $400,000 investment property’s purchase price) against our homes equity and this can act as our deposit. We then raise a loan for the balance of the investment property and we’re all sorted.
In practice there’s plenty of details to work through which is where a good Mortgage Broker can help but the theory is quite straight forward and allows people to progress their investing in the absence of a cash deposit.
The Positives
Generally Safe
Property generally maintains its value well as demand for well located property is increasing as our population grows
Capital Growth
With this increased demand invariable comes increased value over time and significant increases too
Accessibility
You don’t need to be qualified. As long as you are in a solid financial position property investing is open to all
Reduced Risk
Well located property will always rent well and sell quickly if the need arises so you can enjoy good cash-flow from tenants to help pay the loan off and a quick turn around when you want to ‘exit’ the property
Sense of Control
You make the decisions in respect of your investment property so unlike your superannuation investments, you have this genuine sense of control
Tax Benefits
Generally speaking expenses relating to investments that generate a taxable income are tax deductible so you should be eligible for tax relief from your ownership of an investment property.
The Negatives
Cost of Entry
Unfortunately the cost of property is very high so the barriers to entry are the deposit levels required and the actual cost to purchase.
Liquidity
Property is not a ‘liquid’ investment which simply means you cannot transact in or out of property very quickly unlike cash based investments. Good quality shares can be often sold down in a day which represents good liquidity but property is a different ‘animal’.
Maintenance Issues
Nearly all properties require money to be spend on them from time to time. You cannot sign up to be landlord and have total disregard for the tenants (and what is their home). Treat your tenants with respect and be prepared to invest money into the property occasionally which will maintain good tenants and enhance the property’s value too.
Tenancy Issues
We’ve all heard horror stories of tenants but it doesn’t have to be this way. This is generally fixed in one simple solution – an excellent Property Manager. It is the Property Managers role to fully assess Tenancy Applications. A good Property Manager will get proof of the character of an applicant and their rental history so there should be no surprises and hence no bad news stories for your investment.
What comes first – the property or the finance?
It will come as no surprise that most people start looking at property before having their finances in order but the reality is you need your finances sorted first. I get the fact that there is nothing remotely exciting about the actual Home Loan but if you haven’t had your borrowing capacity tested and Home Loan pre-approved by a lender, then you’re not ‘market ready’. There’s no point in looking at an area if you cant raise the funds, is there?
Once you find a suitable property and reach an agreement on price things happen very quickly and there is little time to then start getting the finance organised from scratch. So put yourself ahead of the game and have your finance sorted first and give yourself the best chance of securing the home of your dreams.