Why invest in property?

In a recent blog I opened the debate – which is a better investment – property or shares?

Of course, this is an age old debate with both sides pretty entrenched in their views.

I concluded by saying that if you were still not convinced I would give you 11 reasons why property is a great investment and that’s what I’m going to discuss today.

Now let me just say that although I see property as the easiest way for the average Australian to become wealthy over time, not everyone who invests in property is successful. I’ve explained some of the reasons for this in a previous blog, however property has been the way most Australians have created the majority of their wealth even if it was by purchasing their family home.

Let’s look further into some of the reasons why I think you should consider getting involved in property as the new property cycle rolls out around Australia.

1. More millionaires have been created through property than any other form of investment.
Remember, there’s nothing wrong with seeing what successful people do and applying those principles to your own life. If the majority of extraordinarily wealthy people have used real estate profitably, there is no reason why you shouldn’t also.

2. Anyone can do it
Property investment is not just for the wealthy. It doesn’t really take large sums of money to get involved in real estate. This is because banks will lend you up to 80% against the security of residential property, which means that most Australians with a steady job and a little capital behind them can afford to buy investment properties.

It has been shown over and over again that careful and intelligent use of real estate can enable ordinary Australians, like you and me, to become property millionaires in about 10 years. If you truly intend to become one of the wealthy people in the future, you should probably take a serious look at using property to your advantage.

3. Security
It’s often said that residential real estate offers the security of ‘bricks and mortar’, but let’s take a closer look at why I believe it’s one of the safest and potentially most profitable investment markets in Australia.

You never hear of houses ‘going broke’ do you? But lots of companies have gone broke. Even companies previously considered blue chip have gone broke. Yet even allowing for the ups and downs of real estate values that we hear about, the underlying trend of property prices in the major capital city residential markets has been steady growth.

You don’t have to believe me when I say that residential property is a secure investment. Just ask the banks. Banks have always recognised property, and especially residential real estate, as an excellent security. The reason they’ll lend you up to 80% of the value of your property is that they know property values have never fallen over the long-term. In fact, the entire Australian banking system is underpinned by the continual growth of residential property.

But the really special feature of the residential property market is that owner-occupiers, that is people owning or paying off their homes, own about 70% of these properties.

This means the majority of the market in which we invest does not act according to normal investment criteria or motivation. If times get tough the majority of homeowners don’t panic and rush to sell, as can (and did) happen in other sectors such as the sharemarket. So while property prices do fluctuate over time, affected by supply and demand, the large homeowner market will always underpin property values.

Another factor that adds to the security of residential property as an investment is that you can insure it against most risks. 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.

4. Income that grows
The rental income you receive from your investment property allows you to borrow and gain the benefit of leverage by helping you pay the interest on your mortgage. Over the years the rental income received from property investments has increased at a rate that has outpaced inflation.

Will this continue in the future?

Well, statistics show that the level of home ownership is slowly decreasing in Australia. There are a number of reasons for this but, in particular, as property prices keep rising, fewer people are able to afford their dream homes. This is compounded by higher rentals meaning that many first home buyers have been hit with a double whammy – making the great Australian dream of owning a house just that for many – a dream.

We know that the government is having difficulty providing public housing, which means there will be plenty of opportunities for landlords to make good money in residential property investment, particularly if you own a property that will be in demand by tenants of the future.

5. Consistent capital growth
Good capital city residential property has an unequalled track record of producing high and consistent capital growth. Over the past 25 years the value of the average property in all capital cities has doubled in value every eight to 10 years. However, in the short-term the picture is much more uncertain and confused, and at times capital growth stops and even reverses, as we saw in the early 80s, the early 90s and in some areas in the most recent slump we experienced in 2008.

While all our capital cities growth have averaged growth of around 8-10%, compounding each year over the last 25 years, these are just averages. The better your property selection – where you buy, what you buy, how well you negotiate and how you finance your property investment – the better your returns could be.

6. You can buy it with someone else’s money
Sure you need some of your own money – I don’t believe in nothing down deals, but the ability to use leverage with real estate significantly increases the return on your investment capital and, importantly, it allows you to purchase a substantially larger investment than you would normally be able to.

7. You are in control
Property is a great investment because you make all the decisions and have direct control over the returns from your property.

8. Tax benefits
Property investors are able to take advantage of a range of tax benefits including tax deductions and depreciation allowances. These are too detailed to mention here, but are so important that I have allocated a whole chapter to them in my top selling book How to Grow a Multi Million Dollar Property Portfolio – in your spare time.

9. You can add value
There are hundreds of ways you can add value to your property, which will increase your income and your property’s worth.

10. You don’t need to sell it
Unlike most other investments, when real estate goes up in value you don’t need to sell in order to capitalise on that increased value. You simply go back to your bank or mortgage broker and get your lender to increase your loan.

11. Most forgiving
Even if you bought the worst house at the worst possible time, chances are that it would still go up in value over the next few years. History has proven that real estate is possibly the most forgiving investment asset over time. If you are prepared to hold property over a number of years, it’s bound to rise in value.

There’s really no other asset class quite like property. And with a new property cycle working its way around Australia I believe you should catch the property wave too.

How has property worked for you as an investment? Are you considering getting involved in property investment? Tell us below by leaving your comments.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.