Why Invest in Property?
Complete Business Strategies specialise in solutions for property investors. We have recently received several enquiries from our property investors and those looking to invest in property so we thought it was a good time to provide some information to answer many of those commonly asked questions.
When reading this please bear in mind we are not anti-sharemarket nor pro-property. This is not specific advice to go out and buy property but is an introduction to some of the reasons property has a place in most investment portfolio's.
We will expand on all of the following topics in our property series, but our advice is to seek transaction specific advice regarding your proposed property move.
1. More millionaires have been created through property than any other form of investment
This is a statement heard often from property proponents and it is supported by history so, if property is part of your wealth planning, then it is worth listening to. History shows us that an intelligent and prudent approach to property can build significant wealth over the long run for ordinary Australians like you and me.
This is primarily because of these fundamentals:
- Capital Growth
- Leverage (aka Gearing)
We will explain these fundamentals in follow up articles but feel free to comment below or give our office a call for more immediate information.
2. Self Managed Super Funds and Property
It is possible and can be beneficial to acquire property within a self managed super fund (SMSF).
It is true, that there is a high level of compliance needed for property investments within a Self Managed Super Fund but with the right strategy the extra compliance is outweighed by the benefits to SMSF property owners.
We will discuss this strategy in further detail in a follow up article, but for now, if you have a SMSF or even if you don't have a SMSF but have a sufficient balance in your Super Fund, you may be able to effectively acquire an investment property using your super balance as a deposit.
3. Tax benefits
Complete Business Strategies and Active Financial Answers specialise in accounting and bookkeeping solutions for property investors. A properly structured property investment can provide a range of tax benefits including tax deductions and depreciation allowances.
These benefits operate to limit the amount of tax payable on capital gains, through the 50% general discount, as well as provide a possible offset against your existing income to reduce the tax you pay on that income. We will cover the tax benefits fully in a future article.
For the moment, our advice is to seek advice early. Firstly, you must get your structure of your investment correct and secondly, to make sure you have appropriate ongoing advice. We can also provide assistance with a feasibility analysis to make sure you have appropriate information before making any decisions.
4. Security – "Bricks and Mortar"
Unlike other forms of investment, property necessarily involves acquiring a "real" asset. Hence the terms "real Estate" and "Real Property". The physical nature of the asset gives our banking industry some comfort about the security of the asset and so they tend to lend more money to buy property (up to 80% and sometimes even more of the value of the property) than they would, for example, to buy shares.
The other aspect to security for property investing that is often forgotten is the fact that most properties are not investment properties at all. In fact, most (around 70%) are owner occupier homes. What this means is that the majority of the property market is stable and remains largely unaffected by panics as have been seen in the money and share markets in the past. Of course there are some exceptions, such as mining towns and some of the targeted Australian Government schemes like NRAS and Defence Force housing which attract a significantly higher proportion of investors but we will address those specifically in a follow up article.
Finally, most property investment risks can be insured. You can insure the building against fire or damage and you can insure yourself against the tenant leaving, damaging your property or breaking the lease.
5. Rental Income Growth
The income generated from a residential property through rent tends to increase over time. Naturally, this will depend on the time frame we are looking at but over the medium to long term we see rent increase in almost all areas of the residential property market. Currently the rates of home ownership are falling and this increases the demand for rental properties. Simple economics also tell us that as demand goes up then the price (in this case rent paid) will also increase.
There are regional trends and some area's suffering rental decline so this should rental growth is not an absolute given in all circumstances.
Our key advice here is to do your research. Make sure you understand the underlying drivers of rental housing in your area and make sure you prepare a feasibility analysis for any property you are seriously considering purchasing.
6. Capital Growth
Increasing rental income tends to underwrite increasing capital values. In addition, inflation will ensure the cost to build new housing will almost always increase. If we assume there are only two alternatives to enter the property market, buy existing or build new, then as the cost to build new properties increases there will be a corresponding increase in value for existing properties.
General population increases and other localised demand factors have also worked to increase property values over time. As more people want property, the price will tend to rise.
History shows that the average value of property in all capital cities has doubled in value every eight to 10 years. Providing a capital growth rate of 7.2% per annum over a 10 year period. Consider, the modern day gold rush towns so critical to the mining industry at the moment.
Think about how many people may be living in those locations should the mining industry retrench in those regions. Our advice is for investors need to be cognisant of the underlying economics of the geographic area, be prudent with your projections and again, prepare a feasibility analysis for any property you are seriously considering purchasing.
A word of caution. While it may be a reasonable assumption to consider property prices will continue to rise in the future, continued growth cannot be guaranteed. Capital growth can stop or even reverse, as we saw in the early 80s, the early 90s and in some areas in the most recent slump we experienced in 2008.