35 reasons why property is a smart investment
- Melanie Burns
- January 30, 2020
- Bad Credit, Borrowing money, Commercial, Commercial Loans, Credit Impaired, Home Loan, Home Loans, Investment, investment property, Low Doc Loans, Mortgage Broking, Mortgages, Property, Property Development, Real Estate, Refinancing, Self Managed Super Fund Loans, Self-Employed Loans, SMSF
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35 reasons why property is a smart investment
Bricks and mortar have taken a knocking in recent months – but it’s still one of the most robust investment classes, especially in the long term. Here’s why.
- It’s safe (as houses)
There’s a reason why ‘safe as houses’ is a well-known phrase: it’s true. According to research by AMP, Australian property has increased in value at a rate comparable to that of the share market since 1926 – an average of 11.4% per annum – despite a succession of wars, disasters, recessions and crises. It’s done so without the volatility of the share market, too (more on this later), making it an all-round safer investment.
- It’s easy to get started
You don’t need specialist knowledge to start investing in property: in fact, many Australian property investors didn’t start off intending to make their fortune through property. Instead, they just bought a house to live in. It’s only after seeing the value of their home increase – and realising how much wealth you can generate – that many investors take the leap and start proactively investing.
- It’s easier to research than stocks and shares
Playing the stock market requires a lot of education. You have to understand how the system works, understand the complex world of trading (not least the different kinds of financial instruments used), as well as research brokers and fund managers. Once you’ve done this, you’ve then got to get to grips with the companies on the market – which involves trawling the financial press, annual reports, other company releases and so on.
Investing in property, meanwhile, is much simpler: at its most basic, you can simply jump online and start looking at properties. Admittedly, there’s more to getting property investing right than just picking a property, but a significant amount of research can be done online (and is usually either free or inexpensive) or by visiting suburbs, open houses and auctions – without having to garner reams of specialist knowledge beforehand.
- It’s relatively easy to get finance
It may not feel like it when you’re applying for a mortgage, but lenders like property. Home loans are a major part of any bank’s business model, and lenders are more likely to lend on residential property than any other asset class – as evidenced by the fact that they will lend a higher proportion of the value (up to 95%) and at lower interest rates than any other asset class – including commercial property. This makes it a lot easier to borrow to invest in property than in any other asset class.
- You can use leverage
Borrowing to invest in property also means you get greater access to one of the oldest and most powerful tricks in the financial book: leverage.
Lenders will 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 strokes for different folks
Property is a remarkably flexible investment: no matter what your financial aims are, you should be able to find an investment strategy that suits you. Common strategies include:
Long-term capital growth Looking to build a retirement nest egg? Long-term increase in value is the most effective way to do this.
Positive cash flow
Need cash now? Choose properties where rents outweigh holding costs.
Spotted a shabby old place with potential? You can renovate, subdivide or develop and create value out of thin air even through a simple paint job– unlike other asset classes.
- 100% control
If you invest in the sharemarket, you typically 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 less the case in property: once you’ve settled, you directly own the asset and you have complete control over it (assuming you can keep up the mortgage repayments, and within the bounds of planning law). That’s a hugely powerful thing, as it means that you can influence both asset worth (by adding value) and cash flow (eg by raising the rent) directly – something that’s nigh-on impossible to do with shares in a company
- You can renovate (cosmetically)
Talking of influencing asset worth, there are a number of strategies you can use to do this, in ascending level of difficulty (and cost). One of the most common is cosmetic renovation – buying a tired property and sprucing up the interior and exterior. This can vary from simply repainting and putting in new carpets, to putting in new kitchens and/or bathrooms and landscaping gardens.
It’s a tried and true method of increasing the value of a property – even the outlay of just a few thousand dollars can add twice as much to the right property.
The next step up from the cosmetic renovation is the structural renovation: adding bedrooms, bathrooms and so on. This is more complex than a simple cosmetic job – with more scope for things to go wrong and costs to blow out – but can also be significantly more profitable.
- You can subdivide
Find a property on a big enough block, in an area that’s zoned correctly (or will be soon) and you can apply to the council to chop the block in two – and sell one or both halves for a tidy profit. While not physically difficult, finding the right property can be a challenge – and council approval to subdivide can take months.
- You can develop
Biggest risk and biggest reward is taking an existing property or vacant block. subdividing and building upon it – usually units or townhouses. The profits can be substantial – if you can get it right.
Buying property that can later be developed can equal massive profits. These types of opportunities cannot be found in other asset classes.
