Are you currently searching for an investment that provides good returns, positive cash flow, and very little downside risk?
With a population of 24 million people, Australia is currently one of the world’s prime investment destinations and one of the largest economies in the Pacific region. In this article, we will reveal the 7 reasons why you should consider investing in property.
1. Property is recession proof
Property with strong cash flow can withstand uncertain times and recessions due to one simple reason: it meets a basic human need - shelter. People will always need a place to live, even during difficult times. They would do anything just to have a roof over their heads. Personal sacrifice plays a huge factor when a country faces financial gloom. However, people will remove other luxuries just to have enough money to pay for their rent and mortgage.
2. Strong future demand
The continuing demand for housing is fuelled by strong population growth and the shortage of housing supply, this ensures property prices are sustained and stable. It’s also worth noting that the price drop most people fear are NOT real losses until you actually sell the property. If the property was purchased correctly and generates a healthy cash flow, the investment can be sustained until the value gets back up again. The REIA (Real Estate Institute of Australia) advises that “According to the third National Housing Supply Council State of Supply report, the gap between the supply and demand for housing will increase in the future, putting further pressure on housing prices”.
3. Significant tax benefits
Australian tax laws are beneficial to people who wish to invest in Real Estate. For example, it enables you to write off investment expenses against taxes. This lowers your tax bill and offsets the shortfall between your rental income and holding costs, either in part or in full. This makes the act of investing in Real Estate more economically feasible for Australians who are not necessarily affluent.
Building depreciation is also something that will help your bottom line come tax time. Just like you would claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.
4. The power of leverage
It’s easier to obtain financing in Australia because the banks are more likely to lend money for residential properties than any other investment class. Banks are generally comfortable to lend more for property as they recognize it as a low-risk investment option, and they’re also confident that they can recoup the cost, should they need to.
In some cases, banks will allow you to borrow up to 90% the value of the property, this means you can reap the benefits of the entire property while only investing 10% of the total value. Let’s see how this compares to shares, which the banks will typically allow you to borrow up to 70% of the total value.
Let’s say you equally purchased $500,000 worth of shares and $500,000 worth of property. Also, that they both gave an annual return of 8% capital growth. The only difference being the ability to leverage! The banks will allow you to borrow 60% of the value of shares, but allow you to borrow 90% of the value of property.
Total Value $500,000
Annual growth rate (8%) = $40,000
| Shares | Property | |
|---|---|---|
| Initial deposit | 40% = $200,000 | 10% = $50,000 |
| Return on investment (initial investment/annual growth rate) | =20%/annum | =80%/annum |
The ability to leverage your investment should not be overlooked. Offering the same economic environment with banks lending requirements being the only variable, you will see a fourfold return on property over shares… Powerful!
5. Funding your Retirement
A person eligible for the full age pension can expect an annual income of around $21,481. According to the ACOSS (Australian Council of Social Service), the national poverty line is a person with an annual income of less than $22,167. This puts our retirees that are eligible for the ‘full’ pension into poverty! Honest, hardworking people that have worked for 40+ years of their lives set foot straight into poverty the day they retire. This is why investing in your future is becoming less of a nicety and more of a necessity. Property has allowed hundreds of thousands of everyday Australians build enough wealth to live a comfortable life in retirement. In fact, finding an asset that provides capital growth, cash flow and leverage gives you the ingredients for compound growth. Using compound growth and annual growth rate of 8%, you can turn an initial $100,000 investment into $2,300,000 in approximately 12 years.
6. It’s safe (as houses)
As long as people choose to live in houses, units & apartments, residential property will always be stable. From the young couple who have saved enough for a deposit, to the investor renting student accommodation through to the downsizer and retirement village, residential property is always sought after.
7. Not just investors in the market
An important factor in the robustness of the property market is the fact that it’s not just about investors buying and selling a 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 reasons. This provides the housing market with a base of activity which, while not protecting it from ups and downs, does limit their impact somewhat.