- An investment for every budget
A quick look at the property data in the back of this magazine shows that the too-often-made assertion that Australian property is unaffordable is simply untrue. Admittedly, if you’re looking for an investment in the prime suburbs of Sydney or Melbourne, it’s likely that you won’t come away with much change from half a million – even for a two-bedroom unit – but middle-ring suburbs, regional towns and cities, or cheaper capitals (Adelaide and Hobart, for example) can all offer affordable entry points; if you buy smartly, you can also expect equivalent or even better growth than more expensive assets.
- Price is flexible
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’s exactly the reverse: buying and selling is all about negotiation. You (or someone working for you) can talk down a vendor; equally, a motivated buyer could pay over the odds for the right property. There’s also huge scope to find undervalued properties, particularly deceased estate or mortgagee sales, or sales due to divorce.
- It improves your financial knowhow
Perhaps a left-field advantage, but investing in property improves your financial know-how. The simple act of saving for a deposit teaches financial discipline; working the numbers in terms of affordability prior to purchase is essential, and once an investment has been acquired, the juggling act of dealing with holding costs, rental income and tax benefits not only requires some monetary dexterity, but also makes you more capable of managing your money – and making the most of every cent.
- Tax breaks – negative gearing
Speaking of tax benefits, we’d be remiss not to highlight one of the most important benefits for investors: the fact that the tax office allows you to write off investment expenses against tax, thus lowering your income and your tax bill and offsetting any shortfall between rental income and holding costs either partially or in full. This makes investing in property more affordable for the everyday Australian.
- Tax benefits – depreciation
As well as the negative gearing benefits, property investors also benefit from depreciation – the decline in value of the actual property, fixtures and fittings over several years. Depending on the age of the property and whether it’s been renovated, this can run into thousands of dollars every years – and can be the difference between a property being negatively geared and paying for itself. Investors dismiss depreciation at their peril
- Tax benefits – CGT
That’s not all, either. Property also benefits from a favourable environment in relation to 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’ve held for more than 12 months, you only pay capital gains tax on half of the profit. These three tax benefits mean that Australia has a uniquely favourable taxation environment for investing in property – and that’s before you start looking at investing in property via super (more on that later) or targeted schemes like NRAS.
- You can use your super
Self-managed super funds have been around for some time – however, it’s only in recent years that investing in property via super has emerged as a feasible option due to changes in the law regarding borrowing. It’s incredibly tax-effective: CGT on sale is just 10%, and zero if you’re over 60; a recent ATO ruling also means you’re now allowed to renovate properties held within the fund too. However, you do have to stay within the rules, which are quite complex, so seek advice before going down this route.
- It’s easier to hold onto if things go wrong
Margin calls are a common feature of shareholdings: essentially, if you’ve borrowed to invest in share, the margin call is when you are asked to deposit more money if the assets in your portfolio fall below a certain amount. However, it’s almost unheard of for a lender to ask you to top up a mortgage if a property falls in value – as long as you can keep up the repayments, you’ll be able to continue holding your property until its value increases again.
- It’s an asset you can use
Investment or not, your property is still just that – a property. So, should events take a turn which means you have to move into that property, you can (pending rental agreements, of course) whether for the short term or the long term – and, if things change again, you can move back out, leaving your investment intact. That’s a hard thing to do with a share certificate or a bar of gold.
- Not just investors in the market
An important factor in the robustness of the property market is that fact that it’s not just investors buying and selling property – in fact, investors are the minority. Investors account for around 30% of all mortgages taken out (ABS, July 2011), with the remaining 70% by homeowners – who aren’t necessarily buying with the principal aim of making money from property, but due to any number of reason. This provides the housing market with a base ‘floor’ of activity which, while not protecting it from ups and downs, does limit their impact somewhat.
- Demand is outstripping supply
Linked to this is that there is an ongoing demand for property – both rental property and property to buy. Australia’s population is growing – perhaps not as quickly as in it was between 2006 and 2009, but still at a solid pace – and housing supply remains tight in many areas (particularly capital cities and areas affected by the resources boom). This provides another floor under the market which makes it less likely that prices will crash. Do your research carefully, though, as some areas of the market do experience oversupply!
- Limited immunity from fluctuation
The right kind of property can also offer limited immunity against recession. During an economic slowdown, more demand from both buyers and tenants falls into lower markets. This increases values and yields.
- Other people pay for your investment
In fact, it’s worth noting that, as well as being able to borrow the vast majority of the asset value and the tax benefits, you’re also getting other people – namely tenants – to subsidise your investment through rental payments. You’re getting three different parties helping you make money through capital gain (or cash flow) – making property one of the most affordable investments around.
- The only thing Australians aren’t taxed on
One especially for the homeowner, the family home is one of the few untaxed assets in the average Australian’s armoury. We get taxed on everything in Australia, but your own principal place of residence is one of the rare things left that the Australian government doesn’t tax you on. Therefore, you can add real value to your own home through a renovation or by redeveloping your property in another way – and every dollar of value you create is yours to keep. The taxman gets none of it.
- Still keep growing – even when you’re retired
Many investors following a capital growth strategy are putting together a nest egg for their retirement – whether that’s based on selling down and creating a lump sum, partially selling down and living off rental income, or on living off a line of credit. However, what some investors forget is that, even after they retire in, say, 20 years, yield and value will continue to improve – making you worth more each year.
- It’s a more stable investment
The property market is usually much less volatile than the share market, at least partly due to the effort required in order to purchase a property – in terms of due diligence, legal checks, inspections, length of settlement periods and so on. This means that property is less prone to short-term speculators than paper asset classes. This – along with the relatively long amount of time it takes to liquidate a property asset – also reduces market volatility significantly.
- Bricks and mortar
Another factor which is comforting to many investors is that they’ve invested in something tangible – something they can ‘look at and touch’.
While much this may be a psychological comfort, there’s also a monetary benefit. After all, even if the worst happens, the fabric of the property and the land underneath will still have some tangible value – unlike shares in a company that’s gone under.
- The government’s got your back
The government of the day – regardless of party – wants house prices to remain robust. Why? Because properties house voters. Case in point: the last time negative gearing was tampered with was in 1987, when the government tried getting rid of it. The results were disastrous: investors stopped investing and rents in Sydney skyrocketed because investors didn’t buy residential property. The decision was quickly reversed negative gearing was reintroduced.
- Australia’s economy is solid
There may be some short-term wobbles, but Australia’s economic future is well and truly solid. The country’s population is projected to reach at least 30.9m people by 2056 – and these people will all need housing, most likely in the state capitals. The resources boom – responsible for significant property price growth in parts of Western Australia and Queensland in particular – is also expected to continue well into the next few decades, with knock-on effects on supporting industries. This is all set to fuel solid property growth in the coming years – although savvy investors would do well to carry out extensive research into which areas will benefit most.
- You benefit from other people’s spending
Specifically, government and company investment. Spending on infrastructure like roads and rail and airports can boost values in a suburb or regional town which may have previously had accessibility issues; meanwhile, investment in new premises or projects – universities, hospital factories, resources projects, shopping centres and so on – can provide employment opportunities and increase housing demand. New amenities can also see house prices increase, purely down to an area becoming a nicer place to live. And that all happens without you having to spend a cent.
- Government incentives
On top of the relatively benign attitude towards homeowners, the tax benefits and the benefits property owners get from investment in infrastructure, the government will also directly give you money to buy certain types of property. The most well-known incentive is the First Home Owners Grant, but most states also have some incentive for off-the-plan and new properties. In addition there are stamp duty exemptions for first home buyers buying an owner occupied property. Another investor-focused incentive scheme is the National Rental Affordability Scheme (NRAS), which sees investors paid over $9,000pa to invest in affordable housing.
- Investors provide housing
Financial benefits not enough for you? Well, how about social benefits? Investing in property provides a supply of rental housing at a range of budget levels – meaning those that either can’t or choose not to buy a property have a choice of places in which to live. Without property investors, providing rental housing would be solely down to the government – you’re housing the nation.
- You can pass it onto your kids
When thinking long-term for your investment, you don’t just have to think your lifetime – you can also think about your children, too. Depending on the legal structure in which you own your properties, you can pass your investments onto your children either before or after you pass away. Sure, you can do this with shareholdings too, but how many top companies from 30 years ago are still at the top of the ASX 200? Not that many – whereas a well-positioned property should continue to grow over the long term.
- You don’t have to do the dirty work
If the idea of property hunting, renovating, developing, dealing with tenants or any of the associated tasks that come along with investing in property don’t appeal to you, then you don’t need to do them. The property industry is well-established, with the ability to outsource pretty much every task to an eager – and competent – service provider such as buyers agents, builders, property managers and so on. Sure, it may cost you – but the best providers also confer a competitive advantage which can actually boost your profits.
- You can do the dirty work
On the other hand, if you do want to get hands-on with the process – whether that’s researching properties, being an active landlord or renovating – then there’s nothing stopping you either. As you’ve got control of your investment, you can be as involved or uninvolved as you wish or as is practical to your lifestyle. However, before plunging in head first, it’s probably wise to make sure you’ve done the necessary research and preparation first.